Case 2.10 LocatePlus Holdings Corporation
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CASE 2.10
LOCATEPLUS HOLDINGS CORPORATION
Synopsis
The management team of LocatePlus developed a New Age business model but relied on an old-
fashioned fraud scheme to burnish their company’s financial statements. LocatePlus collected a
massive database that consisted of information profiles for 98 percent of all U.S. citizens. The
company sold access to the database to a wide range of parties that wanted to investigate the
backgrounds of job candidates, future business partners, or possibly a prospective son-in-law. By
2004, the company had accumulated an accumulated deficit of $30 million. To improve its
operating results, LocatePlus’s CEO and CFO developed an imaginary customer. During 2005 and
2006, the two executives relied on this fictitious customer to boost LocatePlus’s revenues by more
than $6 million. Despite the bogus revenues, the company continued to post large losses each year.
This case focuses on the failure of LocatePlus’s independent auditors to uncover their client’s
less than artful accounting fraud. During both the 2005 and 2006 LocatePlus audits, the company’s
auditors identified red flags indicative of fraud but failed to properly investigate them. Two partners
involved in those audits, the audit engagement partner and the concurring partner, were charged with
engaging in “highly unreasonable conduct” by the SEC. In addition to three-year suspensions for
each partner, their firm was fined and was required to provide CPE to employees that focused on
such topics as fraud detection and risk assessment.
LocatePlus Holdings Corporation--Key Facts
10. The SEC accused the LocatePlus audit engagement partner and concurring partner with “highly
5. To understand the nature and purpose of a letter of representations.
Suggestions for Use
1. Listed next is a bullet list of specific requirements included in AS 2401 of the PCAOB’s auditing
standards that L & H apparently failed to complete or complete adequately. This bullet list was
drawn from the major subsections of AS 2401. A longer list could be compiled by “drilling down”
into the detailed requirements of each of these major subsections. (Note: AU-C Section 240 in the
AICPA Professional Standards corresponds with AS 2401.)
Paragraph 13: Failure to exercise sufficient professional skepticism. This deficiency was apparent
in numerous instances during the 2005 and 2006 audits, particularly with regard to
considering/investigating the allegations of the former board member of LocatePlus.
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company’s accounting records. As pointed out in the case, fraudulent cash transfers and accounting
entries were used to help conceal the fraud from the L & H auditors. (Note: Paragraphs 58-67A of
AS 2401 include a long list of specific audit tests and procedures that can be used by auditors to
identify instances in which client management may have overridden the given company’s internal
controls.)
Paragraph 79: Possible failure to adequately communicate with the client’s audit committee
2. For audits of public companies, the relevant auditing standards in this context are presented in
AS 2610, “Initial Audits—Communications Between Predecessor and Successor Auditors,” of the
PCAOB’s auditing standards. The comparable auditing standards for audits of other entities can be
found in AU-C 210 and AU-C 510 of the AICPA Professional Standards.
Predecessor-successor auditor communications are intended to help ensure that successor
auditors receive all relevant information they need to make a client acceptance decision and to help
them design an appropriate audit for the new client following that decision. The prospective
successor auditor is responsible for initiating predecessor-successor auditor communications. Prior to
accepting a client, the successor auditor should request permission from the prospective client to
communicate with the former auditor. Additionally, the successor auditor should ask the client to
AS 1220.01 notes that, “An engagement quality review and concurring approval of issuance are
required for the following engagements conducted pursuant to the standards of the Public Company
1220.10 identifies a litany of individual tasks that an engagement quality reviewer must perform on
an audit engagement. Examples of these tasks include “evaluate the significant judgments that relate
to engagement planning . . .; “evaluate the significant judgments made about materiality . . .;” and
“review the financial statements, management’s report on internal control, and the related
engagement report.” In sum, an engagement quality reviewer serves as an overall quality control
4. AS 2805 of the PCAOB’s auditing standards documents the nature and purpose of a letter of
representations (“management representation letter” is the actual phrase used in this context). The
corresponding section of the AICPA Professional Standards is AU-C Section 580, “Written
Representations.”
AS 2805 mandates that U.S. auditors obtain “written representations from management”
(Paragraph 1) and notes that such representations are “part of the evidential matter” (Paragraph 2) that
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13). (Notes: Appendix A of AS 2805 includes an illustrative letter of representations. An implicit
objective of obtaining a letter of representations is to mitigate an audit firm’s legal liability if it
becomes involved in litigation subsequent to completing an audit.)
AS 1105 requires an auditor to collect sufficient appropriate evidence to support his or her