So all that fuss over at Colonial Bank? Accounting irregularities, natch. According to Reuters, “Colonial BancGroup Inc (CNB.N) said it faces a criminal probe by the U.S. Department of Justice (DoJ) related to accounting irregularities at its mortgage lending unit, and the struggling lender warned it may be put under receivership.”
The SEC is also taking a peek at the bank’s participation in TARP. Book cooking for taxpayer funds may have its poster child. Top notch, Colonial. Top notch.
Colonial BancGroup faces criminal probe, FDIC action [Reuters]
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Do You See What Happens?
The PCAOB was kind enough to issue a couple of examples this week of what happens when you don’t take your role as auditor seriously.
We wouldn’t dream of putting them both in one post so we’ll give you one in the morning to ponder and save the second for later right about the time you’re ready to flip out, so hang in there.
We’ve also done you the courtesy of reading (sort of) both of the orders so that you can remain fully chargeable (not counting the time you take to read this post of course):
Thomas Linden was a partner in the Chicago office of Deloitte and lead engagement partner on Navistar Financial Corporation (NFC). At the 11th hour, prior to filing the fiscal year 2003 10-K, the engagement team realized that assets, revenues, and net profits were overstated by $19.7 million.
Check out the rest, after the jump
Having a typical over-confident management team, NFC had already taken the liberty of announcing the fourth quarter earnings prior to filing the 10-K.
Because Tom Linden was a Big 4 Partner and thus impervious to any challenge he encounterd, he took the following action (all our emphasis):
• Initiated an increase of approximately 50 percent in Deloitte’s planned tolerance for misstatements in NFC’s reported financial results
• Authored, with the assistance of a member of the NFC engagement team, an NFC auditwork paper that inaccurately characterized the reasons for and circumstances surrounding the increase
• Failed to evaluate adequately the risk that NIC’s financial statements were materially misstated due to error or fraud
• Otherwise failed to act with the requisite due professional care and professional skepticism
Okay, so the last two are boring but the first two kinda, sorta give us this impression of what happened:
Dude finds out the numbers are bunk, client isn’t cool with telling their analysts (who NFC told that they had a kick ass quarter) that said numbers are bunk, so Dude up and decides to ABBACADABRA make the tolerance for misstatement 50% higher than it was for the entire audit (read: that’s a lot).
Then, after probably putting the proverbial (or possibly literal) gun to head of the “member of the NFC engagement team”, they wrote a workpaper that supposedly explained why the tolerance was all of sudden 50% higher but the rationale was something to the effect of “because we said so”.
So for all that tomfoolery (snap!), Linden gets fined $75,000 and can’t be associated with a registered accounting firm for two years and which point he can petition to be to be reinstated. Yow-za. To better times, Tom.
ORDER MAKING FINDINGS AND IMPOSING SANCTIONS In the Matter of Thomas J. Linden, CPA, Respondent. [PCAOB]
CFO Article Illustrates Internal Audit Cowardice & CCM Confusion
Editor’s Note: Robert Stewart is a former Big 4 auditor and ex-Marine who has since served in several executive management roles in both Internal Audit and Corporate Finance. He is also the founder and chief contributor to the online accounting and audit community, The Accounting Nation. Outside of work, he is a husband, father, brother, writ dequate aspiring triathlete.
Alright, CFO.com, with your latest contribution you’ve satisfied your requirement to pander to your internal audit constituents. If you put a little more effort into the headline, they might read it too. With an article paraphrase like:
A biotherapy firm’s continuous controls monitoring program, which is essentially run by its internal audit team, is credited with creating numerous (though unquantifiable) benefits
you’ve assured that nobody will read further. Talk about hard hitting journalism. Grabs ya’ right by the goods and begs you to read more…doesn’t it? Well, I did read more. Because I am an idiot. Because I need to get out more. Because I’m an internal audit junkie. And mostly because I just love the apathy directed at internal audit by “real” business people.
This article touts the benefits of implementing a Continuous Controls Monitoring system through the “success” story of Talecris Biotherapeutics, a $1.4 billion provider of injectionable medical treatments.
Here’s what I have to say about some points in the article:
• The quote that exemplifies why there is such apathy toward Internal Audit: “‘We can’t help [management] design controls or tell them that a control is the right one to have in place, but we can help them monitor it,’ states Mary Anne Tourney, IAD at Telecris.” This, of course, is bullshit. YOUR JOB IS TO HELP MANAGEMENT.
Don’t twist the IIA Standards to relinquish one of the tenets of your responsibilities (i.e. to offer “advisory” services to management). Hiding behind the independence argument is cowardice. Maybe if you acted like a member of management, they’d treat you like a member of management (and CFO.com might capitalize your title in its article).
• As for the program’s ownership, Tourney states that management designs the controls, ‘But we control the program in internal audit so the parameters of the tests don’t get changed without our knowledge.’ WTF? Where is your independence argument now? Listen, you can’t just apply the standards when they suit you and bend them when they’re inconvenient.
• Miklos Vasarhelyi, a Rutgers professor, states that quantification of the CCM program’s effectiveness is difficult and it’s “flaky” to do too much quantification. At another point in the article, Talecris declined to comment on how much it has spent on the CCM system.
This illustrates another point that internal audit practitioners need to understand better: it’s not just about having an en vogue system that you can brag to your fellow IA geeks about at the local IIA chapter meeting. It’s about spending the company’s money where you get the greatest return on investment. Calling the act of quantifying the ROI of the system “a bit flaky” illustrates why this guy is a professor instead of a CFO. Shareholders don’t care if you have the Cadillac of internal control systems unless it translates into increased shareholder value. This may not always drive the best behavior but let’s face it, that’s how the game works.
Look, the jury on CCM is still out in my book. Although I believe the foundation is sound, I’m not sure about the relative importance in the web of controls chosen by an organization to mitigate its risk. It is, after all, still a back-end monitoring tool that detects anomalies after they have occurred and I’m inclined to spend more of my money on the preventative controls rather than detective controls.
And to all you Internal Auditors out there, stop being afraid to consult management on their internal controls and make control recommendations. THAT’S. YOUR. JOB. You can’t implement or own the controls, but for god’s sake, share your knowledge to improve the organization. It’s the only way for internal audit to start getting some respect (it’s a good start anyway).
Look Man, Not Even Ron Paul is Buying Your Fed Conspiracy Story, So Can We Drop it?
Because we know you haven’t gotten enough of the whole Bank of America/Merrill Lynch deal-under-duress drama, we’re happy to report that Representative Darrell Issa of California (seen at left, with, we can only assume, a constituent, not a high-priced call girl or his staffer’s wife, or his Argentinean soulmate) isn’t satisfied by B-squared’s testimony and likely won’t be satisfied with Hank “Just call me Lance Armstrong” Paulson’s testimony that is scheduled for Thursday.
No, no. Issa wants more information, “[he] wrote to Treasury Secretary Timothy Geithner July 2 asking for all records surrounding an October 13 meeting and decision to use government bailout funds to buy equity in financial institutions.”
You think that’s good? He’s not done:
Issa also asked the Treasury to provide records and communications, including notes and e-mails from a range of officials, relating to the Bank of America-Merrill merger from August 1 though February 1. Issa also asked New York Attorney General Andrew Cuomo in a July 1 letter to provide transcripts of interviews with Paulson and any other communications with federal officials on the Bank of America-Merrill merger.
That’s right. Six months worth of emails and notes. Every single post-it that you did your best Jackie Treehorn sketch on MUST. BE. SAVED.
Issa, a believer in a Nixon-esque coverup at the behest of Bernanke, has clearly channeled his inner-Maxine Waters and will BE DAMNED if this is happening on his watch.
Lawmaker seeks more data in BofA-Merrill deal [Reuters]