Cardsmax The Accounting and Auditing Enforcement Release

Cardsmax

The Accounting and Auditing Enforcement Release (AER) for this proceeding is no. 3288 June, 2011. In this case there was a violation of Section 10A of the exchange Act by L&H, Howley and Wood 2005 & 2006-year-end audit, in addition this proceeding also discussed the year-end audits and quarterly interim reviews of the financial statements of Locate Plus Holdings Corporation ("Locate Plus") (Collectively "the Engagements"). Howley served as the Engagement Partner and Wood served as the Concurring Partner on the Engagements. The complaint alleges that, as part of Locate Plus' fraud, its CEO and CFO created a fictitious customer called Omni Data Services, Inc. ("Omni Data") and that Locate Plus then improperly recognized revenue from Omni Data. The improper Omni Data revenue was included in Locate Plus' financial statements that were part of quarterly and annual reports for fiscal years 2005 and 2006 and were included in filings with the Commission (Securities Exchange Act of 1913).

The proceeding conclude that, Locate Plus falsely reported more than $6 million from Omni Data for fiscal years 2005 and 2006, this amount accounted for over 25% of Locate Plus' total revenue for those two years. On November 10, 2010, the Commission amended its complaint to include charges against Jon R. Latorella, Locate Plus' former CEO, and James C. Fields, Locate Plus' former CFO, alleging that, among other violations, they each violated the antifraud provisions, and aided and abetted Locate Plus' violations of the reporting provisions, of the federal securities laws (Securities Exchange Act of 1913).

2. Explains in detail the accounting, auditing, and/or disclosure issue that gave rise to each violation.
The issues with the current case in question are almost too numerous to mention. The first issue that was presented was the Omni Data was a bogus customer (disclosure). Fraudulently Omni Data would purchase services from Locate Plus and make a fictitious payment to Locate Plus. These Payments were them marked as revenue in its financial results. These results were included in the filings sent periodically to the commission. L&H were unable to locate and verify the existence of the ASR notes receivable. The note carried a zero balance on the Locate Plus balance sheet (accounting issues). This was one of the most significant if not the primary issue; the company now had to account for fraudulent accounting that was utilized to make it look as if Omni Data had revenue.
In June 2005, L&H were made aware of various red flags associated with the revenue from Omni Data which resulted in receivables on Locate Plus (Accounting & disclosure). L&H was unable to find records for Omni Data on the Connecticut Secretary of State's website (i.e., the state where Omni Data was purportedly located); secondly, that the alleged President of Omni Data was not listed for any of the Omni Data entities that they did find; and lastly, that L&H could not locate a website for Omni Data, despite the fact that Omni Data was purportedly a business doing data sales over the Internet (disclosure). Disclosure of this information during the audit stage would have made things easier; however there is no quick fix for the issues that are brought about. Now the validity of the company is in question with little data to support the existence of this business at a specific time period. This could also bring about other legal issues regarding fees and specification that were not met dealing with the actual date that the business was started and legally doing business in its state.
The issues were clear and it became an issue as to how these problems could in fact be rectified. The Omni Revenue was bogus, and there was no information available to support the validity of Omni Data's existence. Again, the fact that the Omni contract was signed months before the business had been incorporated also give way to issues with if the business itself was operating legally when it acquired the Omni Data account. The inability to find a verifiable president of Omni Data too leads for a need to further investigate the validity of any transactions that took place under this client name. The Locate Plus' Audit Committee Chairman had a conflict of interest because he had pledged assets to secure a loan to Latorella; in addition Latorella had been buying off Locate Plus' Audit Committee Chairman through extending him high interest loans (at 30% to 40%). Lastly, a revolving line of credit with Locate Plus, was not Identified as a related party, and was owned and controlled by Fields and Latorella.
During the 2005-year-end audit, L&H failed to competently evaluate the reliability of the audit evidence obtained by the confirmation process. First, L&H initially sent its confirmation to the President of Omni Data -- a person alleged by the informant to be a "stooge" of Latorella -- at the address Locate Plus had provided. Moreover, the confirmation was initially returned to L&H by the U.S. Postal Service as "undeliverable." Ultimately, a confirmation was received, signed by a person purporting to be President of Omni Data. During the 2006-year-end audit, the confirmation sent to the Omni Data address that Locate Plus had provided was again returned as "undeliverable" (Securities Exchange Act of 1913). Here is a conclusive list of the areas of violation. Failure to adequately test the Omni Data Revenue and Receivables, Failure to adequately plan the 2005 and 2006-Year-End Audits, Failure to Competently Evaluate Evidence Obtained by the Confirmation Process, Failure to Assess the Risk of Material Misstatement Due to the Omni Data Transaction, Failure to Use Due Professional Care and Exercise Skepticism, and Failure to Issue Accurate Audit Reports.

Work Cited Securities Exchange Act of 1913, USA before the SEC § et seq. (2011). Print.