Category: Big 4

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

Former SEC Chairman Pitt: Criminal Prosecutions Are Possible for Ernst & Young, Lehman Execs

Okay then! Not exactly what you’d want to hear from a former SEC Chairman on Monday but what’s a former SEC honcho to do? Paint a rosy picture for everyone? Hell no! The man is gong to get real about this latest bank/accounting firm disaster. Barron’s ran down Harv to get his $0.02 on the whole Lehman/E&Y sitch and he he laid it out for Dick Fuld, E&Y, et al. as how to best handle this dicey situation.

Regarding the timing of a response to the report, you best explain yourselves ASAP and while you’re at it, none of that fancy-schmancy language. Everyone needs to be able to understand this:

If they want to avoid the logical consequences of the Report’s conclusions-and none of those consequences are at all good for either Fuld or E&Y-they will need to come forward quickly with a very plain, easily understandable explanation of the errors or their defenses. The longer it takes them to do that, the less likelihood they will have of mitigating the publicity the Report’s allegations have already received.

Consequences, you ask? How about indictments? How about no more SEC clients for E&Y? Next Andersen? Maybe! Shockingly, the SEC seems to be dragging its feet, per the usual standard operating procedure (emphasis original):

Many are wondering why there hasn’t been any action taken, and why the government hasn’t reported on the same events itself. Criminal prosecutions are possible, as are SEC civil actions. For Fuld, an SEC action could mean that he would forfeit his right to participate in the securities industry and possible disgorgement of monies he received over the years from Lehman. For E&Y, the SEC has the power to suspend their right to practice accounting, limit their ability to take on new clients, and impose remedial sanctions.

Yeah, that last part is kind of the crux. As you may recall, Andersen did not bite the dust because of the money it had to pay to Enron investors but because it’s reputation took such a bad hit that states began revoking their license even before the firm voluntarily surrendered its license to practice before the SEC. This occurred after Andersen clients started running away from the firm like a band of lepers. There’s no indication that’s what will happen to E&Y but there’s a 2,200 page report with E&Y’s name all over that says nothing flattering about the firm.

And say what you want about Harvey Pitt: bearded Bush yes-man, lawyer, whatever. As far as we can tell, he has nothing to gain by throwing out wild-ass speculation about what the possible outcomes could be.

Lehman: Criminal Prosecution Possible, Says Pitt [Barron’s]

Inside Ernst & Young: Talking Points on Lehman Brothers

If you’ve ever worked at a Big 4 firm, you’re aware that when big news hits the MSM, A) it’s never good and B) there is typically some sort of communication from management reiterating the firm’s position on the matter, everything is cool, thanks for your hard work, etc. etc.

With last week’s revelation of the bankruptcy examiner’s report on Lehman Brothers, E&Y seems to be following this protocol as it relates to the troops on the ground. As you would expect, leadership is keeping their heads about this while in the background in-house counsel is likely engaged in all-night smoky room strategy sessions.

We checked in with a few of our Ernst & Young sources to get an idea of what people were thinking and so far, there doesn’t sound like there are any signs of panic (yet!).


From one source:

Overall reaction from what I gathered is pretty muted. We did get a call from some of the higher-ups saying that we reviewed our work and that we feel that our audit was completely adequate and that Lehman’s failure was nothing more than the same systemic failure of two of the other major banks and that we plan to defend ourselves vigorously. Presumably, the examiner’s report really didn’t give any ah-ha moments….

[I]s there a possibility of a payout at some point? It’s possible. Are we worried that we’re the next Arthur Andersen? I don’t think so.

So at least on the surface, E&Y leadership is communicating that what came out in the report wasn’t surprising and that the defense of the firm’s position will be, as usual, vigorous.

That doesn’t of course stop the speculation:

I heard from a technical guy there was some concern because they didn’t issue a going concern opinion [for the previous audit].

And as you might expect, “I heard that [the firm] helped cook the books and is deep shit,” with the book cooking being arguable but pretty hard to prove and the “deep shit” aspect being a given.

Some Ernst & Young partners are probably losing sleep just thinking about the potential liability involved here but eventually they’ll get over it (until something else comes up).

No partner worth their salt got admitted to the partnership focusing on the downside. The problem is that when people use consistently use words like “deceptive” and “misleading” to describe Lehman’s accounting this reflects poorly on the firm since they were comfortable with the treatment.

And because it’s still busy season for a lot of people, they are focused on the shitstorm that currently surrounds them, not one that will likely drag on for years after they’ve left the firm (voluntarily or otherwise).

Anyone with more insight or thoughts on the matter, get in touch with us and we’ll keep you updated on the chatter inside E&Y.

UANI Goes After KPMG for Iran Ties

[caption id="attachment_6035" align="alignright" width="260" caption="There\'s no connection. See? Iran is way over here. "][/caption]

It’s hard enough to be a Big 4 firm these days that you don’t need this. New York-based United Against Nuclear Iran (UANI) is a little upset with any and all companies that are doing business in Iran and just because you claim that you are a protector of the capital markets, that doesn’t earn you a free pass.

The Financial Times reports that UANI’s latest target is none other than the House of Klynveld and the lobby group sent a letter to Tim Flynn stating their displeasure with KPMG’s ties to their independent member firm in Iran, Bayat Rayan.


Flynn, who is stepping down as the Chairman of KPMG this summer, probably isn’t too psyched to have the firm lumped into the cross-hairs of UANI, who has relentlessly pressured companies to stop doing business in Iran.

The FT reported that the UANI set its sights on KPMG “after [a] week-long campaign against Ingersoll Rand ended with the Dublin-based diversified industrial company announcing on March 8 it was instructing its subsidiaries not to sell products ultimately destined for Iran.”

We contacted KPMG for comment but have not yet heard back regarding a response from the firm.

According to the letter, UANI will take “any and all action we deem necessary to hold KPMG accountable for its inappropriate business relationships with Iran,” which sounds pretty serious. Although we’re not sure what ‘any and all action’ will entail but for T Fly’s sake, we suggest he gets this resolved sooner rather than later. If he doesn’t, he can expect calls from Bill O’Reilly and his mug next to Ahmadinejad’s on the Factor.

KPMG is latest target for activists seeking to cut corporate ties to Iran [FT]

Quote of the Day: Ernst & Young Partners Losing Sleep? | 03.12.10

“A successful lawsuit against E&Y could result in a court finding that the failure to properly advise the audit committee prevented Lehman from taking genuine steps to substantially reduce its leverage, which may have saved the firm from bankruptcy. Which is to say, E&Y could find itself blamed for all the losses to Lehman shareholders. That would be a stretch – such a claim would be speculative – but it still should be scaring the heck out of the partners.”

~ John Carney

Are Big 4 Auditors Irrelevant?

Okay people, the calls for the complete obliteration of the accounting world have begun. Check that. It’s more or less the accounting world as it relates to auditors of public companies (i.e. Big 4 auditors).

Steve Goldstein at MarketWatch, for one, is NOT A FAN, “What precise purpose does it serve to have a supposedly independent auditor (paid for by the company) sign off on accounts? From Enron to Lehman to Satyam to Parmalat, it’s clear that the major accountants lack either the skill or the determination (or both) to ferret out fraud.”


So in case you didn’t catch it, he’s calling into question the Big 4’s (our assumption) integrity, competence and fortitude. Oh and before you start huffing about “it’s not the job of the auditor to detect fraud,” we’d argue that’s not even the point any more. Lehman was engaging in what a former CFO calls “shenanigans” that E&Y knew about for years and went along with it. Why? Because Lehman said everything was kosh.

Goldstein goes on:

Company executives already are forced to sign off on their accounts. When they are caught lying, companies face liability over disclosure.

So the threats that keep (some) companies honest are there regardless of whether the reports are audited. The outside auditors themselves are assigned a negligible value by the market.

A solution? Here’s two admittedly out-there solutions that the Securities and Exchange Commission probably won’t adopt.

One is quite simple: get rid of accountants. Who cares? They add no value, and their expenses weigh on the bottom line.

The other would be for someone else to hire the accountant. How about the company’s top five shareholders? While the likes of Fidelity would grumble about the added costs and the free-rider benefit for smaller shareholders, they would certainly have an interest in securing a far tougher audit.

Okay, Big 4 auditors, here’s your homework: explain why auditing for public companies isn’t irrelevant. We’ll listen, we swear. Or just start shooting off at the mouth if you feel it necessary. Goldstein isn’t the first to make this determination. Francine McKenna and Jim Peterson have argued that the value of an auditor’s opinion has been nil for quite some time and they’re both Big 876454 alums. It’s okay if you admit it. Acceptance is the first step.

What exactly is the point of having accountants? [MarketWatch]

Ernst & Young Was ‘Comfortable’ with Lehman’s Shady Accounting

Late yesterday, U.S. Bankruptcy Examiner Anton Valukus released a 2,200 page report that details the collapse of Lehman Brothers. It points the finger at Lehman execs for engaging in shady accounting that Ernst & Young knew about and was comfortable with. Lehman’s Board of Directors were not informed of the questionable accounting treatment.

To put it in more technical terms: Ernst & Young is in deep shit. The lead partner on the Lehman audwed more times than Dick Fuld for crissakes.

The accounting in question was known inside Lehman as “Repo 105.” These transactions moved billions of dollars off of Lehman’s balance sheet that were described by emails in the report as “basically window dressing” and their global financial describing them as having “no substance.” The Times reports that the treatment was so crucial to LEH that one executive, Herbert McCade, was known internally as the “balance sheet czar” and that he described in an email that the treatment was “another drug we r on.”


The really bad part for Ernst & Young is that they were okay with the “drug.” From the report, the lead partner stated that E&Y “had been aware of Lehman’s Repo 105 policy and transactions for many years.” For you wonky types, Lehman was accounting for these “Repo 105” transactions based on guidance from Statement on Financial Reporting Standard 140, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.

E&Y’s “team had a number of additional conversations with Lehman about Repo 105 over the years,” although they were not involved with drafting the policy nor did the firm provide any advisory services related to the transactions. According to the lead partner on the engagement, the firm simply “bec[a]me comfortable with the Policy for purposes of auditing financial statements.”

The problem, according to the Examiner’s report is that E&Y was okay with the treatment based on the theory:

Ernst & Young’s view, however, was not based upon an analysis of whether actual Repo 105 transactions complied with SFAS 140. Rather, Ernst & Young’s review of Lehman’s Repo 105 Accounting Policy was purely “theoretical.” In other words, Ernst & Young solely assessed Lehman’s understanding of the requirements of SFAS 140 in the abstract and as reflected in its Accounting Policy; Ernst & Young did not opine on the propriety of the transactions as a balance sheet management tool.

According to Lehman’s Global Financial Controller Martin Kelly, “Ernst & Young ‘was comfortable with the treatment under GAAP for the same reasons that Lehman was comfortable.'” Don’t you love it when things work out like that?

Ernst & Young has issued a statement that simply addresses the final audit that the firm performed: “Our last audit of the company was for the fiscal year ending Nov. 30, 2007. Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.”

SO! E&Y is in a bit of a pickle. Civil suits have already been filed against both firms and more investigations will certainly be coming. If you’ve got some time over the weekend, take a flip through this beauty. We know there is accounting porn in there for some of you.

Report Details How Lehman Hid Its Woes as It Collapsed [NYT]
Examiner: Lehman Torpedoed Lehman [WSJ]
Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report [Jenner & Block]

Why Isn’t Deloitte Ranked Higher on DiversityInc’s Top 50 List?

What a relief. We were really concerned that we would get half way through March without hearing about a list of companies being good at something that included the Big 4. Fortunately, DiversityInc comes to our rescue today with their list of Top 50 Companies for Diversity for 2010.

Aaaand as you might exall present and accounted for, although some firms may wish to be higher(?). How does one determine success on these lists? Just being on it? Making the top ten? Is it an honor just to participate in the survey?

Speaking of the survey, the website describes the methodology so you can get an idea of how this particular jumble falls together. The survey is broken down into four areas:


• CEO Commitment

• Human Capital

• Corporate and Organizational Communications

• Supplier Diversity

Digging further, we found more details:

The survey consists of more than 200 empirical questions (no subjective or qualitative information), which have predetermined weightings. Ratios between key factors, such as demographics of managers compared with managers who received promotions, play a significant factor in determining point scores. Companies must score above average in all four areas to earn a spot on the list. CEO Commitment is the most heavily weighted area because if a company lacks visible leadership, its diversity-management efforts will fail to be a priority.

SO! While this explains some things, it certainly brings up more questions. Since we spend the majority of our day perusing the web for every instance of Big 4 CEOs simply breaking wind, we’d like to think that any “CEO Commitment” as it relates to diversity would be noticed by us or our team of monkeys that work around the clock.

That being said, we’d be hard pressed to find a bigger diversity go-getter than Deloitte’s CEO Barry Salzberg. The man is tirelessly pursuing diversity at every waking moment. Even after Deloitte announced its freshly minted Chief Diversity Officer, Bar gave a speech earlier this week on as part of the DiversityInc festivities demonstrating that he’s still on this.

So then, our question is, how does Ernst & Young rank 5th, PwC 6th, KPMG 15th and Deloitte bring up the rear at 25th?

Perhaps the other firms display diversity fliers with their CEOs mugs on them to serve as constant reminder to all employees of the diversity in their firm but if CEO commitment is measured by MSM talking points, how does anyone beat Barry Salzberg? The only thing we can think of is there is some sort of secret anti-male pattern baldness bias at DiversityInc that quietly knocks Deloitte down the list. Sure Dennis Nally is slowly going Costanza there but Moritz in the tighty-whities probably made up for it.

So the efforts of Deloitte’s diversity commitment are rewarded but did they get the recognition they deserved?

The Unveiling of the 2010 DiversityInc Top 50 [DiversityInc]
The DiversityInc Top 50 Companies for Diversity [Full List]

The Purpose of PricewaterhouseCoopers’ New HR Service in India Isn’t Entirely Clear

PwC has launched a new HR service in India and one can only speculate as to the inspiration behind staging the move there (I’ll give you a hint: it starts with Satyam and ends in fraud) but let’s take a look at the official spiel before we rush to judgment.


India’s Financial Express:

Global audit firm, PricewaterhouseCoopers, announced the launch of its human resources service ‘Saratoga’ in India along with India Human Capital Effectiveness survey (HCE), a top company official said.

“Saratoga is the most extensive database of HR metrics available globally. We are launching it in India and we have already got an immense response from Indian companies,” PricewaterhouseCoopers’ Partner and Global HRM network leader, Richard Phelps, told PTI here.

On the surface, Saratoga looks like little more than an inventory count of companies’ human capital, which means something when you have to keep a leash on a bunch of customer service guys with fake first names (how else would you keep track of them?).

See, PwC cares. They care that JP Morgan outsources call center jobs to India – I know this because I’m a Chase customer (leave me alone) and have had the misfortune of dialing in. Meanwhile, JPM’s off-shore hiring spree continues and someone’s got to handle all that “human capital”, why not PwC?

I don’t care that some guy in India has a job, I care that he calls himself Patrick and pretends to have a bizarre hybrid Texas/New Jersey accent. Is there going to be a check box on these PwC Saratoga metrics for guys who fake 50s-style American first names from Indian call centers?

I’m not bitter. It’s good that PwC cares about the global community and wants to reach out to facilitate cheap labor for its audit clients like JP Morgan (for the record I use BofA too and they have the decency to hire air-headed middle-state chicks named Kelly and Sarah).

Could you imagine what would happen if the Fed stepped in and barred PwC from auditing anything that’s moving here in the US? Hell, it happened in India.

Good luck with that human capital census or, uh, whatever it is, PwC. I mean that.

We’re Not Convinced That CFOs Mean What They Say When They Switch Audit Firms for No Apparent Reason

Today in boilerplate press releases, MedAssets dropped BDO as its auditor for the bigger and bluer KPMG and the CFO punted on giving a real reason as to why.

“We are very fortunate to have had the pleasure of working with BDO Seidman for many years, including during the period of time covering our initial public offering in 2007,” said Neil Hunn, Executive Vice President and Chief Financial Officer, MedAssets. “BDO has been a tremendous business partner for us and instrumental in our success. MedAssets has experienced tremendous growth, especially over the last few years, and we expect this trend to continue. As such, we feel that KPMG is best suited to serve our Company and stockholders in the future. We look forward to our new relationship with KPMG.”

So if we were translate this statement, basically it sounds like MedAssets wants a big firm because the business is growing like gangbusters and they simply can’t be held back by a second-tier firm like BDO.

Or maybe we’ve got it dead wrong. Maybe MedAssets is spooked about BDO’s chances in the Banco Espirito appeal. Maybe KPMG’s Atlanta office is desperate for work and lowballed the audit fee. Feel free to share your own speculation but we’re sure as hell not buying the statement that a firm (in this case, BDO) ‘has been a tremendous business partner’ and ‘instrumental in our success’ and just gets up and dropped because ‘tremendous growth’ is expected to continue. Is BDO really that incapable of continuing to serve the company?

Basically, we are asking for more honest language in SEC filings and press releases.

MedAssets Engages KPMG as Auditor [Press Release]
8-K [SEC.gov]

Luxembourg Court Ruling Nullifies Madoff Investors’ Claims Against Ernst & Young, UBS

Of course the investors are appealing but one win at at time, amiright?

The suits were filed in the fall by investors who lost millions in the LuxAlpha Sicav-American Selection fund which had 95% of its fund invested with Bernie Madoff. The fund claims that it had $1.4 billion in net assets a month prior to Madoff’s arrest.


UBS acted as the custodian while E&Y was the auditor and were sued for “seriously neglecting” their supervisory duties for the fund. Investors in the fund filed more than 100 lawsuits against the two companies.

Luxembourg’s commercial court said in a ruling today concerning 10 test cases that investors can’t bring individual lawsuits for damages. The court said it’s up to the liquidators of the funds that invested with Madoff to seek the “recovery of the capital assets.”

In other words, UBS and E&Y, you’re going to get sued by Irving Picard de Luxembourg rather than 100+ pissed off individuals whose life savings went *poof*. Setting legal precedent aside, taking emotion of the equation works wonders for making an argument.

UBS, Ernst & Young Win Bid to Block Madoff Lawsuits [Bloomberg BusinessWeek]

Earlier:
Ernst & Young Is Thankful for Lawyers, Possibly Toblerones

Imprisoned Ex-KPMG Partner Sentenced to 57 Months for Defrauding IRS

Today in insult to injury news, Bob Pfaff, who pleaded guilty back in the fall for conspiracy to defraud the IRS, was sentenced today to 57 months for his tax untruthiness. He was also ordered to pay the IRS over $1 million in restitution. The bright side for Pfaff is that Judge Richard Berman ordered that only three months of this new sentence would be served consecutively. After 97 months, an additional three will be nothing. That’s just half of a baseball season.


Pfaff is already serving a 97 month sentence for his role in the KPMG ‘tax shelter mill’ that originally involved 17 KPMG executives. Charges were dropped against all but four of the accused after it was determined that prosecutors had pressured the Firm to not pay their legal bills.

Seemingly this marks the end of this particular KPMG/tax shelter case. Another recent case involves Daryl Haynor, a partner in the Tysons Corner office. Mr Haynor was indicted back in the fall for allegedly conspiring to defraud the IRS to the tune of $240 million.

Ex-KPMG Partner Pfaff Gets 57 Months for Tax Crime [Bloomberg BusinessWeek]