Deliverable # 1 – Assignment – Week 3

ACCT 573 – Course Project Deliverables

ACCT 573 - Course Project - LDC Cloud Systems

With a plot centered on a bribery allegation and questionable accounting oversight within the company, LDC Cloud Systems provides the reader a better appreciation of how fraud situations can unfold and then addressed, including the importance of strong board oversight. The case study explores actions of management and the board, along with the timeline of decisions after they uncover potential problems within the company. It also illustrates how complex accounting practices common in today's fast-changing business environment can make a company susceptible to fraud.

Resources:

https://www.thecaq.org/wp-content/uploads/2019/03/LDC_Cloud_Systems_case_study_2017-10.pdf

https://www.youtube.com/results?search_query=ldc+cloud+systems+case+study

Deliverable # 1 – Assignment – Week 3

Review the written case study from the link (also located in the class files) and review the following scenes that reenact conversations among LDC key players.

SCENE 1: CONVERSATION BETWEEN SCOTT TENSAR AND FILIPPE ARIZMENDI : PAGE 5

https://www.youtube.com/watch?v=wyYUIhQcq4A&list=PLA3kzgLG3GmVFJWHhhyxcatMwir4glqxR

This conversation highlights Internal Audit Head Scott Tensar's concern that he needs more staff to keep up with the growth in the company.

The CFO seems to understand Tensar's dilemma, and notes that he, too, could use an additional accounting policy expert, but any expansion of staffing levels will have to wait.

Respond to the following questions ensuring you provide examples and concepts from our lessons.

1) What challenges are facing the accounting and internal audit departments in keeping up with a fast growing public company?

2) Since the company's IPO three years earlier, it has "graduated" from the designation of an emerging growth company (EGC) to a large accelerated filer. How has this affected the external auditor?

3) What evidence exists that a component in the fraud triangle is being compromised? Be specific about the behavior you have observed.

4) What role should internal audit play in ensuring adequate controls?

SCENE 2: CONVERSATION BETWEEN LATHAM ASPER AND LESTER DARNAL - PAGE 6

https://www.youtube.com/watch?v=1KPSLkhkAs0&list=PLA3kzgLG3GmVFJWHhhyxcatMwir4glqxR&index=2

In this conversation, Audit Partner Latham Asper is asking Audit Committee Chair Lester Darnal if he has seen—and if he is concerned with—signs of stress in LDC's accounting team

Respond to the following questions ensuring you provide examples and concepts from our lessons.

1) State the evidence that LDC is a fast-growing startup. Comment on the reasons why the critical support functions of accounting and internal audit are busy and under stress. Is this typical in a start-up?

2) The external auditor has noticed the accounting department is under stress and has raised the issue with the audit committee chair. Given his oversight responsibilities, should the audit committee chair be more proactive?

3) What additional questions should the audit committee chair ask of the external auditor? Of internal audit? Of the CFO about his finance team?

Deliverable # 2 – Assignment – Week 5

Review the written case study from the link (also located in the class files) and review the following scenes that reenact conversations among LDC key players.

SCENE 3. LDC EXECUTIVE TEAM MEETING - PAGE 7

https://www.youtube.com/watch?v=ZqpNmOytLV8&list=PLA3kzgLG3GmVFJWHhhyxcatMwir4glqxR&index=3

In an executive team meeting, CEO Shep LeDuc offers insight into the culture he has set at LDC. He has high expectations for himself and the staff, and is not concerned that everyone is working long hours.

Respond to the following questions ensuring you provide examples and concepts from our lessons.

1) What role has the CEO played in setting the "tone at the top?" What pressures has this put on the following departments: legal, accounting, sales, and internal audit?

2) Looking at the fraud triangle from deliverable #1, what additional components should be added or modified?

SCENE 4: CONVERSATION BETWEEN ROSS TRELA AND BEVERLY SHEEL - PAGE 8

https://www.youtube.com/watch?v=_U48OrAEWOo&list=PLA3kzgLG3GmVFJWHhhyxcatMwir4glqxR&index=4

In this conversation, Beverly Sheel is updating Ross Trela on her investigation. She has uncovered a payment of $20,000 to a consulting firm that is controlled by the family of a government official, and as such, the payment may be perceived as a bribe for building permits in LDC's Asian operations.

Respond to the following questions ensuring you provide examples and concepts from our lessons.

1) Comment on the components of the fraud triangle that led to these events: (a) the operations manager in Asia was delayed in opening on time, so he opted to make a facilitation payment (a bribe). (b) The information in the email and the email attachment uncovered during the bribery investigation suggests that some of the accounting estimates were questionable and could result in a restatement of the financial statements.

2) Why did Sheel wait three months to bring the email to the attention of her boss?

3) Why didn't the internal controls catch the bribery payment? What procedures could LDC put in place to detect this kind of payment?

4) What is the significance of the information in the email that Sheel is now bringing to Trela's attention? What about the information contained in the attachment marked "For Accounting Eyes Only"?

Deliverable # 3 – Assignment – Week 7

SCENE 5: CONVERSATION BETWEEN FILIPPE ARIZMENDI AND ROSS TRELA - PAGE 6

https://www.youtube.com/watch?v=azNaOPNy8D8&list=PLA3kzgLG3GmVFJWHhhyxcatMwir4glqxR&index=5

In this scene, CFO Filippe Arizmendi is expressing concern to General Counsel Ross Trela that the accounting team is working extremely hard to make sure that the accounting department will be able to correctly recognize revenue on the myriad terms and conditions that the sales function is offering to close deals in order to meet growth targets.

Respond to the following questions ensuring you provide examples and concepts from our lessons.

1) Revisit the fraud triangle. How does the cascading effect on other departments that aggressive growth targets can have on the company.

2) How are accounting and legal departments are impacted by the sales function? What could go wrong? Why did the CFO say that the team feels like they are playing goalie?

3) Comment on how the sales "deals" put pressure on the accounting function, which is tasked with determining how to recognize revenue for these different arrangements.

SCENE 6: CONVERSATION WITH ROSS TRELA, LATHAM ASPER, AND LESTER DARNAL - PAGE 9 - 10 https://www.youtube.com/watch?v=inL0mTz4aSU&list=PLA3kzgLG3GmVFJWHhhyxcatMwir4glqxR&index=6

The three men are prepping for the upcoming board meeting where they will discuss the accounting information discovered in the email that has the potential to result in a restatement of prior period financial statements. CEO Shep LeDuc has been asked to sit out this board meeting so that the board can have a candid discussion about the situation at LDC.

Respond to the following questions ensuring you provide examples and concepts from our lessons.

1) What are the key decisions facing the Board of Directors (for example, do they need to restate financial statements from prior periods?)

2) What does "governance" mean when it comes to fraud detection, prevention and investigation? Is LeDuc a good chief executive for LDC? How about CFO Arizmendi? What responsibility does Arizmendi have in these events? Why is the CEO being asked to sit out this board meeting?

3) Should the company delay filing the quarterly financial report until there is a determination about the materiality of the questionable accounting estimates highlighted in the email attachment?

Deliverable # 4 – Assignment – Week 8

The final deliverable for the Course Project is a narrated presentation reflecting on:

1) Key Insights in each of these areas:

· The Fraud Triangle - What examples from the case study support:

a. Pressure(s) to commit unethical actions or fraudulent activities

b. Opportunities due to weak internal controls or rewards for bad behavior

c. Rationalization(s) by employees and key players that minimized the consequences of bad behavior

· The Organizational Structure of LDC

a. How did you evaluate the key players’ performance?

b. How does the reporting relationships in the organization hinder fraud investigation?

· The Internal Control Environment and Ethical Culture

a. Identify weaknesses in the internal control systems.

b. What evidence exists that “doing the right thing” is expected (or not) by employees?

2) Recommendations to prevent, detect and investigate fraud in these areas:

· PASTURE #1: OUTLINE OF THE CASE (“WHAT IS GOING ON AT LDC?”)

Objective: The objective is to talk about LDC and identify the specific problems that exist there.

· PASTURE #2: REFLECTION ON WHAT WENT WRONG (“HOW DID WE GET HERE?”)

Objective: The objective is to identify the underlying factors that existed at LDC and that likely caused or contributed to the problems identified above.

· PASTURE #3: THE FINANCIAL REPORTING SUPPLY CHAIN

Objective: To evaluate each member of the financial reporting supply chain. Students will assess the overall performance of the key players in the case study.

· PASTURE #4. THE FINANCIAL REPORTING ENVIRONMENT (“HOW DOES THE SYSTEM WORK, AND HOW SHOULD IT WORK?”)

Objective: To explore the internal controls systems, the roles and responsibilities of the various key players particularly their interdependencies and the ethical culture in the company

3) Your personal lessons-learned from this exercise in response to the course description

“This course examines the nature of occupational fraud, how it is committed, and introduces actions to detect it and procedures to deter it. The course also covers how to investigate allegations of fraud in order to meet requirements of civil and/or criminal court procedures. Also examined are ethics and governance in business as fraud-prevention tools. Coursework prepares students interested in earning the Certified Fraud Examiner (CFE) credential, examining tools and techniques for gathering evidence and information during fraud examinations”