Author: Caleb Newquist

Founding editor, Going Concern.

Deloitte Manages to Tone Down Its Response to This Year’s PCAOB Inspection Report

The PCAOB has released its 2009 Inspection Report for Deloitte and out of 73 audits inspected, 15 deficiencies were cited in this year’s review.

The Board writes that deficiencies are “failures by the Firm to identify or appropriately address errors in the issuer’s application of GAAP, including, in some cases, erikely to be material to the issuer’s financial statements. In addition, the deficiencies included failures by the Firm to perform, or to perform sufficiently, certain necessary audit procedures.”


Issues cited by the PCAOB in the report included goodwill impairment, deferred tax assets, inventory valuation, a failure to identify a “departure from GAAP,” among others. The Big 4 Blog rightly notes that this is the first time that the PCAOB has provided the sample size of the inspections which allows for some surprising error rates:

The error rate in this situation is quite high, almost one of every five audits has errors. Obviously, Deloitte performs thousands of audit each year and extrapolating from a small sample is quite dangerous, nonetheless, even at half of 20%, the natural conclusion is that one in ten audits has an error, and would have gone unnoticed had not the PCAOB done a good post-audit on the audit.

You could really make a fuss about what auditors did and did not do but the fact remains, audits are never perfect. Some are just more unperfect than others. What’s especially interesting is how Deloitte’s attitude has changed with regards to the PCAOB’s findings as compared to last year.

In last year’s inspection report, the Board cited seven audit deficiencies which resulted in a three page letter from Deloitte that, in no uncertain terms, told the PCAOB to get bent and keep their Monday Morning QBing to themselves. This was about as an aggressive of a response from an accounting firm as we had seen so it was definitely a surprise to see a firm lose their cool.

This year, despite the fact that Deloitte was cited for over twice as many deficiencies, the firm is considerably less defensive (read: boring) and put together a concise one page response to the Board’s findings that included the following:

“We have evaluated the matters identified by the Board’s inspection team for each of the Issuer audits described in Part I of the Draft Report and have taken actions as appropriate in accordance with D&T’s policies and PCAOB standards.”

It’s nice to see the firm playing nice with their regulator this year but we’re curious as to how the change in attitude came about. We hope that at least one of the remaining Big 4 will include a little more color in their response.

PCAOB_2010_Deloitte_Touche_LLP
PCAOB Inspection of Deloitte Audit – 20% Error Rate?? [Big 4 Blog]
Audit Deficiencies at Deloitte [WSJ]

Stressed Out PwC Partner Was Criticized By Fellow Partners for Being a Total Pansy

On Monday we briefly mentioned the unfortunate case of Colin Tenner, a former PricewaterhouseCoopers partner that is suing the firm for disability discrimination. He is claiming that after he took a leave from the firm after “mismanagement by PwC and bullying by a client,” after which, negotiations for him to return to the firm fell apart and he was let go.

Now the Times Online is reporting some of the feelings of Tenner’s fellow partners. In January 2007, Mr Tenner took sick leave for a couple of days and that did not sit well with his fellow partner Hugh Crossey:

While Mr Tenner was on sick leave in January 2007, his managing partner, Hugh Crossey, e-mailed a third partner to say that he had heard that Mr Tenner was ill again and that the firm needed to point out that “real partners simply do not get sick”, it was alleged.

Depression? Anxiety? Apparently those aren’t real sicknesses, according to Hugh. But wait! Hugh wasn’t the only ones that thought Tenner was a total wuss. The tribunal also heard that a member of PwC’s “partner affairs team” (which probably has nothing to do with treating people like whores) wrote to the firm’s chief medical officer (?) “that there was a ‘very strongly held view that [Mr Tenner] was not as unwell’ as he claimed.” So not only is he total sissy, he’s also a faker.

Tenner claimed that his health had deteriorated to the point that it led him to “actively research ways of committing suicide,” although he actually never made any attempts on his own life.

PwC maintains that this mental health thing is all bullshit, sticking with the standard communiqué, “We believe that his claim is completely without merit and we will vigorously contest it.”

PwC manager told Colin Tenner ‘real partners do not get sick’ [Times Online]

Accounting News Roundup: Times Square Gets Back to the Grind After Bomb Scare; Down with the Corporate Income Tax; The Politics of Spending | 05.07.10

Times Square Goes Back to Work After Bomb Scare [FINS]
FINS checked in with several companies who have locations in the Times Square area to see if things are back to normal after last weekend’s failed bombing. Most companies are officially mum on the issue including our favorite TS resident, Ernst & Young, who was quoted as to have, “reached out [to their employees] on an informal basis.”

And by “informal” apparently that means “nothing” in some cases We checked with a couple of our own sources at E&Y and we were told that they had not received any communication at all. If there’s an email floating around out there, let us know but it sounds like any reassurance of safety was passed around on a post-it note.


A.I.G. Said to Dismiss Goldman [NYT]
Back in the game AIG! Thanks for the good times GS, Citigroup and Bank of America will take it from here. All it took was a little money for AIG to realize that they were in an abusive relationship.

Time to Junk the Corporate Tax [WSJ]
Michael Boskin argues for dumping the corporate income tax in an op-ed in yesterday’s Journal, citing several reasons that it sucks big time including double taxation, “Corporate income is taxed a second time at the personal level as dividends or those capital gains attributable to reinvestment of the retained earnings of the corporation. Between the new taxes in the health reform law and the expiration of the Bush tax cuts, these rates are soon set to explode.”

…And that stakeholders ultimately bear this cost, “the corporation is a legal entity; only people pay taxes. In a static economy with no international trade, the tax is likely borne by shareholders. The U.S. economy is neither static nor closed to trade, and taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers.”

The Political Economy of Consumption: ‘Tis Better To Give, and Give, and Give [Tax Vox]
This sums up why America’s deficit problems and citizens personal debt problems will never be fixed:

Not to stereotype, but nations do have personalities. Italians eat. Russians drink. Americans spend. And when anything—or anyone—gets between us and our consumption, watch out.

Recessions make us grumpy in part because we can’t consume as much as we like. In the depths of the current downturn, the savings rate in the U.S. topped 5 percent. But retail sales have been rising since October, and the savings rate has fallen in half. I suspect Americans won’t really feel better until we drive our savings rate back to zero.

Accordingly, politicians have to pander to masses about “cutting taxes” and “reducing spending” when it’s very simple and popular to the do the former, while in reality it’s very difficult and unpopular to do the latter.

While the World Implodes, Let’s Bicker About Accounting Program Rankings

Despite your 401k taking a deuce and the entire continent of Europe about to sink into the Atlantic, the Bloomberg Businessweek Business School undergraduate speciality rankings are out and the accounting rankings are, shall we say, interesting. Maybe no one is that worried about it but if sports play any part in your like/dislike of a particular school, then there should be a few words:

1 University of Notre Dame (Mendoza)
2 Brigham Young University (Marriott)
3 Emory University (Goizueta)
4 University of North Carolina – Chgler)
5 Wake Forest University
6 Lehigh University
7 Boston College (Carroll)
8 University of California – Berkeley (Haas)
9 University of San Diego
10 Southern Methodist University (Cox)


11 Babson College
12 University of Washington (Foster)
13 University of Richmond (Robins)
14 Villanova University
15 Case Western Reserve University (Weatherhead)
16 University of Texas – Austin (McCombs)
17 University of Virginia (McIntire)
18 Cornell University
19 College of William & Mary (Mason)
20 New York University (Stern)
21 University of Southern California (Marshall)
22 Tulane University (Freeman)
23 Fordham University
24 Georgia Institute of Technology
25 Loyola University – Chicago
26 University of Illinois – Urbana Champaign
27 Ohio University
27 University of Denver (Daniels)
29 University of Texas – Dallas
30 University of South Carolina (Moore)
31 University of Connecticut
32 Boston University
33 Santa Clara University
34 University of Maryland (Smith)
35 Indiana University (Kelley)
36 Syracuse University (Whitman)
37 Washington University – St. Louis (Olin)
38 Binghamton University
39 University of Pennsylvania (Wharton)
40 Texas Christian University (Neeley)
41 University of Miami
42 University of Missouri – Columbia (Trulaske)
43 University of Michigan (Ross)
44 North Carolina State University
45 University of Wisconsin – Madison
46 Texas A&M University (Mays)
47 The College of New Jersey
48 University of Minnesota (Carlson)
49 Miami University (Farmer)
50 University of Georgia (Terry)
51 Massachusetts Institute of Technology (Sloan)
52 University of Delaware (Lerner)
53 Ohio Northern University (Dicke)
54 Seattle University (Albers)
55 Northern Illinois University
56 Michigan State University (Broad)
57 Georgetown University (McDonough)
58 California Polytechnic State University (Orfalea)
59 Loyola College in Maryland (Sellinger)
60 University at Buffalo
61 Bentley University
62 DePaul University
63 University of Iowa (Tippie)
64 Drexel University (LeBow)
65 Northeastern University
66 Marquette University
67 St. Joseph’s University (Haub)
68 University of Pittsburgh
69 University of Utah (Eccles)
70 University of Oregon (Lundquist)
71 Seton Hall University (Stillman)
72 Bowling Green State University
73 Kansas State University
74 Colorado State University
75 Louisiana State University (Ourso)
76 Baylor University (Hankamer)
77 University of Oklahoma (Price)
78 University of Colorado – Boulder (Leeds)
79 University of Massachusetts – Amherst (Isenberg)
80 James Madison University
81 George Washington University
82 University of Tennessee – Chattanooga
83 University of Houston (Bauer)
84 Xavier University (Williams)
85 Florida State University
86 John Carroll University (Boler)
87 University of Hawaii (Shidler)
88 Arizona State University (Carey)
89 Florida International University
90 University of Louisville
91 Bryant University
92 Rensselaer Polytechnic Institute (Lally)
93 Purdue University (Krannert)
94 Illinois State University
95 University of Arizona (Eller)
96 Texas Tech University (Rawls)
97 Hofstra University (Zarb)
98 Ohio State University (Fisher)
99 Clemson University
100 University of Florida (Warrington)
101 University of Akron
102 University of Arkansas – Fayetteville (Walton)
103 Butler University
104 University of Nebraska – Lincoln
105 University of Illinois – Chicago
106 University of Central Florida
107 Virginia Polytechnic Institute and State University (Pamplin)
108 Carnegie Mellon University (Tepper)
109 Temple University (Fox)
110 Pennsylvania State University (Smeal)
111 Clarkson University

Apparently Ernst & Young Doesn’t Buy the “C’s Get Degrees” Mantra

We know that lots of you out there are perfectionists, so this could never happen to you but for you mere mortals, you can sympathize a little bit.

Courthouse News Service reports that a class action suit in California has been filed against E&Y claiming that the contracts signed by graduating seniors “compel” them to work for the firm but allow the company “to legally renege or cancel the offer of employment” if the senior does not maintain “continued strong academic standing.” Apparently this means if you slack off your senior year and slip a couple of C’s in there, you could be out on the street.


Yunjung Gribben, 43, is the named plaintiff in the suit and she is seeking damanges for wrongful termination, age discrimination, breach of employment, specific performance and violations of the Labor Code.

Ms. Gribben claims that she graduated from Cal State Fullerton with a 3.6 grade point average but, “After working for Ernst & Young for a month, Gribben says, she got a call from human resources, questioning her about the C’s she got in her senior year. She says she was fired the next days [sic].”

She claims that “continued strong academic standing” was not defined in her contract, although she admits that there is a “hazy reference” to the term on the firm’s website.

Dale Fiola is representing Ms. Gribben and he us, “No student should be under the impression that they have an employment agreement once they graduate. Most of the time when people sign offers of employment they think they’ve got something.”

The suit alleges that other students have cited the “continued strong academic standing” language and in Ms. Gribben case, “younger employees were allowed to stay at the company.”

Ernst & Young spokesman Charlie Perkins had no comment at the time our post was published.

Class Sues Ernst & Young Over Contract [Courthouse News Service]

Accounting News Roundup: Will an International Audit Regulator Become a Reality?; GMAC Shopping for a CFO Candidate; FASB Sued for Antitrust Violations | 05.06.10

Audit chief welcomes debate on international regulator [Accountancy Age]
The idea of an international audit regulator is being kicked around in the EU with about as much seriousness as returning to the moon. That is, it’s absolutely something to be discussed but at this point nobody’s firing up the boosters just yet. IFRS has been proved to be, putting it lightly, a challenge but ever since the Lehman Brothers/E&Y fiasco, reform of the auditing business doesn’t seem far behind.

And while the idea is being entertained, the hurdles to an international regulator sound a little familiar:

Ian Powell, senior partner at PwC UK, said the establishment of an international regulator is “worthy of debate” but believes global consensus among nations may prove difficult.

“Most countries think their regulation is good and it is their system which should be applied – that is going to make it difficult to convince them to give up their system,” he said.

“If you talk to virtually any regulator in any country they do want to see more globalisation of regulation, but the big problem is there are certain political issues that are different in different countries.”

GMAC Said to Consider Ex-Citigroup Banker Yastine as Next CFO [Bloomberg Businessweek]
GMAC is hot on the trail for a new CFO after their last one bolted in March shortly after his TARP testimony. The ward of the state is said to be considering Barbara Yastine, who formerly was the CFO at both Credit Suisse’s and Citigroup’s investment banking groups.

FASB Defendant in Suit Alleging Antitrust Violations and Patent Misappropriation [Silicon Economics, Inc. Press Release]
Silicon Economics, Inc. is suing the FASB, alleging “antitrust violations and with willfully attempting to misappropriate patented technology,” according to the San Jose-based company’s press release.

The lawsuit concerns Silicon Economics’ EarningsPower Accounting™ (EPA™) – a patented method developed by the company to improve the accuracy, validity, and usefulness of financial statements. Silicon Economics recommended the merits of EPA to FASB in response to FASB’s request for public comment on the objectives of financial accounting (No. 1260-001, July 6, 2006). FASB claims that its website terms and conditions gave it ownership of Silicon Economics’ technology, even though such terms were not part of FASB’s invitation for public comment or otherwise disclosed to Silicon Economics.

Seems Hard to Believe That a Pre-Loaded Sponge Company Would Have to Resort to Fraud

Today in “they just made the numbers up” news, it’s shocking that a company with this business description:

We design, produce, market, and distribute cleaning products primarily for vehicular use utilizing patented technology relating to sponges containing hydrophilic, or liquid absorbing, foam polyurethane matrices and other technologies. Our products can be pre-loaded with detergents and waxes, which are absorbed in the core of the product then gradually released during use. We have designed and are conducting additional research and development for products and applications using hydrophilic technology and other technologies for kitchen and bath, health and beauty, auto, medial and pet use, which we intend to market and sell as part of our product offering. There is no assurance that we will successfully be able to market and sell products for kitchen and bath, health and beauty, auto, medial and/or pet use.

…would have to make up five customers out of thin air to account for 99% of their revenue:

According to the SEC’s complaint, after several years of relatively little business with a single customer comprising the bulk of Spongetech’s limited sales, Metter and Moskowitz began to paint a more promising and misleading picture of Spongetech’s business. Beginning in approximately April 2007, Spongetech issued dozens of phony press releases touting increasingly larger, yet fictitious, sales orders and revenue. The press releases fraudulently exaggerated the demand for pre-soaped sponges by referencing millions of dollars in sales orders, business, and revenue from five primary customers that purportedly accounted for 99 percent of Spongetech’s business, yet none of those customers actually existed.

Yes, they had an auditor. According to the the last 10-KSB filed it was Drakeford & Drakeford, LLC who has had their own share of trouble.

SEC Charges Spongetech and Senior Executives in Pump-and-Dump Scheme [SEC Press Release]
SEC v. Spongetech, et al. [SEC]

IRS Accused of Being Sneaky Double-Crossing Tricksters

Who would have guessed that the IRS was capable of pulling the old switcheroo on confessed tax dodgers?

Apparently not some “former high-ranking tax officials” who are all bent out of shape because the IRS decided to prosecute their clients even though they came out of offshore tax haven land with their hands up.

A letter dated March 30 and signed by 32 lawyers, many of them former high-ranking tax officials now in private practice, said the IRS actions “smack of trickery.” They said that because the taxpayers had turned themselves in, they shouldn’t be prosecuted. The letter said heavy-handed treatment of some account holders could cause taxpayer confessions to “grind to a halt.”
…
The letter acknowledged the government’s long-held right to reject confessors if it already has their names or has opened an audit. But it argued that subjecting these taxpayers to rare public prosecutions would look like a double-cross. The writers also warned that if the government went ahead with prosecutions, it would radically change the “risk assessment” they offer their clients and lead to fewer voluntary disclosures.

So you acknowledge the right of the Feds to say ixnay on confessions of known tax scofflaws, plus one of Dougie’s deputies is quoted saying this: “The Service has been clear and consistent. We said that people already known to us were not good candidates,” and then you write a letter? The IRS has been attacked from the air, had suspicious packages dropped on their doorsteps and been blamed for suicides and you think a stern letter is going to sway them?

IRS Faulted for Prosecuting Confessed Evaders of Taxes [WSJ]

TRAC’s Susan Long: IRS Increasing Efforts Towards More Small Business Audits in a Perverse Fashion

Last month we mentioned a study that was done by the Transactional Records Access Clearinghouse (“TRAC”) of Syracuse University that was critical of the IRS’ trend of auditing fewer large corporations and focusing smaller business. A major concern for not only small business owners and managers but also taxpayers since they pay for the audits that are occurring.

We recently spoke to Dr. Susan Long, co-director of TRAC and AssociaSyracuse’s Whitman School of Management about the study.


Going Concern: What’s the biggest takeaway from the findings on the report?

Dr. Susan Long: The report really does two things: 1) Presents a tool [link to tool] that users can use to look up all sorts of statistics about IRS audits for any size corporation. From very small to very large, you can look at trends over a long time so that you can see how things have changed.

2) The focus of our report was to look at the continuing large drop in corporate audits even though this is a time of rising deficits. The IRS has been given more budget for agent staffing but they have not chosen to focus on the largest corporations even though that’s where, historically, the IRS gets the biggest bang for the buck.

GC: One section of the report discusses the politics of tax collection and deficits. Is the IRS and Treasury taking the wrong approach into obtaining more revenue for the Federal Government?

SL: Our role was not to judge them but to lay out what they do and look for some kind of rationale. We could not find any rationale apart from some kind of a perverse quota system. It certainly does not appear to be at all consistent with focusing where tax dollars are underreported based on their own statistics.

GC: Do you have suggestions or opinions about what the IRS can do better? Is there a way that the Service can improve the quota system or do they need to reassess their strategy altogether?

SL: The role of TRAC is not the typical policy research organization. Our role, as we see it, is to present a picture of what the government, in this case what the IRS, is doing with respect to tax audits and to leave it up to the reader to decide what makes sense.

What we did find is that IRS sets performance goals, as all agencies do, and it sets group targets, not individual targets for agents. But nonetheless they are based on how many total audits of corporations take place for the large and mid-sized industry group (“LMSB”) and then separately for the small and self-employed business unit (“SBSE”). We noticed that there was a peculiar reversal in audit rates when you got to the margin of those companies at say, with the bigger companies for SBSE audits versus what would then be larger companies but represent the small guy for the LMSB auditors. It just showed quite clearly that there was a tendency for each branch to shy away from its biggest audits and put increased efforts on its smaller guys within its unit in a very perverse fashion.

GC: Since you used the IRS’ own data to compile your study does it appear that the statistics could be the result of the flawed goals or quota system?

SL: Right. We’re all human and we respond to what we’re measured on. If those measurements are not in accord with what the priorities are [i.e. where the largest underreporting occurs], you’ll work to the measure rather than to the overall priority. This is not the first report where we’ve noticed this. In this case, what was interesting was that for a long period of time, Congress had been cutting the IRS’ budget and it’s really tough when you have more and more returns and fewer and fewer agents to cover them. You’ve really got hard choices there.

So we were very interested to see, now that we’ve entered a new era, Congress has been giving the IRS more budget for hiring more revenue agents. Therefore they have more discretion about where they will put these additional resources and they are certainly not putting them in the large corporate area.

GC: What about the IRS’ contentions that they audit 100% of companies of $20 billion in assets or more?

SL: According to their figures, the IRS audits more than 100% of all the corporations of that size. These particular figures we took from the IRS databook that is put out annually. There has only been three years where there has been a breakout with these categories.

The first time it came out the IRS said, “yes it’s over 100% but that’s because you can audit more than one year’s return in the same year” and that’s true. But then in the second year it’s over 100% and they make the same excuse. Now this is third year and it’s still over 100% [see footnote at the bottom of the study].

They’re not doing a very good job of accurately measuring that [the number of companies audited] so we presented figures that give the IRS the benefit of the doubt. They’re not measuring the size of the returns vs. the size of the audits in a consistent way, so we just grouped it with the next largest category and saw exactly the same trends in terms of the hours spent auditing the biggest companies.

Simply, there’s a tendency to spend less time on less complicated returns. As companies get bigger their businesses get more complex. When you see that sort of thing in an organization, you look at what are the goals being measured against. If they’re being measured just on quantity and there isn’t any distinguishing between that workload that takes longer to do, it’s easier to up your numbers by choosing workload that you can churn out faster. It’s human nature.

Accounting Fraud on the Stage Fails: Enron to Close Sunday

After mixed reviews, it seems that no combination of nostalgic accounting fraud, raptors in Brooks Brothers and former President Charles Logan could save Enron the musical.


The play will close Sunday, May 9th after 22 previews and 15 regular performances despite Stephen Kunken’s portrayal of Andy Fastow was nominated for a Tony.

Maybe the producers completely misjudged the interest of theatre-goers on this side of the Atlantic. Enron was a huge success in Britain where accountants get red carpets and trophies.

In the States they get on look at porn, support terrorism (allegedly!) and create awkward videos. There’s a disparity there.

Enron on Broadway to Close Sunday, May 9TH, 2010 [Broadway’s Best Shows]