This Case is about ACCOUNTING

PUBLICATION DATE: April 11, 2013 PRODUCT #: TB0329-HCB-ENG

In October 2009, Andrew Amphlett, a recent MBA grad, as well as a financial analyst at Southern Cross LLC, was requested to prepare an evaluation of Pre-Paid Legal Service’s fiscal performance and its own accounting methods. Pre-Paid Legal Services recruited associates to promote its strategies that are legal to consumers who paid about $21 per month for access to the network of independent legal companies who provided legal services for a fee that is set.

As a consequence, Pre-Paid Legal Services was a multilevel advertising association, or what is often perjoratively described a “pyramid scheme.”

Southern Cross intended to contemplate adding the business to its shorts portfolio after Price Target Research confirmed a price target of $36 per share and kept a hold evaluation. The shorts fund comprised firms that Southern Cross believed were headed for significant stock price fall based on fundamental analysis. By October 2009, Pre-Paid Legal’s stock price was trading at $43 per share higher than the recently recognized target cost of $36 per share of Cost Target Research.

The portfolio manager of Southern Cross had requested Amphlett to pay careful attention to the organization’s accounting methods, and especially to its policy of capitalizing and amortizing indirect outlays, rather than expensing them instantly. At the request of the SEC, it restated its financial statements in 2002, its independent accounting firm, and Deloitte & Touche, stepped down from the account.

In the month of October 2009, the Division of Enforcement of Securities and Exchange Commission (SEC) demanded information from the Pre-Paid Legal Services related to its monetary, commerce, and accounting policies.

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