Category: Big 4

If it happens at a Big 4 accounting firm, we’re talking about it here.

(UPDATE 2) Outlook 2011: How Will the 9th Circuit Rule in Campbell v. PricewaterhouseCoopers?

~ Update includes oral argument date included in third paragraph

~ Update 2 includes correction of the spelling of “Stepan Mekhitarian” under the list of amicus briefs for the plaintiffs.

One of the stories that we’ve covered with interest since the launch of Going Concern has been the wage and hour lawsuits in California. For those needing a refresher, these are suits that were brought by non-licensed associates against various accounting firms (list of cases at bottom of this post) included who believe they were misclassified under California law as exempt professionals and are due overtime and other benefits due to non-exempt empltle differently, “I worked a ton of hours during busy season and all I got was sleep deprivation, a fat ass and I still don’t have a CPA so, pretty please, I’d like a little more money.”


Every once in awhile we get asked about the status of these cases and since it’s been a few months almost a year since our last post, we thought we’d update you briefly. You may remember that the main case, Campbell v. PricewaterhouseCoopers, is currently with the 9th Circuit Court of Appeals on interlocutory appeal over the issue of whether “learned professionals” can be defined as an exempt employees.

We recently spoke with a source familiar with the defense’s strategy in this case and learned that the two sides are to give oral arguments before the court sometime early this year on February 15th, after which, the Court will likely render its decision in the latter part of 2011 (everyone’s hoping, anyway). Regardless of the decision in the 9th Circuit, the case will go back to the trial court, so get comfortable.

While the developments in the case have been slow, it is interesting to note that both sides are both confident in their chances of victory in the 9th Circuit and make no mistake, it’s an important ruling. If the 9th Circuit were to rule in the favor of the plaintiffs, it could very well be a quick resolution, as the plaintiffs’ attorney, Bill Kershaw told us in July 2009, “the likelihood of the case resolving itself prior to trial would substantially increase,” although, our source disagreed with this sentiment, so we’re counting on a battle.

Something else worth noting (that we may have glossed over in prior posts) is that there are suits brought in both state and federal court. The main difference being that at the state level, once a suit is classified as a class-action, individuals are classified as plaintiffs until they opt out while the cases at the federal level are “collective action” where once a particular group of people are identified as plaintiffs, they are given the chance to opt in to participate in the lawsuit. In other words, employees of a firm who are thought to be non-exempt under California law, are automatically members of the class-action in state court while in federal court, potential plaintiffs have to choose to participate voluntarily. This makes the federal cases broader in scope geographically but trials at the state level will have a larger number of members in the class-action, which could mean a larger settlement.

Finally, some additional new information that we have to pass along are the organizations that filed amicus briefs on behalf of both parties. Here are the groups that filed amicus briefs on behalf of both parties; the notables being the U.S. Chamber of Commerce and AICPA for PwC:

Organizations Filing Amicus Briefs in Support of PwC

1. Employers Group, Chamber of Commerce of the United States of America, and California Chamber of Commerce (one brief)

2. American Institute of Certified Public Accountants

3. California Employment Law Council

Organizations Filing Amicus Briefs in Support of Plaintiffs

1. California Employment Lawyers Association

2. Former Commissioner of the California Industrial Welfare Commission (Barry Broad) and Former Chief Counsels of the California Division of Labor Standards Enforcement (Miles Locker and H. Thomas Cadell) (one brief)

3. Brandy Blaske, David Lee, Julia Longnecker, Stephan Stepan Mekhitarian, and Svetlana V. Murphy (all are Plaintiffs in Mekhitarian, et al. v. Deloitte & Touche, a proposed class action involving D&T’s Tax line of service)

So while it will be some time before we’ll see a ruling in Campbell this year, not to mention a resolution at the trial level, you can bet lots of unlicensed PwC employees will be working plenty of hours this busy season.

Wage & Hour Lawsuits

KPMG Takes Subtle Approach Wooing Anyone Interested in a Job at Ernst & Young

Recruiting for the talent amongst the Big 4 is competitive. This is known. What isn’t widely known are all the tactics in this competitive game of catch the accountant. In the past, we have seen direct solicitation by an E&Y recruiter which may be an effective method but it may be too abrasive for many within in the business who value propriety over the win-at-all-costs attitude.

Now comes news of a more subtle approach from KPMG, courtesy of an E&Y tipster who was searching for the firm’s career website:

While searching for the link to my firm’s career website I stumbled upon a pretty awesome ad (in a “ohhhh no you didn’t!” sort of way).


Since we’re fairly unfamiliar (read: completely unfamiliar) with Google’s method to the madness, we can only speculate how this little link found its way to the very top of Google search of “ey careers” but it does say “Ad,” so make of it what you will. Anyhoo, just for fun, we did our own quick Google Search of “ey careers” and got this:

So, it’s in the margin for us as opposed at the very top. But it’s still prominently placed on the search page and it’s also pretty hilarious that the hyperlink, “Ernst & Young Opportunities” goes directly to a KPMG URL (yes, it’s clearly disclosed by the Jobs.KPMGCareers.com at the bottom but who pays attention to that?). Perhaps our tendency to make mountains out of molehills is getting the best of us here but at the very least, this is an exciting twist on Sneaky Pete Piet.

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]

Bonus Watch ’11: Some Details on KPMG’s New Utilization Bonuses

Who cares what they’re doing in Luxembourg, anyway? Our tipster qualifies some of these numbers for the new bonus program but assures us that they’re in the ballpark.

Details of the utilization bonus came through to managers in the NY Office to prepare them for the announcement to staff. Payments will be made in April and October based on total billable hours. Three Tiers T1 – 1700 hours, T2 1800 hours, T3 1900 hours, must meet or exceed hours listed. Bonus amounts based on base salary and level.

Associates are as follows as a percentage of base (might be slightly off, SA here and didn’t pay much attention to Associates pay) T1 – 2% T2 – 3%, T3 – 4%. Senior Associates T1 – 2.5%, T2 3.75%, T3 5%. So for a year if you reach 1900 hours, 950 Oct-April and 950 April-Oct, you would have received 10% of your base pay as a bonus broken into 2 payments.

I might have some of the numbers slightly off, as I read over my managers shoulder, and am only interested in Tier 3 SA as I had 2100 billed hours last year, but I think they are generally accurate. This was for IT Advisory. I know other Advisory practices have the same pay out rates but lower hour expectations by tier. No idea about Audit or Tax.

UPDATE: Tables from the advisory email that was sent out earlier today:

If anyone can confirm these numbers for IT Advisory, please get in touch. Likewise, [I]f you’re in other advisory groups, audit or tax and have the details, email us and we’ll update.

Making Sense of the Ernst & Young Defense

Over at Bloomberg, Jonathan Weil (who has the tendency to let the dust settle before chiming in) takes Ernst & Young to task for their lack of willingness to take responsibility for the Lehman Brothers bankruptcy and digs up a bunch of old bodies in the process.

E&Y had established itself as a repeat offender long before Governor-Elect Cuomo filed his suit. In recent years we’ve seen four former E&Y partners sentenced to prison for selling illegal tax shelters, while other partners have been disciplined by the SEC for blessing fraudulent financial statements at a variety of companies, including Cendant Corp. and Bally Total Fitness Holding Corp.

In the Bally case, E&Y last year paid an $8.5 million fine, without admitting or denying the SEC’s professional-misconduct claims. The SEC also has imposed sanctions against E&Y three times since 2004 for violating its auditor-independence rules.

After that friendly reminder (which certainly makes some people wince), JW takes a look at the E&Y’s response to the suit, specifically the part where they more or less say that Cuomo is off his rocker, “There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP).”

Weil says E&Y is missing the point entirely:

That isn’t an accurate depiction of the claims Cuomo brought, though. Cuomo’s suit unambiguously took the position that Lehman violated GAAP. What’s more, it’s not credible for E&Y to say that Lehman didn’t. (An E&Y spokesman, Charles Perkins, said he “can’t comment beyond our statement.”)

In the footnotes to its audited financial statements, Lehman said it accounted for all its repurchase agreements as financings. This was false, because Lehman accounted for its Repo 105 transactions as sales, a point the Valukas report chronicled in exhaustive detail.

The question is, of course, if this all adds up to fraud on E&Y’s part. Cuomo says it does. Weil says that E&Y needs to come up with a better story. Colin Barr, on the other hand, writes that E&Y could easily turn the tables:

The Ernst & Young statement suggests the firm will argue that it can’t be prosecuted under the Martin Act because Lehman, not E&Y, was the outfit actually producing the financial reports, and because it was Lehman, not E&Y, that was peddling billions of dollars of securities just months before its implosion.

In this view, E&Y was just a gatekeeper hired to vouch for Lehman’s books, something it will claim it did well within the confines of the law. This strikes lawyers who are familiar with the law as an eminently reasonable approach, if not exactly a surefire recipe for success.

“If I were Ernst & Young, I would assert I was not a primary actor,” said Margaret Bancroft, a partner at Dechert LLP and author of a 2004 memo that explained the Martin Act soon after Spitzer began brandishing it against Wall Street. “You can say that with more than a straight face.”

“Just gatekeepers,” and not “fraudsters,” is obviously the preferred view but the catch is, E&Y would be admitting that they are really shitty gatekeepers.

American Apparel Takes Issue with Deloitte’s Notion That Management Withheld Some Fairly Important Financial Statements

Remember the hipster drama Deloitte caused this past summer when they resigned as the auditor of American Apparel? It was quite the rs the stock took a beating (it has recovered in the meantime) and questions were raised about the company’s ability to continue as a [g]oing [c]oncern.

Some recent developments in this particular story have come to light as Dov & Co. have been providing a whole mess of information to Deloitte, as is SOP in these matters. For starters, Deloitte notified the APP audit committee that the 2009 financial statements are not kosher and anyone using them for any other purpose than lining a bird cage is nuts.


From the 8-K:

On December 15, 2010, the Audit Committee of the Company received notice from Deloitte stating that Deloitte had concluded that Deloitte’s report on the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2009 (the “2009 financials”), including Deloitte’s report on internal control over financial reporting at December 31, 2009, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (such reports, collectively, the “Deloitte Reports”) should not be relied upon or associated with the 2009 financials.

Deloitte explained that its conclusion was based on the significance of the declines in operations and gross margin in the Company’s February 2010 monthly financial statement, combined with the January 2010 monthly financial statements, the Company’s issuance of revised projections in early May 2010 which reflected a significant decrease in the Company’s 2010 projections, and Deloitte’s disagreement with the Company’s conclusion that the results shown in the February 2010 monthly financial statements would not have required a revision to the Company’s projections as of the date of the 10-K filing and the issuance of Deloitte’s reports. Deloitte further indicated that their decision considered their inability to perform additional audit procedures, their resignation as registered public accountants and their professional judgment that they are no longer willing to rely on management’s representations due to Deloitte’s belief that management withheld from Deloitte the February 2010 monthly financial statements until after the filing of the 2009 10-K and made related misrepresentations.

So if you can get past how poorly written these paragraphs are, you can boil down Deloitte’s concerns about the 2009 10-K to a few things: 1) business was not looking good; 2) they didn’t buy APP’s notion that financial projections for February ’10 were hunky dory (which weren’t made available until after the 10-K was filed); 3) APP management was more or less full of shit. You can also read their official letter to the company, if you are so inclined.

You won’t be surprised to learn that Dov & Co. have a difference of opinion here:

The Audit Committee of the Company has commenced an investigation into the assertions that management withheld the February 2010 monthly financial statements and related misrepresentations. Management disagrees with Deloitte’s assertions and does not believe that the February 2010 monthly financial statements were withheld. The Company does not currently believe, including after discussions with Marcum, that the reaudit will result in any changes to the 2009 financials, though no assurance can be given in this regard.

So, somewhere, there are February 2010 financial statements stuffed in a drawer (but whose drawer?) that basically caused this whole fiasco. This seems like a completely plausible scenario.

Ernst & Young Wants a Showdown

This was worth the wait.

Directly from the firm’s website:

Ernst & Young’s Response to New York Attorney General’s Complaint

New York, 21 December 2010 – We intend to vigorously defend against the civil claims alleged by the New York Attorney General.

There is no factual or legal basis for a claim to be brought against an auditor in this context where the accounting for the underlying transaction is in accordance with the Generally Accepted Accounting Principles (GAAP). Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry.

Lehman’s bankruptcy occurred in the midst of a global financial crisis triggered by dramatic increases in mortgage defaults, associated losses in mortgage and real estate portfolios, and a severe tightening of liquidity. Lehman’s bankruptcy was preceded and followed by other bankruptcies, distressed mergers, restructurings, and government bailouts of all of the other major investment banks, as well as other major financial institutions. In short, Lehman’s bankruptcy was not caused by any accounting issues.

What we have here is a significant expansion of the Martin Act. Although the Martin Act is almost 90 years old, we believe this is the first time that an Attorney General is attempting to use this law to assert claims against an accounting firm, rather than the company that took the alleged actions.

We look forward to presenting the facts in a court of law.

In other words, Andy – get lost; drop dead; suck it. AM Law Daily reports that E&Y has big guns on the case:

Miles Ruthberg, a former global litigation chair at Latham & Watkins, confirmed, via an e-mail to The Am Law Daily, that he’s representing E&Y in the suit along with Latham securities litigation and professional liability cochair Jamie Wine and Kramer Levin Naftalis & Frankel white-collar defense and SEC regulatory cochair Barry Berke. Latham, which has previously represented E&Y, has been handling securities litigation against the accounting firm stemming from Lehman’s failure.

To mark this occasion, we present an appropriate video (BL-inspired):

Fraud Experts: Calls for Criminal Charges Against Ernst & Young Are ‘Absurd’

Since Andrew Cuomo decided to make our lives insanely busy this week, we’ve been talking to lots of different people about what will happen next in the Ernst & Young saga. We stumbled across a couple of experts, Dr. Mark Zimbelman an Accounting Professor who specializes in fraud, forensic accounting and auditors’ detection of fraud at BYU’s Marriott School of Business, along with his son, Aaron Zimbelman, a doctoral student at the University of Illinois at Urbana-Champaign whose research interests include auditing, financial statement fraud and corporate governance.

The father and son team have a blog, Fraudbytes, that discusses, well<arious forms including a post from yesterday about this week’s developments.


We corresponded with the Zimbelmans by email for this interview. They have combined their positions to provide us with the answers to our questions.

Going Concern: Does E&Y risk losing creditability with the market at large (á la Andersen) because of these civil fraud charges?

Zimbelmans: We don’t think this case will hurt E&Y’s credibility, based on what we know at this point. Lehman’s accounting for Repo 105 transactions was in accordance with GAAP and appears to have been a common practice for similar transactions in the industry. In other words, E&Y was probably following the letter of the law in signing the audit opinion. In Andersen’s case, the firm had shredded documents and faced criminal charges. Until we see a clearer act of wrongdoing (e.g. a clear departure from auditing standards), we don’t see E&Y individually facing a significant loss of credibility. More likely, the auditing and accounting profession as a whole will take a credibility hit as individuals question the standards and industry norms adhered to by E&Y in auditing Lehman.

GC: Reports say that E&Y is in talks to settle – how do you interpret their willingness to settle rather than litigate in this matter?

MZ/AZ: We think a willingness to settle speaks mostly to the great deal of uncertainty associated with the litigation process in auditing cases. Jury trials in cases like these can be very unpredictable and may not be strongly related to whether or not E&Y actually did anything wrong. Juries tend to have a poor understanding of auditing and accounting issues and also tend to side with victims and against deep pockets. In this case in particular, were the case to go to trial, E&Y has a good chance to become a scapegoat for the collapse of Lehman and perhaps even the economic crisis as a whole. Even if the probability of a verdict against E&Y were fairly low, the damages assigned by a runaway jury could be devastating. This gives E&Y a strong incentive to settle, regardless of whether or not they did anything wrong.

GC: Is there any advantage to litigating?

MZ/AZ: If the requested settlement amount would be devastating to E&Y, the firm is better off litigating. The firm may also be better off litigating if the requested settlement amount is high and E&Y feels they have a very solid case that has a good chance at overcoming the common jury biases we discussed in the previous question.

GC: How would you react to those who feel that are calling for criminal charges against the firm?

MZ/AZ: We don’t really see any criminal behavior here–E&Y allowed Lehman to account for Repo 105 in accordance with GAAP and in accordance with what was fairly standard in the industry. Until we see evidence of potentially criminal behavior, calls for criminal charges seem absurd.

GC: Prediction time: what happens next? Fine of $X and….?

MZ/AZ: We doubt there are any criminal issues here. E&Y will likely try to settle as quickly as possible to get this behind them. Cuomo is likely to want a huge settlement because of the magnitude of the bankruptcy and because of the potential for a runaway jury. Given that Lehman’s bankruptcy was $691 billion, this settlement could easily exceed E&Y’s Cendant settlements which were over $600 million.

Is This a Picture From Last Night’s Ernst & Young Holiday Party?

Supposedly the picture at right was from last night’s E&Y festivus/”suck it, Andy Cuomo” party and we thought we’d share it with you to see if you recognize the scene.

Our tipster simply confirmed “EY Christmas Party: awkward sexual advances,” the former being in question, the latter, well, obv We employed some detection skills to help us determine if the pic is, in fact, from last night’s festivities. Here are a few clues that lead us to believe that this is a legit picture:

1. The lady is still wearing her ID badge – Lots of Big 4 types are hardly fashion conscious, so this oversight was probably fairly common last night.

2. Three dudes, three whites shirts – No tie on twinkle toes and the guy in the background is wearing khakis. Obviously not front office.

3. Talk to the Hand – Or alternatively, “Do not take my picture with this accountant who, sure as hell, isn’t Patrick Swayze.”

If you’ve got additional evidence to prove this picture as an authentic E&Y holiday rager action shot, (e.g. post-dance photo-op with Jim Turley) we’d love to see more pics. Or if you can provide more details to give it more context: a) What song were they dancing to? b) Was this serious dancing or twisting at Jack Rabbit Slims? c) Did everyone circle around or did a conga line ensue?

Any or all of these details would be helpful.

Ernst & Young Wasn’t About to Let Some Civil Fraud Charges Put a Damper on Their Holiday Season

A trusted source emailed us that things were getting festive last night:

EY had their FSO party last night at Cipriani’s downtown. Used to be at Tavern on the Green.


This is good news. And not just because this is an upgrade from last year’s party. Despite all the bad press the firm is getting, the celebration will go on! It must go on! Now whether the Governor-elect was aware of this and purposefully decided to make a few people’s hangovers a little worse by filing the charges today, we can’t possibly know (but he does seem to have an innate sense of timing).

What we would like to find out is the mood at this fiesta. Were there a lot of long faces, grumbling about Hank Paulson, weeping in their single malts? OR did people manage to convince themselves that this whole thing is NBD and people had a good time – enjoying the open bar, power smoking Cohibas, making awkward sexual advances, partners dancing?

We need, and the people demand details, so if you were at the party email us the details.