September 18, 2020

Auditors

Auditor Resignation Du Jour: Deloitte Didn’t Appreciate Their Audit Files Being Held Hostage

And yes the perpetrator, Longtop Financial Technologies, is a Chinese company.

As we mentioned, Deloitte had some decent reasons for kicking LFT to curb, among them:

(1) the recently identified falsity of the Company’s financial records in relation to cash at bank and loan balances (and possibly in sales revenue); (2) the deliberate interference by certain members of Longtop management in DTT’s audit process; and (3) the unlawful detention of DTT’s audit files. DTT further stated that DTT was no longer able to rely on management’s representations in relation to prior period financial reports, that continued reliance should no longer be placed on DTT’s audit reports on the previous financial statements, and DTT declined to be associated with any of the Company’s financial communications in 2010 and 2011.

And because it seems to be the standard narrative in stories such as these, Longtop’s CFO has resigned and “The Audit Committee has also initiated a search for a new auditor.” Although were not sure if there’s a firm out there that will pick up a client who has engaged in hostage taking.

[via Longtop Financial Technologies]

KPMG Lands More Audit Work From Bridgewater Associates

Big win for the KPMG audit practice in New York as we’ve confirmed that the Asset Management group has won more audit work from the Westport, Connecticut hedge fund.

This week Institutional Investor compiled the largest 25 Hedge Funds and Bridgewater was at the top with $58.9 billion in hedge fund assets. Our source, someone familiar with matter, was impressed, “Huge win for them considering they’re typically fighting for 3rd in those major bids.” It’s our understanding that KPMG had some work from BW but adding more engagements will make for a prestigious addition to their client roster. Congrats to KPMG and the team that made it happen.

Comp Watch ’11: Deloitte Auditor Has PwC Bonus Envy

From the mailbag:

Caleb,

I am reading about PWC getting some spring love in the form of a bonus, and other firms already openly discussing compensation with their employees. Apparently Big D missed that memo.

Everybody at Deloitte had a terrible busy season, that is no secret. We changed our audit methodology, and then in December the powers that be decided to do some last minute tweaking, aka destroy any hope of a bearable busy season. I am a senior working out of Boston and have been pretty busy since October. To reward my hard work Deloitte has given me absolutely nothing. There was no post audit dinner, no monetary reward, not even a free cup of coffee. I did however (and so did everyone else in Boston) receive emails from every executive partner in the NE thanking us for all our hard work, reminding us how much money we made the firm, and telling us to reward ourselves by taking some time off. Apparently being rewarded now means using our own PTO to take a day off. I have had to work both firm holidays up to now (one in January and one in April for the Boston Marathon), so I am not sure when they think we can reward ourselves by using the PTO we already earned. Usually engagement teams hand out “Applause Awards” to their people for hard work, and maybe I am just on a few teams with Ebenezer Scrooge Partners, but I think it is crazy that either Deloitte, or the Boston Office, or one of my engagement partners couldn’t scratch together a few dollars as a thank you for the long hours.

Partners and HR continue to wonder why people leave, but we are continually asked to do more and more and never rewarded for it. With the other firms opening up the piggy banks already, what are the chances that Deloitte follows suit? They missed the mark last year on the compensation, and everyone suffered as a result with the crush of seniors headed for the door. As a result they ended up giving a mid-year raise just to stem the bleeding. Are partners too busy looking to next year or playing golf at their fancy country clubs to remember the little people?

Of course our writer is referring to the PwC bonuses we wrote about on Monday. Don’t know if this is a Deloitte problem or a Boston Deloitte problem but it sounds like Green Dots in Beantown are wicked pissed. How’s your office faring? Tell us below or email us.

Center for Audit Quality Concerned That No One, Outside of a Few Auditors, Knows What Auditors Actually Do

The CAQ’s continuing dialogue with individual investors indicates that many in the marketplace do not fully understand the scope of the audit process and the responsibilities placed on public company auditors. The In-Depth Guide to Public Company Auditing will help to bridge that information gap. The new Guide describes how a public company audit firm decides to accept a new audit engagement, how it assesses the risk that the financial statements contain material misstatements as part of determining the audit’s scope, and then how the auditors perform and report their findings – all in plain English. [Cindy Fornelli/CAQ, Guide]

Today in Chinese Company Auditor Resignations: KPMG Doesn’t Appreciate Being Ignored

The House of Klynveld resigned as the auditor Shanghai-based ShengdaTech, Inc. effective April 29th after less than three years. According to the 8-K filed yesterday, KPMG was none too impressed with management blowing off their concerns:

KPMG previously informed the Company’s Audit Committee of certain concerns arising during its incomplete audits of the Company’s consolidated financial statements as of and for the year ended December 31, 2010, and the effectiveness of internal control over financial reporting as of December 31, 2010. These concerns included serious discrepancies and unexplained issues relating to, among others: (i) the Company’s bank balances; (ii) transactions with major suppliers; (iii) VAT invoices and payments; (iv) sales and payments for sales by third parties; (v) sales to the Company’s second largest customer; (vi) discrepancies between KPMG’s direct calls to customers and confirmations returned by mail; and (vii) concerns raised by directly confirming customer sales and accounts receivables.

In a letter dated April 19, 2011, KPMG informed the board of directors of the Company that in KPMG’s view the Company’s senior management has not taken, and the board of directors has not caused senior management to take, timely and appropriate remedial actions with respect to these discrepancies and/or issues, and KPMG stated that the continued lack of resolution of the issues would materially impact the financial statements for the year ended December 31, 2010 and possibly prior periods.

And as you might expect, this resulted in KPMG taking its audit reports and going home:

On April 29, 2011, we were also informed by KPMG, our former independent accounting firm, that disclosures should be made and action should be taken to prevent future reliance on their previously issued audit reports related to the consolidated balance sheets of ShengdaTech, Inc. and its subsidiaries as of December 31, 2008 and 2009, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for the years then ended and the effectiveness of internal control over financial reporting as of December 31, 2008 and 2009.

8-K [SEC via ShengdaTech]

PCAOB Permanently Bans Utah Accounting Firm, Ex-Managing Partner From Auditing Public Companies

The PCAOB has just made a serious example out of Bountiful (yes, it’s a town), Utah-based Chisholm, Bierwolf, Nilson & Morrill by banning the firm permanently from auditing public companies after “numerous violations of professional standards, including failure to detect fraud.” The Board also barred former managing partner Todd Chisholm for life and partner Troy Nilson for five years.

Curious about what kind of shoddy work the firm performed to get such a slap? Us too. Luckily the Salt Lake Trib has an example:

One of the companies that the firm audited was Powder River Petroleum International Inc., an Oklahoma corporation with offices in Alberta, Canada.

Until it was placed into receivership in 2008, Powder River’s public filings reported that it acquired, developed and resold interests in oil and gas properties. The company resold interest in oil and gas leases to investors in Asia, but reported those investments as income despite also promising investors a return of 9 percent until their principal was recouped, the board said.

That resulted in the company, traded over-the-counter, overstating its revenue by up to 2,417 percent, its pretax income up to 441 percent and assets up to 48 percent.

I called the PCOAB to see if this was the most severe ban every given to a firm and a CPA but couldn’t get an immediate answer. The five year ban also seems pretty severe. Doesn’t seem like too much of a stretch since the Board has only issued 36 disciplinary actions since 2005. I’ll update the post when I get some definitive answers. UPDATE: We’ve been informed that “it’s among the most severe” penalties issued.

It’s also worth noting that two of the firm’s clients – Hendrx Corp. and Jade Art Group – had substantial Chinese operations which wouldn’t be an issue if it wasn’t for this, “Chisholm, who does not speak or understand Chinese, relied on Firm assistants with Chinese language skills to identify audit issues, communicate with management and third-parties, and analyze documents provided by the issuer.”

Maybe those “assistants” were audit wizards, maybe they weren’t but either way, Mr Chisholm might be looking to change careers.

Chisholm

Navistar Says Deloitte Sucks at Auditing; Deloitte Not Amused

Last week Navistar International Corp. sued Deloitte for $500 million alleging “fraud, fraudulent concealment, breach of contract and malpractice” on audits from 2002 to 2005. That, in and of itself, isn’t too unusual. What is pretty fun (not fun in a “man, the circus is fun” kind of way but in “you’ve gotta love this stuff” kind of way) is when a company comes right out and says that Deloitte lied about its competency to provide audit services.

Bloomberg reports:

In other words, not only is Navistar saying that Deloitte is a buncha liars, they’re saying, “Biggest accounting firm in the world, you say? How about the suckiest accounting firm in the world?” They’re saying that Deloitte isn’t qualified to be in business. In essence, that the firm shouldn’t even exist. Because such fighting words simply can’t be taken sitting down, Deloitte spokesman Jonathan Gandal emailed the ‘Berg (which is good because he never calls us back) to express the firm’s position:

“A preliminary review shows it to be an utterly false and reckless attempt to try to shift responsibility for the wrongdoing of Navistar’s own management,” Gandal said in an e-mailed statement. “Several members of Navistar’s past or present management team were sanctioned by the SEC for the very matters alleged in the complaint.”

HA! Now who’s a bunch a liars? So who’s really to blame here in this round of ‘liar, liar pants on fire’? Well, over at Fraud Files Blog, our friend Tracy Coenen tries to shed some light on this spat:

Navistar’s story about the fraud seems to keep changing. Early on in the case, the company denied wrongdoing and said the problem was with “complicated” rules under Sarbanes-Oxley. I’m not sure how SOX is to blame for management having secret side agreements with its suppliers who received “rebates.” Or improperly booking income from tooling buyback agreements, while not booking expenses related to the tooling. Or not booking adequate warranty reserves. Or failing to record certain project costs.

And now the company says Deloitte is to blame.

Here’s what’s funny about lawsuits like this: They essentially say… Our employees committed fraud and actively took steps to avoid discovery by the auditors. The auditors did not discover the fraud (at all, or soon enough), and now we’re going to hold them responsible for that failure.

In the case of Navistar, the each of the fraudulent accounting schemes above are nearly impossible to detect. The company failed to book items or provide information about them to the auditors, yet they are suing the auditors for failing to find the items.

So it appears that Navistar was expecting Deloitte to have some magical powers of fraud detection that even the likes of Tracy or Sam Antar don’t possess. Does that make them incompetent? You tell us.

Navistar Sues Its Former Auditor Deloitte & Touche [Bloomberg]
Navistar v Deloitte: Blame the auditors for fraud committed and concealed by employees [Fraud Files Blog]

Wanted: Auditors for Inventory Count Who Won’t Get Queasy at the Sight of a Few Dead Chickens

Did I say a few?

The Alabama Poultry and Egg Association estimated that five million chickens probably died in the tornadoes, which slammed the northern part of the state, where the industry is centered.

Not to worry though, you’ll still be able to get your McNugget™ fix:

That alone isn’t enough to disrupt chicken supplies nationally. The state usually produces about 21.5 million chickens in a week. The U.S. produces roughly nine billion chickens annually.

Storms Destroy Hundreds of Poultry Houses [WSJ via JDA]

Some People Take Exception with the Idea That Investors Don’t Care About the Lack of Audit Firms

That said, it’s not as if investors can be everywhere at once. Audit committees could stand to get better at sharing information.

Liz Murrall, director of corporate governance and reporting at the Investment Management Association, strongly refutes this claim. “Investors do care”, she insisted, saying “no one wants to see an auditor in place for 50 years”.

However, Murrall warned that investors cannot engage with every company, and therefore cannot be expected to watch over audit committees’ shoulders to check every appointment. “Shareholders want the option of being involved, but don’t want consultation to be mandated – they don’t always have the time or resources.”

Transparency is the order of the day, according to the IMA. If audit committees increased disclosure about the tender process, shareholders would be more motivated and able to engage, boosting choice and competition in the market.

Investors ‘do care’ about audit competition [Accountancy Age]

Center for Audit Quality Thrilled That SEC Study Recommends Auditors Continue Auditing

I am pleased that the SEC’s Office of the Chief Accountant’s thoughtful study recommends retention of Section 404(b) of the Sarbanes Oxley Act for companies whose market capitalization is between $75 and $250 million. Section 404(b) requires independent auditors to attest to management’s assessment of the effectiveness of its internal controls over financial reporting […]. The study concluded that costs of Section 404(b) compliance have declined and financial reporting is more reliable when the auditor is involved with ICFR assessments. Importantly, the study found that investors generally view the auditor‘s attestation on ICFR as beneficial. [Cindy Fornelli/CAQ]

Alterra Blows Off Proxy Advisors; Recommends Shareholders Reappoint KPMG as Auditor

After all the hubbub over the PCAOB inspection report that was brought to light by Bloomberg’s Jonathan Weil, including two recommendations by proxy advisors Glass Lewis and Institutional Shareholder Services Inc., Alterra Capital Holdings has recommended to its shareholders that they vote “FOR” the ratification of KPMG as the company’s independent auditor.


From thc.gov/Archives/edgar/data/1141719/000093041311002842/c65254_defa14a.htm”>SEC Filing dated April 19th (all emphasis is original):

TO THE SHAREHOLDERS

We are writing to bring your attention to a disagreement between Alterra Capital Holdings Limited (the “Company”), on the one hand, and each of ISS Proxy Advisory Services and Glass Lewis (each, a “Proxy Advisor”), on the other hand, with respect to the recommendation by each of the Proxy Advisors to vote “against” the Company’s proposal to ratify the appointment of KPMG Bermuda as the Company’s independent auditors for fiscal year 2011 and authorize the Company’s board of directors (the “Board”) to set the remuneration of the independent auditors at the Company’s Annual General Meeting of Shareholders scheduled to be held on May 2, 2011. The Proxy Advisors’ recommendations are primarily related to a report issued by the Public Company Accounting Oversight Board (the “PCAOB”) regarding the Company’s auditors, KPMG Bermuda. The PCAOB is a nonprofit corporation established by the U.S. Congress to oversee the audits of public companies. One of the principal roles of the PCAOB is to perform inspections of the audit files of accounting firms that conduct public company audits. Each audit firm is selected by the PCAOB for inspection at least once in every three years.

In November 2009, the PCAOB reviewed KPMG Bermuda’s 2008 audit files of a public company client located in Bermuda in connection with a routine periodic inspection. In March 2011, the PCAOB publicly issued its findings in a report dated January 28, 2011 (the “PCAOB Report”). Although the PCAOB Report did not identify the public company by name, an article posted on Bloomberg News on March 30, 2011 alleged that the public company client at issue was the Company (formerly Max Capital Group Ltd.). The Company confirmed that it was the client referenced in the PCAOB’s Report in a Current Report on Form 8-K dated March 31, 2011.

The Proxy Advisors’ recommendations also cite concerns that certain of the Company’s directors and officers previously worked at KPMG.

For the reasons set forth below, the Board disagrees with the Proxy Advisors’ recommendations to vote “against” the Company’s independent auditor proposal. The Board unanimously recommends that you vote “FOR” the ratification of KPMG Bermuda as the Company’s independent auditor.

Since this decision by the Board might not sit well with a few people, they’ve carefully laid out the case as to why sticking with the House Klynveld is the right thing to do. They are as follows:

1. The PCAOB Report did not question the Company’s valuations that are reflected in its financial statements.

2. The PCAOB Report did not impact KPMG Bermuda’s unqualified opinions on the Company’s financial statements in 2008, 2009 and 2010; there was and is no restatement issue.

3. The PCAOB made similar findings regarding all four major accounting firms.

4. The Audit and Risk Management Committee was aware of the PCAOB review and made an informed decision in recommending KPMG Bermuda as the Company’s Independent Auditor for 2011.

5. KPMG Bermuda is independent from the Company.

6. The Audit and Risk Management Committee will reassess KPMG Bermuda’s qualifications and suitability in 2012.

Just a few thoughts on some of these:

• It’s not the job of the PCAOB to question the Alterra’s valuations. That’s what KPMG was supposed to do. The PCAOB said KPMG did a lousy job of getting enough evidence to support those valuations.

• Just because there wasn’t a restatement doesn’t mean the auditors did their jobs correctly.

• Admitting that “all four major accounting firms” had similar findings says a lot about what the Board thinks of auditors.

• Is point #5 supposed to be a reminder for the shareholders that have no business acumen whatsoever?

• Point #6 could be better stated as “Our Board is getting good at jumping through hoops. See you next year.”

Any other thoughts? Leave them below.

(UPDATE) Comp Watch ’11: Things Are Looking Up for KPMG Advisory

~ UPDATE: Email sent to audit professionals added to the end of the post.

How do variable increases “larger than last year for most of you and much larger for many” sound?

With the first half of FY2011 in the books, we want to provide you with an update on the firm’s and Advisory’s performance and share information about our plans for employee compensation.

We are pleased to report that the firm and Advisory are ahead of plan for the first half of the year. Advisory’s revenues have grown 18% compared to last year and our pipeline of opportunities stands at a record $1.5 billion, confirming the marketplace relevance of our services.

We have also successfully added more professionals to our team (over 800 new and ennovated high value services (including services around cloud and data analytics), acquired a strategic sourcing business (placing us No. 1 in that important piece of the market) and strengthened our training programs (through Advisory University and many targeted programs).This is great news, and a direct result of your contributions!

Further, we are confident that we can finish the year in a very strong position if we continue to work together with a sharp focus on the marketplace, our people, the profitability of our engagements (including expanding the work we offshore to KPMG Global Services), and the timely billing and collection of our receivables.

So what does this mean for compensation? As we have said in the past, our philosophy is that as the business does well, we will share those rewards with our people. And, assuming we stay on plan the remainder of the year, that’s exactly what we plan to do:

Variable Compensation and Salary Increases

Based on our strong results to date, variable compensation will be larger than last year for most of you and much larger for many. Further, we expect that approximately 80% of you will receive a variable compensation award in October. And if you are a client service associate or senior associate, variable compensation is in addition to any awards earned as part of the Above & Beyond program.

Market conditions are dynamic and will vary greatly across our many service disciplines within Advisory. Therefore the range of salary increases will also vary greatly by individual and skill set. We have increased the planned spend for salary increases as well, so increases in base salaries on average will also be better than last year. We know that rewarding and recognizing our people is critical to fostering a high-performance culture, so you can be sure that we will continue to meet our commitment to provide an attractive and competitive total compensation package that differentiates exceptional performers with superior rewards.

Accelerated Compensation Communication

To help provide you with more clarity on what you can expect in the way of compensation come October 1, in July, a leader will meet with you individually to provide you with a line of sight into what you can personally expect to receive regarding salary increase and variable compensation. (As in past years, employees promoted as of July 1, will receive a promotion bonus at that time that will be in addition to any salary increase or variable compensation effective October 1).

And we ask that each of you continue working as a team, providing the best service you can to your clients and colleagues, and helping us to drive outstanding business results. Remember, the better the business does, the better we all do.

Thanks for everything you’re doing to build KPMG’s reputation as the best firm to work with, and to contribute to our success!

Reactions are welcome at this time.

UDPATE: Henry Keizer lays it down for the audit side of the house and while rosy (nearly identical wording as noted in the comments), there’s no specific “larger” or “much larger” language which may be of concern:

With the first half of FY2011 in the books, I want to provide you with an update on the firm’s performance and share information about our plans for employee compensation.

I am pleased to report that the firm is ahead of plan for the year. This is great news, and a direct result of your contributions. And, while there is still a lot more work to do, we are confident that, working together, we can finish the year in a strong position. We have good traction in the marketplace and anticipate that the demand for our services and skills will continue to be strong.

So what does this mean for compensation? As we have said in the past, our philosophy is that as the business does well, we will share those rewards with our people. And, assuming we stay on plan the remainder of the year, this year’s compensation pool will be enhanced compared to last year.

We know that rewarding and recognizing our people is critical to fostering a high-performance culture, so you can be sure that we will continue to meet our commitment to provide an attractive and competitive total compensation package that differentiates exceptional performers with superior rewards.

And we ask that each of you continue working as a team, providing the best service you can to your clients and colleagues, and helping us to drive outstanding business results. Remember, the better the business does, the better we all do.

Thanks for everything you’re doing to build KPMG’s reputation as the best firm to work with, and to contribute to our success.

Tax people – anything to report?

Glass Lewis Recommends That Alterra Shareholders Drop KPMG-Bermuda as Auditor

Remember Alterra Capital Holdings Ltd? They’re were exposed by Bloomberg’s Jonathan Weil last month as the KPMG-Bermuda audit client that was selected by the PCAOB for inspection. The audit didn’t go so hot as the inspectors found “the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.” To put this in context, Weil explained that available-for-sale securities were the largest asset on Alterra’s balance sheet and it accounted for “half of the company’s $7.3 billion of total assets as of Dec. 31, 2008, and a little more than half of its $9.9 billion of total assets at the end of last year.”


In wake of this little revelation, research firm Glass Lewis & Co. has recommended to Alterra Capital Holdings that they kick KPMG-Bermuda to curb (after nine glorious years), according to a copy of the “Proxy Paper” sent to Going Concern. The report rehashes the whole story and then concludes with this:

Despite the lack of any restatements of previous financial statements, we believe that shareholders should be concerned about the reappointment of KPMG following the lapses uncovered by the PCAOB. Therefore, we believe that shareholders should hold the audit committee responsible for reappointing the same audit firm.

Glass Lewis also wanted to make shareholders “aware” of the fact that Alterra’s Audit Committee Chair, CFO and CAO are all KPMG alumni but stopped short of citing it as a reason to oppose KPMG at the meeting on May 2. According to the report, Glass Lewis had recommended that Alterra retain KPMG as auditor prior to the last shareholder’s meeting which the shareholders did by an overwhelming margin with nearly 91 million votes voting “For,” 182k voting “Against” and 32k abstained.

Can a KPMG Audit Intern Pull the Switch to Advisory?

Welcome to the tax-day-tease edition of Accounting Career Emergencies. In today’s edition, a young Brit has an audit internship with KPMG but would wants to pull The Switch and work in the advisory practice. Proposing a ménage à trois probably isn’t going to work so what’s the alternative?

Are you tired of being tired? Trying to build a celebrity client practice? Need some gift idea for your new overlords? Email us at advice@goingconcern.com and can recommend something other than a fondue set.

Back across the pond:

Dear GoingConcern Team,

Firstly I have really enjoyed reading your articles and as a budding/ aspiring accountant I was hoping you could help me. I got a internship offer for KPMG in audit which is great, but I think its likely I would feel more comfortable going into Advisory, probably Transactions and Restructuring branch of the Firm. Obviously I have to stick it out in audit for the internship, but is it possible to switch between service lines after, and probably location too?

I know that in the KPMG selection process I still need to go through the Partner Interview, so would you say I am potentially blowing my chances if I switch from Audit to Advisory, or should I play it safe, stick it out with Audit, and the ACA, and then transfer, assuming I passed and survived?

Thank you!

Dear Flip the Switch,

In the words of another, “Well, if I hear you correctly–and I think that I do–my advice to you is to finish your meal, pay your check, leave here, and never mention this to anyone again.”

Now maybe things are a little different in the UK but what you’re proposing is almost impossible to pull off and I’m not sure how you got in this situation in the first place. If the revelation that you’re more interested in advisory just came to you recently, that’s one thing. Your desire to pull a switch may be understandable but that doesn’t make it any more feasible. If, on the other hand, you accepted an audit internship with the knowledge that in reality you wanted an advisory internship, why didn’t you apply for an advisory internship?

On top of that you are also wanting to inquire about a moving to another office before you start full time? Let me see if I understand this correctly: you took an internship in a service area where you have no interest, in a location where you don’t want to live. Do you see why I’m confused? I’m not suggesting that you can’t ask but expect some side-eyed looks after you broach the subject. In other words, you could be “blowing your chances” because you sound like a person who doesn’t know what they want. These firms want people who are ready to hit the ground running, not someone who can’t seem to choose a path. If you can sit still for a year or three, then maybe you can start to inquire about a transfer of service line or location but as an intern-about-to-become-first-year, you’ll just sound like a lost puppy.

Did a PwC Auditor Work Herself to Death?

Pan Jie was a 25 year-old auditor in PwC’s Shanghai office, starting her career with the firm last October. She died of acute cerebral meningitis on April 10th, having “ignored the illness until a fever surged,” after catching the flu on March 31st. Reports have stated that Jie told a friend that “she had been working up to 18 hours a day and about 120 hours a week,” prior to her death.


A doctor quoted by one of the reports explained the cause:

Dr Wang Guisong, an expert in the neurosurgery department at Renji Hospital, said overwork can make people more vulnerable to infections. “Based on her symptoms and her low white blood cell count, it’s reasonable to conclude that overwork led to a weakened immune system, which makes her more vulnerable to infections,” Wang said. “When an infection worsens over time, people can develop acute cerebral meningitis.”

According to the story, PwC has denied that Ms Jie died from work-related fatigue but it’s hard to argue that her fatigue was caused by anything else. The firm is providing psychologists for employees, has sent a “team” to comfort Jie’s family and has even offered to assist with the cost of her funeral and this kind of outreach is admirable but the overarching culture within Big 4 firms is really what is of concern here.

Fatigue from overworking is not uncommon in the Big 4 life but when someone dies as a result of the fatigue, that’s will obviously get some attention (even if it’s just for a little bit). At some point it became acceptable for sleep – and health in general – to become of secondary importance when it comes to having a successful career. If you don’t believe me, look around you; everyone is exhausted and that’s part of the life inside a Big 4 firm. The pressures of performance in the name of client service are so great that people regularly come to work when they should be in bed or, in some cases, an emergency room. Of course there’s the macho contingent inside these firms that say “sleep is for the weak” and that’s the kind of attitude that perpetuates the culture of “getting the job done.” How is this acceptable? Not only can lack of sleep kill you, it doesn’t really do much for job performance. We’ve all seen people make big mistakes when they’re lacking sleep and yet no one considers the root cause. If you think skipping a few hours of sleep a night is worth to a few thousand dollars a year (at best) then you’ve got some seriously fucked up priorities.

I admit that people aren’t dropping left and right inside these firms due to lack of sleep but let’s quit pretending like working hours upon hours, putting your health at risk and coming into work looking like – pardon the expression – death warmed up is some kind of badge of honor.

Did Ohio State Dump Deloitte for PwC Over Colors?

Sounds like CFO Geoff Chatas and state auditor Dave Yost wanted to figure a way around a 15-year limit but it was to no avail, “Ohio State CFO Geoff Chatas said Yost discussed with him the possibility of letting Ohio State be the first to stick with the same audit firm, but the school opted to put the contract out for bid.”

A likely story. If you ask me, this has everything to do with the fact that Deloitte’s main color is blue while PwC has opted for slightly more appropriate hues.

PwC to follow Deloitte as Ohio State audit firm [CBF]

Valukas Testimony: Public Has the Right to Conclude That Auditors Will Stand Up to Management

“The public has every right to conclude that auditors who hold themselves out as independent will stand up to management and notsuccumb to pressure to avoid rocking the boat.”

Valukas Testimony 4-6-11 Am

Lynn Turner Doesn’t Let Accountants, SEC, FASB Off the Hook for Their Part in Financial Crisis

Today’s testimony before the subcommittee of Securities, Insurance and Investment will be focused on the how the accounting industry can help prevent the next financial crisis and will feature many prominent figures. The first panel will feature James Doty, Chairman of the PCAOB, Leslie Seidman, Chairwoman of the FASB and James Kroeker the Chief Accountant of the SEC.

The second panel will include Anton Valukas of Jenner & Block and the bankruptcy examiner of Lehman Brothers, Cynthia Fornelli of the Center for Audit Quality, Thomas Quaadman of the U.S. Chamber of Commerce and Lynn Turner, the former Chief Accountant of the SEC. Throughout the statement Mr Turner points to various defects within the accounting profession infrastructure. This includes the profession itself, “auditors helped contribute to a crisis in confidence” the efforts of the accounting rule-making body, “Clearly the FASB has failed to develop quality and timely standards,” and the hapless SEC, who “[lacks] the tools for the job.”

Mr. Turner’s written statement appears in full after the jump.

SenateBankingSecuritiessubcommittee04062011

PCAOB Chairman Doty Shares Some Confusing Statements Made by Auditors

Yesterday, prior to today’s excitement regarding Satyam and PwC, PCAOB Chairman James Doty spoke at the The Council of Institutional Investors 2011 Spring Meeting and he had some interesting things to say about the audit profession, specifically that auditors don’t always remember that “protecting investors” ≠ “client service”:

Time and time again, we’ve seen services that might be valuable to management reduce the auditor’s objectivity, and thus reduce the value of the audit to investors. While management may need the services, they just don’t have to get them from the auditor.

Audit firms call this “client service,” and it makes things terribly confusing. When the hard questions of supporting management’s financial presentation arise, the engagement partner is often enlisted as an advocate to argue management’s case to the technical experts in the national office of the audit firm. The mortgaging of audit objectivity can even begin at the outset of the relationship, with the pitch to get the client.

Consider the way these formulations of the audit engagement that we’ve uncovered through our inspections process might prejudice quality:

• “Simply stated we want management to view us as a trusted partner that can assist with the resolution of issues and structuring of transactions.”

• We will “support the desired outcome where the audit team may be confronted with an issue that merits consultation with our National Office.”

• Our audit decisions are “made by the global engagement partner with no second guessing or National Office reversals.”

Huh. Doty doesn’t name names but you could easily interpret those statements as one made by a client advocate, not a white knight for investors. He continues:

Or, to demonstrate how confusing the value proposition could be even to those auditors who try to articulate it:

• We will provide you “with the best, value-added audit service in the most cost effective and least disruptive manner by eliminating non-value added procedures.”

(What is a “non-value added procedure”? Whose value do you think the claim refers to? If a procedure is valuable to investors but doesn’t add value to management, will it be scrapped?)

In other words, “we promise that we won’t be pests” and “value” will be a game-time decision. And finally:

Or, consider this as a possible audit engagement formula for misunderstanding down the road:

• We will deliver a “reduced footprint in the organization, lessening audit fatigue.”

(What is “audit fatigue”? Does accommodating it add value to investors? How should investors feel about a “reduced footprint”?)

Yes, what is “audit fatigue”? Is that what happens to second and third-year senior associates every February/March? Or is this better articulated by “we know audits are annoying and our hope is that we won’t annoy you too much.”?

Taking this (the whole speech is worth a read) and everything else that happened today into account, it will be interesting to hear what Mr Doty has to say at tomorrow’s hearing.

Looking Ahead: Auditor Oversight [PCAOB]
Also see: Watchdogs caught nuzzling and wagging tails; auditor sales pitches exposed [WaPo]

Marcum Has Some Doubts About American Apparel’s Ability to Continue Selling Gold Lamé Leggings

Bad news for Dov Charney’s hipster retail paradise as Marcum – who replaced Deloitte last summer – has issued its auditor’s opinion with the language that no one likes to see.


But before we get to that, if you take a quick glance at the balance sheet you’ll see that the company barely has enough money to keep the lights on as their working capital is a measly $3 million (current assets of $216 million, current liabilities of $213 million). This shockingly bad number is mostly due to the $138 million in revolving credit facilities the company has included in its current liabilities. The company is also shows an accumulated deficit of over $73 million in its equity section. APP also bled over $32 million in cash from operations, according to its cash flow statement. All this bad news has lots of people talking about bankruptcy and that doesn’t touch the thirteen (that’s Gawker’s count, I only saw twelve) ongoing lawsuits against the company. Plus there’s the subpoena the company received from the U.S. Attorney General for SDNY last August over their auditor switcheroo.

We could go on and on but you get the pic. Here’s the final paragraph from Marcum’s opinion in APP’s 10-K:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred a substantial loss from operations and had negative cash flow from operations for the year ended December 31, 2010. As a result of noncompliance with certain loan covenants, debt with carrying value of approximately $138.0 million at December 31, 2010, could be declared immediately due and payable. Notwithstanding the foregoing, the Company has minimal availability for additional borrowings from its existing credit facilities, which could result in the Company not having sufficient liquidity or minimum cash levels to operate its business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Obviously the bad news is that investors are really spooked but the good news is that there could be a serious fire sale on hoodies and t-shirts in our future. Silver lining!

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]

#auditorproud

McGladrey Team’s Request for Confirmation Rubbed Someone the Wrong Way

So this happened.

Best Confirm Ever

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]

Weary Big 4 Auditors Are Invited to Live Out Their ‘What I Really Wanted to Be’ Dreams This Saturday

As busy season trudges along, some of you may be looking for a second wind. For many of you, any chance that you can reach down into your soul and conjure up a little more energy to help you reach the finish line passed with that blown deadline.

However, for anyone on the Isle of Manhattan that is looking for a little pick-me-up this weekend, we’ve been informed that there is a fiesta in the making (invitation art at right) and it invites you to harken for the days when your aspirations weren’t so practical:

My friend is having a party this weekend with what I think is a pretty clever theme. On Saturday, we will be attending “Fuck! We are Auditors (How did that happen)”. Description:

“Have you always dreamed of becoming an Auditor?

If so, this party is not for you. For everyone else, come celebrate the (nearing) end of busy season! The theme of FWAA is to dress up as something you wanted to be when you were a kid. So call up your mom or flip through your diary to see what aspirations you had when you were young. Points (more alcohol) will be given to those who have a very convincing outfit.

So don on a lab coat, leotard, or tiara, bring a little somethin’ somethin’ (alcohol), and come get your drunk on. Feel free to invite other auditor or drab job related friends. Perhaps this theme will inspire other auditors to put their life in perspective and go for it…or just drink more to our unachieved dreams. We obviously don’t mean any disrespect to our jobs (or firm. no need to bite the hand that feeds you) seeing as we just started, but any reason to drink/dress up right? It’s been a long busy season. One down, and god-knows-how-many to go.

And good news, the party-throwers (who wouldn’t share their firm with us) have deemed this all-firms-are-created-equal event, “we’re willing to look past those corporate labels and invite all auditors to party.” Of course if you’re not in the Tri-state area, you’ll have to organize your own dashed-dreams rager but the theme has been set. Cowboy, pro athlete, Miss USA, movie star, whatever you failed to be, you’re invited to pretend for a few awkward hours this weekend. As long as you’re not working of course.

How Should an Ex-Big 4 Manager Broach a Possible Return to the Firm with His Boss?

Welcome to the this-ashes-made-me-break-out edition of Accounting Career Emergencies. In today’s edition, a former Big 4 manager wants to pursue a chance to return to this old firm. How does he handle this with his current employer?

Got a question about your career? Do you have an interesting opportunity but not sure if you should pursue it? Need a new nickname for your special, super-secret team? Email us at advice@goingconcern.com and we’ll help you avoid anything lame (or possibly racist).

Back to the Big 4 Boomerang:

Hey Going Concern,

About a year ago, I left Big 4 as an audit manager and now work for a client of my former firm (though not one of mine, Paul Sarbanes and Michael Oxley made sure of that). Lately, I’ve been seriously considering a return to my old Big 4 stomping grounds.

My questions isn’t whether I’m crazy or not, it’s how to handle the issue with my current company. It’s not a slam dunk that I will return to my old firm, but I want to at least pursue it. On the plus side, I have a good relationship with my current boss (we’ve known each other for several years).

If I come clean to my boss but end up staying, that’s a pretty big matzo ball hanging out there. If I reach out to my firm on the sly and leave, I threaten to restart my audit career by angering a client.

Help me Going Concern, you’re my only hope…

Thanks,
The Once and (possibly) Future Auditor

Dear Oa(p)FA,

A Seinfeld and a Star Wars reference? Obviously this is keeping you up at night. I’m on this. Since you’ve made up your mind that you are pursuing a Big 4 boomerang situation, I won’t pass judgment there but knowing a little more about your situation might be helpful. I’ll be making some assumptions in order to help you with your ordeal.

Personally, I’m a “honesty is the best policy” type, so telling your boss about your ambitions is the way to go. It sounds like you’ve got a good relationship with him/her and if you do the march in, drop the news and are gone in two weeks, I feel like you’re torching that bridge. The best thing you can do is explain your reasons for pursuing a return to your Big 4 firm. If it’s because you really miss auditing, I think you need your head examined. If it’s because you think you want to make a run at partner, the odds are against you. If it’s because you think it will better prepare you for a return to an industry for a management position, then you can probably explain this to your boss (assuming he/she is level-headed person); your honesty will be appreciated and your integrity will remain intact.

And if you don’t get the job, what then? Well, that is a bit awkward but if you and your boss have a good relationship and are the only two people aware of the situation (which I recommend), you don’t have to worry about others getting all judgmental on your ass and you’ll eventually get back to business as usual. If your boss knows you well, he/she probably is aware of your long-term career ambitions and knows that a move (regardless of whether it’s a return to your old firm) is inevitable at some point and situations like this will come up occasionally. And if your boss isn’t aware of what you want out of your career, this is a perfect time to start talking about it. May The Force be with you.

Authors of Spam Emails Are Now Posing as Auditors

As if the profession’s reputation wasn’t already bad enough.

From: “davidlolf@hotmail.com”
Sent: Wed, March 9, 2011 2:49:04 AM
Subject:

Good Day

I am Mr. David Lolf the Director in chrage of the Auditing section in Malaysia. Am sorry if this message comes to you as a surprise.

I have decided to contact you on a project that will be very beneficial to both of us . During our auditing in this Bank, I came across some amount of fund laying in wait here, and when i carried out my investigation, I discovered that it was an Overdraft that was perfected by the formal Auditor whom I took over the Office from, He was unable to move out this huge sum of money due to the Urgency that was attached to his dismissal from the Office.

And the said Fund is $16.2 Million United States Dollars.I am in search of a reliable person who can put a claim on this fund, so that it will be transferred to his/her account for both of us to use it for Investment purpose, right now I have successfully moved the Fund to an escrow Bonded Account in one of the Local Bank here In Malaysia.

Upon your acceptance to carry on this task more information will be made known to you. Please you have been advised to keep “top-secreat” as I am still in service and intend to retire from service after I conclude this Deal with you. I will fly down to your country or any place we shall agreed on for subsequent negotiation regarding the investment and benefits immediately this Fund has being tarnsferred into your designated Bank Account. , I look forward to receive your urgent reply via email davidlolf@gmail.com

Yours Faitfully
Mr.David Lolf
+60163206804.

Naturally, we’re hatching a plan to respond to Mr Lolf but in the meantime we thought we’d share his peculiar capitalization technique as well as present the chance at a windfall for those of you who are little more risk-inclined.

Is Taking Cash Out of the Hands of Young Auditors a Good Idea?

As global cash transactions have become increasingly complex, both the familiarity and training of accountants in the cash area may have actually declined. Most young adults no longer keep check books, and consequently, no longer perform the reconciliation process on their personal accounts. Instead, they simply check available balances either online or at an automatic teller machine, and adjust their spending habits accordingly. [SmartPros]

O Bank Restatements, Where Art Thou?

Because Jonathan Weil is wondering.

He noticed that Audit Analytics found that 699 SEC-registered companies filed restatements last year which was slightly higher than ’09. This was considerably less than the 1,566 restatements in ’06 but when it came to the number of banks that had restatements, he noticed something strange:

The figures for banks, in particular, look unnaturally low. Forty-four banks restated last year, one fewer than in 2009. Even more curious, there were 133 banks that issued corrections from 2008 through 2010. That was down from 169 banks during the previous three-year period, before the financial crisis took off in earnest, which makes no sense.

Here we had the greatest banking industry meltdown since the Great Depression. Hundreds of lenders failed. And yet the number of banks correcting accounting errors declined while the collapse was unfolding. There were no restatements by the likes of IndyMac, Washington Mutual or Lehman Brothers, for example. The obvious conclusion is the government has been giving lots of banks a free pass, as have their auditors.

Honesty for Banks Is Still Such a Lonely Word [Bloomberg]

Latest Epic Video Out of Ernst & Young Includes Lots of Bleeps, Faux-Coffee Diss, Best Lyric Ever

It’s been increasingly obvious that Ernst & Young has the most talented video producers amongst the rank ‘n’ file Big 4 professionals. Last year we saw a video from the Las Vegas office (it was pulled) that was not the most impressive in terms of the talent presented but a Elvis impersonator made up for the rest of the group.

More recently from the Black and Yellow we’ve seen a farewell rock video and a mockumentary from across the pond (also pulled) that both demonstrate the sort of right-brained capabilities that exist within E&Y. Today, we bring you the latest in epic E&Y videos that brings voice to the frustration of being stuck in a JIT (“just-in-time”) cubicle.


So there’s a lot to digest here but I’ve got my favorite moments picked out:

1. I’m not sure who wears vests to the office these days but it’s fashion-forward and I like it.

2. Cursing right off the bat (and not letting up) score bigs points with Adrienne.

3. A Flavia diss is always apropriate.

4. Best lyric ever: I’M THE KING OF EY; ON A JET LIKE TURLEY; YOU’RE IN PUBLIC ACCOUNTING, NO YOU AIN’T LEAVIN’ EARLY

5. Kicking the roller was mean (but hilarious).

6. They should have known they were doomed when they wrote the lyric about a partner “seeing me now.”

7. Chuck Norris? Obama? Paddycake? Things really took a strange turn at the end.

The word from the tubes is that it’s been making the rounds inside and outside E&Y so we’re not exactly sure when this was made but our tipster was a little miffed about the possibility of these guys not having anything to do:

Here’s another video produced by auditors in the midst of busy season who somehow find time for this shit. This one comes courtesy of EY San Jose. Apparently it’s been making it’s rounds inside (and outside) of EY all day. HR must be thrilled at this use of company time (and property, from what it appears).

Apparently it never occurred to our tipster that this was a firm-sanctioned production since the Vegas vid went over so well. There’s only one way to find out so I left voicemails for both of these guys to try and get the behind-the-JIT story. So far I haven’t heard back from either of them but it’s still a little early out in San Jose. But whenever you can guys, email us.

Your thoughts on this latest bit of video ingenuity are welcome at this time.

Mike Mayo Is of the Opinion That Citigroup ‘May Have Violated Sarbanes-Oxley’

Last week we heard from a number of people on the topic of Citigroup’s internal controls that while it didn’t sound like they were quite up to snuff, KPMG was somehow cool with it and Vikram Pandit signed his name to it, saying that everything was hunky dory.

Now along with bloggers and journalists, the scourge of Citigroup, CLSA analyst Mike Mayo, has decided to get into the act:

Citigroup may have violated Sarbanes-Oxley with its 2007 10-K submission, in our opinion. The new information relates to letters from regulators that were only revealed earlier this year as part of the FCIC archive. We believe these letters between Citi and the Fed, Citi and the OCC, and the OCC with internal staff, imply that Citi should have known about internal control shortfalls for the year 2007 and was directly told about them by the OCC only eight days before the 10-K was signed. Also, Citi reported large unexpected losses with less than two months left in the year. Thus, the lingering question in our mind is why Citi signed off on its 2007 10-K as having effective controls in light of such problems. This information is still relevant today because it reflects on the magnitude of the risk shortfalls and what we feel is the higher-than-perceived task of turning them around.

That’s from Mayo’s update on the bank, dated today, and along with the “opinion” on a Sarbanes-Oxley violation, he has a few questions:

To what extent was the audit committee and board at Citi aware of the concerns voiced by various regulators at the time, and who gave the advice to sign the 10-K? To what extent has Citi’s board examined the issue since the release of letters from the FCIC? Has the SEC and DOJ looked into this matter?

We bolded that portion since it might – just might – be referring to KPMG and the apparent disregard everyone had for the letter sent to Citigroup from the OCC. Of course, not everyone always agrees with Mayo, namely Dick Bové who has gave HofK the thumbs up although it was obvious that he’d never heard of the firm. Bové hasn’t weighed in on this particular report but it’s only Monday.

Anyway, Citigroup remains steadfast in their thoughts on the matter, telling The Street’s Lauren Tara LaCapra that the “certifications were entirely appropriate,” although things increasingly seem to be pointing to the possibility that wasn’t the case. A message left for Marianne Carlton, a KPMG spokeswoman, hasn’t been returned.

How Did Citigroup’s Internal Controls Cut the Mustard with KPMG?

Jonathan Weil writes in his column today about Citigroup and their “acceptable group of auditors,” (aka KPMG) and he’s having trouble connecting the dots on a few things. Specifically, how a love letter (it was sent on February 14, 2008, after all) sent by the Office of the Comptroller of the Currency to Citigroup CEO Vikram Pandit:

The gist of the regulator’s findings: Citigroup’s internal controls were a mess. So were its valuation methogage bonds, which had spawned record losses at the bank. Among other things, “weaknesses were noted with model documentation, validation and control group oversight,” the letter said. The main valuation model Citigroup was using “is not in a controlled environment.” In other words, the model wasn’t reliable.

Okay, so the bank’s internal controls weren’t worth the paper they were printed on. Ordinarily, one could reasonably expect management and perhaps their auditors to be aware of such a fact and that they were handling the situation accordingly. We said, “ordinarily”:

Eight days later, on Feb. 22, Citigroup filed its annual report to shareholders, in which it said “management believes that, as of Dec. 31, 2007, the company’s internal control over financial reporting is effective.” Pandit certified the report personally, including the part about Citigroup’s internal controls. So did Citigroup’s chief financial officer at the time, Gary Crittenden.

The annual report also included a Feb. 22 letter from KPMG LLP, Citigroup’s outside auditor, vouching for the effectiveness of the company’s financial-reporting controls. Nowhere did Citigroup or KPMG mention any of the problems cited by the OCC. KPMG, which earned $88.1 million in fees from Citigroup for 2007, should have been aware of them, too. The lead partner on KPMG’s Citigroup audit, William O’Mara, was listed on the “cc” line of the OCC’s Feb. 14 letter.

Huh. There has to be an explanation, right? It’s just one of the largest banks on Earth audited by one of the largest audit firm on Earth. You’d think these guys would be more than willing to stand by their work. Funny thing – no one felt compelled to return JW’s calls. So, he had no choice to piece it together himself:

[S]omehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, [Ed. note: OH, right. That.] still sporting a balance sheet that made it seem healthy.

Actually, just kidding, he ran it by an expert:

“As I look at the deficiencies cited in the letter, taken as a whole, it appears that Citigroup had a material weakness with respect to valuing these financial instruments,” said Ed Ketz, an accounting professor at Pennsylvania State University, who reviewed the OCC’s letter to Pandit at my request. “It just is overwhelming by the time you get to the end of it.”

What Vikram Pandit Knew, and When He Knew It [Jonathan Weil/Bloomberg]

And Now, the Auditor’s Version of ‘No Sleep ’till Brooklyn’

Recently we came across a version of Ke$ha’s “Tik Tok” for auditors. The battle over who actually coined this ode to opining was up for grabs but now it’s been brought to our attention that throwback tunes are also being rewritten to express the plight of auditors.


Surely there’s a divergence of opinion – right down generational lines – on which rewrite is better but working in “fat finger” and “Friends think I do tax ’cause of the ‘CPA’ ” scores big points in our book.

To the tune of “No Sleep ’til Brooklyn” by the Beastie Boys

(chorus) No sleep ’til – Filing

Hand on the tenkey – never a fat finger
Got work to do, I hope this client don’t linger
My job ain’t a job – it’s a damn good time
Gonna get this tied-out to the dime
On location – cursing damnation
Why’re my client contacts always on vacation?
Eight of us crammed around this audit table
I do what I do best because I’m willing and able
Ain’t no fakin’ – audit fees I’m rakin’ in
Goin’ coast to coast vouching money you’re makin’
While you’re at the job working nine to five
I’m still at the office when you arrive

(bridge) No sleep ’til –

Another spill, another thrill
Another freaking fire drill
Caffiene gum – another SUM
I wish this Diet Coke had some rum
Now where’s my contact? – he always disappears
This is the guidance, why can’t he just adhere?
Been so long since I’ve seen my fam’
I wish my computer had more RAM
We’re thrashing financials like it’s going out of style
Getting paid along the way cause it’s worth your while
Quarter after four – IA’s out the door
I’m chained to my computer for six hours more
We got a drawer with a lock to hold our files
Aside from the ones all over our table in piles

(repeat bridge)

(repeat chorus)

Ain’t seen the light since we started this audit
All we need is in this room- we got it
Born and bred to document all day
Friends think I do tax ’cause of the “CPA”
That’s not right but I don’t care
‘Cause whenever I explain it they just stare.
Got coffee, cola, chips and candy
I’ve gained ten pounds ain’t it just dandy?
Step off homes – get out of my way
‘Cause our signed opinion is the final say
Waking up before I get to sleep
Cause I’ll be rocking this party eight days a week

No sleep till filing ….
No sleep till filing …
No sleep till filing …
No sleep till filing…
No sleep till filing…

And just in case you’ve got no idea what this should sound like:

What Did Ernst & Young Call Lehman’s ‘Goat Poo’ Assets?

Considering E&Y was, ya know, the auditors and all, they should have been aware that these assets were a grade or two (or three) below human excrement and probably had some name for them.

Lehman Brothers Holdings Inc (LEHMQ.PK) filed for bankruptcy on Sept. 15, 2008 and then quickly sold its prize investment banking assets to Barclays Bank (BARC.L). JPMorgan had been Lehman’s banker. The court papers, filed in U.S. Bankruptcy Court in Manhattan on Thursday, said that Barclays and Lehman called certain Lehman assets “toxic waste” and “goat poo” and knowingly excluded them from their sale agreement.

Jim Turley has been a willing participant in this whole thing so far but were far more interested in what you guys think.

JPMorgan says Lehman called assets “goat poo” [Reuters]

In Case You Were Wondering, KPMG Is Still Wells Fargo’s Auditor

As we’ve discussed, the sudden departure of Wells Fargo’s now-former CFO, Howard Atkins, has been a bit of a mystery. The bank stated that Howie quit for “personal reasons” but Chris Whalen, for one, wasn’t buying that story and stated that it was an “internal dispute” at the Stagecoach Shop and “public behavior suggests significant problems in the bank’s internal systems and controls as defined by the Sarbanes-Oxley law.”

Then John Carney got all heresay yesterday, reporting:

Others say that the departure stems from a heated argument between Atkins and the CEO of Wells Fargo, John Stumpf. Still others say that there could be even more personal reasons for Atkins leaving.

This is pretty fun because this “heated argument” could have been over something awesome like Atkins’s using Stumpf’s private commode without permission or a spurious challenge in their weekly Scrabble® match. Whatever the reasons for Atkins’s departure, all this speculation got the gang over at The Street wondering that maybe – just maybe – KPMG’s risk management team had soiled themselves over the whole situation and asked the audit team to start drawing up their resignation papers.

KPMG said Friday that it remains Wells Fargo’s […] external auditor, though the firm wouldn’t comment on recent criticism that Wells’ financial disclosures aren’t up to snuff. KPMG spokesman George Ledwith confirmed that the Big Four accounting firm is still working with Wells Fargo, which plans to file its 10-K annual report by the end of the month. Howard Atkins, who had been CFO of Wells Fargo for nearly a decade, resigned unexpectedly last week and won’t be signing off on that report. His replacement, Tim Sloan, will do so instead. “Yes, KPMG LLP is the external auditor for Wells Fargo & Company,” said Ledwith.

So what prompted this brief line of questioning is, in itself, a mystery. KPMG resigning as the auditor of Wells Fargo is about as likely as John Veihmeyer throwing all his copies of Rudy into an incinerator. But then again, maybe The Street knows something we don’t. Was/is/will there be any doubt that KPMG will remain the auditor of Wells Fargo? Rampant speculation and nightmare scenarios are welcome. And if you’re in the know, email us.

Auditor Stands By Wells Fargo [TS]

Compliance Auditor Found Dead at Work… a Day After She Died

As many of you sacrifice your lives for the greater good of the profession, slaving away day in and day out to meet that all important April deadline, just remember it could be much worse: you could be dead in your cubicle for a day before anyone actually notices.


Via KTLA:

An L.A. County employee apparently died while working in her cubicle on Friday, but no one noticed for quite some time.

51-year-old Rebecca Wells was found by a security guard on Saturday afternoon.

She was slumped over on her desk in the L.A. County Department of Internal Services.

“I came in Saturday to do a little work, and I saw them when they were taking her out,” co-worker Hattie Robertson told KTLA.

Wells worked as a compliance auditor in the risk management division of L.A. County Internal Services and had just become a grandmother a week before her death. Prior to her position with the county, she was a tax auditor for the California State Board of Equalization. The Imperial County Coroner’s Office is still in the process of an investigation.

L.A. ISD provides computer, telecommunications, building maintenance and repair, purchasing and contracts, fleet, mail messenger and printing services to departments in L.A. County.

Some Companies Willing to Drop a Big 4 Auditor Like a Bad Habit…For Another Big 4 Auditor

Auditor musical chairs isn’t something that happens too often but Reuters reports that more and more U.S. companies are looking to save a little extra scratch on their audit fees:

Bucking a long-standing preference by most companies to stick with the same auditor for years, some companies are putting their audit work out for competitive bids to win better deals on fees, or to get fresh teams looking at their books. “It’s a change in the competitive landscape among the audit firms where they have the ability and desire to take on more clients,” said Mark Grothe, an analyst at consulting firm Glass Lewis. Public companies also seem to be more willing to switch auditors, as long as one of the “Big Four” firms will be doing the work, he said.

The article cites Apple (dropped KPMG for E&Y) and Tysons (kicked E&Y to the curb in favor of PwC) as two prominent examples. We’re also aware that Credit Suisse is slowly transitioning a good portion of the audits performed by KPMG to PwC, according to sources familiar with the situation. Companies of this size willing to change their auditors demonstrates that some companies aren’t too concerned with the learning curve that may face their new auditors. In fact, some CFOs are more than okay with it, including Linster Fox of Shuffle Master who claims, “There’s no degradation in service — the service is actually higher.”

PwC’s Tim Ryan, however, doesn’t buy the idea that fees are the driving force behind the auditor switcheroo, “When a company does go through a change, it is almost always driven by something other than fees,” he told Reuters. Instead, a change is more likely to happen when, for example, a major fraud gets missed or there’s a difference of opinion on a crucial issue OR the CEO is a finicky character OR some other mysterious reason unbeknownst to all of us.

Regardless, the real concern is that all this auditor swapping puts a lot of pressure on fees:

Fee pressure has been intense worldwide, but especially in the United States, according to the International Accounting Bulletin, which tracks global audit fees. “The U.S. is a very competitive market, easily the largest audit market in the world, and the Big Four have competition from a much larger pool of firms,” said IAB editor Arvind Hickman. “Last year we received reports of fees being cut between 5 and 15 percent on average on audit work, and there were extreme cases where fees were being cut up to 40 percent,” he said. Fee pressure appears to be easing somewhat, “but there will still be fee pressure this year and we don’t predict it will go away any time soon,” he said.

This has Big 4 firms undercutting regional competitors and is no doubt, partly responsible for the parking lot at the Senior Manager level in some markets. With this level of competition and, as a result, a slowly decreasing portion of the Big 4 revenue stream, it doesn’t necessarily mean a career as an auditor is a dead end but it sure doesn’t help.

Auditor shopping helps U.S. companies cut fees [Reuters]

When Should a Future Auditor Mention to His Firm That He’s More Interested in Forensic Accounting?

Welcome to the dead-seven-Irish-guys-in-a-garage edition of Accounting Career Emergencies. In today’s edition, a future Big 4 auditor wants to get into forensics ASAP but is concerned about appearances. How should he broach?

Have a question about your career? Need a post-Valentine’s Day/busy season break-up plan? Want ideas for cheering up your co-workers? Email us at advice@goingconcern.comDear Caleb,

I’m starting with a Big 4 firm in October. I had an audit internship last summer where they spoke about all of the ‘flexibility’ within the firm. I was always more interested in the fraud/forensics side of accounting than audit; however, I felt that I had a better chance of getting an internship in audit due to the larger number of positions available. After taking a fraud course in my masters program this year, I confirmed my initial thought that I would much rather work in that field instead of audit.

How realistic is it to try to switch from audit to forensics within a Big 4 firm? How long should I wait until I ask about switching without burning any bridges? I feel like I already know about the normal downsides of a career in auditing, are there any unique differences (good or bad) from a career in forensics?

-Confused New Hire

Dear Confused,

We’re impressed. It was quite the sly move on your part, playing the numbers game. And per usual for a new associate, you’re thinking WAY ahead, which is fine but don’t forget you haven’t even set foot on hallowed Big 4 ground yet.

Regarding the “realistic” question, we’d venture that it falls somewhere in between “somewhat” and “not very” given the fact that your start date is months away. It’s closer to “not very” at this juncture because you have no work experience whatsoever. Forensics involves turning over lots of rocks and that simply takes time and it’s helpful if you have experience in another investigative career. Now, a switch is “somewhat realistic” for you because you know exactly what career path you’re interested in taking. You have many of your future colleagues (and some superiors) beat in this regard. To appropriately address this with your firm, discussing your interest in forensics with your career counselor and mentors is the best way to go. Simply asking about a transfer in your first year or two at the firm is coming on a little strong. Besides, a few years of auditing will serve your skills well as you prepare for a career in forensics.

As for pros and cons in forensics versus auditing, you’ve already discovered one advantage – the work is far more interesting. It’s also a specialized area, so it can be potentially more lucrative and is a unique skill set. As for disadvantages, forensics is a hot area right now and the groups are relatively small. The groups and demand for services may be growing but lots of people have are exploring this area and spots will fill up quick.

Another big disadvantage is that there’s an intangible quality that forensics experts have, that some people don’t and that is an inherent skeptical attitude and investigative intuition. Here’s what forensic expert Tracy Coenen told us last year:

It’s common for people to think that a good auditor makes a good forensic accountant, and that’s simply not the case. Some people have a gift for thinking outside the box and can get a gut feel for what’s wrong. Others only have a gift for reconciling numbers and using checklists. The [AICPA] survey addressed investigative intuition, but it didn’t even make it into the top five of core skills. I think that’s wrong on many levels.

In that same post, GC friend Sam Antar talked about having additional qualities:

An effective forensic accountant must have a pair of double iron clad balls and a triple thick skin. Prospective forensic accountants can count on making many enemies in the course of their work and must be unhinged by the retaliation that normally follows uncovering fraud and other misconduct. […] Effective forensic accountants must at least think like a scumbag to understand criminal behavior, techniques, and countermeasures.

So, in other words, you need to have raw talent and instincts. You may have wanted to be a professional baseball player when you were a kid but still couldn’t manage to hit a ball off a tee or catch a cold.

So to wrap it up, express interest in forensics but we don’t think you should come on too strong. If you do some time in auditing and perform well, you’ll give yourself a better chance of dipping a toe into a forensics group down the road. Good luck.

China MediaExpress CEO Responds to Fraud Allegations by Falling Back on ‘Reputable and Well-Known Auditors’

For anyone out there concerned about Chinese companies who have less-than solid accounting practices, you can rest easy, as Gary Weiss reported in his TheStreet.com column yesterday:

All you have to do is believe in the infallibility of Big Four auditors!


Case in point, China MediaExpress Holdings is the latest company who hasn’t convinced everyone that their numbers are kosher, so their CEO, Zheng Cheng, went on the offensive:

Responding to allegations that the company is a “fraud and reported revenue is exaggerated by tens of millions of dollars,” China Media’s CEO Zheng Cheng said in a letter to shareholders: “The company is strong and doing well. Its revenues and cash position have been audited by reputable and well-known auditors who have confirmed both.” [Emphasis is GW’s.]

Those ‘reputable and well-known auditors’ just happen to be Deloitte, thankyouverymuch. Don’t think for a minute that we were dealing with Frazer Frost or some other firm that has had problems.

With China Small-Caps, It’s Shorts vs. Auditors [The Street]

Apparently This Video Is a Hit with Big 4 Auditors in Asia

A tipster from Manila sent us this video telling us “[it has] got us laughing over here.” And based on what we see, it seems that being an auditor in the East isn’t really that different from being an auditor in the West. That said, if you detest subtitles or Disney you should probably just move along.

A Multitude of Big 4 Auditors Can Confirm This

[J]ust because a person has the initials CPA after his/her name does not mean that he/she knows his/her arse from a hole in the ground when it comes to preparing 1040s.


That comes courtesy of the Wandering Tax Pro, Robert D. Flach. It got the attention of Joe Kristan, who came to the defense of CPAs everywhere but did admit that some CPAs have no business being near tax forms:

[Robert] then spends his next 10 paragraphs elaborating on our shortcomings. And that’s fine, to a point. Not all CPAs are qualified tax preparers. By the same token, not every lawyer is capable of defending you on a murder charge. But the guy you want by your side when the state wants to send you to the chair is definitely going to be a lawyer. And while not all CPAs should be your tax advisor, many of the best tax advisors are CPAs.

Case in point: many relatives and clueless friends of auditors still ask said auditors to prepare their tax returns. In most cases, a) this is a HUGE mistake and b) they don’t want to help you anyway.

KPMG’s Latest “Green Initiative” Has One Employee Demanding Sherpas

[caption id="attachment_24110" align="alignright" width="150" caption="Clearly a KPMG auditor; all the supplies are blue."][/caption]

As many of you are aware, schlepping around a laptop, supplies and God knows what else is standard operating procedure for many Big 4 employees. If you work in New York, this annoyance is compounded by the fact that you have to coordinate all this stuff in an awkward balancing act in order to walk (at least partially) to your desired location. Even if your engagement budget allows you to take a cab, the annoyance factor is high.

Unfortunately, this has now been made worse (never mind the slick sidewalks for two), according to a tipster who has a beef with the New York office of KPMG’s latest attempt to save the planet:

I don’t know why this set me off the way it did, but this really made me very angry so I thought I’d send it in to you to post for open internet mockery. Now in addition to carrying around a laptop, printers, the new second monitors, binders etc all over the city, KPMG expects me to strap a MUG to myself and heaven forfend I use a “Guest Mug” because then how will I compete in this swell “Original Mug Contest”?

I’m 115 pounds, I don’t have the body mass to deal with what is gradually turning into some sort of fully equipped mountain climbing expedition. KPMG needs to start handing out sherpas. Immediately after this email went out, about three different conversations involving stockpiling paper cups in various drawers started around me. What is 500K cups anyways, about half a tree? My free cup of crummy coffee in my paper cup that requires next to no effort to get is the high point of my day, so screw you KPMG Green Initiative.

Here’s the email describing the initiative (sorry for the disjointed look, we had to clip it twice) that caused our tipster to fly off the handle.

So not only does insufficient auditing space have their unforeseen repercussions, the quantity of stuff that auditors are asked to drag with them is reaching critical mass. No lives appear to be in danger yet but one has to wonder where the breaking point is. Your concerns and reactions are welcome at this time.

Nightmare Audit Rooms Have Their Consequences

The following post is republished from AccountingWEB, a source of accounting news, information, tips, tools, resources and insight — everything you need to help you prosper and enjoy the accounting profession.

With no place to work in the office of the housing authority of a major city, the audit team was provided tables and chairs in the hallway of a renovated apartment building that connected the swinging front door with the elevators. In the middle of winter in a city located on a bay, the wind swept into the hallway driving temperatures to near freezing. Clothed in parkas, scarves, wool hats and gloves, the audit team struggled through the engagement.

Auditing rural hospitals, CPA firm personnel were ordinarily assigned to a patient room for workspace since there was no room for them in the hospital office. This year there were no patient rooms available so they were assigned to the morgue! Steel tables and high stools were their accommodations. Formaldehyde, dead bodies draped in sheets and the medical examiner’s buzz saw greeted them each day.


The auditors of a plumbing contractor were assigned a dark, damp room in the basement for workspace. The room was two flights of stairs and several hundred yards from the accounting office.

Two auditors were assigned workspace at a desk adjacent to and facing the controller. The controller smoked, they didn’t.

I could relate more true stories on and I suspect you could add your experiences to this list of inadequate fieldwork workspace. Here are some obvious questions:

1. Did any of these scenarios increase time charges on the engagements?
2. Who had responsibility to correct or prevent these circumstances?
3. When should corrective action be taken?
4. What actions should have been taken?

Question 1: Of course time charges were increased! The auditors of the housing authority said the audit required almost twice the amount of time it should have. The hospital auditors lost numerous hours going for fresh air and to the restroom to vomit! Going back and forth to the accounting office wasted enormous amounts of time, although the team did lose weight. Not only was the health of the non-smokers impaired, they wasted time leaving the room to discuss audit issues and securing all working papers and electronic equipment every time they left the room.

Question 2: The in-charge accountants on these engagements had responsibility to run the fieldwork but their “stick” wasn’t big enough to get the managements to change their workspace. It was the engagement leaders’ responsibility to speak with managements to correct the situations.

Question 3: If the workspace could not be improved internally, a nearby motel room, a recreation vehicle parked outside a client’s facility or an electronic air filer could be remedies. The cost of these alternatives is likely far less than the unbillable wasted time.

Question 4: This is a planning activity! Proper workspace should be arranged by the engagement leader before the fieldwork begins. Engagement profits can be increased considerably by using foresight and arranging for proper workspace!

You’d Be Wrong If You Thought the Ernst & Young Golden Globe Auditors Were Taking a Back Seat to Other Award Show Auditors

Because, really, is team of Ernst & Young and Ricky Gervais versus PwC, James Franco and Anne Hathaway even a debate?

If you feel strongly about it we’ll hear you out but it’ll take some convincing.

The winners of the 68th annual Golden Globe® Awards will remain a secret until they are revealed January 16 to millions of viewers around the world, thanks to the efforts of Ernst & Young LLP, a leader in assurance, tax, transaction, advisory services and strategic growth markets. The Hollywood Foreign Press Association has relied on Ernst & Young for the past 38 years to conduct the ballot tabulation process of the Golden Globes® with security, integrity and reliability.

And just in case you’re concerned about Ernst & Young’s “security, integrity and reliability” because of you know who, the protocols have been laid out in detail:

• Winners are known only to three senior Ernst & Young executives in advance of the telecast;

• Ernst & Young is also responsible for qualifying voting members of the Hollywood Foreign Press Association, confirming that their credentials are current and meet the standards set forth by the Hollywood Foreign Press Association;

• Ernst & Young controls the entire voting process beginning with the nomination ballots, and maintains control of the ballots until the telecast is over;

• Results are triple-checked to eliminate any margin of error; and

• Winner envelopes are assembled by Ernst & Young and are maintained exclusively under Ernst & Young’s control until they are handed directly to each celebrity presenter moments before they appear on-stage.

The UK Invites the PCAOB Over for Tea (and Some Audit Probing)

Convergence may not be that far off after all, here it is 2011 and now we finally have U.S. and U.K. audit harassment agencies working together to share information and polish up that whole bit about protecting investor confidence in capital markets. It may or may not have something to do with the collapse of Lehman Brothers (personally I think the paranoid mistrust in foreign accounting systems – or perhaps just ours – goes back a tad more than that) but soon enough the PCAOB will have an in (after at least one failed attempt) and get a chance to harass inspect foreign firms. We anticipate that this announcement will bring it with it a fantastic new acronym so we can all keep track of who is who.

The Public Company Accounting Oversight Board today entered into a cooperative agreement with the Professional Oversight Board in the United Kingdom to facilitate cooperation in the oversight of auditors and public accounting firms that practice in the two regulators’ respective jurisdictions.

This agreement provides a basis for the resumption of PCAOB inspections of registered accounting firms that are located in the United Kingdom and that audit, or participate in audits, of companies whose securities trade in U.S. markets. The PCAOB previously conducted inspections in the United Kingdom with the POB from 2005 to 2008, but has been blocked from doing so since that time.

Acting PCAOB Chairman Daniel L. Goelzer welcomed the arrangement, which will lay the foundation for the PCAOB and POB to work together to promote public trust in the audit process and investor confidence in capital markets.

The PCAOB can thank the Dodd-Frank WSCRA which amended SOX to permit the PCAOB to share information with foreign audit agencies under certain conditions.

In light of this event, we’re wondering what happens when the two work together sharing “information.” Does it get a brand new acronym that celebrates this new dawn in inter-obnoxious-regulatory-gossiping (IORG) or does it become a hybrid acronym like the Public Professional Company Oversight^2 Board Board or PPCO^2BB? Surely we can do better.

Party at the PCAOB DC office this evening to celebrate, bring your own acronym suggestions and IFRS pocket guide.

See also:
The PCAOB Is Finally Invited to Europe’s Financial Statement Party [JDA]

Another Fed Up Auditor Needs Help Making a Move

Welcome to the Friday edition of Accounting Career Emergencies (aka: why doesn’t anyone want to poach me?). In today’s edition, an E&Y audit staff has HAD IT with her trade. Problem is, she’s concerned that she might be doomed for “long hours and boring work.” Plus, she’s already has passed the CPA exam and needs to meet the hours requirement. Is her career doomed to boredom and lack of certification?

Need career advice? Recently been tempted by a sexy corporate suitor but don’t want to disappoint the boss? Thinking about turning to extreme measures to get revenge on a co-worker? Email us at advice@goingconcern.com and we’ll run down a cauldron.

Back to fed-up-auditor du jour:

I am currently working at EY in auditing at the staff 2 level. I am miserable in audit and have been trying to stick out my time here until at least senior status, but I’ve come to realize that I just cannot take 9 more months of this work. As such, I am currently exploring my options as to what else is available out there for me.

I have already passed the CPA exams and the only thing holding me back from obtaining my CPA is the CPA hours requirement. Can you recommend a transition job that will get me AWAY from audit but still allow me to put the work hours towards my CPA? I understand that financial advisory is one option and I am considering looking into such positions at Deloitte (because of their large FAS practice). However, the problem is that I’m not sure how different the nature of the work will be in financial advisory. Will I be met with long hours and boring work, similar to audit?

Can you PLEASE help a sista out?

Thanks!
– Concerned About My Own Going Concern

Dear Concerned Sista,

Will you “be met with long hours and boring work?” If by, “boring work” you mean “Microsoft Excel” and by “long hours” you mean, “more than 9 to 5” our response is “possibly” and “HELL YES.” We will not address the question about “long hours.” That is a matter of record all over this site. As far as the work, if it’s the nature of auditing you find dull, you’ll be glad to know that advisory services has many interesting practice areas but think about it, you have an accounting degree (presumably), for crissakes. There will be numbers and spreadsheets involved (if that’s what you find boring). What, exactly, were you expecting? Flip cup tournaments broken up by 2 hour lunches?

The good news is, the season is ripe for people looking to move to another Big 4 firm. However, you might be a little short on experience to jump over to Deloitte FAS. These practice areas are very specific and with only a couple years under your belt, it will be a tough sell. Obviously, this shouldn’t dissuade you but you’re officially on notice that it’s an uphill battle.

As far as your CPA is concerned, many states allow work experience in areas outside public accounting so unless your state has very specific requirements for licensure, you’ll be fine. This means you should take a hard luck about what you do like about accounting and make a decision from there. Keeping in mind that this could mean getting out of the Big 4 altogether. Good luck.

More Bell Effect: Santee, California Dropping Mayer Hoffman McCann

After learning last week that the City of Riverside was kicking Mayer Hoffman McCann to the curb, another small town in SoCal is dropping MHM after that little mishap up the road in Bell.


From the Santee Patch:

Santee Mayor Randy Voepel has confirmed that the city will soon be searching for a new auditor.

The city’s current firm, Mayer Hoffman McCann (MHM), found itself amid scandal and controversy in July 2010 when the Los Angeles Times reported the firm “rubber stamped” a 2008-09 audit for the city of Bell.

Despite the announcement, MHM gets the pleasure of finishing Santee’s ’09-’10 audit (partner has to be LOVING it) but Mayor Voepel, not being the type to give second chances to two-bit accounting firms, is cutting them loose:

Although Voepel said that none of the people who worked on Bell’s audit have worked with Santee, he’s not interested in continuing a relationship with MHM at this time.

“We’re going out to bid for a new auditor,” he said. “Anyone that does bad deserves to be punished, and I would like to not have that particular firm perform our audits in the near future. Down the road, sure, they can quote in our bids again. But right now I’d like to get new bids.”

Possible translation: “We don’t want anything to do with these clowns. Mayer Hoffman McCann will only audit Santee, California over my dead body or impeachment after I am caught on camera at a donkey show in Tijuana.”

Earlier:
Apparently, Mayer Hoffman McCann Passes on GAAS All the Time

Sue Sachdeva Was Needlessly Paranoid About Grant Thornton’s Fraud Detecting Abilities

About a year ago at this time, we just started learning about Sue Sachdeva, the convicted embezzler extraordinaire of headphone cobbler Koss. It took a little less than a year for everything to get sorted out including quite the inventory of luxury loot, her emerging talent for stealing money, lawsuits, a guilty plea and a sentence of 11 years.

Since all that’s settled it’s on to the lawsuits and Suze was recently deposed in Koss’s lawsuit against Grant Thornton where she testified about many interesting things, including being a nervous nelly from the get-go:

Former Koss Corp. executive Sujata “Sue” Sachdeva worried each day that she would be caught embezzling money that eventually totaled $34 million.

“Fear was one thing. I thought it was imminent,” she said in a recent court deposition. “Their auditors, every time they walked in, I’d say, ‘This is it. They’re going to catch me.’ 

Turns out, S-squared was paranoid for no good reason because – as we all know – GT had no clue that she was lifting millions every year to pay off her AMEX, partly, she says, because they were throwing green auditors at the company every year:

Sachdeva said in the deposition that Grant Thornton considered Koss to be a well-run company and a good training ground for its new auditors.

“Every year, we’d have at least one or two new auditors come through, and I know Michael (Koss) and I both objected to that – getting kids right out of college and had to explain the business to them every time,” Sachdeva said.

Sachdeva said she never held back documents from the auditors. They didn’t question the amounts of money flowing in and out of the company, nor did they question the internal controls, she said. The lack of inquiries surprised her, she said.

Then there were the allegations that she was having regular three-vodka-shot lunches, according to an October article in Milwaukee Magazine:

Retailers who lunched with Sachdeva say she downed vodka shots at the North Shore Bistro with Julie and Tracy. “Then they all went back to work bombed,” says one shop owner.

One consignment shop owner recalls picking up Sachdeva and taking her to Harvey’s restaurant in Mequon. “Sue told the waiter she wanted her ‘juice.’ They knew that meant vodka,” says the shop owner, who was surprised by how much Sachdeva drank.

Well, it all kinda makes sense now doesn’t it? She was either paranoid because she drank or drank because she was paranoid. OR the amateur auditors drove her so batty and she had no choice but to get a little loaded. Anyway you slice it, the auditors seem to be ones to blame, which seems like a trend these days.

Koss embezzler feared discovery from start [MJS]
The Diva [Milwaukee Magazine]

Volunteers for an Emergency Inventory Needed (Audit Experience Desired)

This is getting ridiculous.

“[A]n estimated 500 birds that littered a quarter-mile stretch of highway,” in Louisiana, according to the AP. Oh, and apparently in Kentucky too only numbering in the dozens, so that barely qualifies as a story.

Obviously, no one in the MSM is concerned about getting an exact body count but an “estimated 500” is certainly better than the Journal’s stab of “Between 1,000 and 5,000.”

As for the cause, well, everyone seems to have a theory but the conclusion we’re most inclined to believe is along the lines of “we’ve got no fucking idea”:

“There was probably some physical reason, but I doubt anyone will ever know what it was,” Thurman Booth, Arkansas’ wildlife services director, told CBS.

The latest occurrence of more dead birds turning up in Louisiana only compounds local residents’ worries, as in the week prior to the Arkansas blackbird mystery, 83,000 dead drum fish washed up along a river about 100 miles west of Beebe. Wildlife officials claim the incidents are not related.

Oh, right. The fish. People are needed to count fish too.

Some Poor Sap(s) Had a Bizarrely Morbid Inventory Count Late on Friday

As you are no doubt aware, landing an emergency inventory count on New Year’s Eve is about as an unlucky event that can befall an auditor. Typically, you don’t miss any of the booze or scrambling for a midnight kiss but seriously, who wants to work on New Year’s Eve?

As bad as the 12/31 count may be, when you get a call to count birds that fell out of the sky for no apparent reason at 10 pm on December 31st, you can safely assume that your new year will be far, far luckier.

About 10 p.m. Friday, thousands of red-winged blackbirds began falling out of the sky over this town about 35 miles northeast of Little Rock. They landed on roofs, roads, front lawns and backyards, turning the ground nearly black and scaring anyone who happened to be outside.

“One of them almost hit my best friend in the head,” said Christy Stephens, who was standing outside among the smoking crowd at a New Year’s Eve party. “We went inside after that.”

The cause is still being determined, said Keith Stephens, a spokesman for the Arkansas Game and Fish Commission. Of the more than 4,000 birds that fell on Beebe, 65 samples have been sent to labs, one in Arkansas, the other in Wisconsin. Some results may be available as soon as Monday, Mr. Stephens said.

It’s doubtful that auditors in these counts but the skills involved are no less than of the classic opiner. This just happens to be a far creepier count than you would normally be assigned.

The Bell Effect: City of Riverside Won’t Renew With Mayer Hoffman McCann

If you’re a small city in California, you probably won’t be looking to Mayer Hoffman McCann to do your audits. If you’re already with them, it’s time to go auditor shopping.


Following the debacle that was Mayer Hoffman McCann’s completely blown city of Bell audits, the city of Riverside has joined the angry mob and will not be looking to renew with MHM any time soon. Riverside’s CFO Paul Sundeen said “given that the firm’s five year contract with the city is at its end and the controversy at the city of Bell, we will not include them [when seeking proposals for an auditor]”. Sorry, MHM, don’t wait by the mailbox for that invitation because you aren’t invited to the party.

Now that’s not nearly as harsh as getting fired by the client but sends a clear message to MHM (and any other questionably-equipped-to-do-their-job auditors out there) that ineptitude will not fly with the client. Unless, of course, there’s a conspiracy at work to defraud TPTB, in which case ineptitude is totally welcome if not encouraged.

Once again, it comes down to scope. No audit firm should be expected to look at every receipt and every statement but in the case of the Bell audit, auditors obviously missed some very large accounts either on purpose or because the firm sent a bunch of fresh-faced neophytes down there (this rarely happens) to actually perform the audit (Note to MHM: $8.89 million is significant unless you’re auditing the King of Saudi or the Federal Reserve). What happened to the accountability SOX promised us?

Said Riverside city controller Jason Al-Imam, “They want to do the right amount of work because they don’t want to lose their license, but they can’t audit everything. Sometimes something might go wrong and that just might be an area that they didn’t look at.”

Scraping by isn’t doing it anymore for the profession, so Riverside is more than welcome to go track down some new auditors but who wants to bet the kids doing their next audit will be just as fresh-faced and clueless as the last bunch MHM sent to fetch the client’s bank recs and invoices?

City of Riverside to drop Bell’s financial auditor [The Riverside Press-Enterprise]

Apparently, Mayer Hoffman McCann Passes on GAAS All the Time

Editor’s note: This post was republished, in part, with permission from Jr. Deputy Accountant.

I’m no auditor so perhaps it’s out of line for me to say as much but since when is $8.89 million considered not significant? MHM blew it when it comes to the California city of Bell and the office of the state controller doesn’t like the “rubber-stamp” approach – maybe the state controller needs a lesson in “same as last year” and a quick and dirty primer on how audits really work. As in, they are a total farce and rubber stamps are the best we can do when we’re not checking boxes and counting chairs in warehouses on New Year’s Eve.


LA Times:

A prominent accounting firm’s audits of Bell’s city finances amounted to a “rubber-stamp,” according to a state controller’s study concluding that much of the alleged wrongdoing would have been detected earlier had the firm done its job.

The long-awaited report is being closely watched because Mayer Hoffman McCann audits the books of dozens of government agencies in California and has 30 offices nationwide. Officials at several agencies, including California’s public employee retirement board, have said they were awaiting the controller’s study to help determine whether they would consider changes in their auditing contracts.

The controller’s office found that MHM failed to comply with 13 of 17 “fieldwork auditing standards” when reviewing Bell’s books in the 2008-09 fiscal year. The firm focused mostly on comparing financial numbers year to year rather than looking at potential for inappropriate or illegal activities, the controller’s report said.

Don’t trip, the California Board of Accountancy is on it. Surely.

Chiang said his office is forwarding the report to the state Board of Accountancy, which regulates accounting firms in California. A board official has said it would open an investigation. If significant problems are found, penalties could range from fines to the loss of licenses. The controller also sent copies of the study to the Los Angeles County district attorney’s office and state attorney general, which have been investigating the city.

MHM strongly disputed the controller’s findings, suggesting that Bell officials deceived the firm. “Recent evidence disclosed by the controller’s office shows that Mayer Hoffman was subjected to a massive scheme of collusion that reached through every layer of city government, to undermine the audit process and deceive the auditors,” the firm said in its response.

Bill Hancock, president of the firm, said in a statement that his firm “adheres to the highest standards…. But in those 50 years we have never seen anything like the pervasive collusion of so many individuals acting in concert to deceive auditors, as happened at Bell.”

Jump over to JDA for the rest.

American Apparel Takes Issue with Deloitte’s Notion That Management Withheld Some Fairly Important Financial Statements

Remember the hipster drama Deloitte caused this past summer when they resigned as the auditor of American Apparel? It was quite the rs the stock took a beating (it has recovered in the meantime) and questions were raised about the company’s ability to continue as a [g]oing [c]oncern.

Some recent developments in this particular story have come to light as Dov & Co. have been providing a whole mess of information to Deloitte, as is SOP in these matters. For starters, Deloitte notified the APP audit committee that the 2009 financial statements are not kosher and anyone using them for any other purpose than lining a bird cage is nuts.


From the 8-K:

On December 15, 2010, the Audit Committee of the Company received notice from Deloitte stating that Deloitte had concluded that Deloitte’s report on the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2009 (the “2009 financials”), including Deloitte’s report on internal control over financial reporting at December 31, 2009, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (such reports, collectively, the “Deloitte Reports”) should not be relied upon or associated with the 2009 financials.

Deloitte explained that its conclusion was based on the significance of the declines in operations and gross margin in the Company’s February 2010 monthly financial statement, combined with the January 2010 monthly financial statements, the Company’s issuance of revised projections in early May 2010 which reflected a significant decrease in the Company’s 2010 projections, and Deloitte’s disagreement with the Company’s conclusion that the results shown in the February 2010 monthly financial statements would not have required a revision to the Company’s projections as of the date of the 10-K filing and the issuance of Deloitte’s reports. Deloitte further indicated that their decision considered their inability to perform additional audit procedures, their resignation as registered public accountants and their professional judgment that they are no longer willing to rely on management’s representations due to Deloitte’s belief that management withheld from Deloitte the February 2010 monthly financial statements until after the filing of the 2009 10-K and made related misrepresentations.

So if you can get past how poorly written these paragraphs are, you can boil down Deloitte’s concerns about the 2009 10-K to a few things: 1) business was not looking good; 2) they didn’t buy APP’s notion that financial projections for February ’10 were hunky dory (which weren’t made available until after the 10-K was filed); 3) APP management was more or less full of shit. You can also read their official letter to the company, if you are so inclined.

You won’t be surprised to learn that Dov & Co. have a difference of opinion here:

The Audit Committee of the Company has commenced an investigation into the assertions that management withheld the February 2010 monthly financial statements and related misrepresentations. Management disagrees with Deloitte’s assertions and does not believe that the February 2010 monthly financial statements were withheld. The Company does not currently believe, including after discussions with Marcum, that the reaudit will result in any changes to the 2009 financials, though no assurance can be given in this regard.

So, somewhere, there are February 2010 financial statements stuffed in a drawer (but whose drawer?) that basically caused this whole fiasco. This seems like a completely plausible scenario.

Big 4 Auditor Respectfully Requests an Audit of Big 4 “Compensation Studies”

From the mailbag:

Hey Caleb,

So recently I was found out that KPMG will be conducting a compensation study as to whether or not we are in line with “market” and the effects of the results, if any, will be announced mid-January. This came as the result of the follow up on the Mid-America senior council meeting. Apparently the question was raised in this meeting about why KPMG employees weren’t receiving bonuses similar to the other firms [Ed note: We received the following message prior to the announcement of KPMG’s new bonus program that we reported on Friday.]. During the follow-up call it was told that a “compensation study” was being performed.

I always hear all of the Big 4 talking about how they did a compensation study and found out they were in-line with the market but obviously after all of the posts about compensation raises and bonuses nothing seemed to be consistent. My question to you is where are all of these supposed studies done by the Big 4? They say they perform them but do we actually see them? As an auditor I’m inclined to ask where is the supporting documentation? We don’t take our clients word that they have $50 million in the bank we have to agree that to something, so why don’t we get some proof of this study or in your experience with goingconcern have you actually ever seen results of these studies?

Thanks,
Disgruntled Employee

Dear Disgruntled,

We understand your frustration with regards to these so-called compensation studies. To directly answer your question, we have not seen any of these studies nor do we know how the firms commission them. (If you are familiar, get in touch.) The transparency of the process, as you rightly point out, is virtually non-existent. While your call for more information regarding these studies may get some attention and even a brief consideration, don’t expect any “supporting documentation” in the near future. Keeping the compensation sausage recipe secret is advantageous for the firms and since “in-line with the market” is another way of saying, “right in the meaty part of the curve” people have very little room to complain.

Now, if it appears that one firm say, PwC, is compensating employees in a more generous manner than say, KPMG, the only way to conclude that for certain is to speak to a recruiter who talks to employees from both firms. Sure you can mine the comments of posts here or read Bob Half’s salary report to get an idea of what’s what but if you want to know the actual compensation disparity between two firms (especially for your skill set), you’ll have to do a little digging for yourself.

So, do you have the right to be annoyed by the lack of information around these studies? Of course. But don’t expect an in-depth breakdown firm by firm to be presented at your next townhall or webcast.

PCAOB to Start Inspecting Firms Who Audit Broker-Dealers…Sort Of

Prior to Dodd-Frank, auditors who inspected the books of nonpublic brokers and dealers were required to register with the PCAOB but managed to avoid being subjected to the Board Insepctors’ Monday Morning QBing. Now that we’ve entered a new, exciting era of mind-numbingly complex financial regulation, auditors of all broker-dealers will soon know the pleasure of the PCAOB inspection process.

But before any of you get your knickers in a twist, it’s technically an “Interim Program,” because, in all honesty, the Board isn’t exactly sure who should be getting extra-special attention and who they can ignore.


This is part of the statement from Perpetual-acting Chair Dan Goel://pcaobus.org/News/Releases/Pages/12092010_OpenBoardMeeting.aspx”>today’s open meeting (full statement on following slide):

About 520 brokerage firms provide clearing or custodial services. Many of the others are introducing firms that, at least in theory, do not have access to client funds or securities. Some are floor brokers without public clients; some are insurance agents that sell products that are technically securities; some are finders active in the M&A market; some are captives that serve the trading needs of a single, affiliated client. Other categories undoubtedly exist. This diversity raises questions about whether we should devote resources to inspecting the auditors of all of these types of brokers and dealers or whether some of their auditors can safely be exempted from PCAOB oversight without compromising investor protection.

While the Board does not yet have the answers to those questions, the temporary rule will allow the Board to begin inspections of broker-dealer audits so that we can develop an empirical basis on which to eventually address them.

So, in other words, the Board has NFI where to start since the broker-dealer biz encapsulates a lot of different services. The unfortunate thing for auditors is that the inspectors have to start somewhere and that’s what this interim program will do. Mr Goelzer gives you a taste of the fun to come:

The interim inspections will focus both on reviewing the work performed on specific audits and on gathering facts to inform the Board’s consideration of a permanent program. The information-gathering aspect of the interim inspections will provide the Board with insight about the potential benefits of broker-dealer inspections to the investing public and about the potential costs and regulatory burdens that would be imposed on different categories of accounting firms and classes of brokers. Armed with this type of information, the Board will be in a better position to decide on possible exemptions from oversight and to determine the objectives, nature, and frequency of inspections for firms that remain subject to PCAOB jurisdiction.

So if you’re lucky, you might – just might! – get out of the whole process altogether, although, we suggest you don’t get your hopes up. When will this all get sorted out, you ask?

Decisions about the permanent inspection program are probably at least a year away. In the mean-time, there will be ample opportunity for the public to learn what the Board is finding in the interim program and to participate in the decision process.
The proposed temporary rule provides for transparency, in that the Board will issue public reports at least annually on the progress of the interim program and on any significant observations. The permanent broker-dealer auditor inspection program will be predicated on rules that will only be adopted by the Board after public notice-and-comment and will only take effect after Securities and Exchange Commission approval.

So if this whole thing sounds like a dry run, it is. However if inspectors stumble across some über-shoddy audits (bound to happen), the Board is reserving the right to lay the smackdown. From Board Member Steven Harris’s statement (full text on last slide), “While the temporary inspection rules anticipate that firm-specific inspection reports would not begin until after a permanent program takes effect, it is important to note that the Board will still take disciplinary action, as appropriate, against an auditor where inspections under the interim program have identified significant issues in the firm’s audit work.” Likewise, if the inspectors happen across out of the ordinary at the B-D (again, a distinct possibility), they will be ringing up the SEC.

So while on the one hand they’re testing the waters, if you happen to be a downright horrible auditing firm, they’re going to make an example out of you. Investor protection is still at stake, you know.

1 — 101214 Proposed Temporary Broker Dealer Inspections–Goelzer Statement


Harris Broker Dealer Open Meeting 12 14 10 FINAL

Update on Censured Ernst & Young Manager

Just a brief follow-up on the manager who received the disciplinary action handed down by the PCAOB on Monday.

We attempted to reach Jacqueline Higgins late yesterday at her office number in Boston, however we discovered that when we were transferred to her extension we simply bounced back to reception, who needless to say, was very confused about that phenomenon. After attempting to page Ms. Higgins, only then did the receptionist learn and then relay to us that Ms. Higgins was no longer with the firm.

We checked with Ernst & Young spokesman Charlie Perkins on this development and he confirmed that Ms. Higgins “will be leaving the firm at the end of the year.”

And lest there still be any confusion due to the carefully worded E&Y statement, the partner and senior manager in question have been dismissed from the firm.

We’ll keep you updated if we hear more from inside at the firm or if further action is taken by the PCAOB.

PCAOB Chair: We’re Kicking Around Some Ideas for a New and Improved Audit Model

Part of perpetually-acting PCAOB chairman Dan Goelzer’s speech at the AICPA’s Conference on SEC and PCAOB Developments had to do with the future and it kinda, sorta sounds like the Board might start asking for more than just the auditor’s opinion of yore. He spoke this afternoon at the conference, saying, “it is clear that there is considerable investor hunger for more insight from the auditor into the audit process and the company’s financial reporting. Further, the 2008 report of the Treasury Advisory Committee on the Auditing Profession recommended that the Board reconsider the audit report.”


What kind of ideas? Glad you asked!

The Board will have to make some difficult choices next year if it decides to change the time-honored pass/fail report. There is no shortage of ideas. During a discussion of the reporting model at our Standing Advisory Group meeting last April, some suggested that the auditor should provide more information about the audit itself and how it was performed. Others want the auditor’s views on the management judgments embodied in the financial statements regarding such things as estimates and the selection of accounting policies. Auditors have proposed that their reports should be clearer about limitations on the ability to detect fraud. Some users have suggested expanding the auditor’s current opinion to include new material; others have suggested that the pass/fail report should be accompanied by a separate auditor’s report akin to the MD&A.

Do investors really want to know how the audit sausage is made? Some auditors have trouble pulling things together so we see little up side there.

If you’ve got your own suggestions on making audits even better, feel free to share them at this time.

Goelzer_AICPA National Conference 2010

KPMG Partner Who Missed $1.9 Billion Error Having No Problem Blaming Others

Apparently it’s auditor punishment Monday. Or Tuesday, if you’re Down Under:

A lead KPMG auditor who only learnt about a $1.9 billion [about USD $1.88 billion] error in his audit of Allco Finance Group through a report in BusinessDay was benched for nine months by the corporate regulator yesterday.


To be completely fair, it sounds like it may have been a tricky audit:

Christopher Whittingham, a KPMG partner, led a core team of 20 audit staff that signed an unqualified audit report on the notoriously complex accounts for Allco for the year ended June 30, 2007.

Or was it?

The error detected by BusinessDay involved the 2007 accounts classifying $1.9 billion in liabilities owed by Allco as non-current, telling investors they fell due more than a year later. The liabilities were, in fact, current liabilities, meaning they were due within the year. The amount of current liabilities is a significant issue for shareholders when considering whether a company can meet its debts when they fall due.

Whatever the case may be, Mr Whittingham shouldn’t sweat it too much:

[T]he Australian Securities and Investments Commission released an enforceable undertaking with Mr Whittingham, which included a nine-month suspension, a $10,000 fine and 10 hours of professional education.

Well, at least he’s taking responsibility for his mistake and isn’t pointing his finger at anyone else or making excuses, right?

Mr Whittingham said he had relied on managers for aspects of the audit, the error had no bearing on Allco’s collapse and he had reissued its accounts the day after he became aware of the error.

Oh.

Regulator suspends senior KPMG auditor [Sydney Morning Herald]

Earlier:
(UPDATE) PCAOB Gives Ernst & Young Manager the Charlie Rangel Treatment

(UPDATE 2) PCAOB Gives Ernst & Young Manager the Charlie Rangel Treatment

~ Update includes statement from Ernst & Young.

~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 oy 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).

Jacqueline a Higgins CPA[1]

All Those Frazer Frost Christmas Cards Will Go to Waste Now

Last Friday, we linked to a Reuters article that told the story of Chinese clean-tech firm Rino International Corp. admitting that their books weren’t exactly in tip-top shape.

In fact, Rino has some hella-fraud going on, as the CEO is quoted, “[T]here might be problems with 20-40 percent of [customer contracts],” according to a letter from the company’s auditor Frazer Frost. As is the natural progression of these matters, an 8-K was filed informing anyone who cares to know that restatements are happening and that previously issued numbers are more or less worthless.


Then came the news from Financial Investigator’s Roddy Boyd, that Frazer Frost – the offspring of a merger between Moore Stephens Wurth Frazer and Torbet and Frost PLLC – was not really Frazer Frost:

One day shy of the one year anniversary date, the accountancy is scrapping a “trial merger” and is splitting back into Frost LLP of Little Rock, Ark. and Raleigh, N.C. and Moore Stephens, which is headquartered in Brea, Ca.

“Trial merger” kinda sounds like a two accounting/finance types hooking up for the first time. It’s nothing major, just testing the motion in the ocean. But if you go by the Accounting Today article from last year, there doesn’t appear to be anything “trial” about it.

Anyway, Boyd reports that Frost managing partner Dan Peregrin told him that a ‘culture clash’ led to the break up and that, “There is a lot of [issues] right now in [Chinese reverse mortgage] practice area and we just felt it would be smarter to wish them luck and stick to our practice areas.”

Right. The old, “it’s not you, it’s me” routine. But there’s more! Over at Citron Research, it’s not entirely clear just what is going on:

If you call Frost today in Arkansas, they answer “Frost & Co” and say they’re no longer associated with Frazer. Citron spoke to managing partner Dan Peregrin and twice he told us that the two firms have gone their own way. ….but if you call Frazer, they answer “Frazer Frost” and in a brief conversation with Susan Woo, the RINO auditor, she told Citron that Frazer Frost is still an operating entity.

Really? If you go to the Frazer Frost website, you see a homepage with no content in the about us section.

Which is quite true. This is all very strange/sad/pathetic because everyone else seems to be aware of the situation. It’s like Frazer doesn’t know they’ve been dumped and are just going along like everything is find and dandy.

Could someone let them down gently?

News From Auditorville [Financial Investigator/Roddy Boyd]
Dude! Where’s My Auditor?? The Curious Case of Frazer Frost [Citro Research]

Future Big 4 Associate Needs Help Choosing Between Commuting Hell and a Happy Marriage

Ed. Note: DWB was sober long enough today to pen this post for the Friday edition of Accounting Career Couch. If you’ve got a question for us email us at advice@goingconcern.com. We’ll dispense with further pleasantries and get right to it.

I just received three offers from two Big 4 firms in San Francisco (Deloitte and KPMG) for audit and one Big 4 firm for advisory internal audit in San Jose. I really like the idea of going into advisory but the problem is that I live in San Francisco and the advisory clients for this firm are all located around San Jose and the Silicon Valley. This would likely mean at least a one hour and 15 minute commute every day each way from SF to SJ and back againlients I would likely be working on from SF are all located within 20 minutes of my apartment in the city. Moving to San Jose is out of the question for me because my wife works in SF and I’m not ready for a divorce just yet. My question to you and Going Concern readers is should I take the advisory job despite the crazy commute or should I take one of the audit positions?

I’d still be very happy taking one of the audit positions but I’d be lying if I didn’t say that the more consistent working hours of advisory internal audit didn’t appeal to me much more than audit (no insane busy season in advisory). Much of this benefit would be negated by my much longer commute though. Also, if I choose advisory I would be likely getting reimbursed $0 for my commute since the job is based out of the SJ office and I am based in SF. Although $0.50 a mile doesn’t sound like a lot, it really does add up to several thousand dollars in missed reimbursement expenses for such a long commute (assuming 80 miles a day in reimbursable driving). Also, the advisory position pay is slightly less to begin with (approximately $1,500 less) than my audit offers. Other considerations that I am thinking about are that many people from the Deloitte office (mostly associates) have said that the Deloitte SF office is understaffed. To me this means more opportunity for advancement but also more hours of work. Also, I feel that if I started in audit I could do two years of audit and if I didn’t like it then could jump ship to advisory in SF rather than having to start at advisory in SJ and beg to get a transfer to the SF advisory practice in a year or two. So what should I do? Should the lengthy and costly commute for advisory versus audit be a deal breaker? Will I struggle to break into advisory after two years in audit if I decide to make the switch?

Hopefully I’ve given enough info about my choices so that DWBraddock will stop complaining about us not saying enough in our requests for advice.

Kudos to you and your detailed email. Peons of the accounting world – take note [Ed. note: but there is something to be said for brevity. Yeesh.].

First off, my advice is from the “this is usually how it works” camp. Are there exceptions? Of course, and I’m sure that commenters will point them out.

Are you sure you will be reimbursed for every single mile that you travel? The HR policy is typically the net difference between your home to the office and your home to the client site. For example if you live 50 miles from the office and the client site is 53 miles from your home, you are reimbursed for the three mile difference. I strongly encourage you to consult HR before you go re-adjusting the all-in value of the advisory offer with thousands of dollars of mileage.

Now that I crushed your dream of banking $1,000’s, let’s discuss the audit vs. internal audit battle. You make a lot of assumptions in your email, but I think these bullets cover everything you discussed:

• Internal audit should not be looked at as a green-lighted pass to jump around the advisory practice. Many advisory roles are target recruited and are very specialized from a work capacity point of view. The name “advisory” doesn’t mean the roles are similar; it’s simply a nicer way of saying “everything that’s not audit and tax.”

• You will not be fast-tracked at Deloitte just because they’re short staffed. You will work your ass off.

• It’s easier to go from internal audit to external audit, not the other way around (the way you mentioned).

• Don’t think a transfer is a simple process. There has to be a need in the office you want to transfer to, and considering you’re contemplating and office and practice switch-a-roo in one swift motion…really? This is not a game – this is business and not everyone gets what they want.

• PS – I forwarded this to your wife. She said you’re sleeping on the couch for the next week.

What Investment Bank Clients Are Really Saying: “KPMG are stupid”

Auditors – if you have ever suspected that your IB client contacts aren’t convinced of your intelligence, then your intuition is serving you well.

This also helps put the whole AIG/GS/PwC situation into a hilarious context.

[source]

Is Citi Getting Bad Advice from KPMG?

John Carney wonders aloud if Citigroup’s low reserves (approximately $1b reserve for $500b in exposure) for its repurchase risk is thanks to the guidance provided by KPMG. Citi has said that they are, “comfortable with this level of reserves because historically realized repurchase risk has been quite small.” Carney explains, “In short, they haven’t had to pay out much on these claims in the past, so they figure they won’t pay out much in the future.”

Be that as it may, JC and his colleague, Ash Bennington are pret-tay sure Citi has it wrong (they lay out their case in full) and speculates that KPMG is, at the very least, an enabler here.


Carney points out that Francine McKenna has been following KPMG’s not so stellar guidance on this particular issue for years. Starting with New Century in 2007, Wells Fargo last year and Countrywide who was purchased by Bank of America.

Carney then writes that Bank of America is “widely assumed to have the largest repurchase risk, largely thanks to the acquisition of Countrywide.”

So that’s a helluva trail to be sure and Carney wraps up:

So is the advice of KPMG part of the reason for Citi’s complacency when it comes to repurchase risk? Given the history of companies audited by KPMG missing repurchase risk, perhaps Citi should rethink that complacency.

Of course Carney forgets that Dick Bové would take exception with everything he’s saying, since this firm is perfectly acceptable. Even if he doesn’t know who they are.

We’d like to get anyone familiar with the matter (read: Citi audit team members) on the record, so get in touch and we’ll put it out there. Or you can chime in below.

The Guy Responsible for Informing Us About Christine O’Donnell’s Pubic Hair Was an Auditor at the Federal Reserve

We’re just catching up to this little twist in the story so keep your pieholes shut. Plus, it’s election day, making it completely appropriate.

Hard to believe that it was just last Thursday when the anonymous first-hand account of a sexless one-night stand with Senate candidate Christine O’Donnell was published over Gawker, grooming details included.

Aside from Christine O’Donnell’s stance on masturbation, witchcraft and her inability to assign anyone to fill out a postcard for her nonprofit organization, we could have done without this particular exposé. An anonymous douche probably thought he would make off with Gawker’s ‘low four figure’ sum and he would be an anonymous anti-tea party hero.


The Smoking Gun immediately was on the case to identify the pube peeker in question and it really didn’t take much effort on their part, as they came to a pretty solid conclusion late on Thursday after speaking with the author’s former roommate, Brad Kursiko:

While Kurisko refused to out “Anonymous,” some online activity this evening may point to the author’s identity. Shortly after his last phone conversation with a TSG reporter, a single name disappeared from Kurisko’s list of Facebook friends.

The man with whom electronic ties were abruptly cut is Dustin Dominiak, a 28-year-old buddy who attended Albion College with Kurisko. Records show that Dominiak has previously shared a Philadelphia address with Kurisko. One online posting reports that Dominiak, a Michigan native, has worked as an auditor at the Federal Reserve in Philadelphia.

TSG finally got Kurisko to confirm Dominiak as the blathering broheim, thus providing him with the unenviable distinction of being “that guy who wrote about Christine O’Donnell’s pubes.” Especially if she manages to pull off the huge upset today.

But more interestingly this whole story has only reiterated our contention that the sex lives of accountants (and by extension, auditors) is completely random and scattered. This particular encounter – Senate candidates and their grooming habits; Philly Fed auditors that will do anything for a buck – might be the apex of the theory.

On The Trail Of “Anonymous,” Christine O’Donnell’s Sex-Free Pal [TSG via DI]

Will the Solution to the Big 4 “Too Few to Fail” Problem Come Out of China?

Adam Jones at the Financial Times takes a look at the Big 4’s too few to fail problem, noting that the recent green paper from the European Commission is a combination of A) lame ideas:

Its flakier suggestions included getting a regulator or another third party to appoint auditors to ease fears about their independence – a move that would disenfranchise shareholders to an unacceptable extent. A European quality certificate for auditing was also mooted as a way of helping second-tier firms show they could handle the biggest jobs. Such a badge would have limited credibility.


And B) points of discussion that need to be explored further, “[A] call for international talks on a contingency plan for the possible failure of one of the Big Four,” “enforced work-sharing also merits further discussion,” and “Brussels says it may also loosen rules requiring auditors to own the majority of an audit firm.”

All this talking gives us a headache and Jones admits that by allowing all ideas on the table it allows those happy with the status quo to distract from any real solutions:

The surfeit of ideas makes the debate comprehensive. But it also creates easy targets for those who want to preserve an inadequate market structure, detracting from more sensible suggestions made by Michel Barnier, EU internal market commissioner, and his team.

Despite the haters out there, the most interesting solution mentioned by Jones is the possibility of China – albeit a longshot – coming to the rescue:

Some think the danger might be eased by a Chinese accountant teaming up with a second-tier firm to create a new rival to the Big Four. Such an entity would face suspicion in the west, though, and it may be too soon to look to Beijing for answers.

For the market enthusiasts out there, this has to be the best idea you’ve heard even though it comes at the exception of the Chinese.

Think WeiserMazars but on a much, much larger scale. Maybe BDO’s U.S. firm is a target because of their legal troubles. Maybe Stephen Chipman will use his connections in China to parlay into some mega-international merger. We realize it’s hard to use your imagination when you’re staring at spreadsheets all day but ideas are needed people.

Solutions provided by the market will be a far better than something mandated by governments. China’s economy is still growing at a ridiculous clip and some say that’s good for the us here in the States.

Bottom line – we’re happy to entertain the possibility of China getting in the mix because as Jones says, “[W]hile this risk is broadly acknowledged, I have so far seen little evidence of a plan to deal with it.” And as it stands now, the bureaucrats are leading the discussion.

Get to Know Your PCAOB Standing Advisory Group Members

The PCAOB managed to roll out some news at a time other than 4 pm on Friday, announcing new appointments and reappointments to their Standing Advisory Group.

All the major firms are represented as well as some regionals (BKD, EKS&H), academics, industry pros, and others. We haven’t had the pleasure of knowing any of these fine folks (minus Lynn Turner – probably the biggest pot-stirrer on the list) but we’ve got it on good authority that everyone can get audit wonky (e.g. broker dealer auditing, the audit report model, FASB changes affecting auditing). The ushe. So you can rest soundly knowing your audit rules are in good hands.

Standing rs

New Appointments
• Stephen J. Homza, Managing Director of Internal Audit, Legg Mason, Inc.
• Lisa Lindsley, Director of Capital Strategies, American Federation of State, County, and Municipal Employees
• William T. Platt, Deputy Managing Partner, Professional Practice, and Deputy Chief Quality Officer – Attest, Deloitte & Touche, LLP
• D. Scott Showalter, Professor of Practice, Department of Accounting, College of Management, North Carolina State University
•Dan M. Slack, Chief Executive Officer, Fire and Police Pension Association of Colorado

Reappointments
• Joseph V. Carcello, Ernst & Young and Business Alumni Professor, Department of Accounting and Information Management, and Co-Founder and Director of Research, Corporate Governance Center, University of Tennessee
• James D. Cox, Brainerd Currie Professor of Law, School of Law, Duke University
• Elizabeth S. Gantnier, Director of Quality Control, Stegman & Company
• Arnold C. Hanish, Vice President of Finance, Chief Accounting Officer, Eli Lilly & Company
• Gail L. Hanson, Deputy Executive Director, State of Wisconsin Investment Board
• Jamie S. Miller, Vice President, Controller and Chief Accounting Officer, General Electric Company
• Steven B. Rafferty, Professional Practices Partner, BKD, LLP
•Samuel J. Ranzilla, Audit Partner and National Managing Partner, Audit Quality and Professional Practice, KPMG LLP
• Lynn E. Turner, Senior Advisor and Managing Director, LECG

Continuing Members
• John L. (Arch) Archambault, Senior Partner, Professional Standards and Global Public Policy, Grant Thornton LLP
• Dennis R. Beresford, Ernst & Young Executive Professor of Accounting, Terry College of Business, The University of Georgia
• Neri Bukspan, Executive Managing Director, Chief Quality Officer, and Chief Accountant, Credit Market Services, Standard & Poor’s Financial Services, LLC
• Douglas R. Carmichael, Claire and Eli Mason Professor of Accountancy, Zicklin School of Business, Baruch College
• Margaret M. Foran, Chief Governance Officer, Vice President, and Corporate Secretary, Prudential Financial, Inc.
• Michael J. Gallagher, Assurance Partner and U.S. Assurance National Office Leader, PwC
• Gaylen R. Hansen, Audit Partner and Director of Accounting and Auditing Quality Assurance, Ehrhardt Keefe Steiner & Hottman PC
•Patricia Ann K. (Kiko) Harvey, Vice President, Corporate Audit and Enterprise Risk Management, Delta Air Lines
•Gary R. Kabureck, Vice President and Chief Accounting Officer, Xerox Corporation
•Anthony S. Kendall, Chief Executive Officer, Mitchell & Titus LLP
•Wayne A. Kolins, Partner and National Director of Assurance, BDO USA, LLP; Global Head of Audit and Accounting, BDO International Limited
•Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors
•Mary Hartman Morris, Investment Officer, Global Equity, California Public Employees’ Retirement System
•Kevin B. Reilly, Americas Vice Chair, Professional Practice and Risk Management, Ernst & Young LLP
•Barbara L. Roper, Director of Investor Protection, Consumer Federation of America
•Lawrence J. Salva, Senior Vice President, Chief Accounting Officer and Controller, Comcast Corporation
•Kurt N. Schacht, Managing Director, CFA Institute
•Damon A. Silvers, Director of Policy and Special Counsel, AFL-CIO
•John W. White, Partner, Corporate Department, Cravath, Swaine & Moore LLP

If you’re completely raptured with anyone listed, you can check out there bios over at the PCAOB’s website.

PCAOB Announces Standing Advisory Group Members [PCAOB]

Some Early Returns From Deloitte Salary Adjustment 2.0

As you’re no doubt aware, last Friday Deloitte made the announcement that the market for audit salaries had been misunderestimated and a second adjustment was going to be communicated to opiners this week.

Checking with a source inside Deloitte, we’ve heard some of the preliminary returns:

I have heard rumors of 5k in Hartford and 4k in Chicago for Seniors. But nothing to prove them out. The general range I have heard though is 2kish for 2nd years and 5k for seniors.


No word at at this point on what managers are receiving, so if you’ve gotten the news, let us know below.

The question now is – was all this hoopla worth it? Granted it’s early but if the range is in the ballpark, there’s likely a few people that are simply, “meh.” On the other hand, maybe if you got called in for another meeting to be told that you’re getting an extra $2k – $5k you might be really flippin’ stoked. However, many people will likely remind you to get some perspective.

Either way, the tax practice is feeling short-changed and advisory is too busy rolling around in their cash-filled bathtubs to care.

Discuss the situation at present and keep us updated with the adjustment news just as soon as your sit-down is over.

UPDATE – 12:45 ET: This just in:

Deloitte experienced assistant from South Florida – $2k for audit assistants, $5k for seniors.

total raise for the year with comp adjustment – 8%. Could be better but could be the original 4% I got in August…

UPDATE – crica 2 pm ET: The latest:

Miami: 2nd years: $2k, Seniors: $5k
Parsippany: 2nd years: $5K Seniors: $8K Managers: $6K

Accounting Firms Dodge Bullet in NY Court’s Kirschner v. KPMG Ruling

Francine McKenna was the first to opine (strongly we might add) on the ruling in Kirschner v. KPMG (along with the derivative suit Teachers’ Retirement System of Louisiana and City of New Orleans Employees’ Retirement System v. PricewaterhouseCoopers) that was announced yesterday.

The New York Law Journal reported on the ruling first:

Ruling on certified questiirschner v. KPMG LLP, 151, and Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers LLP, 152—a 4-3 majority held that accountants who allegedly should have detected malfeasance by executives of Refco in Kirschner and American International Group Inc. in Teachers Retirement System cannot be sued under state law.

The Court held that the principles under which the suits were dismissed—in pari delicto and imputation—are “embedded in New York law” and “remain sound.”

Like we said, Francine had some thoughts on this and she did not hold back:

A majority of the New York Court of Appeals bought the self-serving, selfish and unjust arguments of the defendants and their flunky amicus brief toadies supporting criminal corporate fraudsters and, get this, the shareholders of the accounting firms (!!). The New York Court of Appeals abandoned the shareholders and creditors of Refco and AIG for criminals and incompetents.

If I were writing this decision as a novel of corporate cronyism to the extreme in a Utopian nirvana for capitalist parasites, I could not have imagined more contemptible excuses for judicial cowardice.

Those “flunky amicus brief toadies” include the AICPA, the New York State Society of CPAs and the Center for Audit Quality, who argued that our very capital market system was at risk if accounting firms (and other professionals) could be held responsible for fraud perpetrated by management.

We share Francine’s passion for holding accountants responsible for their culpability (plus, claiming “we were duped” does nothing for the industry’s reputation) but the ruling hardly comes as surprise. Judge Susan Phillips Read wrote for the majority:

The speculative public policy benefits advanced by the Litigation Trustee and the derivative plaintiffs to vindicate the changes they seek do not, in our view, outweigh the important public policies that undergird our precedents in this area or the importance of maintaining the “stability and fair measure of certainty which are prime requisites in any body of law” (Loughran, Some Reflections on the Role of Judicial Precedent, 22 Fordham L Rev 1, 3 [1953]). We are simply not presented here with the rare case where, in the words of former Chief Judge Loughran, “the justification and need” for departure from carefully developed legal principles are “clear and cogent” (id.). Finally, to the extent our law had become ambiguous, today’s decision should remove any lingering confusion.”

[…]

We are also not convinced that altering our precedent to expand remedies for these or similarly situated plaintiffs would produce a meaningful additional deterrent to professional misconduct or malpractice.

In other words, these particular cases didn’t present a situation that demonstrated a desperate need for change in the law nor would it prove to be a helpful deterrent of fraud in the future. Bottom-line seems to be that Francine is upset at the majority’s pragmatic attitude but what do you expect from a panel of seven judges? It’s a long shot that you come across more than a couple of judges who are willing to turn years of case law inside out and upside down just because a company went bankrupt or a pension fund lost value.

That being said, there was a very enthusiastic and compelling dissent that basically calls auditors a bunch of pansies when it comes to accepting professional responsibility, “[I]t seems that strict imputation rules merely invite gatekeeper professionals ‘to neglect their duty to ferret out fraud by corporate insiders because even if they are negligent, there will be no damages assessed against them for their malfeasance.’ ” You can check out more over at RTA.

As far as the audit firms are concerned, they have to breathing a huge sigh of relief. Considering all the lawsuits out there, firms are already slowly bleeding to death by paper cuts. If this case had gone the other way, it could very well have been a mortal wound for the firms.

Kirschner v KPMG LLP [NY Court of Appeals]
Third-Party Liability Ruled Out in N.Y. Suits for Corporate Misdeeds [New York Law Journal]
New York Court of Appeals Stands By Corporate Man: In Pari Delicto Prevails [Re:The Auditors]

Is Citi One of the Issuers in the PCAOB’s Inspection Report of KPMG?

The long-awaited PCAOB inspection report of KPMG came out on Friday and while we were excited for this unveiling, the Board managed to issue the report at around 4 pm on Friday. Since the Board lacks any sense of timing whatsoever, we opted to punt on our respective post until today because well, we’re human and not a soulless blogging robot as likely perceived by TPTB at the PCAOB.

It’s worth mentioning that this is the first PCAOB report that has been issued since the SEC’s final rule on the inspections that allows audit firms to postpone the release of the report simply by taking issue with any of the findings. Since any appeal could reportedly delay the report by “30 to 100 days,” it’s safe to assume that, with a report date of October 5th, KPMG didn’t have a beef with the findings. You could also assume that since the SEC is taking a peek at these reports now, there’s going to be a ten day lag on the release of the report to allow the Commission enough time to give it their extra-special sniff test.

Anyway, back to the matter at hand –

KPMG had eight issuers noted in the Board’s inspection report and the first two are doozies. “Issuer A” runs approximately two pages and includes failure on testing of “allowance for loan losses” to “test[ing] the issuer’s estimates of fair values of financial instruments” and goodwill impairment.

“Issuer B” is a little more interesting since one of the failures the Board found was related to deferred tax assets which makes us wonder if this is Citi, since analyst Mike Mayo was loudly questioning the bank’s treatment of its DTA. Francine McKenna not-so-subtly solicited guesses on Friday as to who this “bank” might be (even though no issuer is identified as such) but it does make us wonder.

The Board cites run-of-the-mill failures for the rest of the issuers (e.g. fair value testing, pension plan testing, failure to confirm cash[!]) and the House of Klynveld’s response letter was cordial and anticlimactic.

But if you’re KPMG, do you really care what the PCAOB thinks when you’ve got an adorable gnome-ish looking analyst giving you the tepid thumbs-up (despite not knowing your name)? That’s the only endorsement we would need.

2010_KPMG_LLP

Michel Barnier: The Big 4 Audit Model Is a Failure

Okay, those weren’t the EU financial services commissioner’s exact words but you get the sincere impression that he’s had it up to his silver coif with how things are going.

“The crisis highlighted failings in the audit sector,” Barnier said today. “These need to be explored and we need to see what improvements can be made. I believe it is important to approach this discussion in a frank and open manner. No subject should be taboo.”

Right! No subject is off limits. So what will be discussed? Well, for starters this Big 4 thing has to stop. The Telegraph reports, “If one of the Big Four – PricewaterHouseCoopers, KPMG, Deloitte and Ernst & Young – were to collapse the Paper suggests it could create systemic risk for the financial markets.”

Secondly, the notion of independence and “putting shareholders” first is a sham. ‘Berg reports:

Restrictions on auditor choice may reduce “distortion within the system” caused by auditing firms acting in the interests of their clients rather than shareholders when compiling reports on a companies’ financial health, the commission said in a report outlining possible measures.

[…]

The commission said it’s also considering rules that would force companies to change their auditing firms after a fixed period of time.

Forcing companies to rotate their auditors would “enhance the independence of auditors” and “operate as a catalyst to introduce more dynamism and capacity into the audit market,” the commission said.

Lastly, can a Frenchman get some choice up in this mofo?

The top four accounting firms have a market share of about 90 percent in the majority of EU member states, according to the commission’s report.

“The market appears to be too concentrated in certain segments and deny clients sufficient choice when deciding on their auditors,” the commission said.

Barnier isn’t asking for a full-blown cafeteria but for crissakes, the choices right now are chicken, chicken, and….chicken. Sure, they might have slightly different recipes (e.g. KPMG a little spicy/sweet, PwC is in a cream sauce) but it’s all chicken. And Barnier HATES chicken.

Companies May Lose Right to Pick Auditing Firms Under European Union Plans [Bloomberg]
EU markets chief Barnier plans radical overhaul of audit industry [Telegraph]

Some People Are Really Excited That MarcumStonefield Is the Auditor of Fuqi International

That or it’s because they managed to not have an adverse opinion.

Fuqi International, Inc. (FUQI) gained more than 14 percent this morning. After the close yesterday, the seller of precious metal jewelry in the People’s Republic of China filed an 8-K form with the SEC where it disclosed that:

“The principal accountant’s reports of Stonefield on the financial statements of it as of and for the years ended December 31, 2008 and December 31, 2007 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2008 and December 31, 2007 and through October 1, 2010, there were no disagreements with Stonefield on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which if not resolved to Stonefield’s satisfaction, would have caused it to make reference thereto in connection with its reports on the financial statements for such years.”

That emphasis is the orig. Supposedly that justifies the stock being up ~17%. Personally, we feel that it’s pretty snooze-worthy but maybe people get really amped when a Chinese company actually complies with the regulations.

Or maybe everyone is gaga over the MarcumStonefield marriage. Could be anything, really.

Universal Travel Group, Who Appears to Be ‘Partially a Fraud,’ Has Gone Through a Shocking Number of Auditors, CFOs

Yesterday, Henry Blodget wrote about Universal Travel Group’s auditor – Goldman Kurland Mohidin, LLP – quitting two weeks after Bronte Capital’s John Hempton issued a ress explained that the whole damn company was a fraud.

This, of course, resulted in a reactionary measure by UTA, who denied all the allegations immediately and announced that they were looking to sue Hempton because, seriously, who likes getting their feelings hurt?

So that’s the backstory. A little bird suggested to us that maybe we should look into the company’s past to see just how many auditors they’ve burned through and maybe check out how many CFOs they’ve gone through also. WELL!


Auditors
First we went back to the 10-K filed on March 31, 2008 and discovered that on June 23, 2006, the company dismissed Moore & Associates, Chartered:

On June 23, 2006, we dismissed the firm of Moore & Associates, Chartered (“Former Auditor”), which had served as our independent auditor until that date. The Former Auditor was our auditor prior to the acquisition of control of our Company by Xiao Jun.

On June 23, 2006, we retained Morgenstern, Svoboda & Baer, CPA’s, P.C. to serve as our principal independent accountant.

This seemed to be a pretty good call on UTA’s part since it turned out that Moore & Associates was issuing bogus audit reports. No cause for concern at this point.

The relationship with Morgenstern, Svoboda & Baer appeared to be going on swimmingly but ultimately, for reasons unbeknownst to all, it didn’t work out. MS&B resigned on June 30, 2009 to make way for Acqavella, Chiarelli, Shuster, Berkower & Co., LLP:

On June 30, 2009, our prior independent registered public accounting firm, Morgenstern, Svoboda & Baer CPA (“Morgenstern”) resigned and on the same day, we appointed Acqavella, Chiarelli, Shuster, Berkower & Co., LLP (“ACSB”) as our new independent registered public accounting firm.

Similar to their predecessors, ACSB & Co. was humming along just fine, getting ratified in the recent preliminary proxy statement filing until they were up and fired on September 1st:

On September 1, 2010, our current independent registered public accounting firm, Acqavella, Chiarelli, Shuster, Berkower & Co., LLP (“ACSB”), was dismissed and on the same day, we appointed Goldman Kurland Mohidin (“GKM”) as our new independent registered public accounting firm.

Anyone weirded out yet? Does appointing a new auditor the same day that the previous quit strike anyone as panicky? Maybe that’s just us. Anyway, so GKM spends four weeks on the job until:

On September 29, 2010, we received a letter dated September 28, 2010 from our current independent registered public accounting firm, Goldman Kurland Mohidin, LLP (“GKM”), informing us that they had resigned as our independent registered public accounting firm effective with the commencement of business on September 27, 2010. No reason was given as to the cause for their resignation.

Windes & McClaughry Accountancy Corporation is new auditor and has not quit at the time at the time of this writing. They way things seem to be picking up, however, it could be any minute. So for those of you not counting, that makes five different auditors going back to June 23, 2006. Probably not a record but it certainly puts the auditor musical chairs at Overstock.com to shame.

CFOs
The CFO situation is less exciting but there’s enough going on that should make any investor run screaming for the hills. Xin Zhang was appointed CFO as of July 12, 2006. After an eternity (by UTA standards anyway), on February 17, 2009, UTA appointed 27 year-old Jing Xie as CFO. Now maybe this Jing is a financial wizard but this seems, at best, fishy.

Xie lasted exactly six months, resigning on August 17th and Yizhao Zhang was appointed to the big chair the same day, again because there was no time to waste.

Yizhao was on quite a roll but then he resigned on August 16th for “personal reasons” (freaked the hell out?) and the company promoted the crafty veteran Xie back to his old position (on an interim basis). This rivals the CFO shuffle that was going on at Lehman.

So quite the riddle. Quite the riddle indeed. Maybe Hempton and Blodget are on to something with this whole “it’s a complete sham” notion. Or maybe UTA is just a bunch of jerks. Theories are welcome at this time.

Auditor Quits At Universal Travel Group (UTA) — The NYSE-Listed Company That Looks Like A Fraud [BI]

Accounting News Roundup: Investigation of E&Y Over Lehman Begins in UK; Study: Mortgage Interest Deduction Doesn’t Increase Home Ownership; PwC Announces Revenue Numbers | 10.04.10

E&Y auditors investigated over Lehman Brothers [Accountancy Age]
“The Accountancy and Actuarial Discipline Board (AADB) has begun an investigation of E&Y in its role in reporting to the FSA on audit client Lehman Brothers International Europe’s compliance with the authority’s client asset rules, which govern the protection of client money.”

And since they were on a roll, the AADB is also investigating PwC for its role in J.P. Morgan’s misuse of client assets.

Study Finds the Mortgage Interest Deduction to be Ineffective at Increasing Owneref=”http://www.taxfoundation.org/blog/show/26762.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+TaxPolicyBlog+(Tax+Foundation+-+Tax+Foundation’s+%22Tax+Policy+Blog%22)”>Tax Foundation]
“Proponents for the MID often offer the justification that it increases homeownership rates, which they say has positive benefits for society. But most economists seriously question the benefits of MID and many believe homeownership is greatly over-subsidized.”

Visa, MasterCard Antitrust Decision by U.S. Said to Be Near [Bloomberg]
“The U.S. Justice Department may decide as early as this week how to resolve its two-year antitrust probe of merchant restrictions imposed by Visa Inc., MasterCard Inc. and American Express Co., three people briefed on the matter said.

The department still hasn’t decided whether it can reach a deal with the three biggest U.S. payment networks or challenge their policies in court, one of the people said. The department likely will file a lawsuit, and MasterCard and Visa are expected to settle, people familiar with the matter said.

The talks focus on rules that bar merchants from charging extra to customers who use credit cards and steering them to competing cards, and require retailers to accept every type of card banks issue, said the people, who requested anonymity because the discussions are private. The department is leaning toward allowing the companies to maintain prohibitions against surcharging, two of the people said.”

Will KPMG Ever Wake Up and Finally Learn Its Lesson after Being Duped into Completing Crazy Eddie’s Audits Too Early Twenty Three Years Ago? [White Collar Fraud]
Today’s lesson in duping auditors – Sam Antar explains exactly how he fooled KPMG (then Peat Markwick Main) into signing off on incomplete audits back in the 80s.

PwC takes $26.6bn in global revenues [Accountancy Age]
Thanks to the miracle of rounding, $26.6 billion puts P. Dubs in a tie with Deloitte for largest firm in terms of revenues, who reported the same number last month. This obviously will not stand and we will investigate the matter further to the appropriate number of significant digits to determine who the top dog is.


Citi says CEO, CFO “rebutted” Mayo’s criticisms in meeting [Reuters]
On Friday, banking analyst Mike Mayo met with Citi execs including CEO Vikram Pandit and CFO John Gerspach and they discussed, among other things, why Citi hasn’t been writing down their DTAs. Citi says that successfully rebutted the Mayo Man who is issuing a report today with his thoughts on the sit-down.

Accountant gets year-and-a-day in Petters scam [Minneapolis Star-Tribune]
“Harold Katz, the hedge fund accountant who doctored financial statements to hide the Petters Ponzi scheme from investors, was sentenced Friday to 366 days in prison after apologizing to family, friends and investors.

Katz, 43, will be eligible for parole in about 10 1/2 months. He was sentenced for conspiracy to commit mail fraud.

‘I made a colossal error in judgment,’ Katz told U.S. District Judge Richard Kyle. ‘I hope I can use this horrific experience to help others not make the same mistakes as I have.’

Katz created false financial statements at the behest of Gregory Bell, manager of Lancelot Investment Management, a Chicago-area hedge fund, to mislead investors about the stability of Petters Co. Inc., which was defaulting on various promissory notes as its decadelong Ponzi scheme unraveled in 2008. Katz also assisted Bell in making phony banking transactions with Petters Co. Inc. to make it appear the Petters Co. was paying off notes it owed to Lancelot.”

Accounting News Roundup: ‘Won’t Somebody Think of the Small Businesses?!?’; Facebook’s New Arbitrary IPO Date; Debunking The ‘Failure’ of Bush Tax Cuts | 09.28.10

Analyzing the Small-Business Tax Hysteria [You’re the Boss/NYT]
“The rhetoric on this subject has become counterproductive. It can’t be helping consumer confidence, and it’s certainly not creating any jobs. In what used to be a running joke on ‘The Simpsons,’ whenever trouble arose, Reverend Lovejoy’s wife would shriek, ‘Won’t somebody please think of the children?!!!’ The emerging counterpart to that cry in our real-life politics seems to be, ‘Won’t somebody please think of the small businesses!’ ”

AOL in Talks to Buy TechCrunch [WSJ]
“A deal would mark a high-profile marriage between the Internet giant and one of Silicon Valley’s most high-profile blogs, which has often been discussed as a possible acquisition target.

It would also be the latest in a series of alliances between content and Internet companies, which are seeking to draw more users and advertisers by pumping out inexpensive articles on popular topics like fashion, news and sports.”

Facebook IPO likely after late 2012: board member [Reuters]
“Facebook, the world’s largest online social network, is likely to go public sometime after late 2012, a board member said, satisfying investors’ appetite for a slice of one of the Internet’s biggest growth stories.

A stock market debut by a company valued in the tens of billions of dollars would be one of the most highly anticipated initial public offerings of the decade.

But Facebook board member, venture capitalist and PayPal co-founder Peter Thiel stressed on Monday that will not happen until after late 2012, and would depend on the company hitting certain revenue targets and how its business model develops.”

Auditors Aren’t Forcing Full Repurchase Risk Exposure Disclosure [Re:The Auditors]
Auditors looking the other way for their banking clients. Again.

BlackBerry Maker RIM Enters Tablet Scrum [WSJ]
“RIM Co-Chief Executive Mike Lazaridis on Monday showed the device, dubbed the PlayBook, at a conference for BlackBerry developers in San Francisco. The PlayBook has a seven-inch touch screen and high-definition cameras on the front and back sides, but the device won’t connect directly to cellular networks.

RIM said its tablet won’t go on sale until early next year in the U.S. and the second quarter elsewhere in the world, meaning it will miss the key holiday season. The timing also puts RIM behind iPad competitors from Samsung Electronics Co., Dell Inc. and others.”


IRS won’t be mailing tax forms next year [AP]
They’re saving $10 million a year, presumably on stamps and envelopes.

News Corp. SVP Kevin Halpin named Dow Jones CFO [AP]
Kevin Halpin is taking the reins from Stephen Daintith.

Correlation Proves Causation, David Cay Johnston Edition [Tax Foundation]
“I agree with Johnston that tax cuts are not the correct response to every economic situation, and I do not believe that letting the Bush tax cuts expire would cause an economic armageddon. If the federal government’s proclivity for deficit spending can’t be curbed by reducing tax revenue – the ‘starve-the-beast’ approach – then permanently extending the Bush tax cuts for any and all taxpayers is a worse policy than letting the cuts expire because the country will drive off the fiscal cliff even sooner.”

Deloitte Isn’t Buying This Big 4 Oligopoly Nonsense

Over the last 20 years or so, for one reason or another, accounting firms that were able to provide audit services to largest companies on Earth have been whittled down from 8 to 6 to 5 to 4. During this time, it became the concern of many (read: anyone not in the “Big” club) that the firms were too concentrated and audit quality was deteriorating due to the lack of competition.

Naturally, the firms at the top have dismissed this argument as bupkis. And because the public accounting industry is one that elected representatives and their constituents could give a rat crap about, the cries of the less fortunate firms have gone unheard.

Until recently that is. A report this summer that revealed the existence of “Big Four clauses” in credit agreements in the UK and that allowed the Grant Thorntons and BDOs of the world to have their “A-HA!” moment.

Deloitte, however, is not impressed with revelation and would like everyone to know that the audit biz is regular dog fight:

The audit market is “fiercely competitive and transparent” according to Big Four firm Deloitte, which sees no reason to open the top-heavy industry to greater competition.

Deloitte believes audit quality is “higher than ever” and said it has seen “no evidence of anti-competitive behaviour”, according to its submission to the upcoming House of Lords inquiry into audit competition.

“Our experience is that the listed-company audit market is one of the most competitive,” the firm said.

“The firm” presumably said this with a straight face.

Audit market is “fiercely competitive” Deloitte argue [Accountancy Age]

Can My Firm Force Me to Change Brokers Even Though There Are No Independence Conflicts?

Today in accountant anxiety, a new Big 4 audit manager is perplexed as to why the firm is requiring the movement of their brokerage accounts, which on the surface, don’t result in any independence conflicts.

Have a question about your career? Is your favorite gridiron powerhouse affecting your work? Concerned that you may be allergic to your job? Shoot us an email at advice@goingconcern.com and we’ll help alleviate your problems.

Back to our muddled manager:

I’m a new audit manager at a Big 4 firm. As a new manager, my firm is requiring me to move all of my brokerage accounts (even those for which I’m the trustee but have no beneficial interest in) to a firm approved by the company and which participates in their daily transaction import program so they can keep daily track of all of my holdings. How is this legal? I’m not allowed to do business with a brokerage firm of my choice, even when there are no independence conflicts? Doesn’t this violate some law or something!?!?! Advice please!


Frankly, we’re a little surprised that you’re surprised about your firm’s requests in this matter. After all, you’re a manager. In the audit practice. We realize it’s been awhile since you’ve cracked an audit textbook but we’re curious if you’re delegating your annual independence refresher to a lowly staff because you can’t be bothered with it.

As you may recall, audit firms have to be independent in fact and appearance. Your brokerage accounts – both your personal and the accounts that you serve as a trustee – are a huge risk to your firm’s ability to maintain that independence. Your personal accounts are a no brainer – a firm simply cannot have anyone with assets with a broker that your firm has some sort of professional relationship with that could be perceived as conflict of interest.

As far as the accounts that you serve as the trustee for – Wiktionary defines trustee as follows:

A person to whom property is legally committed in trust, to be applied either for the benefit of specified individuals, or for public uses; one who is intrusted with property for the benefit of another; also, a person in whose hands the effects of another are attached in a trustee process.

So in other words, you are legally obligated to invest on behalf of the beneficiary in their best interest. This could possibly put you in direct conflict to act in a manner that would risk the independence of your firm.

And as everyone knows, an audit firm’s reputation as an independent third party that provides an objective opinion is paramount to the industry. Whether they are truly independent is a matter that Francine McKenna would be happy to take up with you on any day of the week but all the firms have a platoon of attorneys and other professionals that monitor the risk of independence violations for their respective firms constantly.

And as long as you’re an employee of the firm, the firm’s interests will trump yours. We suggest paying closer attention at your next ethics training.

The Big 4 Abbott & Costello Routine

“Do you want 7 to go into 28 a total of 13 times? Sure. Just hire a Big Four auditor, and he’s got a rubber stamp with your name on it.”

~ Gary Weiss thinks auditors are a joke.

FRC Raps Big 4; Pressure to Perform Non-Audit Work Remains High

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

The Financial Reporting Council of the UK has released the annual results of its inspection of the Big 4 accounting firms. Its verdict? They can do better.

Each of the Big Four – KPMG, PwC, Deloitte and Ernst & Young – were found to have been less than perfect. Each firm had its own specific offenses, but the common thread running through the report was that auditors faced too much internal pressure to do non-audit work, so that the quality and independence of the audits were in danger of slipping.


Ernst & Young was rapped for linking its auditors’ pay and promotion to their non-audit work. Deloitte and PwC were both castigated for sending employees to advise companies both firms were auditing.

The inspector said that audit firms should take more “sufficient professional skepticism in relation to key audit judgments.” In other words, the firms should not take the CFO’s word at face value. In particular, this skepticism should be applied to forecasts, impairment tests, revenue and the confirmation of claimed assets.

The regulators are in a difficult position. There has never been more demand for the services of the Big 4. This week, Deloitte CEO Jim Quigley said that his firm was planning on hiring 80,000 new staff globally over the next five years, taking its total roster to 250,000.

Despite being blamed for going easy on companies and banks before the crisis, companies and regulators have no option but to rely totally on their services.

This stranglehold on business looks set to continue, with more work coming from the non-auditing side. Deloitte also released results this week that showed auditing revenues had slid 1% this year over last year. But its work in the public sector had grown by 38 percent.

A Big 4 Identity Crisis?

“The Big 4 don’t even like being called AUDITORS. Rather they provide ‘ASSURANCE Services,’ and act as ‘TRUSTED ADVISORS.’ This isn’t just rhetorical. It’s a cynical PR move and an effort to limit their liability.”

~ Francine McKenna, who will be on a panel with Lehman Brothers Bankruptcy Examiner Anton Valukas, NYT Chief Financial Correspondent Floyd Norris and others, discussing the financial crisis.

KPMG Pleased That Premature Audit Sign-offs Weren’t on Failed Audits

If you’re the partner on an engagement and you know, deep down in your plums, that the numbers are fine, you probably get pretty anxious to sign off on this bad boy. You want to go on vacation or a golf date with Phil or – if they’re lucky – spend some time with the family. With that in mind, it’s not so unusual that he/she might jump the gun a little and slap down the Johnnie Hancock before all the work gets done.

Unfortunately, as anyone studying for the audit section of the CPA exam will tell you, this is against the rules.


But hey! If the numbers are hunky-dory, there’s not much cause for concern and everyone has a good laugh:

In the case of KPMG, the FRC’s Audit Inspection Unit looked at 15 audits and found that in three cases the auditor’s report had been signed too soon. Significant changes were subsequently made to the accounts in one case.

Paul George, director of auditing at the FRC’s Professional Oversight Board, which includes the AIU, said the early sign-off problem was not limited to KPMG: “It is a profession-wide challenge to some degree.”

KPMG said it accepted the AIU’s comments. “We are pleased to note that in no case did they think that the audit opinion we issued was incorrect,” said Oliver Tant, head of its UK audit arm.

See? It happens everywhere! Plus, it’s not like accounting and auditing are based on rules that anyone takes that seriously, anyway.

Okay, sure signing off early on 20% of the audits sampled sorta looks bad but at least the numbers weren’t wrong. It would be really awkward to explain that.

Watchdog raps KPMG over early audit sign-off [FT]

The PCAOB Wants to Talk More About Talking

Why? Apparently because they just considered the needs of auditors. Audit committee members were feeling left out (and are, presumably, just as uncomfortable conversing with humans as auditors) so it’s back to the drawing board:

At a July 15 meeting of the PCAOB’s Standing Advisory Group, Goelzer said comments reflected a wide range of views. “A number of comments suggested that we needed to do more homework, more outreach on this subject,” he said. “Some thought we approached the subject too much from the perspective of the auditor and without a full appreciation of what audit committee members wanted or needed.”

A briefing paper to set the stage for the Sept. 21 roundtable says the board is holding the roundtable to get more insight from investors, audit committee members, auditors, and management on the proposed standard. The briefing paper outlines a number of questions the board wants to explore focused primary on what information is most relevant to audit committees, and how auditors and audit committees should communicate on those issues.

PCAOB Reopens Comment on Communications Standard [Compliance Week]

Are Big 4 Audits in Russia Worthless?

Maybe not in so many words but this whole PricewaterhouseCoopers/Yukos situation has got some people wondering. The FT and the Wall St. Journal both published articles yesterday about the Mikhail Khodorkovsky and Platon Lebedev trial that is close (?) to wrapping up after 18 months. The two men are accused of embezzling mega bucks from Yukos, the Russian oil company.

Khodorkovsky and Lebedev’s lawyers are now claiming that PwC “acted improperly” by withdrawing ten years worth of audits under pressure from the Kremlin. Pressure, the lawyers say, in the form of “a prriminal investigations and a slew of court cases threatened to undermine its ability to operate in the fast-growing Russian market.” Basically, they threatened to throw PwC out of Russia. And it’s pretty difficult to grow your BRIC business without the “R” so PwC pulled the audits.

The firm claims that they up and changed their minds after the prosecutors showed them some evidence that led them to believe that they had been lied to by Yukos management.


Douglas Miller was the lead partner on Yukos – and who is also reportedly under investigation by the California Board of Accountancy – claims that the accusations are is more or less bullshit and that he stands by his decision to pull the audits.

However, Miller also said in his interrogation by prosecutors that “I believe these issues are being examined not so much by the
company’s Russian office managers, but by executives at PriceWaterhouseCoopers’ global, world level.” The Journal reported, “a PWC official said the decision to withdraw the audit opinions was made by Mr. Miller and others in PWC’s Russia office.” Miller is obviously speculating about what the BSDs at PwC Global were discussing over their muffins but obviously this is a problem.

As is pointed out in the FT, this doesn’t really bode well for audit firms – hell for anyone – trying to do business in Russia:

Regardless of where the truth lies, what is emerging is a situation where global audit firms operating in Russia may all be vulnerable to the double jeopardy of auditing the books of notoriously opaque companies, while being regulated by a government able to launch arbitrary attacks. This lose-lose situation could call into question the value of audits that have been hotly sought as a western seal of approval ever since Russian companies began to access international financial markets.

[…]

[I]t underlines how all who operate in Russian finance – from global audit firms to oligarchs to pension fund investors – may still be vulnerable as the legacy of the chaotic era of Boris Yeltsin and the ensuing Putin clampdown lingers on.

In other words, audits seem to have even less value in Russia than they do in the United States. And here in the U.S. more or less everyone agrees that, at best, auditors are of limited usefulness and at worst, they should be stacked alongside the Charmin™.

But as we said before, PwC (or any other firm that wants to take advantage of Russia’s expanding economy) has billions of reasons to buckle to any pressure put on them by the Russkis. And nobody blames them – not even people close to the Khodorkovsky and Lebedev defense team quoted in the FT saying, “We don’t hold anything against them: they had a gun to their heads.”

Wall Street Journal and Financial Times Expose Serious Allegations of PwC Wrongdoing in Auditor’s Reversal on Yukos [Khodorkovsky & Lebedev Communications Center]
Oil Tycoon Says PWC Caved to Pressure [WSJ]
Russia: Chain retraction [FT]
More on PwC and Yukos:
Never Say Nyet – PwC and Moscow Update [Re: The Auditors]

Who Would’ve Guessed Al Sharpton Knew Nothing About Accounting?

Presumably everyone but if you guessed that the Rev had the good sense to hire a crack-squad of debit & credit mavens to keep everything at National Action Network tip-top, you’d be sorely mistaken.

An accounting firm hired by Al Sharpton’s National Action Network found the civil-rights group in such financial disarray that it flunked its record-keeping — and may not even survive, The Post has learned.

The scathing critique was spelled out in a hard-hitting internal audit of NAN’s books, a copy of which was obtained by The Post.

“The organization has suffered recurring decreases in net assets — and has been dependent upon advances from related parties and the nonpayment of payroll tax obligations — to maintain continuity,” the firm KBL concluded in an April 2 audit of NAN’s 2008 financial records, the most recent available.

The audit, which was submitted to NAN’s board of directors, warned, “These circumstances create substantial doubt about the organization’s ability to continue.”

KBL said it was “unable to form an opinion” on the accuracy of NAN’s financial figures “because of inadequacies in the organization’s accounting records.”

Audit finds Sharpton’s nonprofit on brink [NYP]

Why Did Dave & Buster’s Fire Ernst & Young?

Earlier in the month, adult playground company Dave & Buster’s filed an S-4 to register $200 million in senior notes. Everything seemed to be in order and the month of August just moseyed along as it does.

Until the 24th, when GOD KNOWS what happened and D&B’s audit committee up and fired E&Y. They then filed the amended S-4, letting the whole world know about it:

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

On August 25, 2010, Ernst & Young, LLP (the “Former Auditors”) was dismissed as the Company’s independent auditors. The Audit Committee of the Board of Directors of the Company approved their dismissal on August 24, 2010.

The Former Auditors’ audit report on the Company’s consolidated financial statements for each of the past two fiscal years did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.

During the Company’s most recent two fiscal years and through the subsequent interim period on or prior to August 25, 2010, (a) there were no disagreements between the Company and the Former Auditors on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the Former Auditors, would have caused the Former Auditors to make reference to the subject matter of the disagreement in connection with its report; and (b) no reportable events as set forth in Item 304(a)(1)(v)(A) through (D) of Regulation S-K have occurred.

Naturally, this invites rampant speculation as to the why, why and the why? It’s not the most high profile client on Earth but as Adrienne pointed out, Ernst & Young is now on a list with Vice-President Joe Biden and no one needs that.

Dave & Buster’s, Inc. Announces Dismissal of Independent Auditor [Business Newswire via JDA]

(UPDATE) Dick Bové: The KPMG Citi Team Is ‘An Exceptional Acceptable Group of Auditors’

And you know he’s not messin’ because that’s what he told Charlie Gasparino and God knows you best not lie to the Fox Business Network’s ace reporter. Sure Bové didn’t actually say “KPMG” (hell, he’s probably never heard the name) but he’s giving credit to auditors which is about as unheard of as Tiger Woods using Trojans with hookers.

Bové may have mentioned some other things about Mike Mayo, Citi, Deferred Tax Assets so on and so forth but we’re sure you’re not worried about that.


Btw, if you need to get caught up on just who Dick Bové is, go here. Courtesy of FBN:

On Citi’s apparent cold shoulder towards analyst Mike Mayo:
“It’s totally wrong. Mike Mayo is a brilliant analyst. He’s been in this business for a long period of time and does a superb job of following the industry. To say he can’t come in and speak to the company in my view is absolutely and totally incorrect.”

On whether Mike Mayo’s accusations against Citigroup’s risk management lapses are accurate:
“Absolutely. In September of 2008, Citigroup was effectively bankrupt. The reason why it was bankrupt was the reason that Mike cites. It was that the risk management procedures had completely broken down and it was not effectively managing its portfolio. Mike is right on that comment.”

On why we should believe Citi on its accounting reports:
“We don’t have to take Citigroup’s answer to Mike Mayo. We can take a look at the fact that this company is audited by an exceptional group of auditors. They are regulated by a large number of bank regulators…and they actually are being audited for their tax issues right now by the IRS. All three of these groups agree with the public statements of Citigroup concerning DTAs.”

“What is the basis for saying that these three groups which have seen the numbers don’t know what they are talking about, whereas people that have not seen the numbers, do know what they are talking about.”

On whether Citi has been given a clean bill of health by the SEC, IRS and the Fed:
“We do have an audited financial statement which is not questioning the DTAs. We do have bank regulators who could have memorandums of understating with Citigroup if they believed there was a problem. Citi is estimated to earn by Mike Mayo $9 billion this year. Next year he estimates the company to show a 33 percent increase in earnings to $12 billion. If there is a DTA problem, why is there a belief that the company can jump its earnings by 33 percent from 2010 to 2011?”

We’ve been assured by the wonderful people at Fox that we will have video of this momentous (and perhaps unprecedented) occasion just as soon as it’s available.

UPDATE: AS WE SUSPECTED! Not only was the initial report mis-transcribed, check out Dick’s reaction to Gasparino’s question, “It’s KPMG I believe, correct?” around the 2:37 mark:

Pretty obvious that the dude has never heard of KPMG in his life.

Apparently, Sport Coats Can Go a Long Way for Big 4 Auditors

And finger quotes are obviously an effective way of communicating.


Someone is wasting some billable hours in a very fine manner this August.

Earlier:
A Brief Moment in the Life of a Big 4 Auditor

There Are More Than a Few Texans Who Aren’t Impressed with Ernst & Young’s Auditing Abilities

And this has nothing to do with Lehman Brothers.

Attorneys from Houston’s Ahmad, Zavitsanos & Anaipakos are representing a group of investors in a lawsuit filed against hedge fund auditors Ernst & Young after the group lost more than $17 million following the collapse of a Plano, Texas-based hedge fund that promised low-risk investments.

The lawsuit focuses on two funds sold by Plano’s Parkcentral Global and was filed on behalf of Houston financial consultant Gus H. Comiskey and four Tucson, Ariz.-based entities, including the Thomas R. Brown Family Private Foundation. The now-defunct Parkcentral Global was operated by affiliates of billionaire and former presidential candidate H. Ross Perot before closing its doors after losing a total of more than $2.6 billion.

“Our clients were told that an investment in Parkcentral was designed to preserve capital. Instead, they lost every penny in record time. E&Y was supposed to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral’s investors of their impending doom,” says attorney Demetrios Anaipakos, who will try the case with Amir H. Alavi.


Did you hear that E&Y? RECORD TIME! But why the Ross Perot mention, Ahmad, Zavitsanos & Anaipakos? Got something against eccentric Texas billionaires that like explaining complex things with charts? Sadly, the BPR does not elaborate.

The lawsuit includes claims that New York-based Ernst & Young falsely represented that the company fairly audited Parkcentral Global and the auditor failed in its “watchdog” [Ed. note: These quotation marks appear to be unnecessary. Also, the “watchdog” thing, sucks as metaphor.] role to warn relying investors of the risk of fraud and noncompliance by management. The suit accuses Ernst & Young of fraud, negligent misrepresentation, securities fraud and conspiracy.

This month, Brown Investment Management, L.P., one of the plaintiffs in this suit against Ernst & Young, won a Delaware Supreme Court ruling that requires Parkcentral Global to disclose its former investors. Those investors could be added to the new Houston lawsuit.

The investments of the Brown foundation, Brown Investment Management and the two other family-related ventures totaled $16 million and were lost within 90 days despite a “worst case loss” estimate of 5 percent. Mr. Comiskey, like his fellow investors, lost 100 percent of his investment when Parkcentral Global went under.

Mr. Anaipakos and Mr. Alavi have handled disputes against hedge funds and private equity firms for more than a decade. This lawsuit is separate from a class action filed in the U.S. District Court for the Northern District of Texas against Parkcentral Global.

A Brief Moment in the Life of a Big 4 Auditor

Well. Any auditor for that matter.

Based on personal experience it’s plausible that the script came from actual conversations.

Ernst & Young Partner Might Be Hiding Emmy Results Under His Pillow, Fails to Land Groupies

On Sunday, The Emmys will be handed out to several cast and crew of Mad Men and a few other people. In order to give these proceedings some legitimacy, Ernst & Young partner Andy Sale (and possibly a few others) counts these votes and certify the results.

The L.A. Times published a Q&A with Sale today since the big day is nearly here and we took the liberty of bringing you the highlights.


For starters, Andy understands that the MSM could really get two shits about accountants except when there are audit failures or celebrities involved:

How cool is it to walk on the red carpet?

It’s one of those things where for at least one day a year, being an accountant is something the press wants to shine a light on.

He also doesn’t appreciate the LAT’s presumption that being an accountant is boring:

Is it the one day of the year it’s fun to be an accountant?

I think it’s fun to be an accountant every day.

Cool fact: if one of the presenters is Mel Gibson-drunk and just blurts out a name that is completely wrong, Andy must sprint on stage give the presenter a roundhouse uppercut and state unequivocally who correct winner is. Fortunately, that has happened…yet:

Has anyone ever screwed up reading a winner?

Part of our role is to ensure the appropriate name is read onstage. If a name was omitted or read inappropriately, we would be duty-bound to go onstage and correct it. It’s never happened. We hope to continue that streak.

The security around these events has to be tight and Sale and the team have to keep things creative when hiding the results. That means the results could be anywhere – a vault, his underwear drawer, Jon Hamm’s pants:

Let’s talk security. After you’ve finished counting the votes, where do they go?

Where they are secured and how they are secured changes every year. It can be in a vault. It can be under a pillow. We have multiple sets of envelopes and those multiple sets of envelopes arrive at the Nokia Theatre by different means. For security reasons, I can’t divulge those specific means. They’re delivered by a means both conventional and unconventional, and that’s all I’ll say on that.

And as glamorous as this gig is, it still not getting Andy as much action as he would like:

Do you get groupies out of this?

I can’t say I’ve seen a lot in the way of groupies.

Andy Sale is counting on Emmy Awards [Los Angeles Times]

Citigroup Blackballs Analyst Claiming the Bank’s DTAs Should Be Written Down

Fox Business Network’s ace news-breaker Charlie Gasparino reports that Citigroup’s management team, including CEO Vikram Pandit and CFO John Gerspach will not meet with CLSA banking analyst Mike Mayo since he’s been telling investors that the big C should be writing down their $50 billion in deferred tax assets.

Carlito reports that Mayo states that this refusal to write down the DTAs amounts to “cooking the books by inflating its earnings through an accounting gimmick.”

Simple question from Mayo via CG, “I’d like to know why all my competitors get meetings with Pandit and the key people there and I don’t.” It’s not like the guy is one of the top banking analysts in the entire world. It’s not like Citigroup has a solid track record of transparent financial reporting. Or did everyone forget that C has the U.S. Treasury as its backstop?

The KPMG audit team can weigh in on this at any time. Or just email us the details.

Analyst: Citigroup is Cooking the Books [FBN]

American Apparel Subpoenaed Over Auditor Switcheroo

American Apparel’s downward spiral continues as Bloomberg reports that the company has been subpoenaed by the U.S. Attorney for the SDNY over the company’s “change in accounting firms.”

If you’re justl started with Deloitte quitting as the auditors of APP late last month. At that time, Deloitte warned that the ’09 financial statements may not (read: definitely are not) reliable and that they were getting the hell out of Dov.

Former APP auditor Marcum – for reasons unbeknownst to us – went back to their old client to try and help them straighten things out. Here’s the latest from the “preliminary results” for the second quarter, while thetardy 10-Q remains elusive. These prelims (i.e. a wild stab?), that were filed today warn that things are likely to get worse before they get better:

Potential Restatement of previously issued financial statements

Effective July 22, 2010, Deloitte resigned as our independent registered public accounting firm. On July 26, 2010, we engaged Marcum as our independent registered public accounting firm. On July 28, 2010, we reported on a Form 8-K that we had been advised by Deloitte that certain information had come to Deloitte’s attention that if further investigated may materially impact the reliability of either Deloitte’s previously issued audit report or the underlying consolidated financial statements as of and for the year ended December 31, 2009 included in our Annual Report on Form 10-K for the year ended December 31, 2009. Deloitte has requested that we provide Deloitte with the additional information Deloitte believes it is necessary to review before any conclusions can be reached as to the reliability of the previously issued consolidated financial statements as of and for the year ended December 31, 2009 and auditors’ report thereon.

Depending on the outcome of this review, a restatement of our financial statements as of and for the year ended December 31, 2009 could be required. Any restatement may subject us to significant costs in the form of accounting, legal fees and similar professional fees, in addition to the substantial diversion of time and attention of our Chief Financial Officer, our other officers and directors and members of our accounting department in preparing and reviewing the restatement. Any such restatement could adversely affect our business, our ability to access the capital markets or the market price of our common stock. We might also face litigation, and there can be no assurance that any such litigation, either against us specifically or as part of a class, would not materially adversely affect our business, financial condition or the market price of our common stock.

But that’s not all! The company discusses a few more issues, “We are subject to regulatory inquiries, investigations, claims and suits. We are currently defending one wage and hour suit, one sexual harassment suit and responding to several allegations of discrimination and/or harassment that have been filed with the Equal Employment Opportunity Commission or state counterpart agencies.”

At that point, the filing finally gets to the problem du jour:

In addition, in connection with our previously disclosed change in auditors, on July 30, 2010, we received a grand jury subpoena from the United States Attorney’s Office for the Southern District of New York for the production of documents relating to the circumstances surrounding the change in our auditors. We have also received inquiries from the Securities and Exchange Commission regarding this matter. We intend to cooperate fully with these requests and any related inquiries.

If consider all that, plus the fact that the company is spending cash like Pacman Jones at a strip club and that they’re likely to be in noncompliance with a major debt covenants at September 30th, it’s no surprise that the stock is off even more than when Deloitte first quit as auditors.

American Apparel Drops After Receiving Subpoena on Change in Accountants [Bloomberg]
10-Q [SEC]

Local Man Gives Up Audit Gig to Live Off Coupons, Risk Homelessness, Suffer Yoga Injuries

Josh Stevens of Chicago was done with his corporate audit job. The glamour of cube farm life had lost its allure and lucky for him, a challenge that only an accountant could embrace.

He decided that he would accept the challenge from Internet sensation du jour Groupon to live on coupons for an entire year, “I had done corporate auditing for a year, and I decided I didn’t want to sit in a cubicle every day. I thought I’d go back and get more education, and right as I started working on those applications, this fell in my lap.”

“This” includes traveling all over this great land, living off of coupons but there are a few rules that could make things difficult for Stevens including:


• “Stevens can’t use or even touch money.”

• “He’s allowed only five visits from family and friends, with each visit lasting less than a day.”

• “Strangers, fans and supporters may donate a place to crash for the night, a car ride or plane ticket.”

So how does Josh handle not being able to have his skin touch cold hard cash and more or less being celibate (his girlfriend can’t visit him) for an entire year?

“It’s the logistics. It’s really hard to plan in advance for anything. You don’t know how to get from place to place. You don’t know where you are going to be so it’s hard to plan where you will go and who will give you rides.” Of course his ability to be a “cross between Anthony Bourdain, who is trying new things, and MacGyver, who has to be resourceful,” has proven helpful (e.g. getting manicures) as has his willingness to rely on the kindness of strangers (one couple let him stay with them for two weeks).

However, there was one instance where his adventurous nature backfired, “I kind of overdid it with a yoga class I did in Washington, D.C. I don’t know much about yoga. I think I just overstretched. I was fine that day. And the next day and then a day after that, all of my muscles tensed up, and I struggled with it for a few weeks.”

Despite this setback, Josh is plugging along and we’re rooting for him to win the $100k if completes the challenge. Hopefully he’ll spend some of the winnings on his girlfriend and maybe give yoga another shot.

Man tries living on coupons for a year [CNN]