Ignite Restaurant Group (IRG), the owner of various restaurants including Joe’s Crab Shack, went public in May 2012. Just two months later, the company announced that it needed to restate its financial statements to correct errors related to the treatment of certain leases. The announcement resulted in a single day stock price decline of 22%. The lease errors began in 2006 (the year of the company’s origination) and continued through the first quarter of 2012. The restatement related to the leases was estimated to be between $3.4 and $3.8 million. As a result of this situation, IRG planned a fixed- asset accounting review to assess historical asset additions, dispositions, useful lives, and depreciation from 2006 through the first quarter of 2012. At the time of the announcement in July 2012, IRG anticipated additional restatements of at least $1.2 million related to the accounting for its other fixed assets and related depreciation expense.

In October 2012, IRG announced that it had completed its internal review of this situation. The aggregate impact of the restatement adjustments and related tax effects (from the company’s inception in 2006 through the first quarter of 2012) reduced net income by a total of $6.4 million over the five-year plus period. In connection with the restatement, management identified material weaknesses in its internal control over financial reporting related to lack of sufficient qualified accounting and tax personnel; lack of adequate supervision and monitoring of accounting operations; inadequate lease accounting controls; and lack of effective controls related to the existence, completeness, and accuracy of fixed assets and related depreciation and amortization expense.

a. What long-lived asset accounts at Ignite Restaurant Group (IRG) were misstated?

b. The situation was described in the press as a minor, but embarrassing, accounting issue. Notwithstanding this description, assume for purposes of this question that the accounting issue was the result of fraudulent financial reporting by management. If that had been the case, what might have motivated management to materially misstate the assets you identified in part (a)?

c. What controls should be in place at IRG to mitigate the misstatements that needed to be corrected?

d. What procedures should the auditor have performed when auditing the assets you identified in part (a)?