Author: Caleb Newquist

Founding editor, Going Concern.

Cuomo Checks Ernst & Young Off the Hit List

Or throws another scalp on the pile, whatever you prefer.

The Journal is obviously very cozy with the Governor-elect:

New York Attorney General Andrew Cuomo filed a lawsuit against Ernst & Young for civil fraud Tuesday, accusing one of the nation’s largest accounting firms of helping Lehman Brothers Holdings Inc. hide its financial weakness from investors for about seven years before the bank finally collapsed in September of 2008.

Ernst & Young knew about, supported and advised Lehman on its “Rs, a type of debt the bank took on, but labeled as sales, which made the firm appear to investors less risky than it really was, according to the complaint. The audit firm also stood by while Lehman misled analysts and investors on conference calls and in financial filings about its levels of risk, particularly after the firm’s stability began to crack after the credit crisis began in 2007, said the complaint.

“Ernst & Young substantially assisted Lehman Brothers Holdings Inc., now bankrupt, to engage in a massive accounting fraud,” Mr. Cuomo wrote in his complaint.

Now that the AG has pulled the trigger on this, we’re wondering what’s next. E&Y still isn’t talking, other than the statement they’ve been giving since the bankruptcy examiner’s report came out in March. One comment suggested a settlement in the nine figure range which would put them in proximity of the DOJ’s fine of KPMG back in 2005.

Colin Barr over a Fortune reports that Cuomo wants at least the audit fees back ($150 million, according to the complaint):

The complaint, filed in state Supreme Court, seeks the repayment of at least $150 million in fees the audit firm collected between 2001, when Lehman’s aggressive accounting began, and 2008, when the venerable bank collapsed, precipitating a global bank run.

“Our lawsuit seeks to recover the fees collected by Ernst & Young while it was supposed to be using accountable, honest measures to protect the public,” said Attorney General Andrew Cuomo.

Something tells us that Cuomo won’t be satisfied by simply the audit fees; we’re talking about the largest bankruptcy in history, after all. If you feel like ballparking the fine, we wouldn’t turn away any outlandish guesses.

UPDATE: Felix Salmon also points out E&Y’s lack of communicado:

E&Y knew this was coming—we all did—but despite that fact, its only public reaction so far has been to refuse to comment. That doesn’t look good, and it forces us back to what the company said in the wake of the Valukas report—that its work as Lehman auditor “met all applicable professional standards,” whatever that’s supposed to mean.

He also agrees with us that the fine will be greater than the $150 million and notes (not hiding his disappointment) that no partners were named, “E&Y will avoid admitting blame and also avoid criminal prosecution. […] [T]he only defendant is Ernst & Young LLP; there are no named individuals on the list. So E&Y’s partners are probably safe too. Sadly.”

Unless, of course, the SEC or PCAOB opt to take up that disciplinary slack. Don’t forget that some people think that Cuomo is making this move because he wants the “last scalp” before leaving the AG’s office for the Governor’s mansion. We realize pinning hopes on the SEC and PCAOB isn’t exactly comforting for those wishing to see more action but maybe Cuomo’s actions are the motivation they needed.

We’ll keep you updated throughout the day and if there’s any internal word from the hallowed walls of 5 Times Square, do email us the details.

Accounting News Roundup: KPMG’s Hiring Spree; PCAOB Issues Audit Practice Alert No. 7; Groupon Names Amazon Exec as CFO| 12.21.10

New York Leads in Pursuit of Lehman [WSJ]
In 2001, the regulator of the nation’s biggest banks told its examiners to be on the lookout for firms whose regulatory filings made them look healthier than they really were. That followed guidelines issued in 1990 that said banks could face disciplinary action if their filings “have significant inaccuracies or are ‘window dressed.’ “

But as early as this week, it is the New York attorney general—not the Office of the Comptroller of the Currency, the bank regulator—who is expected to file a lawsuit alleging accounting firm Ernst & Young LLP allowed Wall Street broker Lehman Brothers Holdings to fake itsppear financially healthier.

Staff Audit Practice Alert No. 7 [PCAOB]
Knowing the PCAOB like we do, we’re expecting a major dump of auditor inspections and disciplinary orders on Friday around 3 pm.

Globalization, Regulation and Offshoring Push KPMG to Hire 250,000 over Five Years [FINS]
Julie Steinberg at FINS gets the lowdown from KPMG’s Global Head of People, Rachel Campbell.

SEC Fines Audit Firm, Bars Partner Over China Energy Fraud [Bloomberg]
The U.S. Securities and Exchange Commission fined a California audit firm and one of its partners $129,500 for “improper professional conduct” in connection with a Chinese energy company accused of accounting fraud.

Moore Stephens Wurth Frazer & Torbet LLP of Orange County “did not exercise professional skepticism and due professional care” in audits of China Energy Savings Technology Inc., the agency said in a statement today. Kerry Dean Yamagata, 53, the partner at Moore Stephens responsible for the audits, was barred from practicing as an independent accountant for at least two years, the SEC said.

Accounting Majors Score Lowest in Verbal and Writing Among All Grad Students [TaxProf Blog]
Get better, people.

Details of secret bank talks revealed [FT]
It gets more awkward for auditors in the UK.

Deloitte CEO: Better Career Preparation Starts in High School [Hire Education/WSJ]
Barry Salzberg gets academic in a blog post for the Journal.


BAE to be handed Tanzania fine on Tuesday [Reuters]
BAE Systems will be fined by a London court on Tuesday after pleading guilty to making accounting errors in Tanzania, bringing a six-year investigation into the company’s activities to an end.

The fine is expected to sign off a settlement agreed between Britain’s Serious Fraud Office (SFO) and BAE in February when the British defence firm entered into a plea bargain deal with the UK fraud watchdog.

How to Make Auditors More Accountable [Room for Debate/NYT]
For those of you looking to get all pointy-headed about this E&Y/Lehman debacle.

Groupon Hires Amazon Finance Executive Child as CFO to Help Raise Funding [Bloomberg]
Groupon Inc., owner of a daily coupon website with 40 million subscribers, named Jason Child chief financial officer as it considers raising more money to fund growth.

Child, 42, previously served as Amazon.com Inc.’s vice president of finance, overseeing its $14 billion international business, Groupon said today in a statement. He will relocate to Chicago, where Groupon is based.

Here’s a Visual: A 64 Year-old Accountant in Bed, Naked, with a Madame, Surrounded by Cash

In Britain, of course:

A respected accountant who turned his home into a brothel was caught in the act when police swooped and found him naked in bed with his Chinese mistress, surrounded by money.


“Respected accountant” Leslie Baleham received a year in prison after his house effectively became a brothel that managed to serve 400 men during a three-month stakeout, according to a report in the Daily Mail. How would an otherwise mild-mannered accountant get tangled up in such a mess? Love, of course!

The court was told that Baleham had been ‘smitten’ with his younger woman – who was a main figure in running the brothel.
Adrian Reynolds, prosecuting, said: ‘Never was the relationship between sex and money more clearly to be seen.’ [Ed. note: Oh, British wit.] The pair, who ran the brothel for two years, had a joint bank account and had paid in £57,000 – including £7,000 he had made in rent. Harry Bowyer, mitigating, told the court that Baleham was not involved in the day-to-day running of the brothel, and was effectively just a landlord. He said: ‘Baleham felt he was having a relationship with her. Now he feels he has been used by her. He is now divorced from his wife.’

Arrested in bed with a madame called Ping Ping, the ‘respected’ accountant who turned his home into a brothel [Daily Mail]

Charlie Gasparino: Someone’s Holiday Vacation Is Holding Up the Ernst & Young Settlement Talks

The Fox Business Network ace reporter is saying that Cuomo & Co. would like to settle this thing up ASAP (a “quick scalp” before AC goes to Albany) however it is definitely not happening this week because, “According to people at Ernst & Young […] one of the lead investigators in Cuomo’s office is on vacation.”


Also interesting is that Chaz reports that E&Y thought there wasn’t going to be such a rush to get this thing settled but now everyone is all worked up because the story got leaked.

As for the SEC stuff, we don’t know what to make of it since there’s been hardly any news about talks between E&Y and the Commission. Francine McKenna told us that Gaspo “got a lot of smoke blown up his tush,” which is typical for reporters who cover Big 4 firms once in a lunar eclipse on the winter solstice.

Ernst & Young Partner May Have Known This Lehman Brothers Bankruptcy Situation Was Going to Get Worse

This was in January 2009 after the shit had hit the fan and E&Y’s partner on Lehman, Hillary Hansen, may have had an idea of how cozy she was going to get with bankruptcy examiners, the NYAG, SEC, PCAOB, etc.

Skip ahead to around 17:00 (you have to go to the website to watch) where Hansen says, “We audit Lehman Brothers, unfortunately,” to sparse chuckles.

Zero Hedge makes the case against E&Y (Hansen being the main culprit) in excruciating detail and thinks FSO might be down for the count:

[W]e are confident that (again, with the assumption that we live in some semblance of a sane/ration world), E&Y’s Financial Services Office is done (even despite such ironically apropos warnings on the firm’s website as “Top six liquidity risk management challenges for global banks “), and quite possibly the entire firm. Integrity is the number one currency for an auditor, and just like Anderson, E&Y’s just went out in a puff of green-colored smoke.

Big 4 Auditor Respectfully Requests an Audit of Big 4 “Compensation Studies”

From the mailbag:

Hey Caleb,

So recently I was found out that KPMG will be conducting a compensation study as to whether or not we are in line with “market” and the effects of the results, if any, will be announced mid-January. This came as the result of the follow up on the Mid-America senior council meeting. Apparently the question was raised in this meeting about why KPMG employees weren’t receiving bonuses similar to the other firms [Ed note: We received the following message prior to the announcement of KPMG’s new bonus program that we reported on Friday.]. During the follow-up call it was told that a “compensation study” was being performed.

I always hear all of the Big 4 talking about how they did a compensation study and found out they were in-line with the market but obviously after all of the posts about compensation raises and bonuses nothing seemed to be consistent. My question to you is where are all of these supposed studies done by the Big 4? They say they perform them but do we actually see them? As an auditor I’m inclined to ask where is the supporting documentation? We don’t take our clients word that they have $50 million in the bank we have to agree that to something, so why don’t we get some proof of this study or in your experience with goingconcern have you actually ever seen results of these studies?

Thanks,
Disgruntled Employee

Dear Disgruntled,

We understand your frustration with regards to these so-called compensation studies. To directly answer your question, we have not seen any of these studies nor do we know how the firms commission them. (If you are familiar, get in touch.) The transparency of the process, as you rightly point out, is virtually non-existent. While your call for more information regarding these studies may get some attention and even a brief consideration, don’t expect any “supporting documentation” in the near future. Keeping the compensation sausage recipe secret is advantageous for the firms and since “in-line with the market” is another way of saying, “right in the meaty part of the curve” people have very little room to complain.

Now, if it appears that one firm say, PwC, is compensating employees in a more generous manner than say, KPMG, the only way to conclude that for certain is to speak to a recruiter who talks to employees from both firms. Sure you can mine the comments of posts here or read Bob Half’s salary report to get an idea of what’s what but if you want to know the actual compensation disparity between two firms (especially for your skill set), you’ll have to do a little digging for yourself.

So, do you have the right to be annoyed by the lack of information around these studies? Of course. But don’t expect an in-depth breakdown firm by firm to be presented at your next townhall or webcast.

(UPDATE) Early More Chatter on the Ernst & Young Civil Charges

As we mentioned earlier, the Wall St. Journal has reported that out-going New York Attorney General Andrew Cuomo will be filing civil fraud charges against Ernst & Young related to its actions (mostly lack thereof) that led to the Lehman Brothers bankruptcy. Charges are expected this week but everyone is talking about it now obviously (and we were hoping for a quiet week).

Anyhoo, we’ve rounded up some of the early sound blog bites out there and we’ll keep you updated throughout the day. Of course, if you’re with E&Y and have any insight or hear some calming, soothing words from TPTB, email us t��������������������ore–>
In her column at Forbes, Francine McKenna is happy that Andrew Cuomo is actually doing something, which is more than can be said for the Feds:

Whether Cuomo is doing this on his own, in defiance of the Feds, or has their implicit blessing in light of the Federal Government’s seeming unwillingness to act, New York’s Attorney General is showing the world he’s the only one in the US with the nerve to shake this tree.

Fox News’s Greta Van Susteren is not so impressed, saying criminal charges are really what’s needed:

Attorney General Andrew Cuomo needs to get tough instead of this “window dressing” CIVIL business. He is soon to be the Governor of NYC and this is his last act as the State’s Attorney General. I hope this is not to appease Wall Street. Let a jury decide whether is is criminal behavior or not and whether anyone has committed a crime. As it stands now, Cuomo is blocking that determination with only civil charges.

Felix Salmon postulates that Cuomo is using the possibility of criminal charges to scare E&Y into a settlement:

On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen. Still, I’m sure that Cuomo’s office is doing nothing to downplay the contingent existential threat here, in its negotiations with E&Y.

Yves Smith at Naked Capitalism is practically giddy and hopes that this will turn up the heat on Dick Fuld:

One can only hope turning up the heat on Ernst & Young will lead to the prosecution of Richard Fuld. The buck is supposed to stop with the CEO, particularly when they are paid as many bucks as Fuld received. Given the scale of looting that took place in the runup to and after the crisis, there is no hope of getting the banking industry back in its proper role of supporting the real economy until we see some senior bank executives in orange jumpsuits.

CNBC’s John Carney thinks that execs at both Lehman and E&Y should take the civil charges as good sign:

Why should executives at Lehman and Ernst & Young be relieved? Because the filing of civil charges rather than criminal charges may signal that prosecutors do not believe they can prove a criminal case. The key difference between criminal and civil charges in these contexts is the quality of evidence and it looks as if New York Attorney General Andrew Cuomo’s office has decided it doesn’t have the evidence to prove a criminal case beyond a reasonable doubt.

Fortune’s Colin Barr is appalled that E&Y’s Global CEO Jim Turley believes that there wasn’t any chicanery going on:

Take this exchange between E&Y chief Jim Turley and Fortune’s Geoff Colvin, from a September interview.

Colvin: Would it be fair to say that the crisis was caused in part by some financial firms doing misleading things that were within the rules?

Turley: I don’t know that it would be fair to say they were doing misleading things.

It’s remarkable Turley would still say that two months after the financial firm of the best and the brightest, Goldman Sachs (GS), agreed to pay $550 million to settle Securities and Exchange Commission charges that it misled investors in a bubble-era debt deal. The auditors weren’t involved in that one, but the Wall Street mindset was pretty obvious to everyone not running an audit firm.

Over at DealBook, Peter Henning has an interesting theory that the NYAG could be going after the accountants while the SEC focuses on individuals:

If the S.E.C. agreed to share the Lehman case with the New York attorney general, then it may be that the state took the accountants as the focus of its investigation while the federal government concentrates on individuals. Such a division of labor would allow each to husband resources by avoiding any duplication of effort in the investigation – and may be the reason the state is planning to file charges before the S.E.C. decides to act.

Emily Chasan at Reuters managed to get a statement out of someone (Charlie Perkins’s phone has likely exploded by now) although the firm is sticking to the talking points:

A spokeswoman for Ernst & Young said the company did not comment on speculation and repeated a previous statement made by the firm about its dealings with Lehman Brothers. “Throughout our period as the auditor of Lehman, we firmly believe our work met all applicable professional standards, applying the rules that existed at the time,” the statement said.

Matt Taibbi (whole post is worth a read) is calling for the paramedics:

My guess is that this suit is the beginning of the end for Ernst and Young and, who knows, may be the beginning of a series of investigations that ultimately take down the auditors and ratings agencies that made the financial crisis possible. Without accountants and raters signing off on all the bogus derivative math and bad bookkeeping, a lot of this mess would never have happened.

We’ll be updating this post with more reactions and as things develop.

Accounting News Roundup: Cuomo Has Ernst & Young in the Crosshairs; PwC Report: Petters Fraud Attracted $36 Billion; Few Will Pay Estate Tax in 2011 | 12.20.10

Auditors Face Fraud Charge [WSJ]
New York prosecutors are poised to file civil fraud charges against Ernst & Young for its alleged role in the collapse of Lehman Brothers, saying the Big Four accounting firm stood by while the investment bank misled investors about its financial health, people familiar with the matter said.

State Attorney General Andrew Cuomo is close to filing the case, which would mark the first time a major accounting firm was targeted for its role in the financial crisis. The suit stems from transactions Lehman allegedly carried out to make its risk appear lower than it actually was.

Petters’ schemes drew in $36 billion, report says [MST]
This makes for lots of paper cuts, “PwC said it obtained financial data that would fill more than 560,000 bankers boxes. It said it found 87 accounts in 21 different banks that were part of the investment scheme.”

IRS Agent Accused of Stealing Tax Refunds [NBCNY]
Fern Stephens, a revenue officer at the Internal Revenue Service, is being charged by the U.S. Attorney’s office for stealing more than $160,000 in unclaimed tax funds from 12 taxpayers, according to federal court documents.

Former ECB Member Padoa-Schioppa Dies [WSJ]
Since July, Mr. Padoa-Schioppa chaired the board of trustees of the IFRS Foundation, which oversees the International Accounting Standards Board and helped promulgate the move toward a single set of accounting rules used worldwide. Sir David Tweedie, the IASB’s chairman, said in a statement Sunday that Mr. Padoa-Schioppa “possessed a rare combination of intellect and vision, delivered with a wry smile. He was a friend and colleague and will be missed by many, many people.”


Icelandic Bank Fails in $2 Billion Bid to Sue Former Execs, Auditor in New York [The American Lawyer]
A judge refused to hear Glitnir Banki’s suit against PwC and former execs.

Estate Tax Will Return Next Year, but Few Will Pay It [NYT]
Almost no one will have to worry about paying the estate tax under the tax legislation just [signed into law]. By one estimate, from Alan Rothschild, the chairman of the American Bar Association’s real property, trust and estate law section, less than one-half of 1 percent of people who die in 2011 will be hit by the estate tax. In contrast, 10.5 percent paid the estate tax in 1977.

Let’s Watch President Obama Use a Ridiculous Number of Pens to Sign the Tax Cut Bill

Running late as usual. At least they aren’t using whiteboard markers. Since it’s Friday and we’ve got nothing better to do, we’ll be live-blogging below.


4:02: Starting in two minutes? You’re already 12 late Mr President. We realize you’re the President but some of us have holiday cheer to spread, get with it.

4:05: Filing in. Finally. Biden in the Hizzous. Cracks about a “big deal,” without the F-bomb, this time. Shout out to half-man, half-tortoise, Mitch McConnell. Bipartisanship lives!

4:08: The big guy is up. Applause. Biden is semi-beaming. BHO gives a shout out to the Veep. Biden grins like only Biden can. Love for McConnell and Dave Camp. Shot of Larry Summers is less than flattering. Did his mother teach him anything about sitting up straight? Yeesh. Bipartisanship, bipartisanship, bipartisanship. We get it. You managed to play nice, what do you want, reelection?

4:13: Al Sharpton? Golf clapping? Can someone explain why the Rev is at this thing?

More name-dropping. Nancy, T Geith, Boehner. Sigh.

4:17: John Hancock time. Hugs, handshakes, back slapping. OUT!

Who’s Going ‘Above and Beyond’ at McGladrey?

A few people, apparently.

The “prestigious 2010 McGladrey Achievement Awards” are only given once a year (we think) and while C.E. Andrews realizes everyone is doing their part, there are a few people that need special recognition, “While all of our employees are focused on the client, these award winners are being recognized as having gone ‘above and beyond’ to ensure client success.”

But enough with the boilerplate, on to the names:

This year’s winners include:

• Dalia Pearson (Ft. Lauderdale) was recognized as Employee of the Year for her can-do attitude and excellent customer service
• Michael Sher (Chicago) was recognized as Partner/Managing Director of the Year for his strong work ethic, industry expertise and his industry knowledge.
• Jennifer Murtha (Melbourne) was recognized as Career Advisor of the Year for developing talent, cultivating teams and relationships and helping to shape the firm’s future.

Individual and team awards were also presented for relationships, excellence, integrity and unity. Team awards included the Great Lakes Core Tax Team, Ohio Private Equity Growth Team, Building Trust Through Service Engagement Team, the Olympus Capital Audit Team and others.

Obviously this is stupendous news but what we’re curious about now is, what does extra-special people receive for such a prestigious honor? A year’s worth of bragging rights is a given but is there any money involved? As much punch and cake as their hearts desire? A lunch with your Mickey G’s-sponsored golfer of choice? We need answers. Or wild-ass guesses.

Marin County Adds ‘Racketeering’ to the List of Allegations Against Deloitte

Hell hath no fury like an obscure California county that feels completely gypped (to the point that they feel it’s fraudulent) by the largest professional services on Earth.

Marin officials fired another salvo in an escalating $105 million legal war with international computer consultants, filing a new lawsuit Thursday accusing them and a former county official of violating racketeering law in a bid to rip off taxpayers.

The new suit was filed against Deloitte Consultant LLP, software developer SAP and former assistant auditor-controller Ernest Culver, who served as project director of the county’s troubled computer installation before quitting to join SAP.

As you may recall, Marin County’s original suit against Deloitte for $35 million involved allegations of “fraud, misconduct and misrepresentation” which included using ‘neophytes’ on the implementation of the county’s ERP system. The new racketeering charges are especially interesting and the Marin Independent Journal has the details:

It alleges a conspiracy, asserting consultants wined and dined Culver and interviewed him for employment at the same time Culver was approving deficient work on the project, approving fee payments and helping line up new contracts.

“County taxpayers were charged for millions of dollars in services that Deloitte failed to properly perform” and residents were “defrauded of the honest services of a high-ranking county official,” according to County Counsel Patrick Faulkner.

Deloitte denied the allegations of the original suit, saying that Marin County was actually responsible for the snafu. However, and unfortunately for Deloitte, new shit has come to light:

Faulkner disclosed that the county has combed through its computer system to retrieve thousands of e-mails issued by consultants and Culver while they worked in county offices, providing a backbone for accusations leveled by the latest suit.

The complaint alleges six violations of the federal Racketeering Influenced and Corrupt Organizations Act by Deloitte and SAP, and three counts of illegal conduct against Culver, including a violation of the state anti-corruption statute.

So it doesn’t sound like there’s a smoking gun per se but enough back and forth that adds up to this:

The lawsuit, the county said in a press release issued late Thursday, claims that when problems with Deloitte’s work surfaced, Deloitte and SAP engaged in a “cover-up that included bribing Culver to falsely ‘approve’ Deloitte’s defective work, and silencing an SAP employee who tried to intervene on the county’s behalf.”

So, in other words, pretty bad stuff. The MIJ reports that “Settlement talks are expected and while the parties remain at odds, the latest court filing could spur negotiations.” Using our best translation skills, this more or less says, “Deloitte, SAP and Culver realize they’re fucked – begrudgingly – and will be going to the table any day now to sort things out.”

The Independent Journal also reports that SAP, Deloitte or Ernest Culver “could not immediately be reached.” Our own messages with Deloitte spokemen Jonathan Gandal and John La Place were also not immediately returned.

Marin County alleges racketeering in new lawsuit over computer debacle [MIJ]