Lawrence & Harcourt (L&H) was the world\'s leading provider of speech recognitio
ID: 2508327 • Letter: L
Question
Lawrence & Harcourt (L&H) was the world's leading provider of speech recognition technology products, solutions, and services to businesses and individuals worldwide. Both Microsoft and Intel invested millions in L&H. However, accounting scandals and fraud allegations sent the company's stock crashing and forced the firm to seek bankruptcy protection in France and the United States. The following selected information pertains to L&H's sales and accounts receivable: Consolidated revenue increased 184 percent from the 1997 fiscal year to the 1998 fiscal year. Revenue in Singapore, which has a reputation as a difficult market for foreign companies to enter, increased from $97,000 in the first quarter of 1999 to approximately $59 million in the first quarter of 2000. In the second quarter of 2000, sales grew by 104 percent but accounts receivable grew by 128 percent. Average days outstanding increased from 138 days in 1998 to 160 days for the six-month period ended June 30, 2000. L&H's auditor did not confirm accounts receivable from customers in Singapore. However, The Wall Street Journal contacted 18 of L&H's Singaporean customers and learned the following: -Three out of 18 customers listed by L&H stated that they were not L&H customers. -Three others indicated that their purchases from L&H were smaller than those reported by L&H.
5) How would you rate the risk of material misstatement for revenue and receivables? Explain.
6) Do you believe that the auditors had justification for not confirming receivables? Explain.
7) Assume that after obtaining the information about the Wall Street Journal’s findings, the auditors decide to confirm receivables.
8) Explain the procedures that they should follow in the confirmation process. In your responses ensure that you address the following:
-The type of confirmations -Sample sizes
-Steps they should take to ensure reliability of their confirmation results.
-Follow up procedures (if any) that should be done in the case of none response
-Steps that should be taken in case of confirmations returned showing discrepancies.
Explanation / Answer
Answer - 5
Risk rating - Very High
Reason - The growth in Revenue figures at Consolidated levels is high (184%) and for a tough market like Singapore the growth is unprecedented (from $57000 to $59 million) in just one year.For such abnormal growth every possible analysis should have been performed.Also the increase in days outstanding from 138 to 160 in another indicator of a shift in basic credit policy extended or a possible quality of Customers.
Answer - 6
Auditors had no justification for not getting the balance confirmations especially in the light of the fact that huge values were involved and the growth rate was very high.
Answer 7 & 8
Sample size of 18 taken by WSJ shows approximately 6 incorrect cases (33%) clearly puts doubt on the receivables shown.This too in backdrop of such huge and abnormal revenue growth.
Keeping above in mind sample should be drawn so that atleast 75% to 80% receivables get covered.
Methodology for balance confirmation should be via e-mail to the Customers.In case Customers donot repond then contact over phone to be made and confirmation sought.In case no email and contact numbers are there in the masters then letters should be sent to the registered address.
Tracking monitor to be in place with following parameters to be periodically updated and reviewed -
1. Total Customers in scope (which form 75% to 80% of the Receivables)
2. Mode of Contact wise split
3. Communication Status wise split
4. Confirmation Status wise split
As the picture emerges with confirmatins flowing in actions to be decided.
In case there are discrepancies in the responses then following actions to be taken -
1. Person responsible for incorrect books.
2. Adjustments to books.
3. Possible reinstatement of P&L and BS
4. Any legal action to be initiated for fraud.
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