Category: Big 4

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

PCAOB Report States That There Was a Fair Amount of Failing Going on at Ernst & Young

The PCAOB has issued its annual report on Ernst & Young having given the firm the third degree at its national office and 30 of its 80 U.S. offices. It inspected 58 audits performed by the firm but exactly who is, of course, a big secret (unless you tell us).

There were five “Issuers” that were listed in the report and some form of the word “fail” was used 25 times (that includes the footnotes).

[Issuer A] The Firm failed to adequately test the issuer’s loan loss reserves related to certain loans held for investment. Specifically, the Firm failed to reconcile certain values used in the issuer’s models with industry data, failed to test the recovery rates used in the issuerfailed to test the qualitative components of the reserves.

Damn those loan loss reserves!

[Issuer C] The Firm failed to perform sufficient procedures to test the issuer’s allowance for loan losses (“ALL”). The issuer determined the general portion of its ALL estimate, which represented a significant portion of the ALL, using certain factors such as loan grades. Data for this calculation were obtained from information technology systems that reside at a third-party service organization. The Firm relied on these systems, but it failed to test the information-technology general controls (“ITGCs”) over certain of these systems, and it failed to test certain of the application controls over these systems. Further, the Firm’s testing of the controls over the assignment and monitoring of loan grades was insufficient, as the Firm failed to assess the competence of the individuals performing the control on which it relied.

This loan thing appears to be a trend…

[Issuer D] The Firm failed to sufficiently test the costing of work-in-process and finished goods inventory. Specifically, the Firm’s tests of controls over the costing of such inventory were limited to verifying that management reviewed and approved the cost allocation factors, without evaluating the review process that provided the basis for management’s approval.

Hopefully that doesn’t blow back on an A1.

Anyway, you get the picture. The whole report is below for your reading pleasure. E&Y’s got its $0.02 in, however it was short and was mostly concerned about the firm’s right to keep its response to Part II (the non-public part)…non-public:

We are enclosing our response letter to the Public Company Accounting Oversight Board regarding Part I of the draft Report on 2009 Inspection of Ernst & Young LLP (the “Report”). We also are enclosing our initial response to Part II of the draft Report.

We note that Section 104(g)(2) of the Sarbanes-Oxley Act requires that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.” Based on this statutory provision, we understand that our comments on Part ii will be kept non-public as long as Part ii of the Report itself is non-public.

In addition, we are requesting confidential treatment of this transmittal letter.

So this doesn’t mean much other than E&Y would prefer that no one know how it managed to tell the PCAOB to fuck right off as nicely as it could.

If you had the pleasure of being on one of these 58 engagements, we’d love to hear about your experience.

2010 Ernst Young LLP US

Did KPMG Plagiarize Part of Its Atlantic Yards Market Study?

Back in the fall we told you about a market study that KPMG issued on the Atlantic Yards project.

At that time, we learned that KPMG had done some less-than stellar research on the movement of the units on Prospect Park and it got the attention of some the local blogs covering the massive development project.

Namely, the Atlantic Yards Report blog. It reported:

KPMG’s report has some very shoddy research. Consider that the report (dated August 31) claims that Richard Meier’s On Prospect Park is 75% sold. (Only rental buildings are pre-leased.)

However, the New York Times reported September 27:

While the developers say half of the building’s 99 units have been sold, the real estate Web site StreetEasy.com documents only 25 closings through public records.

AYR didn’t state it so boldly back in the fall but in a post from yesterday (as well as reports in May and June) it isn’t so nice and flat out calls the firm out for lying, “The KPMG report got very little discussion, but it contains lies–blatant, checkable lies–about condo sales.”

But wait! There’s more! We learned today from a friend of GC that not only does AYR call out KPMG for having their pants on fire, it also says that the firm got a little carried away with the copy and pasting:

I discovered when I took another look, it contains more than two pages of shameless borrowing–plagiarism that is not diminished by a vague footnote.

The entire section on New York City Market Dynamics is cribbed from The Corcoran Report(s) for Manhattan and Brooklyn for the second quarter of 2009.

Yes, there’s a footnote to the section headline that cites “The Corcoran Report–2nd Quarter 2009” as a source (click to enlarge), but there’s no indication that nearly all the text–with the slightest of changes–comes from Corcoran.

No quotation marks, no indentations, no italics.

AYR provides several examples that are oddly the same identical. We’ve presented a clip from KPMG’s report here:

And here’s Corcoran’s (apologies for the small type):

Like we said, this is just one example. Our messages (email, voicemail, in a bottle) to KPMG have not been returned at this time.

Apparently a Few People at PwC Are Feeling Shortchanged

The PricewaterhouseCoopers compensation post is still a hot thread, as the majority of news was about double-digit raises and bonuses have been reported from many although at least one commenter was skeptical that all the news was good in the PwC world:

“[P]robably the people most willing to share are the ones who got the most $.”


That comment was in response to someone who assumed PwC was throwing around “1” ratings (the firm’s highest) like boomies at a Phish show. Of course, not everyone can be so lucky and apparently there are a couple of terms being thrown around by the less fortunate.

Late last week a source close to PwC dropped us the following:

“Fonus”– noun; the much-diminished bonus Big 4 firms give to borderline staff they can’t afford to pay properly, but don’t want to quit.

Not to be confused with the ‘nonus,’ which is no bonus at all.

Apparently these terms have emerged this week as fonuses started appearing in people’s paychecks.

So not to worry “as expected” staff that can’t afford to quit your jobs! If you ended up with the 6%/0% instead of the 14%/10% or whatever, whathaveyou, you’re not alone! Plus, there are some fun terms you can throw around to help you bitch about it. Continue to discuss and keep us updated with any other fallout from the discussions – verbal creativeness or otherwise.

KPMG Has Gotten Tired of KV Pharmaceutical’s Financial Reporting Side Effects

Last week we ran a post courtesy of Sheryl Nash at CFOZone that discussed the tough 2010 that KV Pharmaceutical was having. Well, it’s getting worse. KPMG, not completely adverse to risk,ps and has dropped KVP like a sack of spuds.

In an 8-K rammed through just before quitting time yesterday, “On June 25, 2010, KPMG LLP (“KPMG”) notified K-V Pharmaceutical Company (the “Registrant” or the “Company”) that it had resigned from its engagement as the Registrant’s principal accountant. KPMG’s resignation was not recommended or approved by the Audit Committee of the Registrant’s Board of Directors.”

What was the problem, you ask? Where do we start? There’s a lot in this 8-K so we’ve bolded the good parts for you:

KPMG’s report on the consolidated financial statements of the Registrant and subsidiaries as of and for the year ended March 31, 2009 contained a separate paragraph stating that “As discussed in Note 3 to the consolidated financial statements, the Company has suspended the shipment of all products manufactured by the Company and must comply with a consent decree with the FDA before approved products can be reintroduced to the market. Significant negative impacts on operating results and cash flows from these actions including the potential inability of the Company to raise capital; suspension of manufacturing; significant uncertainties related to litigation and governmental inquiries; and debt covenant violations raise substantial doubt about the Company’s ability to continue as a going concern.”

The audit report of KPMG on the effectiveness of internal control over financial reporting as of March 31, 2009 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles, except that KPMG’s report indicates that the Registrant did not maintain effective internal control over financial reporting as of March 31, 2009 because of the effect of material weaknesses on the achievement of the objectives of the control criteria and contains an explanatory paragraph that states “Material weaknesses have been identified and included in management’s assessment in the areas of entity-level controls (control awareness, personnel, identification and addressing risks, monitoring of controls, remediation of deficiencies and communication of information), financial statement preparation and review procedures (manual journal entries, account reconciliations, spreadsheets, customer and supplier agreements, stock-based compensation, Medicaid rebates and income taxes) and the application of accounting principles (inventories, property and equipment, employee compensation, reserves for sales allowances and financing transactions).

We’ll interject here with…why didn’t they just admit, “We have internal controls in place but they suck. Every last one of the controls is ineffective and we’re really not sure they’re being performed anyway. In fact, we don’t even employee people with accounting degrees. We have a weekend COSO crash course to get temps up to speed.” ?

Back to the filing:

As of the date of their resignation, KPMG had not completed the audit of the consolidated financial statements and the effectiveness of the internal controls over financial reporting of the Registrant as of and for the year ended March 31, 2010. KPMG had informed the Audit Committee prior to the date of their resignation that upon completion of their audit of the consolidated financial statements as of and for the year ended March 31, 2010 they expected their audit report would contain a separate paragraph expressing substantial doubt about the Registrant’s ability to continue as a going concern and their report on internal controls over financial reporting would indicate that the Registrant did not maintain effective internal control over financial reporting as of March 31, 2010 because of the effect of material weaknesses reported as of March 31, 2009 that had not been remediated.

We’d continue but it’s probably not necessary.

Comp Watch: Sit Downs Starting at Deloitte; Anxiety Over Raises Picking Up

Lots of news this week on the compensation and promotion fronts with Grant Thornton, KPMG and PwC all making announcements or soon-to-be making announcements (that we’ve heard; are you holding out on us, E&Y?).

The latest out of Deloitte is that the discussions are starting (although maybe not today since it sounds like most are off) but the news on yay or nay on promotions is starting and now the anxiety around comp will increase over the next two month:

The year-end ratings and promotion decisions have been approved by National; so the process of communicating both to Deloittians is starting…At a high-level, I heard that promotions this year were tough – that being said, plenty of people made it through. For the most part, people are now waiting to hear about comp – scheduled for communication the last two weeks of August.

We did hear one rumor about the number of new partners expected, “at a recent partner meeting, it was announced that there will be more than 60 new PDPs nationally, with more than 10 being in the Northeast,” so you can toss that around your meat-ingestion fest this weekend if you so choose.

Discuss your epic/tragic news re: your new promotion if you’ve received word and keep us updated on the comp rumors.

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

Promotion Watch: KPMG Hands Out New Stripes Today

A source reminded us that today is welcome to your new personal hell job day in the house that Klynveld built:

“Today is July 1st promotion day for KPMG…figured it can be a post item shoutout.”


So that’s exactly what we’re doing. Congrats to those of you enjoying a new title and feel free to pat yourself on the back below but don’t get all Sally Field on us. That’s just embarrassing.

As far as the promotion bonus is concerned…that may be another matter. But if the last three months of the fiscal year go well, who knows what can happen come fall?

UPDATE: We’ve been notified that there hasn’t been any word in at least one office (Southeast) on promotions which strikes us as strange but…HEY! anything is possible. If you’re in the dark, let us know or discuss.

KPMG Resolves Lawsuit with New Century

Francine McKenna reported briefly last week that KPMG settled the $1 billion lawsuit with the New Century Liquidating Trustee. Sure enough, we checked with Steven Thomas and he gave us the same statement:

“The New Century Liquidating Trustee and KPMG LLP have entered into a confidential settlement agreement, pursuant to which the lawsuits and arbitration against KPMG LLP and KPMG International have been resolved.”


Well! That’s some important news. We called up KPMG shortly after we read Francine’s post last week to see what they had to say about it and we were told that they’d get back to us. Unfortunately, we’re still waiting but we’re sure they’re excited, just taking the time to find the right words. Anyway, we’re here when you’ve perfected the prose. In the meantime, if you’d like to take a shot at what the response might be, pen it below.

We’ll pass along more details as they become available.

Who Will Deloitte Buy Next?

Deloitte CEO Barry Salzberg did a little sit down with the Journal and made it perfectly clear that he’s shopping for another acquisition. The BearingPoint transition seems to have gone as well as Dr. Phil could have asked for and now he’s ready to move on to the next one.

But who?

Mr. Salzberg declined to name specific future targets, but said he sees opportunities to build scale in areas including environmental and technology consulting.

“I would be very willing to make another and very willing to position ourselves properly for the right kind of acquisition or a combination in the market.”

The Journal article mentions the recent rumors around Booz & Co. merging with A.T. Kearney but BS wasn’t that hot on the idea (even though D could take both either of them no prob) saying that they aren’t, “‘as high a priority for me’ as other opportunities.”

Plus, Salz is hoping that he can offering something tangible for a change rather than just billing all your hours out, “He cited a newsletter, or ‘information services,’ as an example of something that isn’t as labor-intensive as consulting but provides a complementary service to clients. Such a business ‘isn’t as dependent on the hourly production of people,’ he said.”

No target is too big or too small, according to Salzberg but like we mentioned, he’s not naming names. So let’s try and read his mind a little bit, throwing caution to the wind – McKinsey? DiversityInc Magazine? The Hair Club for Men?

Suggestions, sincere wishes and wild-ass guesses are welcome.

How the Big 4 Are Helping Career Moms Have It All

The Harvard Business Review’s blog (Harvard blogs?) ran a piece earlier today about a recent Pew Research study that claims more women are not having children.

The HBR brushes over the whole birth control thing and serves its best interest by focusing on what they consider having it all (an advanced degree and at least one child), picking the following statistic out of the hay stack, “in 2008, 24% of women ages 40-44 with a master’s, doctoral or professional degree had not had children, a decline from 31% in 1994.”


This had me thinking about the benefits that the Big 4 provide to their employees going through early parenthood. What might surprise you (or might not) is how similar the firms’ services are.

From PwC.

From Deloitte.

From KPMG.

From E&Y.

Parental leave of absence: “Eligible primary care parents with three months of service can use six weeks of paid parental leave during the year following birth or adoption placement (three weeks for non-primary care parents). This is in addition to maternity disability benefits, if applicable, of 60% to 100% for approximately 8 weeks. Paid parental leave runs concurrently with any job-protected time under family and medical leave.”

Provided by every Big 4 firm:

Adoption assistance – Per EY’s site: “Pays expenses up to $5,000 per child (with an additional $1,000 for special needs children), with paid leave available for the caregivers, along with resource and referral services.”

Lactation program – PwC’s program, explained: “Access to educational materials, unlimited pre/post-birth counseling from nationally recognized lactation specialists and breast pump discounts are available through this program. Private mother’s rooms are also available in many of our offices.” Do conference frooms count as “mothers’ rooms?”

Parental paid leave of absence

Deloitte – 2 weeks (this is all I could find – can anyone prove differently?)

PwC – up to 6 weeks

KPMG – 8 weeks “Professionals who plan to return to work after the birth or adoption, are eligible for two weeks (10 days) of paid child care leave.”

E&Y – 6 weeks

Unique programs:

Family time off – The Family and Medical Leave Act of 1993 promises 12 weeks of unpaid leave for those employees who need to take care of a sick family member. E&Y extends this service to 16 weeks.

Back up Child and Elder Care – many of the firms provide some kind of support for employees when family care emergencies occur. KPMG takes things one step further by allowing employees to share their unused resources with colleagues that have depleted their resources.

Note – I used external websites when reviewing the different options – these might outdated from what you have internally. Does your local office offer something unique that is not listed here? Share details in the comments.

More Women Manage to Have It All [HBR]

Today in Auditor Musical Chairs: KPMG and Deloitte Both Get the Boot

Evergreen Energy of Denver dismissed Deloitte effective June 23rd according to the company’s 8-K filing. Hein & Associates, a local Denver firm, will take it from here.

It stands to reason that Evergreen didn’t appreciate the going concern opinions that Deloitte gave the company for its December 31, 2009 and December 31, 2008 financial statements but in cordial SEC filing fashion, there are no parting shots from the company.


Evergreen’s press release indicates that this was simply an opportunity to throw some action to another firm (most likely with lower fees), “With the sale of certain Buckeye assets and our exit from the coal mining industry, Evergreen Energy has transitioned into a green technology company. This is an ideal time to switch to a Denver-based regional accounting firm with substantial public company expertise in the clean technology and software industries that can more cost effectively meet our needs.”

Deloitte’s letter to the SEC is abruptly admits that everything is cool rather than flat out saying, “you’ll be sorry you ever ditched us, you losers.”

Similarly, Measurement Specialties, Inc. showed KPMG the door for Ernst & Young. The company says everything was hunky-dory between the two although there was a small matter of the internal controls around a significant joint venture of which the company had no control. Oh, and the effectiveness of internal controls of some recent acquisitions also couldn’t be determined. But it was cool and the company said, “it was in the best interests of the Company to change its independent registered public accounting firm.”

KPMG has NFI what that means saying in their letter, “we are not in a position to agree or disagree with Measurement Specialties, Inc.’s statements relating to the reason for changing principal accountants.”

We wish everyone nothing but happiness.

Were PwC and Grant Thornton Ignoring Overstock.com’s Accounting Issues?

Yesterday we briefly picked up the Overstock beat as Sam Antar pointed out that everyone’s favorite Salt Lake City resident got a little confused about when they knew about their gain contingency existed that resulted in some contradictory disclosures.

As you may misremember, this arose from the company for recoveries from underbilled fulfillment partners by improperly claiming that a ‘gain contingency’ existed under accounting rules.”

Now Sam has pointed us to some correspondence between the SEC and Overstock that indicates that PwC wasn’t concerned about the issue until the Commission pointed it out and succeeding auditor Grant Thornton was unmoved until Overstock brought it up:

Please tell us if, and the extent of, your auditors’ national accounting office involvement in these issues during audit of your 2008 financial statements or the reviews of your fiscal 2009 quarterly filings.

PwC served as our auditor during the audit of our 2008 financial statements. PwC has informed us that it did not consult with its national accounting office regarding the above issues when they were identified in Q4 2008 or Q1 2009. However, in connection with this response to your letter dated November 3, 2009, PwC has consulted with its national office in regard to both the fulfillment partner under billing and partner overpayment issues and based on context of this being an area that is a highly facts and circumstances based issue that requires significant judgment where reasonable parties have different views, PwC continues to concur with our accounting and disclosure consistent with its reflection of the underlying economics and our past practices of not billing or collecting for our billing errors, rather negotiating for future price concessions that were contingent on future sales.

Grant Thornton (“GT”) reviewed our Q1 and Q2 2009 quarterly filings. To our knowledge the GT local engagement team did not review these issues with its national accounting office at the time of our Q1 and Q2 2009 quarterly filings. In early October, as we prepared our response to your October 1 letter, we asked GT for its national office’s opinion. It was our understanding at the time that GT’s national office concurred that we had used an appropriate (if not preferred) accounting treatment. Only after we received your November 3 letter, did we become aware that GT’s previous “national office” opinion had in fact been an “informal request” only, and not a “formal request.”

In the case of PwC, it’s entirely possible that they just trusted that OSTK knew what they were doing and went along with it. Obviously a huge mistake. When the SEC came calling however, they moseyed through it again and rang up the accounting wonks at 300 Mad.

But the Grant Thornton engagement team, who came in after all this went down was seemingly on board with it without consulting with its own national accounting gurus even though the SEC was already on this like stink on a monkey. GT making an “informal request” of its national office on an SEC inquiry seems a little tepid.

HOWEVER! You have to remember that this is all in the words of Overstock which hasn’t always been forthcoming/reliable/truthful in its filings. Then again, maybe there’s something to this whole auditor “Yes men” thing.