Auditing Analysis
Overview
The present case study mainly describes the internal and external audit at LDC cloud systems. The four organizations, which are involved in the anti-fraud collaboration, are also participated in the audit of LDC because their work is to mitigate the risks caused by the fraud of financial reporting. In the initial part, the company description and financial data of the company are described. In the financial data, the figures for 4 quarters are provided. The things that are highlighted in the financial data are net income, revenue, earning per share, EPS estimate, shares outstanding, and Analysts’ consensus estimate of EPS. After that, the key strategy of the company and executive team are discussed in detail. In the next part of the case study, the internal and external audit of the company is discussed. Scott Tensar is hired as the head of the internal audit team. Tensar was responsible for providing assistance to the internal audit team with help to mitigate the reporting, financial and operational risks. The initial external auditing task was allocated to Sampas, and both Sampas and LDC have good relationships. Both LDC and Sampas faced problems in the form of accounting challenges that are caused due to the business model of LDC.
The case study also shows the cultural reflection of the company. The culture part in the case study shows that the CEO of the company carries high expectations, due to which the managers are ordered to work for long hours to fulfill the commitments. The only thing he knows is to earn growth rates and to maintain the revenue by any means. The case study also shows the organizational culture of LDC as more regressive rather than supportive. The maintenance of the hotline by the company is also reflected in the study. The purpose of the hotline is to record legal, financial, or regulatory concerns by the employees, vendors, and customers. The case study also includes the bribery investigation conduction by LDC.
The things that need to disclose to the board’s attention
During the audit of a company, many things need to consider along with the financial statements. The additional things help the auditing firm to disclose the original cause behind the financial misstatements. In the present case study, the things that are considered while analyzing the financial position of the company are culture, internal control system, and environment of the company. Organizational structure is not included in this case, which is another key fact of the audit. The issues related to the organizational structure are also needed to mitigate (Dewayanto et al., 2017). Due to this, the issues should be disclosed to the attention of the board members.
The organizational structure of a company reflects its information flow process, through which the information flows from the top to the lower level of management. Sometimes, there is a direct link between the upper and lower level of management. Corporate strategy controls the adjustments in the organizational structure. Most of the time, the organizational structure transforms along with the change in the corporate strategy (Velte and Issa, 2019). Hence, there is more probability that the organizational structure may change in terms of the information flow process or other things due to the change in the corporate strategy (Kuang, 2016). Hence, this thing needs to bring to the attention of the Board during the disclosure of auditing results. Along with the organizational structure, the key process, employee engagement, and diversity need to be presented to the board’s attention (Lammers, 2019). The present case study shows that the audit report includes limited non-financial concerns of the company, due to which most of the reasons are not clear.
It is important to present more clear reasons for financial misstatement and the non-financial things related to it. After mitigating the problems in non-financial areas, the company can expect less financially misstated.
Recommendations to Board
The audit results in the case study clearly show that there are sever accounting issues are evaluated by the team. However, the accounting treatment for the declared accounting issues is not found by the team members. There are 16 accounting issues disclosed by the audit team. 16 accounting issues that are declared in the audit are immaterial. The description of the accounting issues are provided in a detailed way, so it became difficult for the members to understand the exact meaning of the issues. It is important for an audit team to present the audit report in an understanding way that it became easier for people to know the key issues (Adams, Druckman, and Picot, 2020). There are many people at the company who have less experience and accounting knowledge; for them, the auditing results will remain unclear. The accounting issues that are declared as a result of the audit are not seemed material by the board members. Some of them said that collectively the issues could be considered as material.
The auditing report is not able to provide clear evidence against the accounting issues or misstatements. Hence, it was impossible for the board to take adequate action based on the unclear results. As there is no such thing that clears about any bribe or misstatement at the company, the board should move on (Pinello et al.,2019). The findings that are attached in the email do not contain an exact date or detailed explanation about the issues, so these things cannot be considered as a crucial thing for the board’s concern. There are other things that the board needs to look for, so the board cannot keep itself busy with such unclear findings. As there is no such clear findings arrived by the attachment, there is no meaning of restating the financials. The restatement of financial statements done due to three main causes- fraud or misrepresentation, accounting errors, and non-compliance with GAAP or IFRS procedure (Mohr, 2020). There are no such reasons revealed based on the auditing results. If the board still makes a decision to restate the financial statement, then there should be valid reasons. Due to this, the board has to again conduct the audit of the company to find out the exact reasons for the accounting issues and the exact amount misstated.
Generally, the changes in the accounting statement can be made only if the misstatements are analyzed in the particular period in which the audit is held. In the present case, the accounting issues that were revealed are from 1-3 years back. Hence, the accounting issues cannot be considered or corrected in the statements. A company cannot change the financial figures of last year as it has already disclosed on several sites and is also revealed to the stakeholders. If the misstatements are found during the same year, then it is possible for a company to restate them (Jokic et al., 2020). In the case of LDC cloud systems, the board get to know about the accounting issues about previous years and 3 years back, so they cannot be restated. Another fact that is important for the restatement of financials is the adequate reason behind the accounting issues. Based on adequate reason, further action of restatement can be taken. In the present context, the accounting issues that are presented in the email neither have the proper date of the issue or the adequate reasons behind it. The issues are also not understandable by the board members, so it became difficult to think about those issues. As there is no such proper proof against the issues and the impact of the issues are not experienced by the company, so there is no need to restate the financials.
Investigation handling
The investigation of LDC is mainly handled by a program named bribery investigation. Along with the bribery investigation, a hotline was formed by the company based on which it can get to know about the latest issues related to accounting, legal, regulatory and other concerns of the company. The hotline can be accessed by customers, employees, and vendors to report any concerns. The investigation was done based on the information provided by a caller on hotline. There is no such clear information provided by the caller, but Trela thought that an investigation is needed. In this bribery investigation, the internal team of the audit is considered for the investigation, as they do not want to hire an external audit firm. Trela decided to involve an internal audit team in the investigation, as he knew that CEO LeDuc would never approve the idea of hiring an external audit firm to carry out the investigation operations.
While continuing the investigation, the first information evaluated by the team is leading to other information. The information gather by the team is revealing earlier discoveries—the operations carrying out by the investigation team expected to took severe months or a year. However, the investigation of bribery does not bring expected outcomes to the board, as the members of the board are not able to understand the exact meaning of the accounting issues.
The exact date and reason for the accounting issues are not clearly discussed in the report, due to which the investigation cannot be considered as successful. An investigation that cannot provide exact reasons for issues cannot lead to the expected mitigation. The bribery investigation reveals a number of accounting issues, but they have not materialized issues. The email attached in the case study discloses clearly the bribery investigation. The investigation identifies 16 accounting issues, but none of them are material. The investigation is not carried out properly, as the team is not able to provide the exact date of the issues or the key reason behind it. The explanation about the issues is not carried out in detail that creates confusion for the board members. Along with the internal audit team, the involvement of the external audit team is also important because an external audit team works in an unbiased manner and does not support any party.
The involvement of an external audit team is not considered in the investigation as the idea is not approved by the CEO. The involvement of an external audit team was required for this investigation. The results that could be revealed by the external team may lead the company to another way (Jan 2018). The investigation results are not expected by the board members as there is no such new information about the company fraudulent, and all the information are from past years cannot be mitigated now. The investigation should be carried out with an aim to disclose the present issues created in the company to mitigate future problems. Considering the past issues only helps a company to learn lessons from it.
Type of audit report needs to be issued
There are severe types of audit report can be presented by an external audit firm, and the opinions based on the audit results are also provided by the external audit team. Being an external auditor, one is responsible to critically analyze the collected information of a firm and then provides an opinion about the integrity of the financial information reported by the company. Based on the results of the internal investigation team, it can be said that an external audit team will disclose a disclaimer opinion-based audit report (Narvas, 2017). In such an audit report, the external team clearly defines that they are not able to provide a definite opinion. This thing happens due to a lack of maintenance in the financial records. Another reason behind the improper financial record is inappropriate to support from the end of management. Due to inappropriate financial records, the auditors are not able to observe the operational tasks and to analyze the procedures.
In the case of an audit report that contains a disclaimer of opinion needs to be formatted in a different way. In the report, a place named disclaimer of opinion will express the reason behind not expressing any opinion for the audit. After that, a heading named basis for opinion will express the key reasons for not expressing any opinion in detail. Key audit matters and conclusions regarding going concerned are two more parts that need to be added in the report (Icaew.com, 2018). An audit report with a disclaimer opinion does not contain other information because it disclaims the opinion. However, the opinions related to strategic report or directors’ report can be considered. There will be no change in the directors’ responsibilities in a disclaimer opinion based report. While considering a disclaimer of opinion in an audit report, the responsibilities of the auditor need to be expressed. In the part of audit report usage, the duty of care of the audit team towards its company needs to be declared. At last, the signature on the audit report takes place (Icaew.com, 2018).
The things that are discussed above are the traditional format of an audit report with a disclaimer of opinion. However, the things can be changed as per the requirement of the auditing firm as well as to express the auditing procedure.
In the investigation of LDC, if we are appointed as an external audit team, then we would try to focus more on current accounting issues and to disclose them to be mitigated. If there is no such information found after completing the auditing activity, then only the disclaimer opinion will be provided. If the operation of the company gives a clear sign of fraudless activities then qualified opinion needs to be provided in the audit report (Narvas, 2017). As an external audit team, the members are responsible for working in an unbiased way without supporting the fraudulent of the company. Being an external audit team, the key responsibility of the members is to maintain transparency in the activities to ensure the integrity of the activities.
An alternative way to solve the problem in the case study
There are more ways to solve the problem that is reflected in the case study. If the board members are not ready to discuss the revealed accounting issues as they are not fruitful for the present time. The board members can be convinced to at least reinvestigate the issues to get detailed information. The accounting issues need to be cleared to stop future issues. If it is disclosed that what are the key reasons behind these issues, then the root of the accounting issues might be found. Working on the root cause will help the board to make adequate decisions regarding the existing process. Based on less detail attached to the accounting issues, the board members do not show any interest to proceed with them.
The board members can be convinced to grant permission for reinvestigation or involvement of the external audit team. Integration of an external audit team will help the company to carry an effective and transparent auditing activity. The investigation by the external audit team, along with the support of the internal team, will help the company to gather exact information about previous accounting issues, as well as the current issues.
References
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