Company: CODI-PB
Filing Date: 2025-12-08
Form Type: 10-K/A
Source: 0001345126-25-000078
Chunk: 214

Company: Compass Diversified Holdings
Filing Date: 2025-12-08
Form: 10-K/A
Chunk 214
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 by the former chief executive officer of Lugano with third parties, and the lack of due care by Lugano employees in the execution of their internal control responsibilities.

3. Deference to the Former Lugano Chief Executive Officer

Company management too often deferred to the former Lugano chief executive officer (and significant shareholder) and allowed Lugano to operate with elevated autonomy, weakening the overall tone of compliance at Lugano, creating a perceived lack of support for the internal audit team, and creating an environment where Lugano could fail to fully implement, adhere to, or enforce SOX controls.

Control Deficiencies Identified at Lugano

1. Tone at the Top

The actions and business practices of the former Lugano chief executive officer created a culture focused on financial performance at all costs in order to satisfy (or not disobey) the former Lugano chief executive officer, as opposed to creating the culture of commitment to ethics and compliance expected of a subsidiary of a publicly traded corporation. The former Lugano chief executive officer took exceptional actions to ignore or override the controls designed by CODI management, or otherwise leverage his significant knowledge of the diamond business and his personal connections within it, to circumvent Lugano controls, including among other actions: disregarding directives from the Company and the Audit Committee; deliberately delaying responses to audit requests; manipulating systems and records, disregarding delegations of authority controls; entering into and not disclosing unauthorized financing transactions; receiving and making inappropriate payments; colluding with third parties; overriding revenue recognition policies; convincing suppliers to provide fraudulent attestations concerning “memoed out” inventory; and intentionally failing to adhere to or monitor expense controls.

2. Segregation of Duties at the Lugano Management Level

Lugano’s former chief executive officer had the ability to create customer invoices, approve customer pricing and credit terms, collect receivables, edit customer files within Lugano’s jewelry store management software, and, for certain transactions, controlled product receipt and delivery and directed the application of cash receipts. Despite the implementation of compensating controls (including a three-way match process, inventory reconciliation controls, and new customer approval controls) and installing additional staff to mitigate segregation of duties issues, Lugano’s former chief executive officer was able to override these controls. Further, certain Lugano employees exercised a lack of due care in the execution of those compensating controls.

3. Security Access Rights for Lugano’s Former Chief Executive Officer

Lugano’s former chief executive officer retained broad access to several functions within Lugano’s jewelry store management software, allowing him