When accounting goes unaccounted for
“Could Ernst & Young have done a better job? Maybe, but claiming they could have done a better job doesn’t necessarily make them liable. Even the best of auditors can be fooled.”
~ Anthony Sabino, professor of law and business at St. John’s University
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.
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.
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.
As previously discussed, a few people are getting impatient with the lack of mid-year comp surprises at Ernst & Young and KPMG. While KPMG seems to be chewing on the idea, we couldn’t help but notice the lack of any word out of E&Y.
We had concocted several scenarios, including the firm paying people large bonuses in exchange for absolute silence but we immediately dismissed this idea as “idiotic” since Big 4 types can’t resist getting chatty when it comes to money. But the lack of kvetching is what we found to be most perplexing.
Until today that is! Finally, someone has had it with the efforts (or lack thereof) of E&Y in response to Deloitte, PwC et al. We may wrong but since there’s less than two shopping weeks left until Jesus of Nazareth’s birthday, people are, as is typical, a little irritated (something which, we’ve never really understood, this is a great time of year). Case in point – the observations we received from “Ernie Guy” in the midwest:
I recently read your article discussing the fact that E&Y and KPMG are lagging in their variable pay efforts. Well E&Y Midwest thinks they have solved the problem, but they haven’t. It seems that their response to PWC’s recent generosity is simply more of the same. They have “enhanced” the recognition program so that gift card awards can be given in more denominations (instead of just $50 or $100 they can now be $50, $150, $200, $300, $400, or $500). However, this doesn’t seem to do much as the next level of award already was eligible for $500-$2000 amounts.
It’s a completely ad hoc process anyway, and does not at all ensure that high performers are rewarded for their work. On top of it all is the fact that I’ve heard that many award nominations have been pending approval for the last month. How great would that be if a bonus meant for Christmas (and remember, they are mostly gift cards, which would be ideal for Christmas shopping/gifts) doesn’t arrive until January 17th!
Needless to say, I AM ANNOYED.
Thanks,
Ernie Guy
We’d add more here but it doesn’t seem necessary. Discuss the efforts of E&Y to date and if there is a pleasant holiday surprise coming your way, email us the details.
Just a brief follow-up on the manager who received the disciplinary action handed down by the PCAOB on Monday.
We attempted to reach Jacqueline Higgins late yesterday at her office number in Boston, however we discovered that when we were transferred to her extension we simply bounced back to reception, who needless to say, was very confused about that phenomenon. After attempting to page Ms. Higgins, only then did the receptionist learn and then relay to us that Ms. Higgins was no longer with the firm.
We checked with Ernst & Young spokesman Charlie Perkins on this development and he confirmed that Ms. Higgins “will be leaving the firm at the end of the year.”
And lest there still be any confusion due to the carefully worded E&Y statement, the partner and senior manager in question have been dismissed from the firm.
We’ll keep you updated if we hear more from inside at the firm or if further action is taken by the PCAOB.
~ Update includes statement from Ernst & Young.
~Update 2 includes statement from Claudius Modesti, PCAOB Director of Enforcement and Investigations
Today in obscure accounting oversight board enforcement actions, an Ernst & Young Manager in the Boston office was censured by the PCAOB for repeated violations o y to Cooperate with Inspectors, and Auditing Standard No. 3 (“AS3”), Audit Documentation.
The violations occurred when 27 year-old Jacqueline Higgins “(1) added documents to the working papers without indicating the dates that documents were added to the working papers, the names of the persons preparing the additional documentation, and the reason for adding the documentation months after the documentation completion date; and (2) removed a document from the working
papers after the documentation completion date.”
The timeline goes like this: E&Y was given notice by the PCAOB that an inspection of the unknown company’s audit was being performed on March 30, 2010 and the partner, senior manager and manager on the engagement were given notice on March 31, 2010. The inspection fieldwork was set to begin on April 19, 2010.
On April 5th, the three Ernsters began preparing for the inspection and that’s when problems started cropping up which led to more trouble. The order has the details:
First, Respondent reported to the Engagement Partner and the Senior Manager that a “Review Procedures Memorandum” was missing from the external working papers. The Engagement Partner and the Senior Manager directed Respondent to create and print out the missing document, and to backdate the document to November 30, 2009. The Engagement Partner and the Senior Manager directed Respondent to backdate her sign-off on this working paper to November 30, 2009, and to add this document to the external working papers.
17. Second, Respondent reported to the Engagement Partner that the tie-out of the financial statements contained in the external working papers was performed upon a pre-final set of financial statements. The Engagement Partner directed Respondent to remove this document from the external working papers, and to replace it with a newly created document which tied-out the final financial statements, and which the Engagement Partner directed Respondent to backdate to November 2009.
18. Third, Respondent reported to the Engagement Partner that the Average Forward Foreign Currency Contracts Calculation (“A3a Working Paper”) was missing from the external working papers. The Engagement Partner directed Respondent to gather the missing document, backdate it to November 2009, and add it to the external working papers.
19. Finally, Respondent reported to the Senior Manager that three checklists were missing from the external working papers. The Senior Manager directed Respondent to assemble the missing checklists as a single document (“HH6.8 Working Paper”) and to backdate her sign-off on this working paper to November 2009. The Senior Manager directed Respondent to add the document to the external working papers. The Senior Manager and Respondent reported to the Engagement Partner the facts and circumstances related to the creation of the HH6.8 Working Paper, and the Engagement Partner took no steps to cause the document to be properly dated, or to have it removed from the external working papers.
So those are the wonky details. Where this particular story is most interesting (in our opinion) is that Ms Higgins was, prior to this little mishap, on the fast track. According to the order, she graduated in May of 2005 and started with E&Y in September. She was promoted to senior associate in October of 2007 and then promoted to manager in October of 2009. Now, perhaps she was an audit-savant or perhaps not but in just over four years, she was a manager, which is a much quicker pace than usual.
Granted, she was still under the supervision of the senior manager and partner on the engagement but a young manager nevertheless. Now, you might be asking yourself, “what about the senior manager and partner? Are they getting their wrists slapped?” Conventional wisdom tell us, “absofuckinglutely” but the PCAOB isn’t saying. We were told by a spokesperson that the Board cannot comment on any other action related to this case.
As far as what a censure by the PCAOB actually entails, we were told that “It is an official reprimand from the PCAOB.” Some might call it a wrist slap but we’re damn sure you don’t want that in your file when you’re 27 years old. The action also states that Ms. Higgins was removed from the engagement in July 2010 and “at that time Higgins ceased participating in issuer audit engagements.”
Messages with E&Y spokesperson Charles Perkins and A message left with an attorney for Ms. Higgins were not immediately returned.
Ernst & Young has issued the following statement:
Our firm policy clearly prohibits persons from supplementing audit workpapers in circumstances like those described in the disciplinary order. When we determined that firm policy had been violated, we put the three individuals involved on administrative leave and subsequently separated the partner and senior manager. We have advised the PCAOB of these facts and have cooperated fully with the PCAOB throughout its investigation of this matter.
Based on the above, you might conclude that more disciplinary action will be coming from the PCAOB but like we said, they’re not talking.
UPDATE 2 – circa 3:30 pm: Claudius Modesti, PCAOB Director of Enforcement and Investigations, explained the seemingly light punishment in an email to Going Concern:
As to the censure, under the facts and circumstances, the censure is appropriate given Higgins’ relatively junior position on the audit team and her overall role in the conduct. We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”
It was then explained to us that the PCAOB has never explained a disciplinary action in this way: “We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”
If that’s not quite clear, consider this: It is significant because, had Ms Higgins acted in the alternative (i.e. not settled), litigation would have been necessary and no one outside of the PCAOB, Higgins, her lawyers and E&Y would have known about the proceedings. Granted, it’s fairly common for lighter disciplinary action to result from a settlement but it also makes sense from a PR perspective (not to mention, transparency and investor protection) if the PCAOB can actually announce that they are taking action against people who break the rules. Part of the challenge the Board has faced is convincing anyone that they have teeth.
It will be interesting now to see if the senior manager and partner follow the same track as Ms. Higgins and how the PCAOB will respond to their cooperation (or lack thereof).
China has everyone beat, no shocker there, but if you don’t count Sarah Palin’s real America the red, white & blue is #2!
Ernst and Young counts only perhaps half (or is it three quarters?) of the 300 million people in the US as “US”, by considering only those states that are doing anything about renewable energy, like California…The “US” excludes all the dirty states that lack renewable policy; states like Wyoming, Indiana, North Dakota, Kentucky, Oklahoma and so on.
Ernst & Young: U.S. Blue States Nearly as Attractive as China for World Renewable Investment [Reuters]
Yesterday, we shared a story with you that probably caused you to thank your lucky stars that you don’t work in Norway (especially if you’re a woman). In that post, we called back to our old report from January about the secure lavatories at Ernst & Young’s Long Island location in Jericho.
You may have been under the impression that someone within E&Y was responsible for the lockdown, however, thanks to an enterprising E&Y employee, we now know who the keymasters really are:
I don’t work in the Jericho office, but got shipped out there for random clients for most of this summer. The bathrooms are in the common areas shared by all tenants of the building, so the keyed entry to the bathrooms is mandated by the building management, not EY (not that I’d put it past the partners to come up with something like this, though).
Also, while there are keys for each bathroom, there are also entry codes you can use instead. So you can grab one of the communal keys (kinda gross), or remember the terribly difficult four digit code (0001 if I remember correctly).
As a side note, I remember the admin mentioning that the original set of five keys for the men’s room was down to two. I’m wondering why someone would make off with these nasty over-sized germ farms.
Okay, so the missing keys aren’t news but what’s it going to take to get some extras made? And, again, who’s making off with the keys in the first place?
And while it’s good to know that the E&Y brass in Jericho aren’t actually the ones putting the clamp on the johns, would it kill them to spring for some private restrooms that non-E&Yers don’t have access to? It’s one thing to have to schlep to the front desk to get a key every time; it’s entirely another to be sharing a bathroom with the entire building. What is this, Penn Station?
Seriously, how much time and cost would it take to throw in some pots, sinks, urinals and XLERATORs®? It’s a health issue for crissakes.
Really not sure why or how E&Y landed this gig but work is work.
Police may be called on to investigate reports [New South Wales] [Members of Parliament] or their staff accessed websites containing sexually explicit images of young people.
The findings were contained in an independent report by Ernst & Young, commissioned in September after an unauthorised audit of computer use in the NSW parliament showed “adult” websites had been visited from the offices of some MPs.
The report, tabled in parliament yesterday, says that of the 72 most-used websites on parliamentary computers over a 10-month period, 35 “appear to be adult-related sites”.
Nine contained sexually explicit images of young people, some of whom may be under 16.
Nearly 50% of the most-used sites over a 10 month period? And some that could involve minors (in NSW)! That’s impressive even by SEC standards.
We don’t recognize anyone but you’re invited to point any notables out.
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And you just know that somewhere, Dick Fuld is slobbing around in a old CU sweatshirt, muttering about backroom number-crunching dweebs that are still in business.
[via NYSE]
From the mailbag:
EY Boston Tax had their end of busy season party last week. On Tuesday, we had beer and wine in the office. Considering everyone had to work through the first football sunday of the year, the least they could do is get us drunk on a Thursday so we can enjoy ourselves. Who’s gonna get drunk in the office on a Tuesday? [Ed. note: show of hands?]
I have to say I’m disappointed with the social/drinking scene at this place compared to other Big 4s in this market. Pretty stiff, but I feel like the firm takes pride in that–I have no idea why.
Without the proper context, it’s difficult to know what kind of a drinker our tipster is. If he/she is merely a two wines/beers and out person then E&Y Boston is really bucking the trend in that fair city. However, if the tipster is Charlie Sheen, then there’s no cause for concern.
Any Bostonians familiar with the situation are invited to elaborate on the Big 4/next tier drinking scene below or share with us directly.