Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 5-5 Tax Inversion (a GVV case)
Jamie Keller was pleased with his new job position as director of international consolidation for
Gamma Enterprises. Gamma Enterprises was a consolidation of high-tech gaming companies,
with subsidiaries of Alpha, Beta, Gamma, Delta, and Epsilon. This past year Gamma had
completed a tax inversion with Epsilon, which is headquartered in Ireland, becoming the parent
company. Gamma was the oldest company of the group and the only subsidiary with material
inventory.
Jamie was preparing for a meeting with Jason Day, the CFO of the group, as well as the senior
manager on the audit of Gamma. The discussion was planning for the year-end and issues with
the tax inversion and consolidation with Epsilon as the parent company.
Jason cleared his throat and said, “I see we all know each other. Let’s get started as I think there
are a lot of year-end issues with this tax inversion. First, the company will keep the corporate
physical headquarters here in Philadelphia, but many of the governance meetings will be at
Epsilon headquarters in Dublin, Ireland. Jamie, I need you to prepare a study for the board to
consider at the next meeting as to whether all the subsidiaries should change to IFRS for the
consolidation or not. Thomas, can you briefly explain the issues with such a change?”
“Under IFRS most assets will be revalued to fair market values. That will increase the values on
the balance sheet. The biggest drawback will be the taxes the company will owe with changing
from LIFO to weighted average for Gamma’s inventory,” Thomas began.
“I don’t see why it is a big deal to use IFRS for all but Gamma’s inventory, Jason said. Thomas,
what do you think?”
Ethical Obligations and Decision Making in Accounting, 4/e 2
“I’m sure something can be worked out,” Thomas replied.
The discussion changed to other issues. After the meeting, Jamie and Thomas went to lunch to
catch up on old times. At lunch, Jamie commented, “Thomas, do you really mean to let Jason
and Gamma Enterprises pick and choose which accounting standards to follow, using a mixed-
bag approach?”
Questions
Assume you are Thomas’s position and know that you have to let Jason know the correct
way to convert to IFRS accounting.
• What will be the objections or pushback from Jason?
Jason is concerned with keeping taxes as low as possible and maximizing earnings to keep the
shareholders happy. He isn’t sensitive to the IFRS issue or the needs for a common financial
reporting framework for all subsidiaries. If Gamma Enterprises is a U.S. company, Jason may
• What would you say next? What data and other information do you need to make
your point and counteract the reasons and rationalizations you will likely have to
address?
Thomas can try to explain to Jason about IFRS and the need to follow a common financial
reporting framework. Jason is not likely to care about accounting rules. Still, Thomas should
Ethical Obligations and Decision Making in Accounting, 4/e 3
Consider whether Jamie and Thomas could work together to convince Jason (and the
board) to change accounting methods. Identify the stakeholders in this case and their
interests in addressing the following questions.
• What are the main arguments you are trying to counter? That is, what are the
reasons and rationalizations you need to address?
• What is at stake for the key parties, including those who disagree with you?
• What levers can you use to influence those who disagree with you?
• What is your most powerful and persuasive response to the reasons and
rationalizations you need to address? To whom should the argument be made?
When and in what context?
As mentioned above, Jason is biased by a desire to minimize taxes and maximize earnings, as
well as keeping shareholders happy. He may use the audit as leverage against Thomas. Thomas
has to make it clear that he can’t compromise his professional obligation to protect the public
interest. He must maintain objectivity and not subordinate judgment to Jason. Given his
relationship with Jamie, it would be a good idea to work together to change Jason’s mind.
Thomas should point out to Jason that as CFO he will have to certify that, as far as he is aware,
the financial statements do not contain any material misstatements or fraud. The CEO will need
to sign the certification as well. This is a requirement under Section 302 of SOX. Perhaps the
two of them can convince Jason there are more costs of not following the rules than benefits of
Extended Discussion of Tax Inversions
The case raises the issue of tax inversion but it is not analyzed or directly discussed in the case.
Given this is a growing matter of concern in the U.S., instructors may want to expand the case to
include questions about the ethical appropriateness of tax inversions. Steven Mintz’s blog on this