Discussion Study Case 1 Reply to Le-Nature’s, Inc. by Darla
Liberty University, School of Business
Jimmy Jones
January 27, 2022
Introduction
Hello Dartha, you provided a masterful undertaking n this assignment for our Advanced
Accounting course. After successfully reading the case study in the course book and evaluating
your post you effectively applied your insight on this undertaking. You displayed a thorough
apprehension of the theory covered in this case. Comprehensive cases included in our
coursebook provides a vast assortment of key theories auditors use to evaluate financial
statements and processes of businesses. American greed is something can that can go against the
true nature of the Christian world view and this is a prime example of another such notion.
Summary
Gregory Podlucky was the founder and CEO of Le-Nature’s, inc. a beverage drink company
located in western Pennsylvania. Gregory was an entrepreneur and a successful certified public
accountant (CPA). Le-Nature flourished masterfully and thrived exponentially and in 2006
ranked as the 33rd beverage company in the United States with annual sales of over 280 million.
Gregory started to defraud the company by putting family and friends in key positions of the
company that essentially Gregory still controlled those facets of the company. Slowly but surely
Le-Nature would illuminate red flags that would provide resourceful. Ernst & Young, was tipped
off by the current chief financial officer that he was certain that revenue from the tea division
was fictious. Other key top executives aborted the company and more suspicions came to light
when Gregory rejected a buyout offer for $1.2 billion dollars for the company. Gregory provided
a false notion that it was not enough compensation. When a number of key executives left the
company together it is a result of something malicious occurring within the company. As a result,
it is of importance that the audit firm BDO, law firm, and CPA firm used to probe Gregory and
the bank Wachovia were sued for their role in the fraud.
Questions
1.Identify the parties impacted by the quality and rigor of an organization’s corporate
governance. What responsibilities do corporate executives have to those parties?
I loved how you defined corporate governance from “Investopedia defines corporate governance
as a government within a company.” (Braswell, 2022) Essentially, “the lynchpin of the Le-
Nature’s fraud was the fatal flaw in the company’s corporate governance system that allowed
Podlucky to single-handedly manipulate and distort the company’s reported financial results”.
(Knapp & Knapp, 2015). Ultimately, I completely agree with Dartha’s assessment. Key
executives and/or board of directors for a company have control over stakeholders, investors,
employees, and the public. “Without transparency, fairness, and honesty all faith has been lost
and can make a major impact on that company. Like the U.S.’s body of congress, the board of
directors ensures the company is following the law, following all federal, states, and company
procedures, and making necessary changes through time. (Braswell, 2022). They also have a
responsibility to provide a duty that requires to act in the best faith of its stakeholders, investors
and the public. An instance where Gregory failed to do this was inflating the sales of its tea
subsidy. As noted, “From 2000 to 2006, that subsidy reported sales of $240 million while its
actual sales during that period were fewer that 100,000.” (Knapp, 2018)
2.Identify and describe the corporate governance-related responsibilities of corporate
accountants, independent auditors, and external accountants hired by companies to perform
forensic investigations.
You provided a great summary of the five dimensions that corporate accounts provide. The “five
dimensions: competence, objectivity, fieldwork quality, fieldwork scope, and an organization’s
investment in internal auditing.” (Braswell, 2022) Accountants and auditors hired by companies
to perform forensic investigations are responsible for identifying, exposing, and preventing
weaknesses in corporate governance, internal controls, and financial statements. “Corporate
accountants are responsible for preparing financial statements that are accurate and a fair view of
the company’s performance in accordance with governing standards” (Hadden, 2012). Auditors
help ensure that they protecting the affairs of the shareholders by ensuring that the financial
statements are valid and authentic. Accountant and/or auditors that find dubious activity, it is
their authority to communicate it. In Le-Nature’s case study, the CFO was appropriate in his
actions by reporting suspicious activity to their independent auditor. Woefully, Gregory still
managed to manipulate the accounting controls and continued to defraud the company.
3.Identify the apparent flaws in Le-Nature’s corporate governance. Relate those flaws to
the five components of the COSO internal control framework and the “fraud triangle.”
I completely agree with Dartha in her guidance that a major flaw that was evident and clear with
Le-Nature is that Gregory hired unqualified people for key positions that overlooked accounting
responsibilities and internal controls but hired friends and family who were unqualified and
provided little internal controls as Gregory craved dominance over the financial details to
continue to defraud his stakeholders and investors. Furthermore, there were little actions by the
board of directors to eliminate Gregory’s fraudulent activities. The fraud triangle is made up of
three parts which are, opportunity, rationalization, and pressure. Gregory had ample opportunity
to defraud the company as he had friends and family in responsible of key functions. Employees
rationalized in the scheme in order to keep the company afloat. Gregory supplied pressure to his
employees in providing manipulation to comply in the fraud.
4.Le-Nature’s was not an SEC registrant. Identify corporate governance safeguards
imposed on SEC registrants that are not imposed on non-SEC registrants.
As noted, “the Securities and Exchange Commission (SEC) is a federal administrative agency
tasked with monitoring markets, enforcing securities laws, and developing new regulations.
Congress established the SEC in the Securities Exchange Act of 1934, which was passed in
response to the market failures that precipitated the Great Depression.” (The Securities and
Exchange Commission, 2021) I agree with Dartha guidance regarding SEC registrants’ ability to
raise capital by issuing shares. Furthermore, another key safeguard in corporate governance
safeguards that are place for SEC registrants are the requirements of financial reporting. This
reporting includes annual and quarterly reports that allows for financial data to be transparent to
investors and stakeholders.
5.Following the Special Committee investigation in late 2003, Le-Nature’s dismissed EY
and retained BDO Seidman to serve as its independent audit firm. What safeguards are in place
to mitigate the impact of auditor changes on the credibility and integrity of the independent audit
function?
It is completely obvious to see that the riddance of an external auditor who was compelled to ask
questions is a crucial indicator of fraudulent activities. Furthermore, I agree that a key
responsibility is that auditors need to be independent from their clients. As noted, “the
independent auditor serves a vital role in our capital markets by providing an objective third
party opinion on the integrity of financial statements that investors rely upon for investment
decisions. Accurate and reliable financial statements are critical for companies to raise capital
and are the bedrock upon which investors depend to make informed decisions.” (Harris, 2016) I
completely agree with Dartha’s assessment of how the SEC provides important safeguards the
mitigate the impact of an auditor changes.
6.Identify the key differences between a “quarterly review” and an “annual audit performed
by an organization’s independent auditors.
Wow, superb job in covering the two types of audits. In addition, “A quarterly review is a
limited examination performed by a CPA, reporting on the plausibility of your financial
statements. A review provides limited assurance, while an audit provides a reasonable amount of
assurance.” (Nachbauer, 2022)
7.Pascarella & Wiker was retained by K & L Gates to assist in the fraud investigation
requested by Le-Nature’s Special Committee. What type of professional service was Pascarella
& Wiker providing? What professional standards governed Pascarella & Wiker’s conduct during
the provision of that service?
Darta assertion regarding Pascarella & WIker appears to be completely accurate. They were
hired by K & L Gates who themselves are law firm hired to uncover the fraud of Le-Nature Inc.
Pascarella & Wiker provided a recommendation of rehiring EY as Le-Nature Inc’s independent
auditor which was put in place.
Biblical Perspective
Something Gregory failed to do was, “trust in the LORD with all your heart, and do not lean on
your own understanding. In all your ways acknowledge Him, and He will make straight your
paths.” (Proverbs, 6 B.C.) If Gregory would have had a relationship with the LORD, his path
would have been one not of deception and fraud but one of straight path.
References
Braswell, D., (2022) Discussion case study regarding Le-Nature, Inc, Advanced Accounting
course, Liberty University
Hadden, T. (2012), Accountable Governance in Corporate Groups article titled, “The
Interrelationship of Law and Accounting. Australian Accounting Review”
Harris, S.B. (2016), Public Company Accounting Oversight Board (PCAOB), article titled
“Auditor Independence and the Role of the PCAOB in Investor Protection”
Knapp, M.C. & Knapp, C. (2015). The Association of Accountants and Financial Professionals
in Business, article titled, “Le-Nature’s Inc. Fraud, What happened and Why?”
Knapp, M. C. (2018). Contemporary Auditing: Real Issues and Cases. Cengage Learning, Inc.
Proverbs, (6 B.C.) Proverbs book 3:5-6 retrieved from, https://www.concordia.edu/blog/15-bible-
verses-to-encourage-you.html
The Securities and Exchange Commission (2021). Legal Information Institute from Cornell
University, article titled, “Securities and Exchange Commission (SEC).
