Scandal-hit subprime lender Cattles is suing PwC, alleging negligence over its audit of two years of financial statements. PwC intends to contest what it called the “inflated and misguided claim” in the High Court in London. […] A supervisor representing Cattles’ creditors asserted that PwC should not have signed off the 2006 and 2007 financial statements of the group, which once had a £1bn market capitalisation. “As a consequence, the financial statements fundamentally mis-stated the financial position of the group. In particular, if the impairment provisions had been properly audited, it would have revealed that the group’s business, over 90 per cent of which comprised a loan book, was not financially viable,” it added. [FT, Earlier, Elsewhere]
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Did PwC Help the Fed Cook Its Books?
After every Federal Open Market Committee meeting, you can peek into the Fed’s brain in a highly succinct fashion when the statement and minutes are released shortly after it ends but five years must pass before the full transcript of the meetings is released to the public. If you’re playing along at home, that means the FOMC transcripts should be full of all sorts of intriguing info specifically pertaining to the market collapse of 2008 on or around 2013.
But we’re talking about the 1999 minutes today and that’s where Adrian Douglas at Market Force Analysis comes in. He decided to read through some of the now-available minutes (hey, we all need hobbies) and look at what we have here. Did PwC help the Fed brush out a material accounting boo-boo?
Maybe when you actually create the money and the financial accounting handbook to go with your audits you can get away with sort of thing but something about this just doesn’t sit right.
This is System Open Market Account Manager Peter Fisher speaking to the committee:
Last spring, as members of the Committee will recall, we entered into a series of transactions with the ESF to re-balance our euro and yen holdings so we could come to a better split both in terms of total holdings and the currency mix. This involved a number of transfers of ownership of a series of investments and resulted in quite a significant amount of accounting activity. In the course of reviewing that, our own accounting staff identified an error that had been introduced in the prior year in our treatment of the premium on bonds held in the accrual account, overstating the accrual account by about $5 million. In the course of confirming that, they identified an additional $26.6 million overstatement in the accrual account for interest on foreign currency investments. We have had a number of staff members working full time trying to trace the source of that $26.6 million overstatement. They have worked back through the records to December 1994, before which detailed records at the transaction level just no longer exist due to the routine and appropriate destruction of documents.
The Board examiners were at our Bank to conduct an examination of the System Open Market Account in September and PricewaterhouseCoopers also has looked over our methodology to try to trace this overstatement back through time and find its source. PricewaterhouseCoopers is confident that we have traced it back as far as we can. They have tested our work papers and agree with our conclusion that we simply can’t go back any further.
After a quick back and forth over whether or not this could be a diversion involving a few folks within the Fed working together to funnel out the money and shooting that theory down, they present the solution:
The Board’s staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors. That involves reducing the accrued interest asset account by the entire $31.6 million, with an offsetting reduction in interest income on foreign currency investments. We will make that adjustment before the end of the year and spread it among all the Reserve Banks. Of course, for all of us with responsibilities for SOMA this is an embarrassing, indeed humbling, event. As a technical matter, though, I understand that PricewaterhouseCoopers is comfortable with the conclusion of both our accounting and audit function and the Board staff that this is not a material event for purposes of disclosure for any Reserve Bank.
That’s right, the Fed fudged the numbers to make things add up right and PwC gave it the all clear. Perhaps I’m a bit ignorant on how things work but “working out an accounting treatment” to scrub out over $30 million in errors is no easy feat, maybe friend of GC and former criminal Sam Antar can give us some hints on how to accomplish such a task?
Notice also that no one else gets the privilege of “the routine and appropriate destruction of documents,” leading us to ask the obvious question: how is it they get away with it?
Is This PwC Auditor Your Next American Idol?
Everyone calm down. Steve Beguhn (we’ve finally confirmed the correct spelling) has a long way to go. But dude can sing. And he’s pretty funny.
The only problem I foresee is that I’ll have to start watching the show. For those of you on Facebook (i.e. everyone) you can ‘Like’ Steve here.
What do you guys think of Steve’s chances? Leave your well wishes or your best Simon Cowell critique in the comments.
UPDATE: Just a few particulars on Steve – he’s a Senior Associate in Milwaukee, has been with PwC since Fall of ’07 and interned prior to joining the firm full time. Oh, and he’s not in the office today, so if you’re around Steve, email me.
PwC Gets a Small Win in the Satyam Case
Hey, any win is a good win, right?
A has judge ruled that there was no evidence that the Delhi office had anything to do with the actions of the Bangalore office, the statutory auditors of Satyam.
The Institute of Chartered Accountants of India (ICAI) — the AICPA of India — had brought actions against PwC offices in Delhi, Kolkata, and Bangalore but the judge isn’t buying that they are related:
“They are separate partnership firms with separate balancesheets. There is no inter-connection (between PW Delhi, PW Bangalore and PW Kolkata [ Images ]) and profit and loss of one cannot be shared by others. You cannot say that the Banglore firm which was statutory auditor of Satyam has anything to do with Delhi firm,” said Justice Sanjiv Khanna.
The court did indicate that if the ICAI wanted to take another shot at Delhi — you know, with some evidence — if it so chose.
P. Dubs has to be happy with the small victory but would probably prefer if their previous suggestion to just forget this whole thing would start getting some traction.