{"id":1867,"date":"2015-07-19T12:05:03","date_gmt":"2015-07-19T12:05:03","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finaccountingxmaster\/?post_type=chapter&p=1867"},"modified":"2016-08-01T18:24:43","modified_gmt":"2016-08-01T18:24:43","slug":"accounting-in-the-headlines-6","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/accounting-in-the-headlines-6\/","title":{"raw":"Accounting in the Headlines","rendered":"Accounting in the Headlines"},"content":{"raw":"

What internal control weakness at Netflix allowed its former VP of IT operations to allegedly receive kickbacks from technology\u00a0firms?<\/h1>\r\n
\r\n\r\n\"Netflix<\/a>\r\n\r\nIn November 24, 2014, Netflix<\/a> filed a lawsuit against its former vice president of IT operations, Mike Kail, alleging fraud, breach of fiduciary duties, and other charges.\u00a0 Here is an excerpt from the lawsuit filing in \u00a0Superior Court of the State of California, Santa Clara County:.\r\n\r\n\u201c\u2026During his tenure at Netflix, including as Netflix\u2019s Vice President of Information Technology Operations, Kail was a trusted senior-level Netflix employee.\u00a0 Kail\u2019s job responsibilities at Netflix included negotiating and executing contracts on behalf of Netflix to acquire IT-related products and services\u2026approving invoices for payments that third parties would request related to IT products and services purchased by Netflix\u2026.after Kail approved such invoices, Netflix would pay the third parties for these approved invoices. Kail was a trusted, senior-level Netflix employee, with authority to enter into appropriate contracts and approve appropriate invoices.\u201d (See entire legal document at <\/em>http:\/\/www.scribd.com\/doc\/248259590\/Netflix-v-Kail<\/em><\/a>.)<\/em>\r\n\r\nNetflix is suing Mr. Kail for fraud, breach of fiduciary duties, and other actions.\u00a0 Mr. Kail was in charge of entering into and authorizing contracts for Netflix\u2019s tech vendors, which included two companies, Vistara IT and Netenrich (both founded\/owned by Mr. Raju Chekuri.)\u00a0 At the same time, Mr. Kail had his own company on the side called Unix Mercenary, which he did not disclose to Netflix.\r\n\r\nMr. Kail\u2019s company Unix Mercenary received 12 \u2013 15% commissions on all contract invoices paid by Netflix to Vistara IT and Netenrich.\u00a0 Part of the evidence that Netflix outlines in its lawsuit are emails between Mr. Kail and employees of Netenrich which refer to \u201creferral fees\u201d from Netenrich to Unix.\u00a0 Here is an excerpt from an email from Netenrich to Kail (from the above-mentioned lawsuit filing):\r\n\r\n\u2026\u201d[We] discussed getting you paid and I just need to ensure the payments from Netflix are in Netenrich\u2019s bank account\u2026I suggest we employ the following process to ensure you receive your referral fees on a timely basis\u2026\u201d<\/em>\r\n\r\nOver a three year period, Netflix paid approximately $3.7 million to Vistara IT and Netenrich, which would translate into commission payments of between $440,000 \u2013 $550,000 to Unix Mercenary.\u00a0 The lawsuit only mentions specific payments of $76,000 to Unix Mercenary.\r\n\r\nIncidentally, Mike Kail left Netflix in August 2014 to become Yahoo\u2019s Chief Information Officer (CIO).\r\n\r\nQuestions<\/strong>\r\n
    \r\n\t
  1. What internal control principle(s) does it appear was (were) violated at Netflix?<\/li>\r\n\t
  2. How might Netflix have designed its internal processes differently to avoid the situation that arose with Mr. Kail?<\/li>\r\n\t
  3. Should Mr. Kail be held totally liable for this situation? Does Netflix have any degree of responsibility in this situation?<\/li>\r\n<\/ol>\r\n<\/div>","rendered":"

    What internal control weakness at Netflix allowed its former VP of IT operations to allegedly receive kickbacks from technology\u00a0firms?<\/h1>\n
    \n

    \"Netflix<\/a><\/p>\n

    In November 24, 2014, Netflix<\/a> filed a lawsuit against its former vice president of IT operations, Mike Kail, alleging fraud, breach of fiduciary duties, and other charges.\u00a0 Here is an excerpt from the lawsuit filing in \u00a0Superior Court of the State of California, Santa Clara County:.<\/p>\n

    \u201c\u2026During his tenure at Netflix, including as Netflix\u2019s Vice President of Information Technology Operations, Kail was a trusted senior-level Netflix employee.\u00a0 Kail\u2019s job responsibilities at Netflix included negotiating and executing contracts on behalf of Netflix to acquire IT-related products and services\u2026approving invoices for payments that third parties would request related to IT products and services purchased by Netflix\u2026.after Kail approved such invoices, Netflix would pay the third parties for these approved invoices. Kail was a trusted, senior-level Netflix employee, with authority to enter into appropriate contracts and approve appropriate invoices.\u201d (See entire legal document at <\/em>http:\/\/www.scribd.com\/doc\/248259590\/Netflix-v-Kail<\/em><\/a>.)<\/em><\/p>\n

    Netflix is suing Mr. Kail for fraud, breach of fiduciary duties, and other actions.\u00a0 Mr. Kail was in charge of entering into and authorizing contracts for Netflix\u2019s tech vendors, which included two companies, Vistara IT and Netenrich (both founded\/owned by Mr. Raju Chekuri.)\u00a0 At the same time, Mr. Kail had his own company on the side called Unix Mercenary, which he did not disclose to Netflix.<\/p>\n

    Mr. Kail\u2019s company Unix Mercenary received 12 \u2013 15% commissions on all contract invoices paid by Netflix to Vistara IT and Netenrich.\u00a0 Part of the evidence that Netflix outlines in its lawsuit are emails between Mr. Kail and employees of Netenrich which refer to \u201creferral fees\u201d from Netenrich to Unix.\u00a0 Here is an excerpt from an email from Netenrich to Kail (from the above-mentioned lawsuit filing):<\/p>\n

    \u2026\u201d[We] discussed getting you paid and I just need to ensure the payments from Netflix are in Netenrich\u2019s bank account\u2026I suggest we employ the following process to ensure you receive your referral fees on a timely basis\u2026\u201d<\/em><\/p>\n

    Over a three year period, Netflix paid approximately $3.7 million to Vistara IT and Netenrich, which would translate into commission payments of between $440,000 \u2013 $550,000 to Unix Mercenary.\u00a0 The lawsuit only mentions specific payments of $76,000 to Unix Mercenary.<\/p>\n

    Incidentally, Mike Kail left Netflix in August 2014 to become Yahoo\u2019s Chief Information Officer (CIO).<\/p>\n

    Questions<\/strong><\/p>\n

      \n
    1. What internal control principle(s) does it appear was (were) violated at Netflix?<\/li>\n
    2. How might Netflix have designed its internal processes differently to avoid the situation that arose with Mr. Kail?<\/li>\n
    3. Should Mr. Kail be held totally liable for this situation? Does Netflix have any degree of responsibility in this situation?<\/li>\n<\/ol>\n<\/div>\n\n\t\t\t
      \n\t\t\t

      Candela Citations<\/h3>\n\t\t\t\t\t
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