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
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LocatePlus Holdings Corporation—Key Facts
1. The business model of LocatePlus involved selling access to its huge database of information
profiles on U.S. citizens to a wide range of parties, including government agencies, corporations, and
individuals.
2. To enhance LocatePlus’s 2005 and 2006 operating results, the company’s CEO and CFO
3. Livingston & Haynes (L & H) accepted LocatePlus as an audit client in early 2005 despite
4. During 2005, L & H discovered several red flags that raised serious doubt regarding the
5. “Overstated and/or fictitious revenues/accounts receivable” from Omni Data were identified by
the L & H auditors as a fraud risk factor during their fraud “brainstorming session” for the 2005 audit.
6. Despite the fraud risk identified for the Omni Data revenues and receivable during the 2005
7. Among other oversights, L & H did not complete a “fraud risk assessment” template for the 2005
8. The 2006 LocatePlus audit suffered from the same general deficiencies evident during the 2005
9. The 2005 and 2006 LocatePlus audit opinions were unqualified but contained a fourth
explanatory paragraph that questioned whether the company was a going concern.
10. The SEC accused the LocatePlus audit engagement partner and concurring partner with “highly
unreasonable conduct;” both partners were suspended while L & H was fined $130,000 and required
to provide CPE for its audit staff members that focused on fraud detection and related topics.
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Instructional Objectives
2. To demonstrate the importance of auditors thoroughly investigating unusual and suspicious
circumstances uncovered during an audit.
Suggestions for Use
This is a case that could be used by instructors to provide a comprehensive review of the
requirements of the PCAOB’s version of AU 316, “Consideration of Fraud in a Financial Statement
Audit.” The first case question focuses on that important section of the PCAOB’s auditing standards
Suggested Solutions to Case Questions
1. Note: AU Section 316 in the PCAOB’s Interim Standards corresponds with AU-C Section 240
in the clarified AICPA Professional Standards.
Listed next is a bullet list of specific requirements included in AU 316 of the PCAOB’s Interim
Standards that L & H apparently failed to complete or complete adequately. This bullet list was
drawn from the major subsections of AU 316. A longer list could be compiled by “drilling down”
into the detailed requirements of each of these major subsections.
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circumvented the company’s internal controls for the purpose of concealing fraudulent errors in the
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 58-69 of AU
Section 316 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.)
2. The original auditing standard that focused on predecessor-successor auditor communications
was SAS No. 7, “Communications between Predecessor and Successor Auditors.” In 1998, SAS 7 was
superseded by SAS No. 84, which has the same title. There are only minor differences between these
two standards. SAS No. 84 is now integrated into AU-C Sections 210 and 510 of the “clarified”
AICPA Professional Standards. In the PCAOB’s Interim Standards, SAS No. 84 is integrated into AU
Section 315.
Predecessor-successor auditor communications are intended to help ensure that successor
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3. Note: the source for this suggested solution is PCAOB’s Auditing Standard No. 7, “Engagement
Quality Review.” AS No. 7 applies to audits of SEC registrants, such as LocatePlus.
Paragraph 1 of AS No. 7 notes that, “An engagement quality review and concurring approval of
issuance are required for each audit engagement and for each engagement to review interim financial
information conducted pursuant to the standards of the PCAOB.” (Note: Prior to AS No. 7, an
“engagement quality review” was typically referred to as a “concurring partner review” or some
similar expression.) Paragraph 9 of AS No. 7 notes that, “In an audit engagement, the engagement
A significant engagement deficiency in an audit exists when (1) the engagement team failed
to obtain sufficient appropriate evidence in accordance with the standards of the PCAOB, (2)
the engagement team reached an inappropriate overall conclusion on the subject matter of the
engagement, (3) the engagement report is not appropriate in the circumstances, or (4) the
firm is not independent of its client.
4. Note: AU Section 333, “Management Representations,” of the PCAOB’s Interim 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 clarified AICPA
Professional Standards is AU-C Section 580, “Written Representations.”
AU Section 333 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
auditors obtain to support the opinion they render on a given client’s financial statements. Such
representations must be obtained “for all financial statements and periods covered” (Paragraph 5) by
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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.)
The third standard of fieldwork within the PCAOB’s Interim Standards requires an auditor to
collect sufficient appropriate evidence to support his or her opinion. In evaluating the quality of audit