Question 1 : Is there anything unique about L&H that made the company prone to engage in fraudulent accounting practices?

The unique characteristics in L&H that made it prone to engage in fraudulent accounting practices were the rapid expansion and acquisition of companies beyond their boundaries, and the inability to oversee these operations. Another important factor that stands out is the lack of ethical values portrayed by the founders of L&H. The top management did not set code of ethics, but instead wanted to maximize their future software value. Mr. Hauspie’s creative but legally acceptable financing plans help him to retain control of the company by selling minority interests. The desperate ambition to succeed together with the …show more content…

The revenues were fraudulent for two reasons: firstly, side agreements were being entered into between L&H and customers which excused them from paying their overdue bills (Intal & Thuy Do, 2002). Secondly, L&H-Korea had been involved in factoring unpaid receivables resulting from some of those fraudulent sales to banks, along with side letters which gave the banks right to take back the money if the L&H Korea's customers defaulted, and so the factoring agreements were in fact were loans.

Unethical accounting practices – Undisclosed related-party sales transactions
The second practice was Dictation Consortium had been an undisclosed related-party of L&H. Dictation Consortium was established by L&H with the initial purpose of allowing L&H to falsely claim revenue from its own R&D costs. L&H had improperly recorded the R&D costs which amounted to $26.6 million in 1996 and 1997 as revenue before the projects were able to produce any saleable products, and hence was inconsistent to the recognition of revenue under US GAAP – which demands that revenue be recognized only when it is earned (Intal et al., 2002). Acceptable accounting practice – Acquisition of Dictation Consortium
However, there was also an acceptable accounting practice such as the acquisition of Dictation Consortium. Dictation Consortium had few assets and a significant portion of the purchase price represented goodwill, which could be amortized over