The following is a summary of the accounting issues in this case.

From the outset, Revue sales were significantly below LOGIs internal forecasts. By late November 2010, sales and finance personnel. Including senior executives, were addressing whether the market price of $299 should be cut. LOGI's CFO at the time and its acting controller were aware that LOGI might have to evaluate taking a "lower of cost or market" (LCM) charge if the value of Revue inventory was impaired.

Under GAAP, the Company was required to value its inventory at the lower of the inventory's cost or market value. Specifically, if the market value of a company's inventory (generally calculated for finished goods as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation) is less than its cost, then the company must write-down the inventory value in its financial statements.

On or around December 7, 2010, because of high inventory levels and weak sales, LOGI directed the contract manufacturer to stop manufacturing Revue, including halting all work in progress. LOGI also instructed the manufacturer not to ship over 26,000 finished Revue units. Further, because the manufacturer, al LOGI's direction, had purchased parts for future manufacturing, LOGI was liable for approximately $11 million of excess components.

At the end of the third quarter of fiscal year 2011 (December 31, 2010), Revue sales were only 40% of LOG ILs forecasts for that product. As part of its financial closing process, LOGI performed an LCM analysis of the Revue finished goods inventory and concluded that no adjustment, or write-down, was required.

On or around January 5, 2011, LOGI's Senior Vice-President (SVP) of Operations informed several executives that he intended to "dispose of the components" awaiting assembly by the manufacturer in light of Revue's "current trajectory." Shortly thereafter, the SVP-Operations instructed the VP of Global Sourcing/Supplier Management (VP-Global Sourcing) to "sell all of the components we could."

Later in January 2011, LOGI management informed the Board of Directors about the poor sales of Revue and about management's future plans for the product, including a plan to lower the retail price of Revue to $249 in the first quarter of 2012 and lo $199 in the third quarter. Management did not inform its independent auditor of this pricing plan strategy.

On January 27, 2011. LOGI issued its third quarter 2011 earnings release, reporting strong results. increasing its guidance for annual revenue for fiscal year-end March 31, 2011, and affirming its guidance for annual operating income in a range of $170-$180 million.

During LOG ILs fourth quarter fiscal 201 l, Revue sales continued to be far below projections. For all of quarter four, despite regular discounting and promotions, Revue sales were 30% of internal product forecasts. By quarter end, retailers were selling fewer than 1,000 Revue units per week.

At the end of the fourth quarter 201 l, LOGI had over 163,000 units of Revue finished inventory in its U.S. distribution centers, with another 52,000 finished and work-in-progress units in Asia. Based on the sales rate for that quarter, LOGI had over a years supply of Revue. Al the quarter-end sales rate to retailers, LOGI had over three years of inventory.

In mid-March 2011, an accountant in LOG ILs Regional Finance area asked LOGIs VP-Global Sourcing about. financial risk for the Revue product and the number of units that could be built from on-hand components. The VP-Global Sourcing informed her that there was no plan to use the components and that Global Sourcing was attempting to sell whatever could be sold. He also noted: "If we need to scrap [work in-progress] and components, we should assume a recoverable value of zero."

On or around March 23, 2011, a LOGI Finance employee sent Wolf a summary of potential excess and obsolete inventory for contract manufacturers in preparation for a meeting the next day lo discuss required accounting adjustments for the year-end financials. The summary highlighted a total potential excess inventory of $19.4 million for Revue units and components that "should be reserved."

On March 31, 2011, LOGI announced that. for reasons unrelated to Revue, it would miss the guidance it had provided to the market two months earlier. LOGI lowered the previous guidance for operating income by $30 million (to a range of $140-$150 million). Internally, the CEO characterized the guidance miss as a "disaster" and informed his executive team, including Barden and Wolf, that management's credibility with the market was damaged.

For its fiscal year 2011 year-end financial close process. LOGI initially prepared an LCM analysis indicating that no LCM adjustment was required for Revue finished-goods inventory. The company's independent auditor arranged separate meetings with Barden and Wolf to discuss the importance of the assumptions in the LCM analysis. In the meetings, the independent auditor stressed the need to consider future pricing assumptions and strategies. Within days, LOGI revised the LCM analysis and, based on a planned price cut lo $249 in the first quarter of 2012. recorded a $2.2 million adjustment. However. in the revised analysis, LOGI did not account for the planned third quarter of 2012 price cut to $199, nor did LOGI consider the excess component inventory.

After receiving the revised LCM with the $2.2 million adjustment, the independent auditor noted the roughly $ 11 million of excess component inventory and informed Barden and Wolf that LOGI was also required to evaluate and, if necessary, record an adjustment for the component inventory.

LOGIs Regional Finance accountant resisted adjusting for the component inventory. When the independent auditor persisted, Regional Finance again emailed the VP-Global Sourcing, notifying him there was "heated discussion" with the independent auditor about Revue and asking him to determine the number of Revue units that could be built from the component inventory.

The VP-Global Sourcing, who was responsible for managing the component inventory liability, informed Regional Finance and Wolf that production had been stopped for months and that he did not "see a chance that we are ever going to build [the components] into units." He wrote that a build-out of components was a far-fetched scenario that has never been formulated."

On the next day (April 18, 2011), Wolf received a detailed list of the excess components. Less than an hour later. She sent a spreadsheet containing an LCM component analysis to the independent auditor. Calculating an adjustment of$ I.I million, based on a hypothetical build-out of 79, 000 additional finished units of Revue. Wolf ignored the fact (communicated to her two days earlier) that LOGI had been actively attempting to sell all of the components. With only limited success and below cost. Instead, she based the Company's accounting on the implausible scenario.

On or around April 18, 2011, after forwarding the component LCM analysis spreadsheet to the independent auditor, Wolf met with members of the independent audit team. At that meeting, Wolf discussed LOGIs plans to use the $all millions of excess components to build 79,000 finished Revue units. She also represented that LOGI could use excess components (beyond what was needed to make 79,000 Revue units) to manufacture even more Revue units. These representations were false.

During the week of April 18, 201 I, Barden and Wolf met with senior members of the independent audit team, where they confirmed the assumptions used in the LCM analyses, and represented that LOGI was committed lo the Revue product for the long-term and was going to build at least 79,000 additional units using excess components. These representations were false.

At the time the representations were made, Barden and Wolf knew or were reckless in not knowing that LOGI had no plan to produce additional units of Revue. They knew or were reckless in not knowing that the contract manufacturer had not shipped any Revue units since late November 2010 and had stopped production in early December 2010. Ln fact, they knew or were reek. Jess in not knowing that LOGI had no timetable for re-starting production or even for completing the work-in-progress units and, for months, had been attempting to sell excess component inventory at substantial discounts.

On or around May 27, 2011, Barden and Wolf signed a management representation letter to the independent audit firm. The letter contained material misrepresentations concerning the valuation of inventory and the LCM analysis for Revue inventory. Specifically, with respect to the Revue LCM analysis, the letter represented that "we considered future pricing adjustments/discounts which are probable of occurring." This representation was false because the LCM analysis did not consider the planned price drop to $ 199 in the third quarter of 2012 or other discounting or promotions that would likely be required to sell the excess finished goods inventory. The company acknowledged the falsehood in its November 2014 restatement of financial statements.

On May 27, 2011, LOGI filed its Form 10-K with the SEC. Wolf signed the Form 10-K as the Company's CFO and Principal Accounting Officer. LOGI reported operating income of $142.7M, which was within the lowered range of $140M-$150M that LOGI had communicated to investors on March 11, 2011.

On November 14. 2014, LOGI restated its financial results for fiscal years 2011 and 2012 because of errors in the timing of the Revue-related inventory write-downs. At the line it initially filed its fiscal 2011 financial statements, LOGI overstated its operating income by $30.7 million (27%). U LOGIT had properly accounted for Revue-related inventory in May 20 II. It would have reported operating income of approximately $112 million, far below the lowered guidance of $140-$ 150 million.

Questions

1. Analyze the corporate governance systems at Logitech. Describe any weaknesses in these systems and how they affected the work of the external auditors.

2. Identify the red flags that indicate earnings management took place at LOGI. Discuss the accounting for inventory in the context of financial shenanigans.

3. Can you identify any violations of the AICPA Code of Professional Conduct by Jennifer Wolf? How about the external auditors in their audit of LOGI? Be specific.

4. There is no indication that LOGI staff accountants knew of the improper inventory accounting during 2010-2011. However, assume that one LOGI staff accountant, who is a CPA, did know about it. What steps should the staff accountant have taken once aware of the inventory issue? Be sure to explain each or the steps and why they would be taken.

5. Notwithstanding your answer to 114, assume the staff accountant decides to blow the whistle on the improper inventory accounting to the SEC. What protections are available to the staff accountant under the (a) Sarbanes-Oxley Act and (b) Dodd-Frank Financial Reform Act? Are there any conditions for these protections?