Discussion: Comprehensive Case Analysis

REPLY OVERVIEW The student will post one reply for this discussion. Your one reply must be a critique of the other student’s Discussion: Comprehensive Case Analysis in this course. The critique shou

REPLYOVERVIEWThe student will post one reply for this discussion. Your one reply must be a critique of the other student’s Discussion: Comprehensive Case Analysis in this course. The critique should be between 1000 and 2500 words, twelve-point type. The student will claim the work to be critiqued by a posting in reply to the selected student’s work. The critique will consist of a thread in reply to the selected student’s work. A proper critique will address each item in the Case Analysis in order, starting with the Case Summary, stating whether you agree with the posted work and adding such comments as you think will add to the Case Analysis. Each question must be written and addressed separately. The Statement of Christian World View must be commented upon. If an item (Case Summary, question, or Statement of Christian World View) was omitted, you must supply the missing item. ACCT 622Page 2 of 2The student must support their assertions with at least four scholarly or practitioner sources which must be listed and cited using the current APA standards for graduate classes. Acceptable sources include both refereed scholarly journals, practitioner journals and textbooks.

Summary of Le-Nature Inc.

Le-Nature’s Inc. was created by Gregory Podlucky by cashing out his ownership interest in his father’s business. Podlucky was a graduate of West Virginia University where he received a degree in accounting and finance. Le-Nature Inc. successfully made a name for itself in the saturated market of beverages with a wide range of flavored waters, fruit, and tea drinks. When offered $1.2 million by investors to sell the company, Podlucky declined and instead decided to try and take the company public.

Podlucky filled employee positions with those close to him, giving many high-up positions to friends and family. The majority of the company’s board of directors was made up of “inside” directors such as Podlucky, his bother, and other insiders. Tammy Andrecyak, a close friend of Podlucky, was hired as “chief of accounting” even though she did not have a college degree or any training in accounting.

Podlucky was very good at raising money and raised almost $1 billion of debt and equity capital during the 14 years that he was CEO. Podlucky would use strategies such as a financing technique where he could do a long-term lease on equipment using an intermediary to lease equipment where they would borrow from a U.S. lender’s funds to make a large escrow deposit. They were able to finance around $300 million in equipment through this technique. They mainly raised funds through long-term borrowing arrangements such as Wachovia underwrote almost $500 million of long-term debt for Le-Nature’s through marketing bond issues for the company and sold primarily to pensions and retirement funds.

In 2003 EY was conducting a quarterly review for the company where they performed a standard procedure of asking high-level executives if they had any suspicion of fraudulent behavior. John Higbee, Le-Nature’s CFO replied that he had significant doubts about the companies recorded sales figure. The CAO and VPA also gave similar answers, all three resigned the next day. Higbee said Podlucky would often refuse to give him key document support for large transactions. He also felt there were significant material weaknesses in the internal controls of the company. EY required that Le-Nature perform an external investigation, have EY review the report and the firm will decide if further investigation is needed. Le-Nature created a Special Committee and hired independent law and accounting firms to investigate. They submitted a draft report to Podlucky who was not part of the committee and then a week later provided a revised report stating that they found no evidence of fraud but did find multiple internal control weaknesses.

Later in 2005 several private equity funds initially bided $1.2 billion but Podlucky turned down the offer. Allegations came out that Podlucky turned down the offer because he did not want a potential buyer to have access to the company’s financial records. Podlucky denied it and said it was because the bid was too low.

Allegations again resurfaced when preferred shareholders got a restraining order against the company citing fraudulent equipment leasing transactions where signatures had been forged. With the restraining order, Podlucky was evicted from the headquarters and Steven Panagos was appointed. Less than one week later Panagos filed an affidavit presenting evidence of mass accounting fraud. From this Le-Nature’s creditors filed for bankruptcy.

Investigations revealed the accounting hoax Podlucky started in the late 1990s. Andrecyak, Podlucky’s most trusted associate, plead guilty to multiple criminal charges and became a critical piece to unraveling the scheme. Le-Nature was reporting millions more than actual sales. In 2002 they reported $135 million in sales when actual sales were $2 million. This fraud was also seen in their tea subsidiary. From 2000 through 2006 they reported sales of $240 million while actual sales were less than $100,000. Their graphics depart had created bogus purchase orders, sales invoices, and regulatory authorities. Le-Nature kept two completely separate accounting systems. One that was the actual and one that was filled with fraudulent financials. Only Podlucky and Andrecyak had access to the actual financials. He used the fraudulent reports to convince investors to pour money into the company and he would siphon large sums for personal use. He was constantly having the repay his stolen funds by getting new loans. Podlucky lived an extremely lavish lifestyle with the stolen funds. Podlucky was sentenced to 20 years in federal prison and seven of his family and business associates also received jail time for their involvement.


  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?

The main parties impacted by Le-Nature’s actions were the stockholders and creditors of the company. They had invested money into the company under the impression that it was much more profitable than it truly was. Preferred stockholders were the most affected and were inevitably the ones to bring light to the fraud in the company. Creditors also were largely affected by the fraud. Creditors need accurate information to know whether their loans will be paid back. When Le-Nature provided false financials, creditors were under the impression that they would be receiving their money back, when in reality the company quickly went bankrupt. Corporate executives have a responsibility to provide accurate and up-to-date financial reports to stockholders, investors, and creditors.

  1. Identify and describe the corporate governance-related responsibilities of corporate accountants, independent auditors, and external accountants hired by companies to perform forensic investigations.

Corporate accountants have the responsibility of keeping up with the day-to-day accounting responsibilities of the company. They play a role in developing, maintaining, and improving internal controls. They also are the first auditors of the financial records. They have the responsibility to check that the financial records are correct and accurate and there are supporting documents for all transactions. “Financial accounting information is the product of corporate accounting and external reporting systems that measure and routinely disclose audited, quantitative data concerning the financial position and performance of publicly held firms” (Bushman & Smith, 2003, p.65). Independent and external auditors are responsible for the external analysis of the financials. They come from outside the company and have no material interest in the company. They should be a completely separate third party that could not benefit from the company in any way. Their role is to check the accuracy of the financial records. They need to be able to provide reasonable assurance that there is no material weakness in the financial reports. This provides investors with the assurance that the records are accurate, and they are investing in a company that is truly doing as well as their financials show. Through this, they all test the internal controls of the company to ensure that there are no weaknesses in the internal controls that could be causing fraud. External accountants may also be hired to perform forensic accounting on a company suspected of fraud. They have the responsibility to identify fraud or potential weaknesses in the company.

  1. 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.”

Le-Nature had many apparent flaws in its corporate governance. Looking at these flaws from the five components of COSO, the control environments were not good. Podlucky had filled high levels of the company with friends and family, many of who were not qualified for the job they were given. For example, Tammy Andreycak, a close friend of Podlucky, was appointed as the chief of accounting even though she did not have a college degree or training in accounting. When the fraud come out it was discovered that Andreycak played a key role in assisting Podlucky with falsifying Le-Natures financials. A control environment needs to be ethical, which means that the information and communication in the system help to manage risk and have an effective monitoring system (Rae, et al., 2017, p. 32). This is not seen in Le-Nature since Podlucky filled the control environment with those close to him who would not question him.

Risk assessment within Le-Nature was also lacking. John Higbee was the company’s CFO who brought light to the fraud sparking the initial investigation. He said that Podlucky would fail to provide documentation for key transactions within the company. This creates a lack in the risk assessment of the company. It was near impossible to perform a risk assessment on the company because of Podlucky’s complete control of the financials. His complete control only created a large risk for the company and its shareholders.

The internal controls of Le-Nature were found to be weak in the initial investigation of the company. Although the investigation did not find fraud or discover the extent to the weakness of the internal controls. In reality, there was a complete lack of segregation of duties, as seen with Podlucky’s complete control of the financial records. Weak internal controls could also be seen with the falsifying of invoices to inflate sales.

Information and communication were not properly done among Podlucky and key members of the company. As stated earlier his lack of documentation for key transactions is poor information. Not only did he have poor information and communication to internal members of the organization but also his false reporting of sales was improper information to external shareholders of the company.

Monitoring likely was the biggest of the five components of COSO that was lacking. “Monitoring is an important procedure that evaluates how well the organizational activities, and particularly the control activities, have met the organization’s objectives” (Rae, et al., 2017, p. 32). Lack of monitoring allowed for fake invoices and sales to be created and lack of monitoring of Podlucky caused the extreme fraud seen within the company.

Podlucky’s actions can be described through the fraud triangle. He had the opportunity through all of the lack of controls and failed COSO components discussed earlier. He was able to create an environment where he had the opportunity and people around him to conceal the fraud. He also had a large financial incentive. Through his fraud, he was able to live an extremely lavish lifestyle. He had to continue to commit fraud in order to maintain his lifestyle, giving him the motivation and incentive. His realization could partly be that he was in too deep and in order to keep up the mirage he had to continue the fraud. Also, Podlucky donated to many religious and charitable organizations, and this could have been used as a realization to him that he was doing something good with the money (Roden et al, 2016).

  1. Le-Nature’s was not a SEC registrant. Identify corporate governance safeguards imposed on SEC registrants that are not imposed on non-SEC registrants.

The corporate governance safeguards imposed on SEC registrants include having a competent, working board.  The responsibilities and accountabilities, the company’s articles and by-laws, and other legal pronouncements and guidelines should be known by the board and shareholders The board should be set up to effectively support the functions of the board. The board should devote time and attention to the company to properly perform its duties. The board should be objective and independent. There should be a measurement of the company’s board effectiveness. And finally, a board member should have high ethical standards and take stakeholders’ interests into consideration (SEC, 2017, p.2).

  1. 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?

An independent auditor should be completely independent of the company and not have any conflicting relationship with the company. The U.S. SEC states that when changing independent auditors, “the prospective firm must cease all prohibited services and/or sever all prohibited relationships with the issuer prior to the beginning of the audit engagement period. Therefore, the audit committee should consider these issues before hiring a predecessor auditor or a prospective auditor to provide non-audit services to the company or its affiliates. Prospective firms cannot audit financial statements of years that they were not independent” (Office of the Chief Accountant, 2017).

  1. Identify the key differences between a “quarterly review” and an “annual audit” performed by an organization’s independent auditors.

The difference between a review and an audit largely falls on the difference in the assurance provided. A review provides “limited assurance” and is a service in which the CPA performs analytical procedures and inquires (AICPA, 2015, p.6). An audit provides the highest level of assurance. “The CPA performs procedures in order to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement” (AICPA, 2015, p.7).

  1. 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

Pascarella & Wiker were hired as forensic accountants to assist with the investigation. “The AICPA has recognized forensic accounting services to generally involve: (1) The application of specialized knowledge and investigative skills possessed by CPAs, (2) Collecting, analyzing, and evaluating the evidential matter, (3) Interpreting and communicating findings in the courtroom, boardroom or other legal/administrative venues” (Davis, et al., 2010, p. 3). Forensic accounts possess a certain set of skills that allow them to effectively assist in an investigation and provide K & L Gates with CPA knowledge and understanding. Forensic accounts professional standards are governed by AICPA’s Statement on Standards for Forensic Services which lays out the standards and expectations for a forensic accountant.

Statement of Christian World View

Podlucky and Le-Nature did not act in accordance with the Christian worldview. He developed an entire scheme to cheat, lie and steal. The most glaring discrepancy with the Christian worldview is his constant dishonesty with the financial records. This is one of the ten commandments, “thou shall not lie” and he lied on pretty much all of his financial statements throughout the entire business (English Standard Version, 2018). Proverbs 10:9 reflects Podlucky’s transgressions stating, “Whoever walks in integrity walks securely, but whoever takes crooked paths will be found out” (English Standard Version, 2018). Not only was Podlucky dishonest with his business but his motivation was greed, and the fraud was used to furnish his lavish and greedy lifestyle.


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within COSO internal control-integrated framework as the underpinning of quality corporate governance, Australasian Accounting, Business and Finance Journal, 11(1), 2017, 28-54. doi:10.14453/aabfj.v11i1.4

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Roden, D. M., Cox, S. R., & Kim, J. Y. (2016). The fraud triangle as a predictor of corporate

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