In late 2003, Le-Nature's Inc., a Pennsylvania-based beverage company, selected BDO Seidman to replace Ernst & Young

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In late 2003, Le-Nature's Inc., a Pennsylvania-based beverage company, selected BDO Seidman to replace Ernst & Young (EY) as its independent audit firm.1 A few months earlier, EY had insisted that Le-Nature's retain an external law firm to investigate allegations made by the company's former chief financial officer (CFO) and two other former company officials. Each of the three men had suggested that Gregory Podlucky, Le-Nature's founder and chief executive officer (CEO), was manipulating the company's accounting records. In particular, the three men questioned the reliability of Le-Nature's recorded sales figures. Le-Nature's made the change in auditors from EY to BDO Seidman shortly after the external investigation demanded by EY "found no evidence of fraud or malfeasance.2
BDO Seidman issued unqualified audit opinions on Le-Nature's 2003 through 2005 annual financial statements. In 2006, allegations of improprieties within Le-Nature's surfaced again. A restraining order issued by a Delaware state court evicted Podlucky from Le-Nature's corporate headquarters. Within a matter of days, Le-Nature's courtappointed custodian reported he had discovered a massive accounting fraud within the company. Following the discovery of the fraud, a bankruptcy trustee appointed by a federal judge began liquidating the company.
Throughout the long-running fraud masterminded by Podlucky, Le-Nature's grossly overstated its annual revenues. In 2005, for example, more than 85 percent of the company's $287 million of reported revenues were bogus. Podlucky and his co-conspirators concealed the fraud for more than a decade from the company's independent auditors and other third parties by producing a flood of forged accounting documents and by maintaining two accounting systems: one system that contained the company's actual accounting data and another system that contained the fraudulent data. Le-Nature's auditors were only aware of the latter accounting system.
Podlucky and seven of his family members and fellow company officials received prison sentences for their roles in the fraud. BDO Seidman was among the parties named as defendants in civil lawsuits triggered by the Le-Nature's fraud. A lawsuit filed in a California court by investors who had purchased Le-Nature's corporate bonds alleged BDO Seidman was aware Podlucky routinely undermined the company's internal controls that were intended to prevent fraud.3 A similar lawsuit filed in a New York court by other Le-Nature's creditors charged that the audit firm had ignored "red flags" indicative of financial statement fraud.4 Finally, a legal complaint filed against BDO Seidman by Le-Nature's bankruptcy trustee claimed the audit firm had failed to uncover the massive fraud because it was negligent in auditing the company.5


Questions
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Contemporary Auditing

ISBN: 978-0357515402

12th Edition

Authors: Michael C Knapp

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