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Accounting News Roundup: EY Audits EY’s Work and Awkward Testimony | 10.28.16

EY audits EY's work

The IRS is battling Facebook over a tax strategy that the company used to allegedly avoid billions in taxes. Facebook says everything is fine because "the plan was fully reviewed by its outside auditors." Of course the firm that audited the tax strategy is the same firm that came up with the tax strategy: EY. You don't have to be the ghost of Arthur Andersen to see the problem: "Over the past four years, Facebook paid EY almost $23 million for auditing, plus $21 million for tax planning and other non-audit work."

Audit firms say this is fine:

The firms say they are so large that their consulting and auditing units are essentially separate. The Center for Audit Quality, an industry-funded group, says that by holding dual roles as consultant and auditor, firms gain a familiarity with the company’s finances, which helps them better serve the client and the public. Cindy Fornelli, executive director of the group, says academic studies show that consulting doesn’t weaken audit quality. “Investor confidence in capital markets, external auditors, and audited financial statements is strong,” she says.

Last I checked, independence "in appearance" is still required of audit firms. But here's what these audit firms don't admit when confronted with questions about non-audit work: It looks bad! And "It looks bad," also means, "It appears bad." This is not difficult to understand. Kids in elementary school don't grade their own work, do they? No, they do not.

Luckily for the firms, they have an out:

In a column called Point of View on the company website, EY weighed the arguments for and against allowing auditing companies to also conduct consulting work for clients. EY’s verdict: The potential for conflict can be managed. “We believe it improves audit quality for auditors to be able to provide these non-audit services,” EY said, “as long as they are preapproved by the audit committee and fully disclosed to shareholders.”

It's hard for me to think of anything more pointless than the concept of auditor independence. We haven't even mentioned the issuer-pay model! Auditor independence is not real. The end.

IRS phone scams

Since that big break a number of weeks ago, the wheels have mostly come off of IRS Scams, Inc. Yesterday, things seem to have ground to a fiery heap:

The U.S. Justice Department charged 61 people and entities on Thursday with taking part in a scam involving India-based call centers where agents impersonated Internal Revenue Service, immigration and other federal officials and demanded payments for nonexistent debts.

The scam, which had operated since 2013, targeted at least 15,000 people who lost more than $300 million. Twenty people were arrested in the United States on Thursday, while 32 individuals and five call centers in India have been charged, the department said in a statement.

In a twisted way, you have to admire the hard work it must've taken to create a vast criminal enterprise that was this successful. But at the end of the day, you're calling up people's grandparents and scaring them to death in order to make money. Not cool. Or legal!

Awkward testimony

In the civil fraud trial of Lynn Tilton, one of the SEC's key witnesses was Peter Berlant, an audit partner of Anchin, Block & Anchin. His testimony was going along swimmingly until:

Amid mundane questioning of the accountant, Peter Berlant, about audits and GAAP-compliant reviews, Tilton’s lawyers showed the CPA an e-mail from 2003 about a dinner the two shared at a Manhattan restaurant.

Wasn’t this “the dinner where your wife accused you of having an affair” with Tilton, the lawyer, Mark A. Kirsch, asked.

Berlant, under cross-examination by Kirsch, initially denied the interaction — but then said, after being reminded he was under oath: “I don’t know what [my wife] thought.”

Oh boy. Testifying is bad enough. Having to explain whether or not you remember your wife accusing you of having an affair with someone who once posed in lingerie for client Christmas cards is whole other level of pressure.

Has Donald Trump released his tax returns?

Nope! But Alec Baldwin, who is more or less Donald Trump in liberal and literal make-up, has been accused of skipping out on sales taxes related to a painting he bought in 2010. See? This story could've been about Trump and everyone would've believed it.

Previously, on Going Concern…

Megan Lewczyk wrote about imposter syndrome. And I mentioned a letter that Elizabeth Warren and some other senators wrote to KPMG about Wells Fargo.

In other news:

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