Please ensure Javascript is enabled for purposes of website accessibility

Accounting News Roundup: Auditing the Auditors’ Auditors and Alpaca Tax Shelters | 04.13.17


Auditing the auditors’ auditors

One topic of conversation that will kicked around in the wake of this KPMG/PCAOB scandal is whether KPMG got an unfair advantage thanks to advanced notice of the PCAOB’s inspection plans. Reports so far haven’t been able to uncover when the leaks started but only when KPMG learned about them, which was in February. A Compliance Week column by Tammy Whitehouse discusses all the possibilities:

Maybe the breach happened before inspections in 2016 and the firm only recently learned about it. If so, that means the firm’s 2016 inspections, the results of which are not yet published, were tainted. Will the PCAOB go back and inspect new audits to even out the playing field with other Big 4 firms before finalizing those reports?

What if the breach occurred in 2015? Reports for that round of inspections have already been published. How would the PCAOB rectify that? Performing new inspections on old audit files is probably not all that productive or informative, unless perhaps there’s a reputation effect and a fairness factor to take into account. Is there a historic record that deserves to be set straight? Isn’t the reputation effect at least part of the reason for doing these inspections and publishing reports on them in the first place?

There’s even the possibility that the information was on 2017 inspections. If the PCAOB has to re-select audits, it’s almost assured that they will be less-risky ones, perhaps giving KPMG an advantage for this year’s inspections.

Those are all good questions. But Whitehouse also notes — and it’s important — that KPMG had the worst inspection results of the Big 4 in 2014 and 2015. The 54% deficiency rate in 2014 was especially bad, since it was “the only time inspectors have found more bad audits than good ones at a Big 4 firm.” Both Scott Marcello and Dave Middendorf, the two high-ranking partners that have been named so far, both came into their leadership roles fairly recently. Marcello’s LinkedIn page says he became Vice Chair of Audit in July 2015. Middendorf’s shows he became head of Audit Quality and Professional Practice in June 2014. If they were tasked with turning around the firm’s inspections results, it seems they were willing to go great lengths to accomplish that goal.

And that seems to be the real concern — KPMG fired six employees for their actions, two of whom were leaders in the audit practice. What kind of pressure did they feel that led to this? Are others within the firm also feeling this pressure? For the PCAOB, the questions are different. Can they assure the other firms that the process is the same for everyone? Will users of the inspection reports still trust the results?

If this leads to auditing the auditor that audits the auditors, I don’t know if I’ll be able to handle it.

Tax shelters

Alpacas as tax shelters? Alright, sure:

Americans are using alpacas as tax shelters, Sen. Jeff Flake (R-Ariz.) has warned in a new report, drawing outraged denials from an outspoken cottage industry and renewing a controversy over the cute but contentious creatures.

Flake argued that owners are writing off the cost of buying alpacas along with related improvements to their property as business expenses. While the federal government allows taxpayers to deduct business expenses — such as for hardware, software, tools and materials — there has long been doubt about whether alpacas are a legitimate business proposition.

Senator Flake’s team even created a video that parodies as an “animal abuse” commercial except the “abuse” is of the tax code. I’m pretty sure it even samples that Sarah McLachlan song! (I hope they asked permission.)

Naturally, the alpaca people are not happy about all this and the Alpaca Owners Association put their man on it:

Alpacas “are treated like any other livestock including cattle, hogs and sheep” for purposes of taxation, said Bud Synhorst, the Alpaca Owners Association’s executive director. He went on to compare the deduction for alpacas to deductions that small businesses enjoy, such as those for equipment and other expenses.

“Sen. Flake was unprepared to talk about the tax code as it relates to the alpaca industry,” Synhorst’s statement read. “I am stunned that the senator would go on national television without all of the facts about the North American alpaca industry!”

What a country.

Previously, on Going Concern…

Greg Kyte’s Exposure Drafts cartoon touched on hot assets. Adrienne Gonzalez wrote about a BDO auditor who spied on his colleagues. In Open Items, a soon-to-be graduate needs advice.

In other news:

Get the Accounting News Roundup in your inbox every weekday by signing up here.