This case study provides information in order to examine LDC Cloud Systems (LDC) through three principal perspectives: the fraud triangle, the financial reporting supply chain, and fraud prevention themes.

With a plot centered on a bribery allegation and questionable accounting oversight within the company, LDC Cloud Systems is designed to provide the reader a better appreciation of how fraud situations can unfold and be addressed, including the importance of strong board oversight. The case study explores actions of management and the board in-depth, providing a 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.

Case Study Narrative

https://www.thecaq.org/wp-content/uploads/2019/03/LDC_Cloud_Systems_case_study_2017-10.pdf (Links to an external site.)

Case Study Videos

https://www.youtube.com/results?search_query=ldc+cloud+systems+case+study (Links to an external site.)

Areas To Examine

1) THE FRAUD TRIANGLE

Pressure

Opportunity

Rationalization

According to the fraud triangle, a fraud is more likely to occur when there is 1) “pressure” to achieve what might be considered unreasonable or unattainable performance goals, 2) a perceived “opportunity” to commit fraud that might go undetected, and 3) a “rationalization” that justifies the fraud to the perpetrator. The case study includes information that will allow the student to identify each component of the triangle in the case study.

2) FINANCIAL REPORTING SUPPLY CHAIN

Construct an organizational chart with solid and dotted lines of the reporting structure among the key players. Evaluate the structure, chain of command, departmentalization or other issues that emphasize the problems of information asymmetry and uncertainty in responsibilities and control.

The key players at LDC

· The Audit Committee

· The Board of Directors

· External auditors

· The internal audit department

· Upper management (e.g., CEO, CFO, general counsel)

3) FRAUD PREVENTION THEMES

Tone at the top (culture)

Skepticism

Communication

Requirements

A project report is required at the following milestones:

Week 3 – Video scenes #1 and #2

Week 5 – Video scenes #3 and #4

Week 7 – Video scenes #5 and #6

Week 8 – Narrated Presentation

For each deliverable, you will be required to review videos of conversations among the key players in this case study. Then you will provide a two-page report responding to certain questions in one or more of these areas (called “pastures”).

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

Objective: The objective is to understand the company and identify the specific problems that existed there.

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

Objective: The objective is to identify the underlying risk factors that existed at 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 (the organization structure). 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.

SUMMARY

· Be on the alert for the existence of conditions that can lead to fraud (as illustrated in the fraud triangle). Fraud is more likely when there is pressure to commit fraud, an opportunity to commit fraud, and a rationalization to justify the fraud.

· Each party in the financial reporting supply chain—management, the board of directors, the audit committee, the internal audit function, and the external auditor—plays a different role when it comes to deterring and detecting potential fraud at a public company.

· An ethical culture environment, internal controls, and systems are critical to discouraging ethical people from making bad choices and preventing bad actors from taking advantage of the environment. An organization’s environment is shaped by the tone set by top management and the board, and the attitudes and beliefs among the organization’s members.

· The internal controls and systems include processes that are put in place to guide the organization and provide checks and balances.

· Good communication is essential. While trust is also important, an attitude of professional skepticism is appropriate among those responsible for auditing, accounting, and financial reporting.