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Dear Mr. Heebink:
The Actual Income reported for 1995 was probably
overstated, based on additional costs incurred over
amounts reserved on jobs reported as Sold/Shipped at
the end of the year. We have attempted to quantify
what those impacts might have been based on an outlook
as of November 11, 1995. In addition, since the 1996
forecast was based on 1995 results, that forecast was
overly optimistic.
HII’s financial statement for 1995 was not restated to reflect
the alleged understatement of reserves.18 HII’s income tax
return for 1995 was not amended to reflect the alleged
understatement. HII had a substantial tax liability for its 1995
fiscal year. HII reported taxable income of $5,990,541 and a
total tax of $2,042,501. HII’s 1995 return was prepared by Mr.
Gaynor in or about November 13, 1995. Any additional expenses
represented by the alleged reserves were deducted in later years.
The alleged understatement was not discovered by HII’s
accountant, Gary Gaynor, in his appraisal of HII as of July 31,
1995, and even petitioners admit that the alleged understatement
18Petitioners allege that HII did not restate its financial
statement for 1995 because bonuses and profit sharing had been
paid to employees on the basis of the originally reported
results, and management did not want to penalize employees and
destroy morale based on errors and misstatements by a few people.
Petitioners also allege that HII did not want to incur the
expense of redoing its financial statements and audits. However,
petitioners do not explain how HII’s employees would have been
affected by a restatement. We are not satisfied that this factor
and the expense of redoing the financial statements and audits
fully explain HII’s failure to restate its financial statement
considering the extent of the alleged understatement of reserves
and the resulting overstatement of earnings.
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