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Friday Footnotes: The PCAOB-to-Practice Pipeline and Audit Quality; Ball Extension; Tim Ryan’s Replacement | 1.12.24

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Long Reads

How Auditor Deloitte Missed A Nigerian Company’s Massive Fraud [Forbes]
Hindenburg Research, known for sniffing out corporate scams, took aim in June at an obscure Nigeria-based outfit named Tingo Group. Hindenburg rolled out a report with a title that left little to the imagination: “Fake Farmers, Phones, and Financials – The Nigerian Empire That Isn’t.” But Hindenburg didn’t just call Tingo a clear-cut scam. The short-seller also threw a spotlight on the auditor who green-lit Tingo’s financials, challenging its competence, and perhaps its willingness, to see the truth. “The issues in Tingo’s financials are glaring enough that we’d expect they could have been spotted by any semi-conscious finance undergrad with severe vision loss,” Hindenburg wrote. “These issues were apparently not glaring enough for the company’s auditor, however.” The auditor in question was Deloitte, the behemoth Big Four accounting firm with annual revenue of $65 billion through a global network that stretches from Amsterdam to Zhengzhou.

Hindenburg’s exposé on Tingo, echoed by the SEC allegations, hints at a more unsettling issue. Auditors get their paychecks from the companies they’re supposed to keep honest. (Tingo paid $1.6 million in audit fees in 2022.) This setup can lead to auditors playing it safe, avoiding the hard-hitting questions that could upset a paying customer. How did Deloitte, the auditing heavyweight watching over Tingo’s books, miss a scam that Hindenburg, an outsider, called out as painfully obvious?


Do former regulators improve the quality of audits? []
Large accounting firms, including the Big Four, have been hiring more and more PCAOB employees, especially since 2010, when the Board expanded its remit to include internal control audits. “Firms began moving in the direction of hiring significant numbers of PCAOB employees after a string of weak inspection reports in the early 2010s, ostensibly to get a sense of what they could do to better comply with auditing standards,” says Steve Maex, an assistant professor of accounting in the Donald G. Costello College of Business at George Mason University. Maex’s recently published paper in Review of Accounting Studies, co-authored with Jagan Krishnan and Jayanthi Krishnan from Temple University, evaluates the effects of such hiring. The researchers tracked the audit quality of large accounting firms over the period in which this hiring emerged and explored the relationship between the hiring and a variety of audit outcomes. “There’s no single proxy that can be used to capture the many dimensions of audit quality,” Maex points out. So, the team used various indicators, including clients’ financial restatements, discretionary accruals (disparities between reported income and cash flow), the accuracy of internal control opinions issued by the auditor, and audit fees. The researchers found that clients of firms that hired ex-PCAOB employees issued fewer restatements in general, which suggests fewer egregious errors on the part of the auditor.

Financial Reporting Council fines against auditors nearly doubled in two years [City A.M.]
The Financial Reporting Council (FRC) levied record-level fines against auditors over 2022/23 after it promised to become more “forceful” after it was heavily criticised for the slow pace of its investigations. According to a report by Thomson Reuters, the accountancy regulator has fined auditors £33.2m in 2022/23, slightly up from £32.8m in 2021/22. However, the latest figure is nearly double that of the £19m recorded over 2020/21. When the Financial Reporting Council’s costs were added, which the auditors have had to pay, the total penalties levied by the FCA hit £40.4m ($51.5 million USD) last year.


EY extends tenure of UK boss for second time [Financial Times]
EY’s UK boss Hywel Ball has been handed a further extension to his tenure as chair, with the board of the Big Four firm granting him a second exemption to continue past its mandatory retirement age of 60. Partners at the accounting and consulting firm were told at the end of October that Ball would receive a one-year extension to lead EY until June 2025, according to people familiar with the matter. The Financial Times revealed his first exemption last year. The latest extension for the 61-year-old, who has run the UK business since 2020, comes as EY’s policy of requiring partners to retire at the age of 60 faces scrutiny.

Grant Thornton UK CEO resigns unexpectedly [AccountancyAge]
During his tenure, David Dunckley managed to stabilise Grant Thornton after his predecessor resigned following attacks on her leadership style and socialist agenda. In a surprising turn of events, Dunckley has announced his decision to step down from his role as head of Grant Thornton UK. Dunckley, who has been at the helm of the firm since 2018, will be succeeded by the firm’s chief operating officer Malcolm Gomersall, until a permanent replacement is found. Dunckley’s decision to step down came as a surprise to many, as he was expected to remain in his role until the end of 2026.

PwC Narrows Field to Three Candidates to Succeed US Leader Ryan [Bloomberg Tax] PwC LLP is narrowing in on three candidates for US partners to choose among when they select the firm’s next senior partner, including two women, according to people familiar with the selection process. Kathryn Kaminsky, who co-leads the firm’s assurance practice; Jenny Koehler, PwC’s strategy leader; and Paul Griggs, US markets leader Kathryn Kaminsky, US Trust Solutions Co-Leader, Jenny Koehler, Strategic growth and business development leader, Paul Griggs, US Markets and sponsor of My+ people strategy are currently the finalists for the role, according to multiple sources familiar with the nominating committee’s deliberations. The three partners are vying to succeed Tim Ryan, PwC’s senior partner who is set to retire this summer after two terms helming the Big Four firm. All three contenders currently serve on Ryan’s leadership team and have a background in auditing. US partners will have the final say who will lead the firm next, but it’s not clear when any vote might take place. Ryan’s successor would begin their term in July.

Ed. note: PwC reached out to us late Friday to request a correction on job titles. We’ve struck out the language used by Bloomberg and replaced it with what was provided to us by PwC in italics.


Taxpayer advocate: IRS again fails tax pros with PPS call answer rate [Journal of Accountancy]
The IRS’s improved metrics on answered phone calls do not account for all lines, and the Service’s performance again was particularly abysmal on the Practitioner Priority Service (PPS) line that CPAs and other tax professionals use, National Taxpayer Advocate Erin Collins said Wednesday in her annual report to Congress. It was harder to reach the PPS line than other lines, Collins wrote, which is especially damaging because practitioners often try to resolve issues for several taxpayers in one call. About 500,000 tax professionals prepare returns for over 85 million taxpayers, she noted. “Requiring tax professionals to call back repeatedly and wait on hold not only inconveniences them but often results in additional costs to taxpayers for the time their tax professionals bill for waiting on hold,” she wrote. “The IRS should prioritize improving service on this phone line.”

Two Tax Shelter Promoters Sentenced to 25 Years and 23 Years in Billion-Dollar Syndicated Conservation Easement Tax Scheme; Two More CPAs Plead Guilty [Department of Justice]
Two men were sentenced Tuesday for crimes arising from their organization, promotion and sale of abusive syndicated conservation easement tax shelters. Jack Fisher, a certified public accountant (CPA) who began selling units in his abusive tax shelters at least as early as 2008, was sentenced to 25 years in prison. James Sinnott, an attorney who joined Fisher’s scheme in 2013 and oversaw the massive expansion of the tax shelters’ fraudulent deduction amounts claimed from the IRS, was sentenced to 23 years in prison. Also today, Victor Smith and William Tomasello, both Atlanta-area CPAs, pleaded guilty to conspiracy to defraud the United States.


Mentoring and Preparing Students and Young Professionals for the CPA Evolution [The CPA Journal]
Current undergraduate/graduate students eligible to sit beginning January 2024 or later. Mentors of interns or students working towards their accounting degree, should counsel them to identify and select courses that may assist with developing the key skills/competencies and learning objectives that the new CPA exam format emphasizes. Candidates should also consider whether a graduate degree program or an accelerated degree program are beneficial; specifically, if the graduate or accelerated degree program covers content included in the core and discipline sections.

Illinois CPA Society Announces Mary T. Washington Wylie Internship Preparation Program Scholars [ICPAS]
The Illinois CPA Society and its charitable partner, the CPA Endowment Fund of Illinois, are proud to recognize the 12th and largest cohort to date to complete its award-winning Mary T. Washington Wylie Internship Preparation Program. This highly competitive program is renowned for preparing promising Illinois-based racial and ethnic minority college students interested in pursuing careers in accounting with the skills needed to obtain their first accounting positions and ultimately pursue the certified public accountant (CPA) credential. Congratulations to the 41 scholars from this year’s class.


CFOs look to tech, M&A to foster growth: Deloitte [CFO Dive]
Finance chiefs marshaling their plans for 2024 are looking to emerging technologies, digital transformation and strategic M&A deals to help them boost growth as they continue to navigate a challenging macroeconomic environment, according to a quarterly survey by Big Four accounting firm Deloitte. Eighty percent of CFOs said they plan to integrate more automation or digital technologies into their operations in 2024, while approximately one-third of finance chiefs said M&A would be a significant part of their growth strategy this year, Deloitte’s Q4 CFO Signals survey found.


Gifting Leave to One in Need is a Good Deed Indeed [Economic Times of India]
In case you were one of those left with unused leaves in 2023, read on. Some companies are offering such employees a chance to gift their leaves to colleagues who are in need of time off and, in return, get incentives. According to the findings of a recent Deloitte survey shared exclusively with ET, the reasons for adopting such a policy include promoting a culture of camaraderie and collaboration.

EY offers 25% bonus for UK consulting staff to take time off [Financial News (subscription)]
EY is set to pay some of its UK consultants to four to 12 weeks away from the business, the latest sign of pressure on a strained market for advisory services. The Big Four firm has launched a “time out summer programme” for financial services consulting staff, according to an internal memo seen by Financial News.


EY Fails on Challenge to DOJ Recommendation It Drop Contract Bid [Bloomberg Law (subscription)]
Ernst & Young LLP jumped the gun when it filed a protest to a Justice Department recommendation that it drop its contract bid to provide professional and IT support services after its first phase submission was rated “low confidence,” the GAO said. “While the agency’s future actions in this matter may create a set of facts appropriate for our consideration,” EY’s current protest, “based on its assumptions regarding the agency’s future actions, is premature and will not be considered,” the GAO said in a decision released Tuesday. GAO decision here.

KPMG Wants Credit Suisse Suit Tossed After Cheating Case Dropped [Bloomberg Tax (subscription)] KPMG LLP should be removed from an investor suit accusing former Credit Suisse leaders of mismanagement now that criminal charges have been dismissed in a separate case involving the auditor, the firm argued in a court filing Tuesday. Federal prosecutors in December dismissed fraud charges against KPMG’s former national managing partner for audit quality and a former employee of the US audit board for their role in a scheme to cheat on the firm’s regulatory inspections. The lack of a crime undercuts Credit Suisse Group AG investor claims that the audit firm violated racketeering laws, KPMG told Judge Colleen McMahon.


How consultants are using AI for emails, PowerPoint and other odd jobs [Australian Financial Review]
Big professional services firms are racing to position themselves as leaders in generative artificial intelligence by rolling out custom-built virtual assistants to their employees that can craft emails and PowerPoint presentations, analyse corporate data and write code.