Theranos Case Summary

1. The case description reveals massive fraud at Theranos, Inc. The fraud was enabled and made difficult to identify due to three critical control environments. First, the company lacked a balanced voting system as Holmes was granted nearly absolute control over voting. Managing corporations is challenging task that requires concerted efforts by the management board and key stakeholders. For this reason, a stockholder has a right to vote on a wide range of issues, importantly, the members of the board of directors, corporate policy, and issuance of securities. Unlike in typical democratic voting system, shareholders are granted votes corresponding to the number of shares they own. Holmes’ quest for significant control over voting led her to

As described in the case, Theranos lacked senior managing executives apart from Holmes and Balwani. This is a clear indication that the company’s board of directors is mainly inactive and the audit committee was missing. The board of directors oversees the corporation and its relationship with the CEO by developing a governance system that allows for periodic interactions. Importantly, the board of directors collectively represent and protect the interests of investors in the company. However, as described in the case, Holmes and Balwani were the only board members who were actively involved in interactions with potential and existing investors. This enabled the two to manipulate the company’s operations in attempts to lure investors by presenting false information. Holmes raised “$400 million from investors including venture capitalists” (Weinstein et al. 12). Most corporate decisions that resulted in such investments were made at Holmes discretion. Therefore, the lack of an active board of directors and audit committee was a control environment weakness that contributed to the fraud at

Theranos did not receive financial statement audits. The only reason why this happened was to cover up massive exaggeration of the company’s financials in attempts to lure investors. The company’s profitability was highly exaggerated to deceive investors into believing that their investments were safe. For instance, one investor was made to believe that the company had net revenue of $108 in 2014. However, according to the actual financial performance, the company had around $100,000 in revenue by the end of the fiscal year 2014. Since financial statement audits are also available to shareholders and potential investors, Holmes and Balwani could not compromise their exaggerated financial projections through financial statement audit by independent external auditors. Nevertheless, financial statement audit is standard practice for startup firms and high-growth Silicon Valley firms that are financed by private sources. Although auditing is mainly associated with sizeable firms with extensive coordination, it is standard practice for startups because it assures investors about record keeping. Knowing that the accounting process is in order not only gives investors a peace of mind but also help them in making financial decisions related to business development and growth. Therefore, as a standard practice, financial statement auditing is required for business growth in startups. For outside investors, we do think they care for the financial statement audits, because you want