Karen Chan doesn't know what she should do

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Karen Chan doesn't know what she should do.

 

Karen is a new auditor with Honest Dave's Accounting (HDA). HDA's largest client is Lost Forest Yacht Manufacturing Corp. (LFY); HDA has provided financial advice and audited LFY's books for ten years. When Karen joined the HDA team last month, she was asked to familiarize herself with several accounts, including LFY. Karen's manager, Sam Moriarty, wanted her to concentrate on LFY's purchasing operations since purchasing can be an area of risk. However, Karen decided to review reports covering all areas of LFY's operations since she wants to be invited to help with HDA's largest account.

Pleased with Sam's confidence, Karen has spent evenings and weekends studying several years' worth of documents, both those provided by LFY and those prepared by HDA. She found several things that worried her. Karen was sure that this was because she didn't know all the details of the account, but she used her background as a forensic auditor to investigate further.

Last night she reached her conclusion: LFY, which traded on the TSX, has probably been engaging in fraud. She had found several significant cases in which LFY had capitalized expenses, thus inflating the net income and cash flow it had reported. For example, a rough estimate led her to believe that LFY's 2016 net income, which LFY reported as $135 million, should have been reported as a loss of $10 million. She suspects that there were similar problems in other fiscal years.

Karen is worried about approaching Sam, since he has been the partner in charge of the account for the last six years. She might appear uninformed and ignorant: after all, she might not be familiar with facts that might explain the apparent irregularities. And, she has told herself, Sam did not ask her to look at these areas of LFY's books.

 

 

 

 

Instructions:

a.    What Karen's options are.

b.    Who the stakeholders are.

c.    How each of Karen's possible actions might affect the stakeholders.

Question:

One of the stakeholders is Karen. Briefly describe her interests. Then describe one possible solution and how this might affect her interests.