Category: KPMG

(UDPATE) KPMG-Bermuda’s PCAOB Inspection Gets a Little Unwanted Attention

Most of you are acutely aware that PCAOB inspection reports, while chock full of interesting tidbits, are a little anti-climactic since we never learn who the auditees are. Oh sure, we can speculate until our heart’s content but the PCAOB says they took a vow of silence after 43 struck his signature on Sarbanes-Oxley.

The secrecy is frustrating (read: bor-ing) so it was especially cool to see Jonathan Weil let the cat out of the bag on at least one Big 4 client:

Two weeks ago,Accounting Oversight Board released its triennial inspection report on the Hamilton, Bermuda-based affiliate of KPMG, the Big Four accounting firm. And it was an ugly one. In one of the audits performed by KPMG- Bermuda, the board said its inspection staff had identified an audit deficiency so significant that it appeared “the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

This being the hopelessly timid PCAOB, however, the report didn’t say whose audit KPMG-Bermuda had blown. That’s because the agency, as a matter of policy, refuses to name companies where its inspectors have found botched audits. It just goes to show that the PCAOB’s first priority isn’t “to protect the interests of investors,” as the board’s motto goes. Rather, it is to protect the dirty little secrets of the accounting firms and their corporate audit clients.

That’s why it gives me great pleasure to be able to break the following bit of news: The unnamed company cited in KPMG- Bermuda’s inspection report was Alterra Capital Holdings Ltd. (ALTE), a Hamilton-based insurance company with a $2.3 billion stock- market value, which used to be known as Max Capital Group Ltd.

Using his detective skills, Weil pieced together the number clients KPMG Bermuda had inspected, the timing of said inspections and the details of the audit deficiency (“the failure to perform sufficient procedures to test the estimated fair value of certain available-for-sale securities”) to come up with Alterra. Of course no one – the PCAOB, KPMG Bermuda or Alterra – would comment/confirm for Weil’s column but you probably knew that was coming. Nevertheless, JW gets into the how bad of an audit this really was:

It’s when you look at Alterra’s financial statements that the magnitude of KPMG-Bermuda’s screw-up becomes apparent. Available-for-sale securities are the single biggest line item on Alterra’s balance sheet. They represented almost half of the company’s $7.3 billion of total assets as of Dec. 31, 2008, and a little more than half of its $9.9 billion of total assets at the end of last year.

This sort of screw-up, some might argue, falls somewhere in the range of “horrendously bad” and “really fucking bad” and Weil wonders if Alterra shareholders will have the stones to throw the bums out at the shareholders meeting on May 2. We can’t say where any of the shareholders stand on the usefulness (or lack thereof) of the audit report, so maybe this revelation is NBD to them. But if that is the case, it seems to make an even stronger case for the irrelevancy of auditors.

Weil’s larger point is that the PCAOB continues to hide behind their policies that are supposed to protect investors but in reality come off as talking points, not so unlike the firms they regulate. The PCAOB says they’re working on that but we’ll have to wait until summer to find out how crazy things get and whether it will be enough to shove auditors back into some respectability.

Dirty Little Secret Outed in Bermuda Blunder [Jonathan Weil/Bloomberg]

UPDATE:
Alterra cops to it with an 8-K that was filed about 90 minutes ago:

Alterra is aware of a recently issued report by the Public Company Accounting Oversight Board (the “PCAOB”) related to the PCAOB’s review of KPMG Bermuda’s 2008 audit files of a public company client located Bermuda, as well as an article posted on Bloomberg that indicates that the public company client is Alterra (formerly Max Capital Group Ltd.). Alterra confirms that it is the client referenced in the PCAOB’s report.

The PCAOB report findings question the sufficiency of procedures performed by KPMG Bermuda in its audit of Alterra’s estimated fair value of certain available-for-sale securities as promulgated by generally accepted audit standards (“GAAS”). The PCAOB report questioned whether the audit procedures used by KPMG Bermuda in 2008 to verify such values were sufficient. The PCAOB report does not question the appropriateness of the values that Alterra attributed to assets available-for-sale in 2008.

Alterra notes that the PCAOB made substantially similar findings in a number of inspections of 2008 and 2009 audits performed by the larger accounting firms and, since 2008, we understand the firms have issued additional guidance to clarify the work to be completed on the audit of fair value investments.

KPMG Bermuda has represented to Alterra and its Audit Committee that it believes it properly and appropriately followed GAAS as defined at the time of the audit. KPMG Bermuda confirmed in its response to the PCAOB report that “none of the matters identified by the PCAOB required the reissuance of any of our previously issued reports.” Alterra reaffirms its belief that the asset values ascribed to its available-for-sale securities in 2008 and subsequent periods remain appropriate.

KPMG Bermuda issued an unqualified opinion for Alterra’s year end financial statements for each of 2008, 2009 and 2010.

Did KPMG Really Warn HSBC About Madoff Fraud Risks?

A report in Bloomberg apparently thinks so.

From the ‘Berg:

HSBC Holdings Plc (HSBA), Europe’s biggest lender, was warned twice by auditors that entrusting as much as $8 billion in client funds to Bernard Madoff opened it up to “fraud and operational risks.”

KPMG LLP told the London-based bank about the risks in 2006 and 2008 reports. The firm was hired to review how Madoff invested and accounted for the funds, for which HSBC served as custodian. KPMG reported 25 such risks in 2006, and in 2008 found 28, according to copies of the reports obtained by Bloomberg News.

Okay l there for two before everyone gets too excited. Let’s just get one thing straight right off the bat – KPMG probably leaked these reports to Bloomberg (I only say probably because I don’t know for an absolute fact but – COME ON – who else?). Secondly, even though the report says “warned twice by auditors” this was not an audit performed by KPMG; it was “[a] review how Madoff invested and accounted for the funds.” What exactly that entails isn’t clear; possibly agreed-upon procedures? Anyway, here’s what the story says were in the two reports:

In the list of risks in KPMG’s report, number 2 was that “BLM embezzles client funds,” using the initials as shorthand for Bernard L. Madoff. To prevent it, KPMG recommended in both 2006 and 2008 that HSBC “establish a process to monitor monthly statements” and reconcile them with contributions from clients.

[…]

The 2006 report listed fraud risk number 5 as “client cash is diverted for personal gain” and risk number 18 as “trade is a sham in order to divert client cash.” It went on to say there were concerns “Madoff LLC falsely reports buy/sell trades without actually executing in order to earn commissions” and “BLM falsifies accounting records which are provided to HSBC.”

KPMG reviewed samples of trades and account statements for both its 2006 and 2008 reports to test the risks and detected no discrepancies, the reports said. Even so, the firm suggested HSBC “consider undertaking a periodic review which includes tracing a sample of client trades back to the bulk order.”

After reading that you might think that KPMG hit a home run but what if the “risk factors” listed are just standard boilerplate risks that are included in every single one of these reports? If that’s the case, then KPMG was slapping in the applicable information as it related to BLM, handed it over and collected a nice fee. Maybe KPMG was all over this but there’s no way to know because A) Bloomberg didn’t republish the reports in full; B) Other KPMG teams close to Madoff are getting their asses sued which means they either ignored the risks or couldn’t get a hold of these two reports and C) HSBC throws KPMG under the bus, essentially saying that they were duped by Berns:

HSBC confirmed hiring KPMG in 2005 and 2008 to review Madoff’s firm, adding it now believed Madoff had tricked the auditors. “It appears from U.S. government filings that Madoff and his employees foiled these reviews by, among other things, providing forged documentation to KPMG,” the bank said in an e- mailed statement.

“KPMG did not conclude in either of its reports that a fraud was being committed by Madoff,” HSBC said. “HSBC did not know that a fraud was being committed and lost $1 billion of its own assets as a victim.”

So did KPMG warn HSBC or not? This Bloomberg story seems to think so but there are is a lot of evidence that KPMG was just as clueless as as everyone else who didn’t walk – or run away screaming, arms flailing – away from Madoff.

HSBC Was Told About Madoff ‘Fraud Risks’ in Two KPMG Reports [Bloomberg]

PwC Lands Another KPMG Partner; Steven Tseng Joining Transfer Pricing Practice

This just in – more competitive poaching from P. Dubs.

PwC US announced today that Steven Tseng has joined PwC US as a partner in the firm’s Transfer Pricing practice. Tseng will relocate to China in June to focus on helping multinational companies with their transfer pricing planning in China and the Asia Pacific region. Tseng will also take the lead role for tax and transfer pricing planning for companies seeking to transform their value chain globally, in particular in Asia.

Tseng joins the firm from KPMG, where he was the Asia Pacific Regional leader for Global Transfer Pricing Services (GTPS) as well as the partner in charge of GTPS in China and Hong Kong. Prior to this role, Tseng was partner in charge of Financial Advisory Services for KPMG in Finland.

This latest pickup follows the firm snagging Tom Henry last month. Rumors have it that there will be more but the question is, who’s next? John Veihmeyer? Keep us updated if you hear anything.

Mike Mayo Is of the Opinion That Citigroup ‘May Have Violated Sarbanes-Oxley’

Last week we heard from a number of people on the topic of Citigroup’s internal controls that while it didn’t sound like they were quite up to snuff, KPMG was somehow cool with it and Vikram Pandit signed his name to it, saying that everything was hunky dory.

Now along with bloggers and journalists, the scourge of Citigroup, CLSA analyst Mike Mayo, has decided to get into the act:

Citigroup may have violated Sarbanes-Oxley with its 2007 10-K submission, in our opinion. The new information relates to letters from regulators that were only revealed earlier this year as part of the FCIC archive. We believe these letters between Citi and the Fed, Citi and the OCC, and the OCC with internal staff, imply that Citi should have known about internal control shortfalls for the year 2007 and was directly told about them by the OCC only eight days before the 10-K was signed. Also, Citi reported large unexpected losses with less than two months left in the year. Thus, the lingering question in our mind is why Citi signed off on its 2007 10-K as having effective controls in light of such problems. This information is still relevant today because it reflects on the magnitude of the risk shortfalls and what we feel is the higher-than-perceived task of turning them around.

That’s from Mayo’s update on the bank, dated today, and along with the “opinion” on a Sarbanes-Oxley violation, he has a few questions:

To what extent was the audit committee and board at Citi aware of the concerns voiced by various regulators at the time, and who gave the advice to sign the 10-K? To what extent has Citi’s board examined the issue since the release of letters from the FCIC? Has the SEC and DOJ looked into this matter?

We bolded that portion since it might – just might – be referring to KPMG and the apparent disregard everyone had for the letter sent to Citigroup from the OCC. Of course, not everyone always agrees with Mayo, namely Dick Bové who has gave HofK the thumbs up although it was obvious that he’d never heard of the firm. Bové hasn’t weighed in on this particular report but it’s only Monday.

Anyway, Citigroup remains steadfast in their thoughts on the matter, telling The Street’s Lauren Tara LaCapra that the “certifications were entirely appropriate,” although things increasingly seem to be pointing to the possibility that wasn’t the case. A message left for Marianne Carlton, a KPMG spokeswoman, hasn’t been returned.

A Few People Are Not Satisfied with the $624 Million Countrywide Settlement

And, unfortunately for Bank of America and KPMG, that could mean digging through the couch cushions.

Several large institutional investors have rejected a court settlement where Countrywide Financial Corp. had agreed to pay $600 million to a number of national pension funds. Those pulling out of the agreement include BlackRock Inc.; the California Public Employees Retirement System, or Calpers; T. Rowe Price Group Inc.; Nuveen Investments Inc.; and the Maryland State Retirement and Pension System, according to a document from the suit filed in U.S. District Court in Los Angeles. The investors decided the settlement, initially agreed to last May, wasn’t enough and will seek their own terms with the mortgage originator and its current owner Bank of America Corp., as well as Countrywide’s auditor KPMG LLP. KPMG had committed another $24 million to the settlement.

In typical HofK fashion, the firm didn’t bother commenting for the Journal’s story however BofA managed to express their disappointment, “It is unfortunate that some investors chose to opt out of what we believe is a fair and equitable agreement to settle these issues.” Right. Because the likes of BlackRock and Calpers should be tickled pink with the pleasure of splitting $624 million with dozens of other investors.

Big Investors Refuse Countrywide Settlement [WSJ]

How Did Citigroup’s Internal Controls Cut the Mustard with KPMG?

Jonathan Weil writes in his column today about Citigroup and their “acceptable group of auditors,” (aka KPMG) and he’s having trouble connecting the dots on a few things. Specifically, how a love letter (it was sent on February 14, 2008, after all) sent by the Office of the Comptroller of the Currency to Citigroup CEO Vikram Pandit:

The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methogage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.

Okay, so the bank’s internal controls weren’t worth the paper they were printed on. Ordinarily, one could reasonably expect management and perhaps their auditors to be aware of such a fact and that they were handling the situation accordingly. We said, “ordinarily”:

Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.

The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

Huh. There has to be an explanation, right? It’s just one of the largest banks on Earth audited by one of the largest audit firm on Earth. You’d think these guys would be more than willing to stand by their work. Funny thing – no one felt compelled to return JW’s calls. So, he had no choice to piece it together himself:

[S]omehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, [Ed. note: OH, right. That.] still sporting a balance sheet that made it seem healthy.

Actually, just kidding, he ran it by an expert:

“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it.”

What Vikram Pandit Knew, and When He Knew It [Jonathan Weil/Bloomberg]

KPMG Employee with Combination of Short-timer’s, Spring Fever Pushes the Dress Code Envelope

Last week’s unseasonably warm weather in New York had one KPMG employee – who had recently put in her notice – taking advantage of the pleasant temps to show off the gams. According to a conversation we overheard on Twitter:


To which someone responded:

This infraction, it’s our understanding, occurred at the friendly confines of 345 Park Ave. Now, anyone familiar with the House of Klynveld knows that shorts are definitely frowned upon, especially at 345 Park where backpacks are rumored to get the crook-eye. Showing this amount of flesh in the middle of February, in a staunchly business casual environment, is about as an awesome disregard for the dress code we’ve ever heard.

The most important question, however, remains unanswered: what kind of shorts? Are we talking boxers? Boy shorts? Daisy Dukes? We need a witness (or two or three) and pictures obviously get bonus points.

In Case You Were Wondering, KPMG Is Still Wells Fargo’s Auditor

As we’ve discussed, the sudden departure of Wells Fargo’s now-former CFO, Howard Atkins, has been a bit of a mystery. The bank stated that Howie quit for “personal reasons” but Chris Whalen, for one, wasn’t buying that story and stated that it was an “internal dispute” at the Stagecoach Shop and “public behavior suggests significant problems in the bank’s internal systems and controls as defined by the Sarbanes-Oxley law.”

Then John Carney got all heresay yesterday, reporting:

Others say that the departure stems from a heated argument between Atkins and the CEO of Wells Fargo, John Stumpf. Still others say that there could be even more personal reasons for Atkins leaving.

This is pretty fun because this “heated argument” could have been over something awesome like Atkins’s using Stumpf’s private commode without permission or a spurious challenge in their weekly Scrabble® match. Whatever the reasons for Atkins’s departure, all this speculation got the gang over at The Street wondering that maybe – just maybe – KPMG’s risk management team had soiled themselves over the whole situation and asked the audit team to start drawing up their resignation papers.

KPMG said Friday that it remains Wells Fargo’s […] external auditor, though the firm wouldn’t comment on recent criticism that Wells’ financial disclosures aren’t up to snuff. KPMG spokesman George Ledwith confirmed that the Big Four accounting firm is still working with Wells Fargo, which plans to file its 10-K annual report by the end of the month. Howard Atkins, who had been CFO of Wells Fargo for nearly a decade, resigned unexpectedly last week and won’t be signing off on that report. His replacement, Tim Sloan, will do so instead. “Yes, KPMG LLP is the external auditor for Wells Fargo & Company,” said Ledwith.

So what prompted this brief line of questioning is, in itself, a mystery. KPMG resigning as the auditor of Wells Fargo is about as likely as John Veihmeyer throwing all his copies of Rudy into an incinerator. But then again, maybe The Street knows something we don’t. Was/is/will there be any doubt that KPMG will remain the auditor of Wells Fargo? Rampant speculation and nightmare scenarios are welcome. And if you’re in the know, email us.

Auditor Stands By Wells Fargo [TS]

PwC Picks Up Thomas Henry from KPMG; Will Lead Global Incentives Practice

This could be what PwC’s Talent Leader was talking about she said that poaching, “[Has] always been a place we like to stay competitive.”

Mr. Henry, a tax partner who has spent more than 25 years in public accounting, most recently at KPMG, has extensive experience in all areas of state and local taxation. He is best known for his work in the credits and incentives space, both domestically and worldwide. His experience in maximizing global incentives for large multinational corporations in the United States, Europe, Asia and Africa will enable both US-based and non-US-based multinational companies to benefit from his counsel when entering into economic incentives negotiations.

Thomas Henry Joins PwC US To Lead Global Incentives Practice [PR Newswire]

KPMG Advisory Doubles Down

KPMG’s head of advisory practice in the Americas, Mark Goodburn, recently gave an interview to Consulting Magazine where he predicted that the House of Klynveld would double its advisory revenue by 2015. While this an admirable goal, it certainly causes one to pause and ask the obvious question: “Does this mean we get double the meat?”

But forgetting animal flesh for just a sec, it may cause the more serious-minded of you to ask, “Just how in hell are you going to do that?” Well, MG goes into details about “transformational business,” “the evolving world of risk,” “the myriad of changes in public policy and regulation” and that’s all fine and good but we’re most interested/curious/shaking with anticipation about the acquisitions the firm will make.

Doubling a multi-billion-dollar business in no easy task, for sure, especially when you consider that KPMG advisory will probably have to significantly outpace the market, which most forecasters— including Kennedy Consulting Research & Advisory—expect will experience very modest growth the next several years. Most likely, the firm will have to make a few significant acquisitions along the way.

This probably doesn’t come as a surprise since we’ve seen Deloitte and PwC shopping around to boost their own advisory practices but Goodburn says you won’t see the HofK making a move on every boutique out there:

Goodburn’s quick to point out that any potential acquisitions, would have to meet KPMG’s criteria—the ability to upgrade to a global platform, quality controls that match the firm’s standards and a financially attractive opportunity for clients and employees. “We’re only looking for companies that meet our standards” he says.

Right, then. So for all you consulting boutiques out there sexing yourselves up to get a big pay day, you better be a match or you won’t be getting a blue rose. KPMG is looking for soulmates.

Naturally, all this revenue-doubling and business development talk means headcount will increase. The firm has already put it out there that they plan on hiring people in spades and MG makes no secret about who will be leading the charge:

Goodburn says KPMG has been hiring pretty aggressively since the firm saw its first sustained uptick back in early 2010, but will that be enough to keep pace? “We certainly expect advisory to grow faster than other parts of the KPMG business in the near and possibly longer term,” Goodburn says. “Our brand is very strong right now, clients are demanding our services, our people are outstanding, and our ability to recruit is extremely high.”

So, from the sounds of it, opportunity abounds for KPMG’s advisory business and anyone interested in joining the blue team. Whether this manifests into an extra-beefy future remains to be seen.

Double Time for KPMG [Consulting Magazine]

Comp Watch ’11: Follow-up on KPMG Transaction Services Midyear Adjustment

Sounds like the previously mentioned potential raises got the John Veihmeyer stamp of approval.

Follow up on the midyear comp email from last wk- srs get 4% and mgrs get 5%. Does not apply to corporate finance and restructuring. Call is still going on right now trying to sell KPMG big time and convince people to not leave

We’ve been told that the raises are effective immediately. We’ll keep you updated.

The Fortune 100 Best Companies to Work For: KPMG #86 (2011)

Wrapping up our review of the mother of all employer lists, is everyone’s favorite four-letter word, KPMG. Since we’ve had about all we can stand of this, let’s get right to it.


KPMG – Previous rank: #88. How does the firms make up for the lack of sherpas? They appeal to employees’ desire to give back, reports Fortune, “Employees of the U.S. branch of the auditing firm get 12 paid hours to volunteer each year and can leave at 3 p.m. Fridays in the summer [Ed. note: while keeping in mind the needs of clients].”

Stats of note:
• New Jobs (1 year): -1,043
• % Job Growth (1 year): -5%
• % Voluntary Turnover: 15%
• No. of Job Openings at 1/13/2010: 5,000
• Most common salaried job: Senior Associate – $73,300
• % Minorities: 27%
• % Women: 48%

Compared to last year’s stats, new jobs and percentage job growth have improved while voluntary turnover jumped 3%. Average salary for the most common job was down from $78k last year, number of job openings nearly doubled and percentage of minorities and women were unchanged. So a slight improvement for KPMG this year in the F100BCTWF and nary a mention of the possibility of more free flesh in the future.

Annnnd so, that wraps up the coverage for this year’s Fortune rankings. The biggest takeaways being the ascension of Plante & Moran and Ernst & Young’s massive drop while the other three amigos managed to improve slightly but they all managed to extend their streak of years on the list. Look for a flier boasting this arbitrary victory in an office near you.

Earlier:
The Fortune 100 Best Companies to Work For: Plante & Moran #26 (2011)
The Fortune 100 Best Companies to Work For: Deloitte #63 (2011)
The Fortune 100 Best Companies to Work For: PwC #73 (2011)
The Fortune 100 Best Companies to Work For: Ernst & Young #77 (2011)
The Fortune 100 Best Companies to Work For: KPMG #88