Tag: Auditors

Should a Big 4 Audit Associate Ditch His Firm for a Client?

Welcome to the I’m-just-sick-about-the-Mad-Men-situation edition of Accounting Career Emergencies. In today’s edition, a Big 4 associate wants to apply for an analyst position at his client and wants to know if there will be backlash or independence issues that would accompany such a move. What’s in store for our turncoat? Let’s find out!

Have an interesting career dilemma? Need some ideas to cheer up the troops? Looking for some ways to offer some constructive criticism without resorting to veiled insults? Email us at advice@goingconcern.com and we’ll help you squash any temptation for name-calling.

Meanwhile back at traitor island:

Dear Going Concern,

I’m an Associate at a Big4 looking to do something more exciting. After checking out at my clients website, they seem to have a lot of entry-level analysts positions that interest me.

I was curious as to what your thoughts were about applying to one of your clients, and how my team might react if I get the job before busy season. Also, do I have to worry about independence issues if I’m only an Associate?

Thank you,
Extremely Bored Associate

Dear Extremely Bored Associate,

You think an entry-level analyst position sounds more exciting than Big 4? Your bar for thrills is awfully low, my friend. Never mind that you lack an inner Indiana Jones, I’m here to help you.

For starters, I’m not really sure what you mean by “just before busy season” since it’s March and busy season is all but over. However if you do ditch your team prior to busy season, some will sneer at your timing and then forget about you. And then there are the people that will hate you just on principle. You simply have to accept that as a cost of doing business. As far as independence is concerned, I don’t see any issues since you’re pretty low on pecking order but your firm may have a cooling off period or some other policy that forbids you from taking a position for a certain amount of time, so consider that your homework assignment.

Have said all that, I should tell you that it’s possible that your client may not be interested in offering you a job simply because you worked for the audit team. The argument being that maintaining a good relationship with their audit provider trumps any cog in the wheel so poaching you from their professional services firm is something they simply won’t do. Now are there exceptions? Probably. So the only the way to know is find out; run it up and see what happens. Good luck.

Brits Call Big 4 Auditors ‘Disconcertingly Complacent’ During Financial Crisis

Not exactly what you would call a compliment. And while they were at it, the House of Lords would like the Office of Fair Trading to investigate why the “Big 4” isn’t a “Global 6” or “Universal 8” or “Dirty Dozen” or something similar.

Of course auditors have claimed that did everything they were legally obligated to do and the HoL admits that’s kindasorta true but not really:

Its report said: “We do not accept the defence that bank auditors did all that was required of them. In the light of what we now know, that defence appears disconcertingly complacent.” It added: “It may be that the Big Four carried out their duties properly in the strictly legal sense, but we have to conclude that, in the wider sense, they did not do so.” Bank auditors and regulators had been guilty of a “dereliction of duty” by not sharing more information with each other on an informal basis before the crisis, the committee claimed. Auditors were either “culpably unaware of the mounting dangers” at banks or they were at fault for not sharing any concerns with supervisors, it added. Either way, auditor complacency had been a “significant contributory factor” in the banking meltdown, the committee said.

So in “the wider sense,” auditors best step up their game. Go forth.

Auditors criticised for role in financial crisis [FT]

Orient Paper’s Auditor Left Out That Part About Not Being Licensed

Details-shmetails.

In an 8-K regulatory filing and in a press release, Orient Paper said it was unaware of the problem until recently. Called the Davis Accounting Group, the Cedar City, Utah-based audit firm was supposed to be licensed by its home state, but its license lapsed in September 2008 and was formally revoked as of November last year. “During the time when Davis Accounting was retained by the Company, Davis Accounting represented that it was in good standing,” Orient Paper said in its press release.

Other than that, everything is kosh. Deloitte even said so. BDO Hong Kong is doing the restatements so everyone can pretend this never happened.

Orient Paper: Ex-Auditor Forces 2008 Re-Audit [TS]

Who’s Ready for Changes to the Auditor’s Report?

“We heard from investors that they want more information in the auditor’s report. Investor dissatisfaction with the current auditor’s reporting model should concern other constituents as well, including preparers, auditors and regulators,” said PCAOB Chairman James R. Doty. “Today’s report from our own staff, based on their discussions with a broad audience, will be vital to the Board’s effort to develop a meaningful proposal for change in a concept release. Our intention is to expose such a release as early as this summer.” [PCAOB]

Is Madoff’s Auditor Spilling His Guts?

Maybe! David Friehling was supposed to be sentenced last week but apparently it got pushed back again.

On November 3, 2009 Friehling pleaded guilty to various charges ranging from securities fraud to filing false reports to the SEC. He was to be sentenced for these crimes in February 2010 but because of his cooperation with the government, that was postponed until September 2010….that was then postponed until March 15, 2011….now that has been postponed until September 16, 2011. […] So what does a guy know who claims he did not know a lot? Is Friehling working with the Feds and Irving Picard (Madoff Trustee) on strong-arming Mets’ owners Saul Katz and Fred Wilpon? I doubt it. Can Friehling put a finger on one of the Bernard Madoff family members, who have yet to be charged criminally? Maybe.

Of course this could mean that Friehling also knows the location Jimmy Hoffa, the true identities of the participants in the Kenneday assassination and the Coke formula. Oh wait, everyone knows that one now. ANYWAY, the investigators may just be enjoying the anecdotes and would hate to see the poor guy shipped upstate. But most likely, he’s trying to save his ass from a sentence in FPMITAP like his #1 client received.

Giving Friehling the benefit of the doubt, he is cooperating to do the right thing now but he is also trying to get his sentence reduced in the process. With a fraud so large, I do not see how the Federal Sentencing Guidelines keep this guy in prison for less than 20 years.

Madoff Accountant — Now Auditing To Save His A#$ [Forbes/Walter Pavlo]

Chart of the Day (From Yesterday): Audit Failure Edition

As if the combination of March Madness and St. Patrick weren’t enough, this slide from yesterday’s Investor Advisory Group meeting should drive many to drink.


After yesterday’s findings on the usefulness (or lack thereof) of the auditor’s report, we bring you “The Watchdog that Didn’t Bark … Again.” It’s not as caught up on surveys and whatnot, as it is just pointing out some of the well, failures by auditors during the financial crisis.

The presentation was prepared by The Working Group on Lessons Learned from the Financial Crisis of the IAG and includes past comments from critics like Francine McKenna and Jonathan Weil on the expectations gap between auditors and basically everyone else. But don’t worry, it also presents the audit profession’s defense of itself including past statements from the Center for Audit Quality and PwC’s Richard Sexton the head of audit it the UK, who said this:

Now, one could come to the conclusion that Mr Sexton works for his clients first and not investors but you might not agree with that.

Now before all the Big 4 auditors get in a huff, the presentation has some criticisms of the PCAOB as well, specifically on the report the Board issued in September 2010:

If you can manage to stop drinking your breakfast for two, check out the full presentation below and discuss.

The Watchdog That Didnt Bark

Report: Nearly 20% of Financial Statement Users Think the Auditor’s Report Is Worthless

Last December, the PCAOB announced that they were going to kick around some ideas for a new and improved audit model. See, you may have heard about a few financial institutions that, it turned out, weren’t in such great shape. Funny thing – all these companies had clean audit opinions. This got people asking pretty awkward questions out loud like, “Are Auditors Irrelevant?” and making statements such as, “Get rid of [them]” AND “They add no value.”

The PCAOB listened to all this gnashing of teeth for about a year (or maybe their entire existence) and they came to the conclusion that some conversations needed to be had and even some changes might be appropriate. What exactly does that mean? Well, it sounds like we’ll hear some suggetions next Thursday when the next Standing Advisory Group meeting is held but in the meantime, the PCAOB’s Investor Advisory Group was plenty busy today, making several presentations that included some very interesting findings.


The first is “Improving the Auditor’s Report” that was prepared by Joseph Carcello of the University of Tennessee, Norman Harrison of Breeden Capital, Gus Sauter of Vanguard and Ann Yerger of the Council of Institutional Investors. Some items worth noting:

• 45% of respondents believe that the current audit report does not provide valuable information that is integral to understanding financial statements while 23% of respondents believe the current audit report provides valuable information.

• 18% believe the auditor report is of no use to them at all.

• Two selected comments from the report: “The statement feels very binary. Either a qualified opinion or not. Not a lot of incremental information once a company gets an unqualified opinion.” and “The audit report is valuable both because of what it says, i.e., an opinion, and by virtue of what it does not say, i.e., an exception.”

• Examples of disclosures that users were asked about: Disclosure of risks (“77% believe auditor should disclose areas with greatest financial statement and audit risk and the audit work performed in those areas”); disclosure of audit hours (“51% believe the auditor should not be required to disclose hours spent on individual financial statement accounts”); materiality thresholds (“56% believe the auditor should disclose quantitative and qualitative materiality thresholds and considerations”); audit partner signature (“44% support requiring the audit partner to personally sign the audit opinion”).

There’s more where this came from so check out the full presentation for some interesting reading. We’ll have more tomorrow.

The PCAOB Has Some Thoughts on This Chinese Reverse Merger Trend

In the past few months you may have heard a thing or two about small Chinese companies making their way into the U.S. by virtue of a reverse merger. If you’re not familiar, it was a speciality of the firm formerly known as Frazer Frost who got out of the business altogether because of a “culture clash” and “issues in the Chinese reverse mortgage practice area.”

All this has gotten the attention of the PCAOB who issued a Research Note (full document after the jump) today discussing t–more–>
Recently minted PCAOB Chair Jim Doty sprinkled in some thoughts for the press release but we obtained this statement from the Chairmn in case you anyone thinks they aren’t taking this shit seriously (my emphasis):

“As the PCAOB Research Note describes, small Chinese companies are increasingly seeking access to capital and trading in U.S. securities markets. The PCAOB has inspected the audits of many of these companies, when they were performed by U.S.-based audit firms. In some cases PCAOB inspection teams have identified significant audit deficiencies and, as necessary, made appropriate referrals for enforcement to protect investors’ interests in reliable audit reports.

“Many other such companies are audited by accounting firms in China. To date, the PCAOB has been denied access to determine through inspection whether such firms have complied with PCAOB standards. This state of affairs is bad for investors, companies and auditors alike. If Chinese companies want to attract U.S. capital for the long term, and if Chinese auditors want to garner the respect of U.S. investors, they need the credibility that comes from being part of a joint inspection process that includes the US and other similarly constituted regulatory regimes.”

Depending on how you perceive the role of auditors, this might seem like be a meaningless statement. But since China’s economy is going gangbusters and Big 4 firms are salivating at the thought of the fees associated with their introduction to the U.S. market, the temptation to help these companies comply with the U.S. rules might be high for an ambitious parter, office or firm.

That said, according to Table 8 of the PCAOB’s Research Note, no Big 4 firm had more than three CRM companies as of March 31, 2010 and now after Deloitte’s resignation from CCME, any partners that were entertaining the idea of chasing these companies could be having second thoughts.

Chinese Reverse Merger Research Note

Deloitte Resigns as China MediaExpress Auditor; CFO Quits

In the wake of Roddy Boyd’s epic post from March 11th, China MediaExpress announced some bad news today – Deloitte resigned as their auditor effective Friday and as a result the company’s CFO, Jacky Lam, quit yesterday:

China’s largest television advertising operator on inter-city and airport express buses, today announced that the Company’s registered independent accounting firm, Deloitte Touche Tohmatsu (“DTT”) has formally resigned its engagement by the Company as of March 11, 2011. Following the receipt of the DTT resignation letter, on March 13, 2011, the Company received notice of the resignation of Jacky Lam from his position as Chief Financial Officer and director of the Company, effective immediately. As a result, CME will delay its fourth quarter earnings release and will not file its Form 10-K for the fiscal year ended December 31, 2010 by March 16, 2011, its original due date.

As you might have already guessed, Deloitte got spooked after all the fraud talk and they also came to the conclusion that management couldn’t be trusted (even if he did say great things about them):

The DTT resignation letter stated that DTT was no longer able to rely on the representations of management, and recommended that certain issues encountered during the audit be addressed by an independent investigation. DTT’s letter also stated that these issues may have adverse implications for the prior periods’ financial reports and that, in their view, further investigatory procedures would be required to determine whether the prior periods’ financial reports are reliable. Upon receipt of the formal DTT resignation letter, the Company requested the suspension of trading in the Company’s common stock on the NASDAQ Global Market to permit full disclosure of DTT’s resignation to be disseminated to the public.

So the company now needs a new auditor and a new CFO. Of course you’ll have to work around forensic accountants and a bunch of lawyers that will be helping the company through this little hiccough but otherwise, this should be a snap.

Earlier:
Apparently ‘The Purpose of Auditors Is Completely, Entirely, and Wholly’ to Look for Fraud and ‘Deloitte is the best. Period. End of Statement.’

Apparently ‘The Purpose of Auditors Is Completely, Entirely, and Wholly’ to Look for Fraud and ‘Deloitte is the best. Period. End of Statement.’

Remember China MediaExpress? That’s the company whose CEO – Zheng Cheng – responded to the accusations of fraud by evoking ‘reputable and well-known’ Deloitte to get the haters off their back. Even though the company is still taking heat, Mr Cheng will be happy to know that he’s got someone in his corner: Glen Bradford, CEO of ARM Holdings LLC, a Hedge Fund Advisory Company. The thing is, Mr Bradford seems a little confused about what an auditor’s purpose is (for fun, I added some emphasis):

I have received tons of messages that can be summarized by the belief that auditors do not look for fraud and that all they do is make sure things line up in the reports. I can say that this is not true simply by being practical. If we didn’t have auditors to verify the claims that companies make, then companies could claim whatever they want to. The purpose of auditors is completely, entirely, and wholly to look for indications of fraudulant activity — and to do their best to remove all possible doubt that the company is misrepresenting itself on its financial statements.

You can make of that what you will but then Glen continues:

Then, if things are OK, they sign off on them. Some auditors are better than others. Deloitte is the best. Period. End of Statement.

Well then! I’m sure Deloitte appreciates the ringing endorsement regardless if it comes from someone who is under the impression that “The purpose of auditors is completely, entirely, and wholly to look for indications of fraudulant activity.” At the very least, this is debatable point, so if you have a difference of opinion with anything above, feel free to share below.

China MediaExpress Holdings: All Eyes on Deloitte [Seeking Alpha]

Chinese Companies Want the Big 4 Magic

“Companies are under pressure from investors to get the best auditor they can,” said Paul Gillis, an accounting professor at Peking University in Beijing. More than 200 Chinese companies are listed on U.S. exchanges, and hundreds more trade on over-the-counter bulletin boards. In the last five months, at least 15 have upgraded to a Big Four auditor — Deloitte, Ernst & Young, PricewaterhouseCoopers or KPMG — from a smaller firm, according to an analysis from Audit Analytics. [Reuters]