Case Study: Analysis of Accounting Irregularities at LDS Computers

This case study analyzes the accounting irregularities within LDS Computers, a technology consulting and software development company. The assignment examines a whistleblower's claims of bribery and accounting discrepancies, including misstated financial statements and disagreements among board members. The analysis identifies key red flags such as complex payment models, an overbearing company culture, and inadequate internal controls. It assesses the materiality of the findings, highlighting misstated accounts and their impact on financial reporting. The investigation's handling is critiqued, and an adverse audit report is proposed, emphasizing the need for strict action to address the issues and reinstate the financial statements. The case study underscores the significance of auditor's role in uncovering and addressing financial statement fraud, along with the importance of effective internal controls and ethical management practices to maintain the integrity of financial reporting and stakeholder trust.

Accounting
Assignment

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Submitted by –
Date – 12th December 2018

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Executive Summary
The following assignment deals with finding the irregularities in the internal system of LDS
Computers that had cause a lot of loss to the company. In this case study we see how the
irregularity in the system and lack of proper management had affected the company and how
auditors can play an important part in overcoming these issues through their actions. An
overview of the findings is presented along with recommendations to improve the same.
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Table of Content
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Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Analysis........................................................................................................................................................5
Key Flags that needs to be presented in the system...................................................................................5
Materiality of Findings.................................................................................................................................6
How the investigation was handled.............................................................................................................7
Audit Report................................................................................................................................................8
Opinion as part of the Group.......................................................................................................................9
Conclusion- Overall Group Opinion...........................................................................................................10
References.................................................................................................................................................11
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Introduction
The following case study deals with the irregularities in the system of LDS Computers and how
it is leading to possible cases of fraud and bribery in the system. The company works in the field
of providing technology consulting services and to develop software’s. The company had
provided services from several local and international branches (Abdullah & Said, 2017). In this
case study we see how the irregularity in the system and lack of proper management had affected
the company and how auditors can play an important part in overcoming these issues through
their actions. It is seen that a whistle blower had led the authorities know that there might be
chances of bribery and during investigation it was found that there were accounting irregularities
have been present. It was found that quarterly financial statements of the company were
misstated. It was found that there was disagreement between the board of the members regarding
what the company should do. It was found that LDC needed to file its financial statements in two
days. So, we see that overall there are chances of fraud in the system and that is affecting the
development of the system. The auditor played an important part in finding the disagreements in
the system. The management of the company was no ready to take these claims seriously and
there only aim was to find that the system was working effectively and their compliance
requirements were fulfilled even though the material misstatement could have effect on the going
concern feature of the company (Belton, 2017).
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Analysis
Key Flags that needs to be presented in the system
In case of the internal system of the company it was found that there was a wide scope of issues
involved and there were a lot of risks to be addressed given that the overall system was very
complex and there were many such grounds on which the company could fail. Like we see that
there were several customers in the system, on how they were regulating the system as there
were several payment models that were present in the system. Due to this the interaction in the
cloud was becoming very difficult (Boghossian, 2017). There were few models for the company
to follow. Since the internal team was not small, it was getting difficult to manage the same and
the aim was to have more team members was needed. In case of culture of the company it was
found that the founder of the company Leduc was concerned only with the growth of the
business and he was only concerned with high revenues and profits, he wanted that the managers
should put in long hours, he always pushed his team and made sure that he never missed his
deadline and that had affected the company on many grounds as the team was getting affected by
that. The employees often felt that budget goals were unrealistic. This caused a lot of stress in the
management of the company. The accounting team was overworked and that was affecting their
feelings and because of that there might be irregularities in the accounting done by the company
and affected how the financial statements were prepared and presented by the company. There
were a lot of different payment options that the company had, and that was based on the
customer’s needs and financial goals of the company. They delayed payment dues until the
revenues started coming (Charles H, Giovanna, Dennis M, & Robin W, 2015). These accounting
methods had made the overall system very complex. The organizational structure was also not
stable, and it was seen that there were many issues involved as the founder Leduc was very
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controlling but not managing the company accordingly. When it came to compliance
requirement the company was following the same as per a company in the technology filed but
there were certain issues that the baseline level the company was not able to follow. So, we see
that level of compliance is not easy to meet always given there are heavy pressure from the
above (Coate & Mitschow, 2017).
Materiality of Findings
After the bribery allegations it was found that the company wanted to hire an outside legal firm
for carrying out the investigation of the company, but the owner Leduc did not want to spend that
on any outside firm and recommended to hire an attorney from the same teams that they were
working for. It was found during the investigation that there exists a mail, which read that the
accounting data of the company was not always clear, and the data kept changing that was
supporting the accounting operations of the company (Iggers, 2018). It was also found that the
accounting people were having issues with the top-level people as they were having huge
problems to deal with and were not ready to listen to the base line issues that the accounting
executives faced. It was also found that there were 16 accounts that were materially misstated
and the estimates for these accounts ranged from zero to few thousand dollars, it was also found
that the largest item in the system had a range of $0.8million to $1.2million. The various
accounts that were misstated included restricting events, revenues, contingent liabilities,
inventory, payroll expenses, amortization etc. It was found that obsolete material was still there
in the system, legal litigations were settled outside the court and expenses were charged to the
company, the revenue recognition potential cut off from the future sales of the company. The
accounting with respect to deferred tax assets and liabilities was not accounted properly. Even
amortization was not calculated properly, and few more issues were also there. As per the
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investigation that all these accounts were materially misstated and that was having a negative
impact on the accounts of the company and the financial statements that were presented by the
company and how they were managed (Kaufmann, 2017).
Based on the overall findings the board should be recommended to manage their accounts of the
company and reinstate the financial statements of the company so that in future the actions do
not affect the potential growth of the company in the future. The overall findings had also shown
that these were such matters that cannot be ignored by the company and they should try to
change the same (Webster, 2017). They should also see to it that all the accounts should be
properly reinstated, and the financial statements should also be reinstated accordingly because in
case it is not done the company would be highly affected due to that. In case the financial
statements are not instated these mistakes would be carried forward to the next year and the
coming years also. It would make the company weak and in the future the company would suffer
badly if they do not change the same now. So the board is recommended that strict action should
be taken and changes should be made such that on all grounds the company does not suffer in the
future and for that the accounts should be reinstated (Borit & Olsen, 2012).
How the investigation was handled
The investigation was not handled in a very good way and it was seen that there the directors of
the company did not give too much importance to the email and the accounting issues that were
found. It was stated by them that all these accounts and the related dollar value associated with
them was very low and thus it was not material, but together there were material, and this was
stated by the auditors of the company. The director also stated that they do not have time for all
this and the email did not state that the wrong doings on anyone part. The email was six months
old and there might be the case that these matters have been already taken care of. They were not
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giving so much importance to the red flags that the auditor found. They decided that the
quarterly report of the company should be held in the light of such emails and information and
the FCPA should continue with their investigation and the accounting authorities should continue
with preparation of the financials of the company and raising an opinion on the same. They said
that the bribes are still not clear, and the fact that the managers are making their best efforts to
move the work in Asia should be a point of concern and such issues should be ignored. So we
see that on many grounds the management was a failure and there only aim was to meet the legal
requirements to fulfil their compliance requirements even though they knew that the accounts
were misstated and in future this will affect the going concern assumption of the company and
the stakeholders will lose their believe in the company (Henriksen, 2018).
Audit Report
In case we were the auditors of the company, based on the issues that were found and the way it
was affecting the company, an adverse audit report would be issued to the management of the
company, that would state the potential reasons behind the same and also state that there are high
material misstatement in the accounts of the company because of which the company is not
operational on many grounds and not managing their stuff properly. It was found that the
directors were not taking actions to change the same and were not putting their efforts so that
such issues can be reduced. Given the materiality level is so high there are chances that in future
the going concern ability of the company might get affected and that won’t be correct as that
would be wrong on part of the company and the stakeholders and hence an adverse opinion is
given in the audit report of the company (Iggers, 2018). It should also be stated how the
management of the company was not ready to take these claims seriously and only wanted to
fulfil their obligations to complete the report. In case the financial statements are not instated
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these mistakes would be carried forward to the next year and the coming years also. It would
make the company weak and in the future the company would suffer badly if they do not change
the same now. So the board is recommended that strict action should be taken and changes
should be made such that on all grounds the company does not suffer in the future and for that
the accounts should be reinstated (Delone & Mclean, 2004).
Audit Report
To,
The board of Directors,
Based on the overall investigation and the audit procedures carried out it would be stated that the
accounts of the company were materially misstated and that can influence the going concern
ability of the company, thus an adverse opinion is being given by us on the same.
In best Regards,
Auditor.
Opinion as part of the Group
In case we were part of the discussion in case of the bribery issue as a board of director of the
company, the aim would have to change the situation in such manner that the financial
statements of the company are not misstated and they are taking all the necessary potential to
make sure that the email that was found is being taken seriously and the management of the
company is taking necessary steps in that. It was found that company is managing on wrong
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grounds and that should be managed properly. The quarterly reports of the company should be
held, and the accounts should be properly checked, proper investigation should be held by the
company and efforts should be put in that all these issues should be changed. The company is
facing many issues and the directors need to put in their best efforts to change that. Support
should be provided to the FCPA investigation and after the investigation is completed the
company should change the same and then the statements should be issued. People who are
connected to the email must be summoned and they should be logically asked on what grounds
these emails was sent off and how investigation should be done (Awasthi, Omrani, & Gerber,
2018). They should be asked on what grounds they have sent that mail and how they have
changed the same and managed the same and what support they do require from the management
of the company that can potentially help in improving their position. The FCPA should also be
given all the support that they need to conduct the operations of the company with respect to
investigation of the fraud (Wellmer, 2018).
Conclusion- Overall Group Opinion
Being in a group different member were having different opinions but management of the same
was that group should reach to a census decision so that the level of disagreement should be low.
It can also be seen that the members were ready to listen to each other but there were grounds on
which they can be against each other but each of them wanted that the operations of the company
should not be affected and all the issues that the materiality level are affected by should be
handled accordingly and managed by the same. All the group members were having their own
opinion but all of them reached to the same point that FCPA investigation should be conducted
accordingly. The management of the affairs of the company is very important and that should be
the primary aim of the board of directors and to remove any kind of misstatements that they see
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in the system. All the members were of the same opinion that first the issues should be resolved
and then any actions should be taken with regards to fulfilment of compliance issue of the
company and its peers. And if required the top management can also be charged for their course
of action in the system.
References
Abdullah, W., & Said, R. (2017). Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, 129-149.
Awasthi, A., Omrani, H., & Gerber, P. (2018). Investigating ideal-solution based multicriteria decision
making techniques for sustainability evaluation of urban mobility projects. Transportation
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