Audit Knapp Answer
CASE 8.1
LIVENT, INC.
Synopsis
Similar to most financial frauds, the Livent, Inc. fraud was masterminded by a few individuals, primarily Garth Drabinsky and Myron Gottlieb. However, numerous individuals were eventually drawn into Livent’s fraudulent schemes by its principal architects, including Maria Messina, the company’s chief financial officer (CFO). Messina, a former partner with Deloitte & Touche’s Canadian affiliate, had previously served as Livent’s audit engagement partner. The fraud unraveled following Livent’s takeover by an investment group led by Hollywood mogul Michael Ovitz. The new management team installed by Ovitz soon found that “massive, systematic irregularities” permeated the company’s accounting records. Subsequent investigations by various regulatory authorities, including the SEC, resulted in numerous civil lawsuits and criminal indictments being filed against Drabinsky and his former associates. Two features of the Livent fraud were particularly disturbing to SEC officials. First, Livent’s accounting staff helped further the fraud by developing computer software that allowed senior management to track the company’s “real” financial data and the data that had been distorted by fraudulent manipulations. The accounting software also allowed Livent’s executives to more readily conceal the fraud from the company’s Deloitte auditors. The second troubling feature of the Livent fraud was the matter-of-fact manner in which the company’s executives organized and carried out the fraud. Following the collapse of Livent, the company’s independent auditors were criticized for failing to discover that the company’s financial statements had been grossly misstated. Much of this criticism stemmed from the fact that the Livent fraud had features common to several “classic” financial frauds. These features included an extremely aggressive, growth-oriented management team, a history of prior financial reporting
LIVENT, INC.
Synopsis
Similar to most financial frauds, the Livent, Inc. fraud was masterminded by a few individuals, primarily Garth Drabinsky and Myron Gottlieb. However, numerous individuals were eventually drawn into Livent’s fraudulent schemes by its principal architects, including Maria Messina, the company’s chief financial officer (CFO). Messina, a former partner with Deloitte & Touche’s Canadian affiliate, had previously served as Livent’s audit engagement partner. The fraud unraveled following Livent’s takeover by an investment group led by Hollywood mogul Michael Ovitz. The new management team installed by Ovitz soon found that “massive, systematic irregularities” permeated the company’s accounting records. Subsequent investigations by various regulatory authorities, including the SEC, resulted in numerous civil lawsuits and criminal indictments being filed against Drabinsky and his former associates. Two features of the Livent fraud were particularly disturbing to SEC officials. First, Livent’s accounting staff helped further the fraud by developing computer software that allowed senior management to track the company’s “real” financial data and the data that had been distorted by fraudulent manipulations. The accounting software also allowed Livent’s executives to more readily conceal the fraud from the company’s Deloitte auditors. The second troubling feature of the Livent fraud was the matter-of-fact manner in which the company’s executives organized and carried out the fraud. Following the collapse of Livent, the company’s independent auditors were criticized for failing to discover that the company’s financial statements had been grossly misstated. Much of this criticism stemmed from the fact that the Livent fraud had features common to several “classic” financial frauds. These features included an extremely aggressive, growth-oriented management team, a history of prior financial reporting