Category: Audit

Nightmare Audit Rooms Have Their Consequences

The following post is republished from AccountingWEB, a source of accounting news, information, tips, tools, resources and insight — everything you need to help you prosper and enjoy the accounting profession.

With no place to work in the office of the housing authority of a major city, the audit team was provided tables and chairs in the hallway of a renovated apartment building that connected the swinging front door with the elevators. In the middle of winter in a city located on a bay, the wind swept into the hallway driving temperatures to near freezing. Clothed in parkas, scarves, wool hats and gloves, the audit team struggled through the engagement.

Auditing rural hospitals, CPA firm personnel were ordinarily assigned to a patient room for workspace since there was no room for them in the hospital office. This year there were no patient rooms available so they were assigned to the morgue! Steel tables and high stools were their accommodations. Formaldehyde, dead bodies draped in sheets and the medical examiner’s buzz saw greeted them each day.


The auditors of a plumbing contractor were assigned a dark, damp room in the basement for workspace. The room was two flights of stairs and several hundred yards from the accounting office.

Two auditors were assigned workspace at a desk adjacent to and facing the controller. The controller smoked, they didn’t.

I could relate more true stories on and I suspect you could add your experiences to this list of inadequate fieldwork workspace. Here are some obvious questions:

1. Did any of these scenarios increase time charges on the engagements?
2. Who had responsibility to correct or prevent these circumstances?
3. When should corrective action be taken?
4. What actions should have been taken?

Question 1: Of course time charges were increased! The auditors of the housing authority said the audit required almost twice the amount of time it should have. The hospital auditors lost numerous hours going for fresh air and to the restroom to vomit! Going back and forth to the accounting office wasted enormous amounts of time, although the team did lose weight. Not only was the health of the non-smokers impaired, they wasted time leaving the room to discuss audit issues and securing all working papers and electronic equipment every time they left the room.

Question 2: The in-charge accountants on these engagements had responsibility to run the fieldwork but their “stick” wasn’t big enough to get the managements to change their workspace. It was the engagement leaders’ responsibility to speak with managements to correct the situations.

Question 3: If the workspace could not be improved internally, a nearby motel room, a recreation vehicle parked outside a client’s facility or an electronic air filer could be remedies. The cost of these alternatives is likely far less than the unbillable wasted time.

Question 4: This is a planning activity! Proper workspace should be arranged by the engagement leader before the fieldwork begins. Engagement profits can be increased considerably by using foresight and arranging for proper workspace!

Thankless Audit Client: Tui Travel Edition

Tui Travel is “an international leisure travel group” (which is fancy-speak for a travel agent) out of the UK. KPMG has been audited the books for awhile but this year they found a booboo that resulted in a £117 million write off. At the time the company copped to the error, although you don’t get the impression they were grateful.


From today’s report in the Guardian:

Just two months ago, Tui chief executive Peter Long said: “KPMG identified some system weaknesses and ledgers that had not been reconciled … Yes, they identified some of these control weaknesses which had then manifested themselves into the issues subsequently identified through a detailed investigation.”

Nothing unusual really, these things happen, clients usually grin and bear it but not our “international leisure travel group.”

KPMG said its relationship with “certain [Tui Travel] directors became increasingly strained” following “extensive discussions with the directors”. Among the areas where KPMG had raised concerns, the letter added, were the implications arising from the restated accounts and “their disclosure and accounting treatment in the financial statements”. Relations had reached such a low ebb, KPMG concluded, that “we are not confident that in the future we could carry out an audit of the company to the appropriate standard, but others may be able to do so.”

So it kinda sounds like their annoyance with the whole thing slowly boiled over into flat-out bitterness, leading to some increasingly unpleasant conversations. Sure, the directors in question would start out acting cool about it, “You know [chuckling], you really didn’t do us any favors there.” But eventually it became, “Boy, you’ve really outdone yourself, this time.” And finally, “For crissakes! You couldn’t leave it alone, couldja? [extremely patient KPMG partner explaining on the other end] What?!? [increasingly steamed, drumming fingers] We don’t care if it’s your job; we don’t like being embarrassed. [Pause, eyeroll] Stewards of generally accepted accounting principles?!? What does that even mean? [brief pause] Whatever, you can plan on us being uncooperative going forward.”

Or something like that.

Tui drops KPMG after it found £117m hole in accounts [Guardian]

It’s Not Impossible To Make Money on Small Audits

The following post is republished from AccountingWEB, a source of accounting news, information, tips, tools, resources and insight–everything you need to help you prosper and enjoy the accounting profession.

Most small firm practitioners can offer lots of answers as to why it is difficult to profit from small audits. Ever-changing professional standards, increasing quality control requirements, using standard “one-size-fits-all” audit documentation and increasing legal liability are a few of the common answers. The problem is that knowing the answer doesn’t solve the problem!

Maybe we need to change the question to solve the problem. A better question may be, “What changes do we need to make in our audit practices to profit from small audits?” Answer this question correctly and we solve a major problem!

Here are changes in audit practices some smaller CPA firms are considering:


• Developing the technical and leadership abilities of engagement leaders is at the top of the list. Recognizing this takes time and money, small firms are making increasing investments in training and consultations to expand the knowledge resource base of their leaders and the firm. Making sure leaders are technically current in all professional standards affecting auditing engagements is a first step. Teaching leaders to pass their knowledge on to all assistants is the second.

• Designing firm policies and procedures within existing professional standards that provide reasonable assurance audited financial statements are not misstated. While we’d like to achieve absolute assurance the financial statements are not misstated, we have to assume some risk they may contain misstatements. In short, we have to give up some of our traditional approaches to audits in exchange for uniquely tailored audit strategies designed to gather the minimum amount of evidence necessary to verify relevant financial statement assertions. Gathering the minimum required evidence in the most efficient ways results in maximum profits!

• Creating proprietary audit documentation packages by eliminating or modifying documentation purchased from major publishers. Extensive audit documentation is not a substitute for the knowledge of staff personnel! We cannot afford to complete practice aids and other documentation containing everything we need to know on every engagement, particularly on small audits. Many small firms are realizing they can modify their quality control documents to permit engagement leaders to tailor documentation on every audit. Using major publisher’s practice aids for reference is the most any firm should do on small audits. When we know the requirements of professional standards, it isn’t difficult to tailor or create basic practice aids to guide small audit performance.

These are just a few of the small audit changes CPA firms must consider to increase profits. I’ve designed my Small Audit Series of live and on-demand webcasts to provide holistic solutions that will enable practitioners to make more money on small audits. You can obtain over 300 pages of instructional text materials and illustrative practice aids designed for CPE credit on the left sidebar of our website, www.cpafirmsupport.com. Don’t be left behind! Small audits can generate BIG profits!

Duoyuan Printing Is All Kinds of Screwed Up After Firing Deloitte

By “all kinds of screwed up” we mean “screwed 17 ways to Sunday”. After firing Deloitte last week, two top DY executives (CEO Christopher Holbert and CFO William Suh) have bailed, DYP shares are in the tank (down 47% as of publication) and, oh, they’re going to need to find a new audit committee chairman as their last one, James Zhang, ran for the hills.

Before running, however, he sent this really nice note explaining his motivations:

To: The Board of Duo Yuan Printing(DY).

6th Sept, 2010.

Dear Mr. Chairman and the follow directors of the Board:

Subject: My resignation as Company Audit Committee (AC) Chairman and Independent Director with immediate effect.

It has been almost one year since DY listed in the NYSE. I have to say that working closely with the Chairman, CEO and CFO of the company has been a great pleasure for me.

From Roughly one month ago, I got the phone call from Frank Li, the Audit Partner of Deloitte (DT) to express concerns to the Audit Committee over several financial irregularities and management control weakness. After hearing the full story, I immediately called an AC meeting and upon receiving unanimous approval from the AC as a well as support from the Chairman, the AC immediately engaged Latham Watkins, the US Law Firm, to handle the independent investigation not only to report back to the AC, but also as a part of the audit process requested by DT to give an opinion to the 2010 DY company financials. As our Chairman put it in the board Meeting just now that maybe due to the cross culture differences between US style work and maybe because of the second tier management don’t fully understand the US listing requirements, the investigation has not progressed in the last month. This delay could potentially render the company not filing its annual financial statements on time to the SEC.

In the past week, the Management has suggested to change the auditors of the company from DT to Frazer Frost (FF) who was the company prior auditors. This proposal has just been resolved in the full board meeting and Full AC meeting with voting taking place of 4 against 3 in favor and 2 against 1 in favor.

As the AC chairman and independent Director of the company, I respect the company democratic decision process as stipulated by the company Memorandum and Articles of Association. However, as a qualified UK Chartered Accountant and a trained Professional, I have brought to the attention of the board the following potential risks related to the change of auditors. These risks can be summarized as follows:

1. FF has not yet signed engagement letter with the company which is a risk to the company.

2. Change of auditors during the investigation process could potentially lead to further investigation from the SEC.

3. To change from a Big4 audit firm to a non-Big4 could have very negative impact in the investment community in terms of corporate governance thus lead to potential share price drop and subsequent US class law suit.

4. Even the Company US counsel has indicated in the meeting against change of auditors at this particular time frame.

Keep it classy, JZ, and good luck wherever you end up after this disaster of a company.

(UPDATE) Dick Bové: The KPMG Citi Team Is ‘An Exceptional Acceptable Group of Auditors’

And you know he’s not messin’ because that’s what he told Charlie Gasparino and God knows you best not lie to the Fox Business Network’s ace reporter. Sure Bové didn’t actually say “KPMG” (hell, he’s probably never heard the name) but he’s giving credit to auditors which is about as unheard of as Tiger Woods using Trojans with hookers.

Bové may have mentioned some other things about Mike Mayo, Citi, Deferred Tax Assets so on and so forth but we’re sure you’re not worried about that.


Btw, if you need to get caught up on just who Dick Bové is, go here. Courtesy of FBN:

On Citi’s apparent cold shoulder towards analyst Mike Mayo:
“It’s totally wrong. Mike Mayo is a brilliant analyst. He’s been in this business for a long period of time and does a superb job of following the industry. To say he can’t come in and speak to the company in my view is absolutely and totally incorrect.”

On whether Mike Mayo’s accusations against Citigroup’s risk management lapses are accurate:
“Absolutely. In September of 2008, Citigroup was effectively bankrupt. The reason why it was bankrupt was the reason that Mike cites. It was that the risk management procedures had completely broken down and it was not effectively managing its portfolio. Mike is right on that comment.”

On why we should believe Citi on its accounting reports:
“We don’t have to take Citigroup’s answer to Mike Mayo. We can take a look at the fact that this company is audited by an exceptional group of auditors. They are regulated by a large number of bank regulators…and they actually are being audited for their tax issues right now by the IRS. All three of these groups agree with the public statements of Citigroup concerning DTAs.”

“What is the basis for saying that these three groups which have seen the numbers don’t know what they are talking about, whereas people that have not seen the numbers, do know what they are talking about.”

On whether Citi has been given a clean bill of health by the SEC, IRS and the Fed:
“We do have an audited financial statement which is not questioning the DTAs. We do have bank regulators who could have memorandums of understating with Citigroup if they believed there was a problem. Citi is estimated to earn by Mike Mayo $9 billion this year. Next year he estimates the company to show a 33 percent increase in earnings to $12 billion. If there is a DTA problem, why is there a belief that the company can jump its earnings by 33 percent from 2010 to 2011?”

We’ve been assured by the wonderful people at Fox that we will have video of this momentous (and perhaps unprecedented) occasion just as soon as it’s available.

UPDATE: AS WE SUSPECTED! Not only was the initial report mis-transcribed, check out Dick’s reaction to Gasparino’s question, “It’s KPMG I believe, correct?” around the 2:37 mark:

Pretty obvious that the dude has never heard of KPMG in his life.

The Way Things Are Going, Eventually No One Will Have to Comply with Sarbanes-Oxley Section 404

As we trudge toward a Senate vote on he financial reform bill, one issue that is of utmost interest to those in the accounting/audit biz is that of small businesses complying with Section 404(b) of Sarbanes-Oxley.

As it stands, only a small number of non-accelerated filers are voluntarily in compliance with 404. Those not jumping at the voluntarily complying with 404 have enjoyed the repeated delays by the SEC since the legislation was passed in 2002.

But if reform bill passes in its current form, all companies with market caps of less than $75 million will be exempt from complying with the requirement to have an audit of their internal control system. And even those companies that went to the trouble of voluntary compliance, might not continue doing so:

Dan Crow is one of the few small-company CFOs with an auditor’s stamp on his internal controls. Getting it wasn’t as time-consuming or as costly as it would have been several years ago, when large public companies first began complying with one of the most onerous requirements of the 2002 Sarbanes-Oxley Act, known as Section 404.

Still, Crow, who oversees finance for retailer Hastings Entertainment, doesn’t rule out dropping the extra review next year if Congress decides to permanently exempt small public companies from needing an auditor’s sign-off on their internal controls — as it seems poised to do. The Senate is expected to vote this week on the final version of the financial regulatory reform bill, which would exempt companies with market caps less than $75 million from complying with Section 404(b), the rule in question. (The House has already passed the bill.)

But that’s not all! Because 404(b) is clearly “red tape” (a popular rallying cry in an election year) that provides no benefits whatsoever and just crushes the spirit of small business (the backbone of America, we might add!) Congress has called for a study of “how the ‘burden’ of 404(b) compliance for companies with market capitalization between $75 million and $250 million could be reduced, and whether an exemption for them could increase the number of initial public offerings in the United States,” in the bill.

Christ, where does it end? Let’s just study the whole damn thing over while we’re at it. Apparently the entire Congressional body has completely ignored the benefits of Sarbanes-Oxley; never mind that costs of gone down significantly in the past eight years, making compliance less financially painful.

And not to mention that smaller companies are at greater risk for fraud and accounting manipulation. Look at the roster of companies on Sam Antar’s website and you’ll note that many of them have market caps of $1 billion or less. If these companies can’t resist the temptation to get shifty with financial reporting in order to meet (or not) the short-term focus of Wall Street, it’s difficult to reason that even smaller public companies won’t succumb to it.

To 404(b), or Not to 404(b)? [CFO]

What’s the Next Move in This PCAOB Situation?

Jonathan Weil over at Bloomberg has a new column up today and he is less enthusiastic about the Supreme Court decision in FEF v. PCAOB than say, everyone else.

JW is mostly wondering why we should keep having an “independent” PCAOB inside the SEC since the board members will now be at the mercy of the towing the political line inside the Commission, “While the court

FERF Survey: Audit Fees Down, Big 4 Still Dominate Public Company Filers

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

It looks like audit fees are stabilizing.

The 150 publicly-held companies responding to a recent survey paid an average of $4.8 million in audit fees in 2009, down 2.4 percent from the total shelled out by these respondents the prior fiscal year.

The 197 privately-held companies responding to the survey paid an average of $291,200, roughly even with the prior year.

Drilling further down, the survey found that total audit fees for 83 large accelerated filers-those with market capitalizations over $700 million–averaged $7.8 million, 3.6 percent less than what they paid the prior year. What’s more, this average of $7.8 million was possibly skewed to the high side this year due to the total audit fees reported by the 19 respondents from companies with more than $25 billion in annual revenues.


On the other hand, the average audit fees paid by the 22 non-accelerated filers were $579,900, 3.3 percent more than what they paid in the prior year.

These are some of the highlights of a newly-released annual report from Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International. It stresses that the averages reported in this year’s Audit Fee Survey are not comparable to those reported in the 2009 survey because this year’s respondents are not necessarily the same as last year’s respondents. In fact, FEI stresses that this year’s average was skewed slightly higher due to representation from more companies with revenues of $25 billion or more.

The survey also found that the total number of audit hours averaged 21,458 for all public companies, and-not surprisingly–was directly proportional to both the size of the company and to the number of legal entities comprising the company. Of the 19 respondents from companies with more than $25 billion in annual revenues, the total hours averaged 108,571.

The average hourly audit rate was $218 for all public companies–$186 for nonaccelerated filers and $220 for the large accelerated filers. Surprisingly, the survey found that the lowest hourly rate ($110) and the highest hourly rate ($400) were both reported by large accelerated filers. It said the $110 rate was reported by a large multi-national consumer goods distributor and the $400 rate was reported by a large multi-national financial services firm.

Other interesting findings:

• 88 percent of public company respondents used Big 4 audit firms compared to 36 percent of private companies.

• After the Big 4, Grant Thornton was mentioned by four respondents and BDO and McGladrey were both mentioned once.

• 21 of the 197 private companies plan to switch auditors, compared to only 7 of the 150 public company respondents. Service issues and fees were key reasons for both groups.

• Just 16 of the 150 public companies indicated that their auditors broke out the cost of the Section 404 attestation.

Crowe Horwath Audit Partner Uses “The Tax Department Is on Another Floor” Defense

Auditors and audit firms have few options when it comes to defense strategy when they are sued for missing a fraud. If fraud occurs and an auditor partner claims to know everything that one should about his/her client, then the partner was probably in on it. That’s a little tricky.

However, if fraud occurs and the partner claims that he/she had no knowledge of any unscrupulous activity, then that means the audit sage is really just a two-bit glad-hander that couldn’t tell a debit from a credit.


And that appears to be the case of William Brizendine, a Crowe Horwath partner, who is claiming that he didn’t know about the relationship between executives of Peoples Bank of Northern Kentucky and Bill Erpenbeck who were engaged in scheme that artificially inflated the purchase price of model homes. Brizendine claims that he couldn’t possibly known that his client was involved with such a shifty character A) the bank’s execs didn’t tell him until after the shit hit the fan and B) this Erpenbeck character’s name only came up on the tax returns and why on Earth as an audit partner, would he look at those?

The bank’s lead attorney, Ron Parry, tried to establish that Brizendine was in a unique position to expose the fraud before it became large enough to take down the bank. Parry said auditors had to be aware of the business relationship because they also did the taxes of the company Finnan and Menne created with Erpenbeck.

[…]

Brizendine claimed he didn’t know of the relationship because he was just involved in the auditing of the bank and that JAMS tax returns were done by the tax department on another floor of the company’s offices.

Parry was able to show, however, that JAMS tax documents were sometimes sent directly to Brizendine. Brizendine claimed he never looked at those documents since his department didn’t prepare taxes.

Brizendine also admitted on the stand that he was the person who brought in the contract to do JAMS taxes.

It’s Ridiculous to Think That Enterprise Financial Dismissed KPMG Because of the Restatements

KPMG has been kicked to the curb by Enterprise Financial according to an 8-K that was filed on Friday by the company. The ubiquitous claim of “no disagreements with [insert firm]” was there along with a mention of a material weakness that was related to the restatements issued for both 2008 and 2007 but that couldn’t possibly have anything to do with the dismissal of the auditors:

In connection with the identification of the loan participation accounting error described in Item 7, Management Discussion & Analysis and in Item 8, Note 2 of the consolidated financial statements and elsewhere in the Form 10K dated March 16, 2010, the Company also determined that a material weakness in its internal controls over financial reporting existed during the periods affected by the error, including as of December 31, 2008. The Company’s management concluded that the material weakness was the Company’s lack of a formal process to periodically review existing contracts and agreements with continuing accounting significance. To remediate this material weakness, during the fourth quarter of 2009 the Company implemented a formal process to review all contracts and agreements with continuing accounting significance on an annual basis. As a result of the review conducted in the fourth quarter, management did not identify any other errors in its previous accounting for such contracts or agreements. Management believes that this new process has remediated the material weakness in the Company’s internal control over financial reporting.

So in other words, “Yeah, maybe we should have been looking at these contracts but we weren’t and so some material misstatements slid through. We’ve slapped some duct tape on it and it’ll be fine from here on it. End of story.”

The esteemed pleasure of auditing Enterprise now belongs to Deloitte who has now snagged three clients from KPMG this year (by our count) – picking up Jefferies and Select Comfort back in March.

Enterprise Bank parent dismisses KPMG [St. Louis Business Journal]

KPMG Resigns as TierOne Bank Auditor

In a bizarre piece of auditing news released late on a Sunday night, KPMG has verbally resigned as Nebraska-based TierOne Bank’s independent auditor, withdrawn its audit opinion for 2008 and taken back its review of TierOne’s financials for the quarter ended March 31, 2009.

Well damn, we’re fairly sure it couldn’t get any worse than that for TierOne, could it?


Citing risk of material misstatement, KPMG has also warned the audit committee that TierOne’s financials are not to be relied upon by investors. Even Overstock.com doesn’t get that kind of treatment.

Last month the Office of Thrift Supervision – TierOne’s primary regulator – gave it until April 30th to merge with or sell its assets to a healthier financial institution so we’re going to go out on a limb here by assuming that they aren’t going to have good news come Friday and KPMG is just doing the responsible thing by backing away from the mess with a week left.

Here’s What Happens When You Lie to Your Auditors

There’s been a fair amount kvetching, Monday-morning QBing, and just plain hating on auditors lately. Most of it deserved. That said, there are still laws on the books that say you can’t dismiss them entirely and tell them bald-faced lies whenever you want.

Bruce Karatz was the CEO of KB Homes and he was convicted for, among other things, lying to Ernst & Young:

Karatz was involved in a backdating scheme in which he awarded himself and other execs millions of dollars in stock-based compensation, a jury found. Background on Karatz is here and here.

The 64-year-old faces 80 years in prison after being convicted of four felony counts including wire fraud and lying to his company’s auditor, Ernst & Young, about the matter, according to the U.S. attorney’s office in Los Angeles. He was acquitted on 16 other counts.

Jesus, 80 years? We’re no expert on sentencing guidelines but using simple arithmetic, that’s 20 years per count. We’re all for justice but that’s some serious FPMITA prison time. And the way judges have been handing out sentences lately, we wouldn’t expect leniency.

After Backdating Setbacks, Feds Chop Former KB CEO Karatz [Law Blog]