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Outline of the Case You graduated from CSU-Global with a Master of Professional Accounting degree. You earned your CPA credential from the state of Louisiana; you applied and were accepted by the AICPA. After working in the field for years, you are now a qualified auditor and you recently joined Skitch, Maryland, and Anderson Accounting Firm (SM&A). Review the case study, and then answer the questions that follow.
Case Study: Louisiana Gas Production and Operating Company (LGO) This year, Louisiana Gas Production and Operating Company was preparing for the end of year audit plan, procedures and opinion for the annual 10K report. SM&A was selected as the public audit firm to prepare the annual audit plan, assessment, audit procedures and opinion.
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LGO is trading on NASDAQ for $9.00 per share. Two years ago, LGO had a $25.00 per share value. LGO has a market float value of $100 million. The main stockholders are pension funds, state retirement funds, hedge funds in the oil sector, and thousands of individual stockholders. Last year, LGO had earnings per share (EPS) of $2.00 and paid cash dividend of $1.50 per share. The company has been under tremendous pressure to raise the stock price. However, the oil and gas marketplace has been very difficult, with West Texas Intermediate (WTI) at $47.00 per barrel, and the natural gas well price at $3.05 cubic foot at Henry Hub in Louisiana. Henry Hub has nine major gas pipelines converging to supply gas at the location in Louisiana. Most of this natural gas product is shipped by LGN to the North East. LGO mostly has gas wells in the Haynesville Shale play area of Louisiana.
Background of LGO top Leadership The Chairman of the Board is Alexander Fred, 65 years old. He has been with the company for 40 years and was part of original group of individuals that started the company. The CEO is Patrick Fred, 42, the son of the Chairman. The family owns 36% of all common stocks and 90% of preferred Stock A. The CFO, Melinda Jones, 38, is a CPA who has been with the company since she was 22 years. Ms. Jones worked her way up through the organization. She is well liked by Mr. Alexander Fred. Ms. Jones is a member of the AICPA and the State of Louisiana CPA organization. The VP of Production is Roger Rock, 44 years old. He is a petroleum production person, has oil is in his veins. He received his Petroleum Engineering Degree from Texas A &M. He has been with the company just one year. Prior to joining LGO, he worked at Chevron for over 20 years. The Treasurer is Mrs. Hanna Hemp, 36 years. She joined the firm just six months ago. She worked for a hedge fund in Boston area for 15 years, and is now considered a team player by Mr. Alexander Fred.
Audit Subcommittee from the Board of Directors Audit committee: Mr. James Fernandez, 63, is a university associate of Mr. Alexander Fred, and has a CPA from Northern Louisiana Tech. James and Alexander were roommates in their university days. He is on the BOD.
Audit committee: Mr. Bill Fideo, 27, is the financial expert on committee. Just joined the board less than six months ago. He has never been a member of the board of director (BOD) or been on the audit committee with any company. He is currently on the BOD. He earned his CPA from North Louisiana Tech.
Public Audit Firm: Skitch, Maryland, & Anderson Office Location: New Orleans, Louisiana. The Partner in Charge is Mrs. Loise Maryland, who has 25 years of experience in the oil and gas industry. The Accounting Audit Supervisor assigned to LGO is Mrs. Sarah Diamond. She has audit experience with 15 years in the petroleum marketplace.
The audit accountants assigned to the client, LGO, are Ms. Lisa Lang, with two years of experience; Mr. Andy Anderson, 18 months of experience; and Mr. Arnold Hernandez, one year of experience. SM&A won the bid process to perform the audit of LGO. This bid was extremely competitive between five firms. The partners with the public accounting firm are hoping to have LGO for the next five years. The public accounting firm has been losing customers to regional accounting firms in the last three years.
Mrs. Loise Maryland lives in a 5,000-sq. foot home on County Hill Country Club. Her husband loves to play golf. He does not have employment with any firm. Mrs. Sarah Diamond loves working for Mrs. Loise Maryland. She would do anything for her. They are extremely close.
Situation This year’s audit plan started well, with cooperation between management and the audit firm. However, during the first quarter review, revenue numbers appeared to be higher with the vertical and horizontal analytics on previous quarters and the annual financial statement. The audit team meet to discuss the impact but could not find any negative or accounting entries earnings management numbers. Mrs. Maryland and Mrs. Diamond requested a meeting with Mrs. Melinda Jones, CFO. In the meeting, Mrs. Jones informed the audit team that everything was fine. They had booked some good sales in the quarter.
LGO Management Behind the Scene Sales have been flat for this year compared to last year. Natural gas well prices are looking downward at Henry Hub. The average revenue gas well per cubic feet price in last year was $3.50. In this year, Henry Hub gas well price is around $3.05. Gas volume is only 5% higher.
In a recent, closed meeting, Patrick Fred and Alexander Fred suggest to Mrs. Jones to be creative and aggressive in booking revenue. In this meeting, no record was kept of the conversation. Mrs. Jones said she knew what to do. Mr. Alexander Fred said the benefit of having revenue being positive would create a positive environment for the LGO stock versus other companies of similar size in the marketplace. In the meeting, Mrs. Jones said nothing about the integrity or duty to stockholders. She simply kept quiet on the issue.
- What might be the professional skepticism in the situation at LGO business environment?
- How would you evaluate the LGO top management under the fraud triangle?
- How would you evaluate the leadership of SM&A?
- How would virtue ethics come into play with SM&A’s upper management?
- What might be the deontology ethical theories and situation with respect to your role at SM&A?
- What might be the duty to perform to stockholders, creditors, employees, and government by upper leadership at LGO?
- What might be the consequentialism the ethical theory expressed and practiced by Patrick and Alexander Field?
- What could be the quantitative and qualitative benefits and costs for Mrs. Melinda Jones to follow the request?
- What might be the criminal and punitive damages under SOX to upper management if they certify this year’s financial statements?
- What might be the ethical, moral decision-making process to agree or disagree with SM&A in your work at LGO?
- How would you handle the many ethical issues with the audit firm and the client?
- Your written paper should be 8-10 pages in length not counting the title and reference pages, which you must include.
- Integrate concepts, terms, and theories from the readings and modules contents.
- You need to cite at least five sources for this portfolio project, outside of the textbook. Four of these sources must come from academic journals. The CSU-Global Library is a great place to find resources.
- Your paper must be formatted according to the CSU-Global Guide to Writing and APA.
If you need assistance with your writing style, start with the links under the Research Help and Writing Help tabs on the CSU-Global Library’s homepage.
Review the Portfolio Project rubric in Module 8 for full details on how you will be graded on this assignment.