Footnotes is a collection of stories from around the accounting profession curated by actual humans and published every Friday at 5pm Eastern. While you’re here, subscribe to our newsletter to get the week’s top stories in your inbox every Tuesday and Friday. See ya.
Staffing Drama
Signal Mountain Won’t Pay Accounting Firm For Extra Work On Audit [Chattanoogan.com]
Clients are the worst
The Signal Mountain Town Council has declined to pay an auditing firm extra money it said was due because of inadequate help from city employees in preparing the annual city audit.
There was discussion before voting whether or not to pay an extra amount for auditing services this year to Johnson, Murphey and Wright PC. The firm had a contract to perform the 2022 year-end audit for $26,135, but in order to complete it, the CPAs had to spend a lot of time doing extra accounting work that the previous town employees had failed to do, it was stated. For the extra hours, an additional $6,040 was billed. At a February meeting, CPA Paul Johnson explained the reasons for the increase.
Accounting problems in Signal Mountain began in 2021 and increasingly got worse, he said. His firm was told that the problems would get better, and they believed it. New employees who were meant to straighten up the problems were not hired until a couple of months before the audit began. The contract with his firm was based on cooperation with Signal Mountain’s personnel, he said. What was not done by the town had to be done by the accountants. They spent five days in Signal Mountain versus the two days that had been planned. He said that each year the firm had donated some time and that nothing had been said because it would have been embarrassing for the town. Instead, the town employees were praised for their cooperation and good work.
NW replaces firm after getting late audit [Wilkes Journal-Patriot]The Town of North Wilkesboro received a “clean” audit report on April 4 from an accounting firm that took full responsibility for submitting the report late. Craig Hopkins, audit manager of Winston-Salem-based Gibson & Co., P.A., told the town’s board of commissioners that “we’ve had some issues at the office. Not to air dirty laundry, but we’ve had some major impacts that have put us way behind the eight ball, and I apologize for that.” The audit for the 2021-22 fiscal year, which ended June 30, 2022, was due Oct. 31, 2022, but Gibson failed to meet eight different deadlines set by the town to complete the report. As a result, the town has broken ties with Gibson and hired another firm on April 4 during its bi-monthly regular meeting to do the next audit, for FY 23, which ends June 30.
Everest Aftermath
EY Breakup Plan Doomed by Miscalculations and Powerful Opponents [Wall Street Journal]
For months, Ernst & Young’s top leaders characterized their planned breakup of the firm as almost inevitable. All that was left were some adjustments around the edges and votes by partners in dozens of countries. They missed a brewing revolt at the firm’s biggest operation, where EY’s top leader and the architect of the breakup had deep ties. A handful of U.S. partners, prodded by a vocal group of EY retirees, scuttled the deal. The firm spent $600 million and more than a year working on the split, executives said on internal webcasts on Wednesday. That tally includes $300 million of payments to a raft of top-tier investment banks and law firms and other outside costs, as well as $300 million of partner time and other costs within the firm. Anna Anthony, a senior executive at EY’s U.K. arm, played down the spending on a call with partners, saying the cost was offset by $400 million that EY saved on projects that were delayed or deferred because of the proposed split.
Julie Boland, the EY leader in the middle of a ‘civil war’ [Financial Times Opinion]
When Julie Boland was picked last year to head EY’s US business, partners hoped she would end a period of infighting that had culminated in the exit of her sharp-elbowed predecessor, Kelly Grier. Boland was “Switzerland”, they joked, a neutral party with a reputation for consensus-building and an almost preternatural niceness of the kind found only in the US Midwest. Yet Boland now finds herself in the middle of what one former partner calls a “civil war”, having pulled the plug this week on a year-long project to spin-off the Big Four accounting firm’s consulting business. The aborted split consumed tens of thousands of hours of work and $600mn of partners’ money. Dubbed Project Everest, it was pushed by EY’s global leadership under chief executive Carmine Di Sibio and backed in principle by Boland herself. But Everest failed to find support among crucial players on the US leadership team, which opted to abandon the plan before 13,000 partners around the globe could have their say.
EY Decision to Call Off Auditing Split Leaves Investors Stranded [Bloomberg Tax]
Now that EY has deserted any plans to assuage these concerns through a thoughtful split, it’s created a contentious environment for other firms to pursue well-advised efforts to separate their business lines. Investors are left to navigate a field of potential landmines in the enormous roster of clients that the Big Four boasts, where auditor independence is understandably in question. The status quo of clients engaging with one firm for consulting and auditing has enabled breaches of fiduciary duties, misstatements, and fraud that only have served to roil investor confidence and markets overall.
Big 4
Wirecard boss threatened ‘legal steps’ against KPMG over special audit [Financial Times]
Markus Braun tried to woo a senior KPMG partner with an invitation to his luxury ski hut and later threatened to sue the Big Four firm as he tried to water down its special audit into Wirecard, a Munich court has heard. Sven-Olaf Leitz, an executive board member of KPMG Germany, told a panel of five judges on Thursday that the former chief executive of the payments group repeatedly lobbied to narrow the scope of the investigation into Wirecard’s outsourced operations in Asia. Braun and two other former senior executives of the disgraced German company are facing charges of fraud, embezzlement, market and accounting manipulation that are punishable with up to 15 years in jail.
KPMG fined 875,000 pounds for failures in Luceco audit [Reuters]
KPMG has been fined 875,000 pounds ($1.09 million) for its audit of lighting manufacturer Luceco (LUCEL.L) for its financial year to Dec. 31, 2016, Britain’s accounting watchdog said on Thursday. “The breaches included failures in the design and performance of audit procedures, failures to adequately review and critically assess the audit evidence obtained, failure to document the audit work and failures by the respondents to apply professional scepticism,” the Financial Reporting Council said in a statement.
Deloitte Can Keep $343 Million TSA Employee Support Contract [Bloomberg Tax]
Accenture Federal Services LLC lost its protest to Deloitte’s Transportation Security Administration contract award after the GAO rejected arguments that the agency did not properly evaluate whether the corporate officers were appropriate for the job at hand. The TSA was looking for a company that could further support their human resource efforts across the lifecycle of an employee. Accenture alleged that the consulting firm had unequal access to information that gave it a leg over Accenture in oral presentations.
PwC note advises clients to sell assets before Sinn Féin takes power [The Irish Times]
Now that’s client service! FYI: Sinn Féin is the largest Irish republican political party
A draft PwC report has warned clients to speed up the sale of assets and investments in their pension pots in order to protect their wealth ahead of Sinn Féin potentially being in power, with the party riding high in opinion polls. The report, dated in March and marked “draft and for discussion”, analyses the impact of the party’s proposals to increase income tax on high earners and gains on asset disposals by wealthy individuals, as well as its plan to reduce tax relief on large pensions. The paper said actions clients could take to mitigate the impact include accelerating “asset sales”, “pension contributions”, “gifts”, and bonuses and dividends.
Audit
Big Four’s Stormy Spring Resurrects Fear About Audit Quality [Bloomberg Tax]
The Big Four accounting firms are having a familiar moment in the public eye, and it’s not a flattering one. Auditors are tasked with reassuring investors that the companies they invest in are financially healthy, and warning them if they’re not. But auditing experts and critics are questioning whether Ernst & Young and KPMG, in particular, are focused enough on their core responsibilities of vetting the books of their corporate clients and protecting investors.
Integration and collaboration in risk management for internal audit [Wolters Kluwer]
As organizations become more globalized, complex, technologically advanced, and focused on regulations, stakeholder demand is sure to increase. To manage this complexity and elevated level of risk, each organization is driven toward risk transformation; that is, the recognition that traditional models of risk management audit, specifically integration, and collaboration, needs to be reviewed and revised to ensure continued success. The role of internal audit is critical to providing assurance on the effective identification and management of risks that organizations face; a landscape that appears to change dynamically nearly every day.
Audit committee oversight of non-GAAP financial measures [JD Supra]
According to audit firm PwC, non-GAAP financial measures play an important role in financial reporting, “showing a view of the company’s financial or operational results to supplement what is captured in the financial statements,” and help to tell the company’s financial story, as the SEC has advocated in connection with MD&A, “through the eyes of management.” Yet, they also have the potential to open the proverbial can of worms, subjecting the company to serious SEC scrutiny and possible SEC enforcement if misused.
Rubio Demands Answers from SEC and PCAOB on Safety Of U.S. Investments in China [Marco Rubio]
Senator Marco Rubio (R-FL) sent a letter to the Securities & Exchange Commission Chairman, Gary Gensler, and the Public Company Accounting Oversight Board’s Chairwoman, Erica Williams, to get answers on declining auditor independence in China. “As the CCP continues to systematically tighten its grip over all financial firms under its jurisdiction, I ask the SEC and PCAOB how they can be satisfied with current levels of Chinese and Hong Kong auditor independence, and how this effectively ensures American investors and fiduciaries that these are worthy investments fully compliant with U.S. law.” – Senator Rubio
Tax
Threat actors strive to cause Tax Day headaches [Microsoft]
Threat actors often take advantage of current events and major news headlines to align attacks and leverage social engineering when people could be more likely to be distracted or misled. Tax season is particularly appealing to threat actors because not only are people busy and under stress, but it is intrinsically tied to financial information. With U.S. Tax Day approaching, Microsoft has observed phishing attacks targeting accounting and tax return preparation firms to deliver the Remcos remote access trojan (RAT) and compromise target networks beginning in February of this year. Remcos, which stands for “Remote Control and Surveillance”, is a closed-source tool that allows threat actors to gain administrator privileges on Windows systems remotely.
What Happened When the IRS Got Audited [Wall Street Journal]
33% of the custom-built software applications critical to the agency’s operations counted as “legacy IT,” which means they relied on archaic code or tech so old that it makes the typical member of Congress look young. IT is the key to making the experience of interacting with the IRS more tolerable—or at least slightly less miserable.
EY Keeps Tax Expertise In-House for Auditors By Scrapping Split [Bloomberg Tax]
EY’s move not to split its audit and tax compliance practice from its consulting services will likely lead to higher-quality audits in the near term, relative to potential quality post-split, as their audit teams will have more tax experts available to them. Considerable research supports that auditors benefit from knowledge spillover gains when they also provide tax services to their audit clients. As perceived or suspected audit failures have come under a microscope in the US and abroad, any action that could worsen quality also deserves scrutiny. By keeping the tax experts in the combined firm, EY’s audit teams will continue to benefit from such arrangements by tapping those experts as needed.
Tax executives expect higher rates of audits, disputes: EY [CFO Dive]
Half of senior tax executives expect the number and intensity of audits and disputes to rise during the next two years as authorities in dozens of countries step up coordination while enacting new global tax rules, EY found in a global survey. Tax officials worldwide are aligning with an agreement among 130 countries to overhaul global tax rules by setting a 15% minimum corporate tax. The accord is scheduled for implementation next year. “Governments used to view tax as a largely sovereign concern but now they’re aligning in an unprecedented way to bring about another wave of global tax reforms,” Marna Ricker, EY’s global vice chair for tax, said in a statement. They “are working together in the same cooperative spirit to enforce both existing tax laws and get ready to enforce changes to come.”
In the Field
Rutgers Business School’s Road to CPA Program opens doors for accounting student [PR Newswire]
When mentor Terice Barnett met Rutgers Business School student Vivian Chou, she was struck by the undergraduate’s passion for accounting. “She was genuinely interested in the profession,” said Barnett, a supervising accountant at Withum. “She came ready with questions.” Chou was in the first cohort of students to participate in RBS-New Brunswick’s Road to CPA mentorship program. By speaking with Barnett twice a month, she gained insight into the work culture at a midsize firm, striking a work-life balance, and job specialization. She also received guidance on how best to earn the 150 credits required for the certified public accountant exam and choosing summer classes. “It was a great, personal experience,” said Chou, who is a Rutgers Business School junior.
Nothing left to chance: The life of a lottery auditor [Journal of Accountancy]
Imani Hudgins’ checklist contains agreed-upon procedures that she oversees in advance of the camera operators joining her in the Raleigh, N.C., television production studio. When the red light goes on, Hudgins stands just a few feet off camera to ensure that the live drawing goes off without a hitch. Four days a week on average, Hudgins serves as auditor for the NC Education Lottery (NCEL).
Brand Visibility In The Competition For Talent [Business Plus]
Didn’t they write the same thing about millennials when we entered the workforce 20+ years ago?
The first step towards effective graduate recruitment is ensuring you understand your target candidates. The typical upcoming graduate is in their early-mid 20s, making them part of Generation Z. Many of this this cohort looks for specific employer qualities. They want to feel challenged and need to know that their entry-level role will enable them to grow as a professional. They tend to have big, out-of-the-box ideas and they want to work somewhere that appreciates them. They think highly of firms that offer workplace flexibility and will often consider this when comparing different firms.
Law
EY, China Resources Land Deny Auditor’s Senior Managers Illegally Bought Developer’s Homes [Yicai Global]
Ernst & Young and China Resources Land have denied that senior managers at the Chinese arm of the global accounting firm illegally purchased at least 10 houses from the Chinese property developer at a low price. The accusation is false, the pair said in separate statements. EY, which is China Resources Land’s independent auditor, announced on its official WeChat account that it had taken legal action in relation to the anonymous accusatory letter circulating online, including filing a lawsuit. China Resources Land noted that it would pursue legal action against the person who wrote the letter. The letter claimed that with the help of China Resources Land’s local management team, most members of EY China’s leadership team, including the boss of the independent auditor who is responsible for the builder’s auditing work, illegally bought more than 10 houses in a project of China Resources Land in Haikou, Hainan province at the end of 2019 for much less than the cost of existing homes in the surrounding area to make money through speculation.
Supreme Court allows federal agencies to be taken to court [Courthouse News Service]
The Supreme Court was unanimous on Friday in ruling that constitutional claims against federal agencies can be brought in U.S. district court.
…
The second case came from Michelle Cochran, an accountant from Texas, who joined a small accounting firm that performed auditing work for companies in 2017. Cochran worked 10 to 15 hours per week at the Hall Group, during which she observed a toxic work environment that required employees to agree to unmeetable deadlines at the risk of termination. According to Cochran, David Hall, the firm’s principal, was responsible for these conditions, often berating employees.
Hall asked Cochran to become a nonequity partner in 2012 in order to continue working at the firm. Cochran would get no increase in pay for taking on this position, but she would be required to take on more responsibility and work longer hours. Cochran declined the offer and left the firm in 2013.
Three years after leaving the firm, the Securities and Exchange Commission filed an order instituting proceedings against Hall, Cochran and another employee for violations of the Exchange Act, including failing to comply with auditing documentation requirements.
The case was sent to an administrative law judge who ruled against Cochran, assigning her a $22,500 penalty and ban from practicing before the SEC for five years. The commission reviewed the ruling and vacated the judge’s decision, however, Cochran was assigned a new administrative law judge to undergo a new round of administrative proceedings.
Cochran sued the SEC in 2019 for constitutional deficiencies in the SEC’s administrative proceedings. The district court dismissed the case for lack of jurisdiction. At divided panel of the Fifth Circuit affirmed but that decision was vacated in favor of an en banc rehearing where the appeals court reversed, finding that district courts had jurisdiction to hear appeals like Cochran’s.
She asked the Supreme Court to uphold the Fifth Circuit’s ruling.
