The following tidbit of information about the aftermath of the Project Everest failure is going in Footnotes later today however we felt it important to call it out for those who skip the weekly linkwrap. Apologies for doubling down on EY news today.
WSJ published an exclusive about the post-Everest mess at the crack of dawn yesterday and honestly the whole thing is worth a read, especially so if you have an EY.com email address. The short of it is they spent a lot of money to make Everest happen and now they have to figure out how to patch the giant hole. The plan is to borrow money from banks and use ‘accounting maneuvers’ so that Everest’s failure does not completely destroy partner payouts. Oh and Americas Deputy Managing Principal Steve Payne apparently told staff “We need to do a much better job…in billing every hour we can get our hands on.”
Global leaders of the company sought to reassure partners that they are working to cushion the financial impact from the abandoned project. That cost mostly fell on EY’s U.S. and U.K. partnerships, which did the lion’s share of the work on the breakup.
Executives at EY’s global unit said on an internal call that they plan to use a combination of bank borrowing and accounting maneuvers to ensure that the dead-deal costs have “minimal” impact on partner earnings.
The global unit is funded by the scores of national firms that make up EY’s worldwide network. Under the plan, the global unit would borrow to repay around $300 million of costs incurred by the U.S. and U.K. firms.
“The new funding facility will provide additional flexibility to manage fund flows within our business and navigate the current market environment,” an EY spokeswoman said.
EY put about $600 million into Everest before it fell apart — half of that was internal costs — and leadership said the firm saved about $400 million along the way that would have otherwise been spent on projects that were deferred while they worked out the deal. EY also intends to reduce the impact of the costs by writing them down over several years, rather than take them as a single hit to earnings, said WSJ.
You know what, let’s throw this in too:
EY’s U.S. leaders this week emphasized the need for the firm to “stay close” to its clients, worried about the impact of the high-profile failure of the breakup project.
The appeal for unity from EY’s leaders didn’t convince some staff members. Many partners at EY’s U.S. arm remain furious that their hopes of a multimillion-dollar payout from the deal were thwarted by a handful of senior auditors, according to people familiar with the matter.
Remember on Mad Men when Lucky Strike ended its 30-year relationship with Sterling Cooper and Don had that desperate meeting with Raymond J. Beans of Heinz? Yeah. Are we going to get a full page ad in the New York Times telling us EY will never work with Carmine again?
~Update 2 includes statement from Claudius Modesti, PCAOB Director of Enforcement and Investigations
Today in obscure accounting oversight board enforcement actions, an Ernst & Young Manager in the Boston office was censured by the PCAOB for repeated violations o y to Cooperate with Inspectors, and Auditing Standard No. 3 (“AS3”), Audit Documentation.
The violations occurred when 27 year-old Jacqueline Higgins “(1) added documents to the working papers without indicating the dates that documents were added to the working papers, the names of the persons preparing the additional documentation, and the reason for adding the documentation months after the documentation completion date; and (2) removed a document from the working
papers after the documentation completion date.”
The timeline goes like this: E&Y was given notice by the PCAOB that an inspection of the unknown company’s audit was being performed on March 30, 2010 and the partner, senior manager and manager on the engagement were given notice on March 31, 2010. The inspection fieldwork was set to begin on April 19, 2010.
On April 5th, the three Ernsters began preparing for the inspection and that’s when problems started cropping up which led to more trouble. The order has the details:
First, Respondent reported to the Engagement Partner and the Senior Manager that a “Review Procedures Memorandum” was missing from the external working papers. The Engagement Partner and the Senior Manager directed Respondent to create and print out the missing document, and to backdate the document to November 30, 2009. The Engagement Partner and the Senior Manager directed Respondent to backdate her sign-off on this working paper to November 30, 2009, and to add this document to the external working papers.
17. Second, Respondent reported to the Engagement Partner that the tie-out of the financial statements contained in the external working papers was performed upon a pre-final set of financial statements. The Engagement Partner directed Respondent to remove this document from the external working papers, and to replace it with a newly created document which tied-out the final financial statements, and which the Engagement Partner directed Respondent to backdate to November 2009.
18. Third, Respondent reported to the Engagement Partner that the Average Forward Foreign Currency Contracts Calculation (“A3a Working Paper”) was missing from the external working papers. The Engagement Partner directed Respondent to gather the missing document, backdate it to November 2009, and add it to the external working papers.
19. Finally, Respondent reported to the Senior Manager that three checklists were missing from the external working papers. The Senior Manager directed Respondent to assemble the missing checklists as a single document (“HH6.8 Working Paper”) and to backdate her sign-off on this working paper to November 2009. The Senior Manager directed Respondent to add the document to the external working papers. The Senior Manager and Respondent reported to the Engagement Partner the facts and circumstances related to the creation of the HH6.8 Working Paper, and the Engagement Partner took no steps to cause the document to be properly dated, or to have it removed from the external working papers.
So those are the wonky details. Where this particular story is most interesting (in our opinion) is that Ms Higgins was, prior to this little mishap, on the fast track. According to the order, she graduated in May of 2005 and started with E&Y in September. She was promoted to senior associate in October of 2007 and then promoted to manager in October of 2009. Now, perhaps she was an audit-savant or perhaps not but in just over four years, she was a manager, which is a much quicker pace than usual.
Granted, she was still under the supervision of the senior manager and partner on the engagement but a young manager nevertheless. Now, you might be asking yourself, “what about the senior manager and partner? Are they getting their wrists slapped?” Conventional wisdom tell us, “absofuckinglutely” but the PCAOB isn’t saying. We were told by a spokesperson that the Board cannot comment on any other action related to this case.
As far as what a censure by the PCAOB actually entails, we were told that “It is an official reprimand from the PCAOB.” Some might call it a wrist slap but we’re damn sure you don’t want that in your file when you’re 27 years old. The action also states that Ms. Higgins was removed from the engagement in July 2010 and “at that time Higgins ceased participating in issuer audit engagements.”
Messages with E&Y spokesperson Charles Perkins and A message left with an attorney for Ms. Higgins were not immediately returned.
Ernst & Young has issued the following statement:
Our firm policy clearly prohibits persons from supplementing audit workpapers in circumstances like those described in the disciplinary order. When we determined that firm policy had been violated, we put the three individuals involved on administrative leave and subsequently separated the partner and senior manager. We have advised the PCAOB of these facts and have cooperated fully with the PCAOB throughout its investigation of this matter.
Based on the above, you might conclude that more disciplinary action will be coming from the PCAOB but like we said, they’re not talking.
UPDATE 2 – circa 3:30 pm: Claudius Modesti, PCAOB Director of Enforcement and Investigations, explained the seemingly light punishment in an email to Going Concern:
As to the censure, under the facts and circumstances, the censure is appropriate given Higgins’ relatively junior position on the audit team and her overall role in the conduct. We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”
It was then explained to us that the PCAOB has never explained a disciplinary action in this way: “We also considered the fact that she settled the matter without requiring the Board to commence litigation, which would have been nonpublic as required by the Sarbanes-Oxley Act.”
If that’s not quite clear, consider this: It is significant because, had Ms Higgins acted in the alternative (i.e. not settled), litigation would have been necessary and no one outside of the PCAOB, Higgins, her lawyers and E&Y would have known about the proceedings. Granted, it’s fairly common for lighter disciplinary action to result from a settlement but it also makes sense from a PR perspective (not to mention, transparency and investor protection) if the PCAOB can actually announce that they are taking action against people who break the rules. Part of the challenge the Board has faced is convincing anyone that they have teeth.
It will be interesting now to see if the senior manager and partner follow the same track as Ms. Higgins and how the PCAOB will respond to their cooperation (or lack thereof).
7 thoughts on “EY’s Gonna Borrow Money and Do Some Accounting Tricks to Spare Partner Payouts From Everest Fallout”
Bill every hour?!! They do that already in the EY. I can see the in-house janitors on reduced hours though…
No, we definitely don’t. Eating hours to maintain margin is the norm.
Are $400M in deferred projects really being sold in “savings”?
Another accounting standard in the pipeline and then “shit is going to hit the ceiling if we didn’t implement a 3 phase project”.
Look at the accounting firms’ audit opinion – it’s a shame. Full of caveats ie they did nothing and reporting on nothing, all done by management .
These and the rating agencies need a massive overhaul!
Borrow to pay failed transaction expenses and viola, net income is unchanged…..
Borrowed? At what interest rate? To quote the former VC of Tax at KPMG post Tax Shelter scandal “Our Partners want to get paid” Client confidence? Let me throw a project over the wall to Parthenon when they couldn’t even engineer their own divestiture at a cost of a half billion
The amount of incompetence and sheer brass balls present in EY leadership is astounding. Why Carmine and his crew weren’t run out of town on a rail after the stark failure of this split is beyond me. Money will be borrowed. Partners will be paid. All while THOUSANDS of those with ranks of senior manager and below will be laid off. I know this because many of my former coworkers who stuck around there are telling me that the axe is going to fall on the first batch in the US sometime this coming week or the next. Everyone there is nervous as hell because evidently, nobody below partner rank is being given any information… Only hearing bits of rumors. Must be scary times for those poor souls. Hopefully the good ones will get picked up by a quality firm, because you just KNOW the chopping decisions were run by someone with a set of parameters, an Excel sheet, and directions to lop off the first x rows.
Bill every hour?!! They do that already in the EY. I can see the in-house janitors on reduced hours though…
No, we definitely don’t. Eating hours to maintain margin is the norm.
Are $400M in deferred projects really being sold in “savings”?
Another accounting standard in the pipeline and then “shit is going to hit the ceiling if we didn’t implement a 3 phase project”.
Look at the accounting firms’ audit opinion – it’s a shame. Full of caveats ie they did nothing and reporting on nothing, all done by management .
These and the rating agencies need a massive overhaul!
Borrow to pay failed transaction expenses and viola, net income is unchanged…..
Borrowed? At what interest rate? To quote the former VC of Tax at KPMG post Tax Shelter scandal “Our Partners want to get paid” Client confidence? Let me throw a project over the wall to Parthenon when they couldn’t even engineer their own divestiture at a cost of a half billion
The amount of incompetence and sheer brass balls present in EY leadership is astounding. Why Carmine and his crew weren’t run out of town on a rail after the stark failure of this split is beyond me. Money will be borrowed. Partners will be paid. All while THOUSANDS of those with ranks of senior manager and below will be laid off. I know this because many of my former coworkers who stuck around there are telling me that the axe is going to fall on the first batch in the US sometime this coming week or the next. Everyone there is nervous as hell because evidently, nobody below partner rank is being given any information… Only hearing bits of rumors. Must be scary times for those poor souls. Hopefully the good ones will get picked up by a quality firm, because you just KNOW the chopping decisions were run by someone with a set of parameters, an Excel sheet, and directions to lop off the first x rows.