Tag: Auditors

PCAOB, SEC to Be All Up in China’s Business Next Week

Perhaps you’ve heard that some U.S.-listed Chinese companies have had some trouble with their financial reporting. Often times this leads to CFOs quitting, auditors resigning or workpapers being held hostage. None of which are good. Occurrences such as these have been going on for a little while and more recently the SEC admitted that they had, in fact, heard something about it. Perhaps even more surprisingly, a Chinese official also confessed that some of these companies weren’t exactly on top of their shit and in some may not have the faintest idea of what they’re doing.

All this excitement has finally gotten the teams at the SEC and PCAOB worked up enough that it has been decided that they’re popping over to Beijing to meet with the country’s Ministry of Finance and the China Securities Regulatory Commission next Monday and Tuesday to see what’s what.

“This meeting is the commencement of our accelerated efforts with the People’s Republic of China to forge a cooperative resolution to cross-border auditing oversight. I believe we share a common objective with Chinese regulators to protect investors and safeguard audit quality through our mutual cooperation,” said James R. Doty, PCAOB Chairman.

The delegation will be led by Board Member Lewis H. Ferguson and include staff from the PCAOB’s Office of International Affairs and Division of Registration and Inspections, and the SEC Office of International Affairs and Office of the Chief Accountant. The delegation will meet with senior leadership of the Ministry of Finance and the CSRC.

“The purpose of this meeting is to provide an opportunity to exchange information about how each country conducts inspections of auditing firms and to move toward a bilateral agreement providing for joint inspections of China-based auditing firms registered with the PCAOB,” said PCAOB Board Member Ferguson.

Reuters reports that Ferguson considers the trip a “confidence-building exercise,” just in case you were still a little queasy on Sino-Forest, et al.

Statement on Delegation to China [PCAOB]
U.S. audit watchdog, SEC plan Beijing visit [Reuters]

Deloitte Auditor Wants to Know if Joining KPMG’s IT Advisory Group Is a Good Idea

Editor’s Note: Have a question for the career advice brain trust? Email us at advice@goingconcern.com.

Hello C,

So with the new found (and welcome) love for Advisory on goingconcern.com I feel comfortable posing my question:
I am currently a 2nd year at D&T audit in Dallas, I am contemplating a move to KPMG’s IT advisory, I currently make $54k and KPMG has offered me $60k. I have some IT in my background and enjoy IT related stuff but don’t want to be stuck in Audit support as an IT Advisory Associate. KPMG has promised me the ability to move within Advisory…so here is my list of questions:

1. Would that switch be the right move for my long term career growth?

DWB:I cannot speak clearly on what your long term career growth can or cannot be without knowing what your goals are. Being that you’re two years into your career, I’m not expecting you to fully know either. That said, I suggest that you look at this in two ways: 1) what are you long term career options if you stay at DT, and 2) what are your options if you leave and enter the advisory practice at KPMG? Weigh these options with your roughly outlined career goals and take it from there. In your favor is the fact that Dallas is a larger market for both firms, so options are not as limited as they would be elsewhere.

2. Should I take the opportunity to progress towards specializing in an ERP and get more technical with IT or eventually switch to M&A/Forensics (another interest of mine).

DWB: Listen – playing first base for the Yankees is an interest of mine but it simply isn’t going to happen. I’m not saying you can’t bounce over to M&A or Forensic (drop the “s” from the name and realize they’re two separate groups at KPMG), but I am hinting at the fact that it is going to be difficult. Advisory lines of business are BOOMING right now for the Big 4, which means they have the ability to go to market and hire individuals with relevant talent. Also, should you move out of IT, that’s just one more position KPMG would have to fill as well. I’m not doubting your talents, skillset, and drive, but I don’t plan on batting clean up anytime soon.

3. What do I do after a few years of KPMG IT Advisory experience? would I be considered for Controller type (because of my Acct degree and Audit exp) jobs or only CIO career path (due to the IT tag)?

DWB: If the market dips again, prepare to fight for your current job. Advisory lines at Big 4 are the first to get slashed when the going gets tough (more discretionary lines of business, too dependent on an active client base, etc.), and IT Advisory at KPMG was slaughtered back in 2008/2009. Also, your two years of audit experience hardly prepare you to compete with senior staff and manager public accountants interviewing for the same controller roles.

4. Am I getting paid a competitive salary at $60k?

Honestly, I have no idea. Can someone in the peanut gallery chime in? What are experienced associates in Dallas making in IT advisory these days? If my gut tells me correctly, you’re a steal for KPMG. One more thing I want to harp on, although I touched on it above in #2:
“KPMG has promised me the ability to move within advisory.” This line is out of the Recruiting for Dummies. The different business lines in Big 4 advisory – as close as they may work together – are very specialized in their skill sets. Being an expert on SAS 70 reviews does not automatically make you an expert with regards to historical due diligence analysis and breaking down a company’s EBIDTA numbers.

One Might Get the Idea That Glen Rose Petroleum Corp. Fired Its Auditor in Favor of a Firm That’s Less Likely to Issue a Going Concern Opinion

It’s not entirely clear why Jonathon P. Reuben’s services are no longer needed but you could easily conclude that the GCO wasn’t appreciated.

On June 20, 2011, the Audit Committee of the Board of Directors of Glen Rose Petroleum Corporation (the “Company”) approved the termination of services of Jonathon P. Reuben CPA, An Accountancy Corporation (“JPR”), effective immediately.

JPR was the independent registered public accounting firm for the Company for the fiscal years ended March 31, 2010 and 2009. The reports of JPR on the Company’s financial statements for the years ended March 31, 2010 and 2009 did not contain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle, except that the reports of JPR on the Company’s consolidated financial statements as of and for the years ended March 31, 2010 and 2009 contained an explanatory paragraph which noted that there was substantial doubt as to the Company’s ability to continue as a going concern due to a deficit in working capital and incurring significant losses.

BDO will take it from here. Perhaps a nice welcome to the partnership gift for one of the newbies?

8-K [SEC via Citybizlist]

PCAOB Member Steven Harris Shares Some Thoughts on Auditors

For anyone that missed it earlier, the PCAOB issued a concept release today putting out some ideas for changes to the auditor’s report. The members of the Board also took the opportunity to say a few words and Mr. Harris saw an opportunity to point some things out:

The events of the last few years have been a case study of the inability of auditors to provide investors with any meaningful signal about increases in financial reporting risks when management assessments or estimates change dramatically, or when debates over significant accounting issues become difficult or contentious.

And he added the following for good measure:

Out of the ten largest bankruptcies during the financial crisis, only two had going concern opinions. During the year leading up to their bankruptcy filings, the market capitalization of the eight companies without going concern opinions declined from a collective $75.5 billion in the year prior to their respective bankruptcy filings to a collective market capitalization of just under $700 million at the time of their filing – a 99% loss in investor value.

[via PCAOB]

Here Are the PCAOB’s Ideas for Changes to the Auditor’s Report

Now before you get all worked up about these, the Board is inviting everyone to throw out comments before September 30th, make other suggestions and participate in a roundtable during the third quarter in case you are inclined to heckle them for making your life more difficult. Anyway, here’s what they’ve got:

• An auditor’s discussion and analysis;
• Required and expanded use of emphasis paragraphs;
• Auditor assurance on other information outside the financial statements; and,
• Clarification of language in the standard auditor’s report.

These are just suggestions mind you, so if you’ve got something better in mind, feel free to share below.

Fact Sheet

Broker-Dealers, Prepare Thyselves for More Intrusive Audits

SEC commissioners will vote today on proposed changes to broker-dealer auditing and reporting rules at a meeting in Washington. As with the 2009 rules, which tightened oversight of advisers’ custody of client assets after Bernard Madoff Ponzi scheme was exposed, the new changes increase oversight of the minority of about 300 broker-dealers who hold customers’ cash.

The proposals — which would be opened for a 60-day comment period — would require that a broker-dealer’s internal controls be checked by a registered public accounting firm and would let regulators examine the broker-dealer’s audits. Broker-dealers would have to file quarterly reports describing whether they have access to client money and how any access is controlled. [Bloomberg]

Ernst & Young Didn’t Appreciate the Threat of ‘Action’ By Audit Client Who Wanted Rubber-Stamped Financial Statements

Some clients treat their auditors like dirt. Given. To these haters, the financial statement audit is an onerous task that is mandated by the SEC and it amounts to an assault on liberty, capitalism and Ayn Rand’s genius. Accordingly, some clients try to push auditors around because typically they can. Today we bring you a rare example of a pushy-ass client going too far and an auditor standing up for themselves.

Ernst & Young resigned at the auditor of Life Partners Holdings Inc. in a letter dated June 6, 2011 after the CEO, Brian Pardo, WROTE IN A MEMO that he would “take action” against the firm if they did not sign off on the financial statement committee got wind of this little soapbox moment and promptly told E&Y about it.

From the 8-K Filing:

On June 6, 2011, Life Partners Holdings, Inc. (“we” or “Life Partners”) received a letter from Ernst & Young LLP (“Ernst & Young”) addressed to the Chairman of our Audit Committee (the “Resignation Letter”) confirming that it had resigned effective June 3, 2011, as our independent registered public accounting firm, as had been orally communicated to the Chairman of the Audit Committee on June 3, 2011. The resignation means that Ernst & Young will not certify our financial statements for the fiscal year ended February 28, 2011 (“Fiscal 2011”), which is necessary for completing and filing our Annual Report on Form 10-K for Fiscal 2011 (the “2011 Annual Report”).

The resignation follows a letter from Mr. Brian Pardo, our Chairman and CEO, to our licensee network (persons who refer purchasers to us) commenting upon the delayed filing of our 2011 Annual Report. The letter stated that it was Mr. Pardo’s position that we would “take action” against Ernst & Young if it did not promptly complete its audit and sign off on our financial statements without adjustment. Our Audit Committee wrote to Ernst & Young disclaiming the letter’s statements and asserting that the letter did not speak for the Audit Committee. Notwithstanding the Audit Committee’s disclaimer, Ernst & Young stated that the letter compromised its independence, and when considered with other recent developments, that it was no longer able to rely upon management’s representations, and that it was unwilling to be associated with the financial statements prepared by management.

Just for good measure, E&Y also stated that the company’s revenue recognition policy sucks, needs revised and they pulled their unqualified opinion over the 2010 financial statements. How’s that for “action”?

8-K [SEC via WSJ]

UPDATE:
As noted by the first comment below, the second comment on a post over at Deal Journal has what appears to be the memo in question from Brian Pardo.

Message From Brian Pardo

Yesterday we filed for an extension of the time to file our annual10K which should have been filed by May 15th because the Auditors have not yet completed their part. Quite frankly I am confident that the SEC is interfering with us by trying to unnerve the Auditors (by asking frivolous questions) which has added to the delay in getting out the 10K which is done and ready to release. They are trying to force us to “restate” our revenue recognition criteria; one that has been in use for ten years now.

Restating for any period, for any reason is viewed by the market as an implicit admission that prior quarters were probably misstated, which they were not. We do expect to file shortly, but the WSJ called last night to print another negative article.

There is no reason to restate because any proposed adjustment is immaterial under GAAP guidelines. E&Y signed off on our revenue recognition criteria policy last year and every other audit firm has as well since we went public in 2000. However some of your clients will probably read about it in the WSJ or in some other supposedly legitimate news media. And, the shorts will no doubt make a big deal about it.

My position is we either ratify the 10k as is very soon or we will take action against E&Y as well as with the SEC in Washington. It is time to put an end to this nonsense! I believe E&Y is trying to mitigate problems they may have with the SEC at our expense. For instance, we were never told by E&Y that they audited at least one large organization in the Madoff matter.

We are well within GAAP boundaries regarding every of aspect of our financial statements including all materials created, used or reviewed in relation to our published financial statements. We have ten years of doing this the exact same way and every Auditor from every firm for the entire time has signed off on every single 10k over those last 10 years.

Brian D. Pardo

PS You are authorized to share my statement with concerned clients and Licensees, but, not the press although the matter is in the public domain now.

Weikang Bio-Technology Felt Compelled to Issue a Press Release Announcing that Grant Thornton Successfully Verified Their Cash Balances with Bank Statements

Chinese companies certainly have had their share of problems with financial reporting in the U.S. but I had no idea that it would come to this.

The Audit Committee of the Board of Directors of Weikang Bio-Technology Group Co., Inc. (OTC Markets: WKBT.PK – News) (“WKBT,” “Weikang” or the “Company”), a leading developer, manufacturer and marketer of Traditional Chinese Medicine (TCM), Western prescription and OTC pharmaceuticals and other health and nutritional products in the People’s Republic of China, today announced that Grant Thornton (“GT”), one of the world’s leading organizations of independently owned and managed accounting and consulting firms, has verified that the cash amounts listed on the Company’s SEC filings for 2010 and the first quarter of 2011 are consistent with account statements obtained from WKBT’s banks directly by GT.

“Given the recent change in auditors and my new chairmanship of the WKBT Audit Committee, we authorized the Grant Thornton review to take place last week, and are now releasing the results,” said Jeffery Chuang, independent director and Chairman of the Audit Committee of WKBT. “Weikang continues to advance as a U.S. publicly-traded company and we are committed to high standards in the thoroughness of our financial information,” said Mr. Chuang, a U.S. CPA who is based in Southern California.

Obviously this is completely harmless compared to, say, threatening to take auditors hostage but as far as giant wastes of time go, it’s right near the top.

Another KPMG Client Gets ID’d in a PCAOB Inspection Report

Back in March, Bloomberg’s Jonathan Weil called attention to a PCAOB report that was pretty harsh on KPMG-Bermuda’s audit of Alterra Capital Holdings. At the time he wrote the column, KPMG, the PCAOB and Alterra weren’t talking but then Alterra filed a 8-K admitting that they were the filer in question.

Today Weil lets the cat out of the bag again and yes it’s another KPMG client, Motorola:lockquote>Four years ago, inspectors for the auditing industry’s chief watchdog discovered that KPMG LLP had let Motorola Inc. record revenue during the third quarter of 2006 from a transaction with Qualcomm Inc. (QCOM), even though the final contract wasn’t signed until the early hours of the fourth quarter. That’s no small technicality. Without the deal, Motorola would have missed its third-quarter earnings target.

The regulator, the Public Company Accounting Oversight Board, later criticized KPMG for letting Motorola book the revenue when it did. Although KPMG had discussed the transaction’s timing with both Motorola and Qualcomm, the board said the firm “failed to obtain persuasive evidence of an arrangement for revenue-recognition purposes in the third quarter.” In other words, KPMG had no good reason to believe the deal shouldn’t have been recorded in the fourth quarter.

This may sound familiar to some of you that read PCAOB Chairman James Doty’s speech from last week when he said this:

PCAOB inspectors found at one large firm that an engagement team was aware that a significant contract was not signed until the early hours of the fourth quarter. Nevertheless, the audit partner allowed the company to book the transaction in the third quarter, which allowed the company to meet its earnings target. Although the firm discussed the timing of the transaction with the customer, it failed to obtain persuasive evidence of an arrangement for revenue recognition purposes in the third quarter. The company had been an audit client of the firm for close to 50 years.

Weil writes, “KPMG has been Motorola’s auditor since 1959; it had been Motorola’s auditor for 47 years at the time of the Qualcomm deal.” So, yeah. How did he piece this one together? Elementary, my dear auditors:

Motorola’s identity was disclosed in public records last month as part of a class-action shareholder lawsuit against the company in a federal district court in Chicago. The plaintiffs in the case, led by the Macomb County Employees’ Retirement System in Michigan, filed a transcript of a September 2010 deposition of a KPMG auditor, David Pratt, who testified that Issuer C was Motorola. KPMG isn’t a defendant in the lawsuit.

Pratt also identified the Motorola customers cited in the board’s inspection report. It’s his deposition that allows me to describe the report’s findings using real names.

The oversight board said a significant portion of the company’s earnings for the 2006 third quarter came from two licensing agreements that were recorded during the last three days of the quarter. One was the Qualcomm deal that wasn’t signed until the fourth quarter. The board also cited other deficiencies in KPMG’s review of Motorola’s accounting for the transactions.

As is their wont, KPMG isn’t talking. Motorola isn’t talking (but maybe there’s another 8-K in our future?). The PCAOB, bound by the law -which, some say, is debatable – isn’t talking. My guess is that Jon Weil will continue to talk…er…write columns shining the lights on shoddy audits until the Board breaks its silence.

Dirty Secrets Fester in 50-Year Relationships [Jonathan Weil/Bloomberg]

You Can Add ‘Hospital Staff’ to the List of Positions That Can Do the Job of a Deloitte Auditor

A hospital in Winnipeg is suing Deloitte after an ATM scam went undiscovered for over ten years. Luckily some vigilant RN, janitor or cafeteria worker (it’s not clear from the article) noticed something amiss and alerted the proper authorities.

Police arrested a long-time hospital employee last year after she allegedly skimmed $1.5 million from automated teller machine (ATM) deposits between 2000 and 2010.

According to a lawsuit filed last week, the fraud was uncovered by hospital staff, not the auditor. The lawsuit accuses Deloitte & Touche of preparing financial statements not in accordance with “generally accepted accounting principles” and “materially misleading” the hospital about its financial position.

“MHC says that D & T owed it a duty in contract and owed it a duty of care not to act negligently or make negligent misrepresentations to MHC and to ensure that cash and liquid assets as reported in the financial statements were not materially misstated.”

According to the lawsuit, a former finance clerk deposited Worker’s Compensation Board cheques into the hospital operated ATM, understated the amount and pocketed the difference.

All this trouble and no one was even taken hostage. Not good, Green Dot.

Misericordia Health Centre files suit against auditor [Winnipeg Sun]

Memo to CFOs: Apple Voluntarily Switched Auditors and Things Are Just Dandy

Ron Fink at CFO Journal reports that CFOs that are breaking out in a rash due to auditor rotation anxiety might be having a knee-jerk hypochondriacal reaction.

You see, the company that the media loves to figuratively fellate, Apple, opted to put their audit business out to bid every five years and not only have costs gone down, “it has reported no problems with its financial results as a result of the change.” So now Apple is also more progressive and transparent with their corporate governance processes than your company. And you don’t have the iPad. [CFO Journal]

PCAOB Chairman James Doty Is Concerned That Some Auditors Either Don’t Care or Are Completely Ignorant About the Notion of Independence

As you may have heard, PCAOB Chairman Jim Doty gave a speech at the University of Southern California yesterday where he discussed among other things, the possibility of mandatory auditor rotation and changing the standard auditor’s report. The prospect of these two changes aren’t exactly something auditors are stoked about but some people are of the opinion that a) auditors like to get a little too chummy with their clients which leads to b) not taking the “independence” thing too seriously and c) the auditor’s report, in its current form, its pretty much worthless.

You can read Doty’s entire speech over at the PCAOB website where touches on all of these but here’s one example around independence that probably qualifies for, in Doty’s words, “[an] approach [to] the audit with an inappropriate mindset”

[An] audit partner’s self-assessment claimed that he “overcame long-standing barriers against non-audit services at [two audit clients] with a series of well-planned meetings and supporting presentations with the Audit Committee Chair, the full Audit Committee, the CEO and the CFO at both companies.”

In response, his reviewing partner noted that he was –

highly alert to cross service line opportunities and has successfully penetrated both of his accounts where few services had been
provided in the past. The results of these efforts were a number of proposals and wins but the efforts will likely impact FY 11 in [a] more significant way.

Anyway, there are other stories of bad auditor behavior, so check the whole speech if you feel so inclined. And while Chairman Doty admitted that “We don’t see these problems in all the files we look at,” it causes he and others to wonder if “these audit partners are unaware of, or simply unconcerned about, the independence rule that should make such considerations irrelevant to their compensation, and why a firm would allow such unawareness or unconcern to continue unabated.”

So flagrantly bending the rules to the point where they might as well be breaking or stupidity? Neither is too flattering.