Course Presentation Deliverable # 4 - Assignment

ACCT573 - CASE STUDY VIDEOS

The Anti-Fraud Collaboration has developed six short video vignettes for use with the LDC Cloud Systems Case Study. In each vignette, actors reenact several interactions selected from the case study. The videos do not provide information beyond that found in the case. Rather, they aim to enable discussion participants to see certain material in a new light and allow the discussion leader to emphasize certain aspects of the case in the classroom.

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. In an effort to sign deals, the sales department is offering unique terms and conditions for each client, and Tensar is challenged to keep up with designing and implementing proper internal controls for these new contractual arrangements. 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.

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

This video can generate a discussion about what challenges the accounting and internal audit departments face in keeping up with a fast growing public company. Remind participants that because of the success of the company following its IPO three years earlier, it has “graduated” from the designation of an emerging growth company (EGC) to a large accelerated filer. Therefore, the external auditor must opine on the company’s ICFR.

The head of internal audit is stressed about the ability of his staff to keep up. The CFO also indicates that his department is short-staffed and in need of an accounting policy expert.

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

Another option would be to use this video in the discussion about the fraud triangle; the stress that internal audit and accounting are under can contribute to an opportunity to commit financial reporting fraud. In this scene, the CFO suggests that an employee couldn’t learn enough about the finance and accounting systems to commit a material fraud—but is that naïve on his part?

PASTURE #3: THE FINANCIAL REPORTING ENVIRONMENT (“HOW DOES THE SYSTEM WORK, AND HOW SHOULD IT WORK?”)

Environment – When discussing “what role should internal audit play in ensuring adequate controls?” this scene could generate a discussion about the realities that LDC’s internal audit team is dealing with.

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.

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

This video can help to set the scene that LDC is a fast-growing startup, and the critical support functions of accounting and internal audit are busy and under stress. The discussion leader can ask if that is typical.

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? The external auditor has mentioned his concerns to the CFO and head of internal audit, but “they always seem eager to get back to work.” Are they avoiding having a discussion with the external auditor about their teams’ workload?

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

In the discussion about the fraud triangle; the stress that internal audit and accounting are under can contribute to an opportunity to commit financial reporting fraud. The audit committee chair indicates that he is aware that the internal audit team is “busy” and now the external auditor is telling him that he sees signs of stress in the accounting department. Should the audit committee chair have shown greater

concern about this? What additional questions should the audit committee chair ask of the

external auditor? Of internal audit? Of the CFO about his finance team?

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.

He has set aggressive growth goals for the company and expects everyone to keep pace with what is

needed to ensure that growth. He expresses concern that CFO Arizmendi’s team is not keeping up with all

of the new deals because they cannot figure out the accounting. He calls out General Counsel Trela for

not pushing through legal contracts quickly enough.

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

This scene can be used to generate a discussion about the culture that the CEO is setting after

talking about what is happening at LDC (i.e.,an ongoing bribery investigation, possible accounting misstatement, high-growth targets that put strain on support functions like legal,

accounting, and internal audit). The video illustrates the high expectations that the CEO

has to remain the go-to provider for customers and keeping the shareholders happy with the

continued growth in sales.

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

In the discussion about the fraud triangle — the aggressive targets that the CEO has set

put pressure on everyone. If the operations manager in Asia was delayed in opening on

time, it could have impacted sales targets, so he opted to make a facilitation payment (e.g.,

a bribe). The information in the email and the email attachment uncovered during the bribery

investigation might suggest that some of the accounting estimates were questionable and

could result in a restatement of the financials. What role has the CEO played in setting the

tone at the top? What pressures has this put on the various team members: legal, finance, and

internal audit?

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.

In addition, she recognizes that an expense of that type and size would not have been caught by the

company’s ICFR. Note also that Sheel suggests that she could use more help, between the investigation

and legal contracts (for the deals being made by the sales group), she has a lot going on. As a result,

we learn in the case study that Sheel was too busy to give appropriate focus to an email that caught

her attention that was unrelated to her bribery investigation but should have raised a red flag.

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

This scene can generate further discussion about the consequences of staff being stretched thin. Why

did Sheel wait three months to bring the email to the attention of her boss, Trela? What would

you have done if you were in her shoes? Sheel expressed concern that LDC’s internal controls

didn’t catch the bribery payment – should it have?

While the bribery may not be material to the financial statements, what processes could LDC

have had in place to detect this kind of payment?

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

Set up a discussion about problems facing the financial reporting function at LDC. What is

the significance of the information in the emailthat Sheel is now bringing to Trela’s attention?

What about the information contained in the attachment marked “For Accounting Eyes Only”?

PASTURE #3: THE FINANCIAL REPORTING ENVIRONMENT (“HOW DOES THE SYSTEM WORK, AND HOW SHOULD IT WORK?”)

Environment – If it wasn’t addressed earlier in the case discussion, this video could be used to generate a discussion about LDC’s internal controls: Why didn’t the controls catch the bribery payment? What processes could LDC put in place to detect this kind of payment?

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

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

This scene is created based on facts and circumstances presented in the case, primarily from the information provided in the “Culture” section on page 6 of the case study. It is not an actual conversation presented in the case. 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. There is stress in all parts of the business, coupled with

a recognition that everyone is supposed to “do the right thing.” However, there is an underlying current

from above that LDC not miss out on the chance to be something special.

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

This scene could be used to further the discussion about the fraud triangle. It illustrates

the cascading effect that aggressive growth targets can have on the company. Under pressure to close deals, the sales team varies from standard contract terms. In turn, this puts pressure on the accounting function, which is tasked with determining how to recognize revenue for these different arrangements. Legal

is impacted because the team has to modify the standard contract terms to meet the terms

and conditions set by the sales team. Ask case study participants how accounting and legal

are impacted by the sales function? What could go wrong? Why did the CFO say that the team feels like they’re playing goalie?

PASTURE #3: THE FINANCIAL REPORTING ENVIRONMENT (“HOW DOES THE SYSTEM WORK, AND HOW SHOULD IT WORK?”)

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This video could be used to generate a discussion about the financial reporting environment at LDC, using the samesituation described in Pasture III above. Under pressure to close deals, the sales team varies

from standard contract terms. In turn this puts pressure on the accounting function, which

is tasked with determining how to recognize revenue for these different arrangements. Legal

is impacted because the team has to modify the standard contract terms to meet the terms

and conditions set by the sales team. Ask case study participants how accounting and

legal are impacted by the sales function? What could go wrong? Why did the CFO say that the

team feels like they’re playing goalie? Is there something that the audit committee chair could

do to alleviate the situation?

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

This scene is not taken verbatim from the case, but does communicate some of the concerns that are

raised in “The Board Meeting” section of the case study (on pages 9 and 10).

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. The text in the case study indicates that when

Audit Committee Chair Lester Darnal read the email,he quickly became concerned and contacted his

colleagues on the audit committee.

Given the short period in which they had to take any action before

the quarter-end filing deadline, and the potential seriousness of the matter, the other audit committee

members agreed the issue should be brought to the full board. To get ready for the board meeting,

the audit committee chair met via video conference with the Audit Partner Latham Asper and General

Counsel Ross Trela.

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

The situation at LDC, as it lays out several important points about the case, and the

decisions that the board has to make: do they need to restate financials from prior periods?

It sets up the key decisions that need to be made by the board.

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

This scene could be used to generate a discussion about the challenges at LDC.

The company has set aggressive growth targets; there is a potential bribery in the Asia

operations; the three main support functions— legal, accounting, internal audit—are concerned

that they don’t have sufficient staff to handle the fast pace of growth; and there is an email

that suggests that there may be some issues with the accuracy of some of the accounting

estimates in prior periods. In addition to many of the questions included on page 6, (e.g., Is

LeDuc a good chief executive for LDC? How about CFO Arizmendi? What responsibility does Arizmendi have?) the instructor has an opportunity to ask other questions about firm governance. Why is the CEO being asked to sit out this board meeting? 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?