Tag: Auditors

Madoff Auditor to Plead Guilty Next Week

Reuters:

“The government anticipates that, at the pretrial conference scheduled for Nov. 3, 2009 … David G. Friehling, the defendant, will plead guilty pursuant to a cooperation agreement with the Government,” prosecutors said in a letter to the judge handling the case in Manhattan federal court.

According to the WSJ, “Mr. Friehling is expected to plead guilty to are securities fraud, investment advisor fraud, obstructing or impeding the administration of Internal Revenue laws, and four counts of making false filings with the U.S. Securities and Exchange Commission.” Since he’s flipping, Friehling will likely not face the maximum sentence of 108 years but he still probably shouldn’t make any long term plans.
Friehling will be third person related to the Madoff scheme to plead guilty and this will no doubt be the last time that we hear about an auditor admitting guilt.
Earlier: Judge, Possibly Fearing a TP’d House, Denies Bail for Madoff CFO

Do Recessions Cause Accounting Irregularities?

Thumbnail image for Cooking the Books.jpgSome people think so. Emily Chasan at Reuters discusses the perceived rise of accounting irregularities today:

“Corporate balance sheets may be showing signs of the wear and tear from the prolonged U.S. recession as accounting irregularities are starting to surface at growing numbers at U.S. companies.”
Okay but don’t accounting regularities happen all the time? If the economy is humming along nicely does that mean that less companies are engaging in accounting hocus-pocus? Hmmmmm.


But there’s more argument for “it’s the economy stupid”:

“Statistically you can show any time you have a recession or some type of tremendous decline in an economy you’re going to see financial pressures on companies,” said Bruce Dorris, program director at the Association of Certified Fraud Examiners, noting that corporate employees can sometimes be motivated to be overly aggressive with accounting or commit outright fraud to meet targets, particularly in difficult economic times.

The article cites Apollo Group’s stock dropping 18% yesterday after announcing that the SEC was starting an “informal inquiry” into its revenue recognition policies. It also lists Overstock.com, Town Sport International Holdings (owns NYSC), Zale Corp and also Huron Consulting whose stock price is still down 40% since the announcement of the SEC investigation. All these companies have delayed earnings reports or had investigations into their accounting practices.

So feel free to discuss your clients and their creative nature in this economy. Are their hard-nosed GAAP puritan ways caving to earnings pressure or are your partners the ones caving in the name of client service? Nobody wants a to be working on a client that’s going through a restatement. Nobody.

Accounting irregularities may be on the rise in U.S. [Reuters]

(UPDATE) Is the PCAOB Going the Way of the Dodo?

Dodo_bird.jpgWho knows? Our separation-of-powers principles knowledge is pretty much zilch. However, the PCAOB is currently “doubly insulated from both political pressure and presidential oversight” which some – including the Plaintiff in the case, First Free Enterprise Fund – think is unconstitutional.
The case, First Free Enterprise Fund v. PCAOB, will be argued during the new session of the U.S. Supreme Court on December 7th. Here’s the take of our sister site, ATL, last year when the possibility of the SCOTUS hearing the case first came up.
More, after the jump


We won’t rehash the whole immaculate conception of the PCAOB, as you’re all familiar with that story. First Free Enterprise Fund v. PCAOB, however, could make things interesting: “This case has the potential to undo the SOX accounting and auditing reforms. As such, the result may impact not just the auditing profession, but also every public company as well as the users of financial statements of those companies.”
‘Undo SOX accounting and auditing reforms’? That sounds kinda serious. We won’t go so far as to suggest that you start forgetting everything that you’ve been trying to get your heads around for the past seven years, but there’s at least a possibility that the PCAOB could become extinct. That could be exciting, or it could make you completely f*cking miserable again.
New Court Term May Give Hints to Views on Regulating Business [NYT]
The Supreme Court Term – Significant Cases for Business [SEC Actions via JDA]
Supreme Court Obsessed With Business This Session [Law Review]

SHOCKER: Audit of the Defense Department Had Serious Problems

Thumbnail image for DoD.pngWe’re pretty surprised that the Defense Department has an audit of its contracts at all but since they do, we’ll give them credit for at least setting up some faux-oversight. That’s where the credit stops however, since the auditors work for “The Pentagon’s Defense Contract Audit Agency” (“DCAA”) which just reeks of independence.
As we mentioned, the fact that anyone would attempt to audit the Defense Department is laughable at best. Some problems that the General Accounting Office found, according to Web CPA:

The problems uncovered by the investigation included waste of time and resources by the audit agency. As an example, the GAO noted that DCAA auditors spent 530 hours to support an audit of the cash management system at a research and development grantee, only to discover that the billing system was non-existent.

Awesome. Three months of work to discover a phantom billing system. Oh, but there’s more:

During a separate billing system audit of a supplier of combat systems, “Auditors deleted key audit steps related to the contractor policies and internal controls over progress payments without explanation.” One DCAA auditor told the GAO he did not perform detailed tests because, “The contractor would not appreciate it.”

Testing is rather inconvenient when accountability is involved. Especially in the name of national security.
For one of the 69 reviews the GAO performed, the audit report cited eight significant deficiencies in the contractor’s accounting system but since the contractor wasn’t really cool with that, the auditors dropped five of the SD’s and recommended that the other three be “improved without additional work”.
Buckling to clients isn’t as unusual so we’ll let this one slide and considering the DoD’s track record, they’ll continue doing whatever they hell they want. We just thought we’d bring it up here for the record.
GAO: DOD Audit Oversight Has “Widespread Problems” [Web CPA]

If Failure = ‘Chaos’, What Does Chaos Look Like?

Riots.jpgThe British government has denied a change in the law there that would limit audit firms’ liability. The Big 4, who seem to enjoy a far more prestigious and influential existence in Britain than in the U.S., lobbied for a change to the law but it was ultimately dismissed by the British Business Secretary.
The British government cites existing law that would allow companies to reach agreements with their auditors to limit their liability.
Continued, after the jump

Under present company law, directors can agree to restrict their auditors’ liability if shareholders approve; however, to date, no blue-chip company has done so. Directors have seen little advantage in limiting their auditors’ liability, and objections by the US Securities and Exchange Commission (SEC) have also been a significant obstacle.

Ahh, the SEC, exerting its far-reaching influence another over sovereign government, not to mention their stellar track record . This does not amuse in the UK:

Peter Wyman, a senior PwC partner, who was involved in the discussions, said that the Government’s lack of action was disappointing. He said: “The Government, having legislated to allow proportionate liability for auditors, is apparently content to have its policy frustrated by a foreign regulator.”

The firms are lobbying, not solely for their own survival, dammit, but the sake of everyone, “They warned that British business could be plunged into chaos if one of them were bankrupted by a blockbuster lawsuit.”
We’re not really sure what ‘choas’ would entail. Hank Paulson had his own version of financial Armageddon but we hardly think that’s a plausible scenario if a Big 4 firm were to fail.
Perhaps there would be an army of accountants roaming the streets in zombie-like states offering their excel expertise to anyone that would accept it. While this is a completely horrifying scene, we’re skeptical of true ‘chaos’.
If you’ve got your own visions of chaos in the event of a large firm failure, describe it in the comments.
Audit firms left unprotected against claims of negligence [Times Online]
Also see: No legislated cap on audit liability [AccMan]

The Accountants Plug at the Emmys Is Made Watchable By an E&Y Hottie and Dr. Horrible

When we heard that the accountants at E&Y with elephant-like memories were the butt of a joke on last night’s Emmys we weren’t really surprised. That being said, we weren’t really expecting a joke that would be that entertaining.
So, we were pleasantly surprised when 1) one of the E&Y reps, Mika Velga (sorry if we butchered the spelling), turns out to be a hottie and B) the sketch featured Dr. Horrible, courtesy of the comedic genius of NPH.
Video, after the jump



If you’re not familiar with Dr. Horrible, feel free to waste a few minutes of your morning getting caught up. Oh, and if you know Ms. Velga, tell her she has fans.

In a Pinch, Deloitte Lets Anyone Sign Off on Audit Reports

DTa.jpgAudit partners are busy people. Regrettably, things get overlooked from time to time. Birthdays. Anniversaries. Pants. There’s just too much to think about sometimes.
One thing that you wouldn’t expect an audit partner to forget is to sign an audit report. Sadly, it appears that this crucial piece of the engagement sneaks by too:
More, after the jump

Deloitte has agreed to pay a £10,000 fine after allowing three members of staff to sign audit reports who were not designated as “responsible individuals”, contrary to audit regulations. Between March 2003 and November 2007 the three employees signed 95 audit reports.

Personally, we’re hoping that interns signed off on these because that would amount to a level of irresponsibility of the utmost hilarity. Speculation aside, Deloitte took this matter very seriously:

“Deloitte prides itself on its rigorous quality procedures and is disappointed that the individuals concerned failed to comply with the explicit policy that only those authorised to sign audit opinions may do so. None of the individuals concerned now work for Deloitte and the firm has implemented further improvements to its processes and controls.”

Rigorous quality procedures that let 95 audit reports sneak by? Short of the partner being on their deathbed, what could have come up that would make it a good idea to have someone else sign the reports? As for “rigorous quality procedures”, these must be on a sliding scale dependent on the number of pints that everyone has at lunch.
Deloitte fined £10,000 over mis-signed audits [Accountancy Age]

PwC Better Bring Their ‘A’ Game to This Year’s Oscars

OSCAR_INSIDER_hmed.hmedium.jpgWe’re not sure how long PwC has been counting the votes for the Oscars but we read some news this morning that made us pause with concern.
Apparently the Academy of Arts & Motion Pictures Sciences thought it was a good idea to change the voting rules for the Best Picture category back to the “preferential system” which was last used in 1945.
Our concern lies with the fact that this change in voting method might not mix well with the desire for routine that is forever embedded in the double helix of accountants, specifically auditors.
More, after the jump


The most common set of instructions that an auditor receives, as some of you well know, is “Do what they did last year”. This mantra, if not cast aside for the 2009 Oscars, could quite possibly be responsible for a material misstatement of epic proportions.
It’s far too early to speculate what films could be affected (maybe not) but we are concerned that since the awards are only six months away, the auditors don’t have much time to have at least a half a dozen meetings to discuss the ramifications of this decisions, let alone start planning, GASP, new procedures.
Best Picture voting gets a makeover [Variety]
Academy Makes Big Changes in Best Picture Voting [The Wrap]

Chrysler Auditor Switcheroo Follow-up (UPDATE)

We’ve confirmed with a Chrysler Spokesperson that the new entity emerging from bankruptcy has appointed Deloitte as the external auditors, a role that KPMG held for the entity that remains in bankruptcy:
More, after the jump

[We] can confirm that, as a new company, Chrysler Group LLC has appointed Deloitte as its external auditors. KPMG had previously served this role for the old Chrysler, which remains in bankruptcy. The new company, Chrysler Group LLC became operational on June 10, 2009.

Basically, as some have speculated, this may be a chance for Deloitte to poach the entire KPMG team, which, we have to admit, might not be a bad idea.
KPMG did not immediately respond to our requests for comment. Deloitte got back to us with no comment.
UPDATE: Chrysler got back to us with some additional information including
• Why the change in auditors – “Chrysler Group LLC is a new company and, as such, the company has decided to appoint Deloitte as its new external auditors.”
• If Deloitte was in the field – “Deloitte has begun initial planning work for the 2009 audit.”
• KPMG’s remaining responsibilities – “We cannot address any services KPMG may be performing for OldCarco (the official name of the company that remains in bankruptcy).”
Nothing too surprising here except for the hilarious awesomeness of “OldCarco”.

Gold Star of the Day: Deloitte

DTa.jpgBrace yourselves, we’ve got a positive story about accountants, specifically auditors. Taylor, Bean, & Whitaker, filed bankruptcy on Monday after some strange goings on in the past month between the lender and the purchaser of its loans, Colonial Bank.
More, after the jump


The collapse came, at least partially, due to some very pesky Deloitte auditors who were calling TBW on their shenanigans. Per the WSJ:

Edward Corristan, the Deloitte & Touche LLP partner who headed the audit, was uncomfortable with the way Taylor Bean was accounting for foreclosed properties, according to a court filing and people familiar with the matter…Deloitte believed that employees of Taylor Bean and Colonial “had engaged in potentially inappropriate communications” about accounting for the foreclosed homes, according to a filing by Taylor Bean in connection with its bankruptcy case. With Ginnie Mae’s deadline for filing an audited financial statement approaching, Taylor Bean agreed to hire the law firm Troutman Sanders LLP to investigate Deloitte’s concerns. Meanwhile, Deloitte suspended its audit.

When TBW missed their deadline for filing with Ginnie, they had some explaining to do:

That task fell to Paul R. Allen, a former Fannie Mae executive who had served as chief executive of Taylor Bean since 2003…On July 6, Mr. Allen wrote a letter to Ginnie stating that there were no unresolved issues between Taylor Bean and Deloitte, according to the court filing. The letter hadn’t been reviewed by Mr. Farkas, Deloitte or Taylor Bean’s legal counsel, the filing said…Ginnie then met with Deloitte, learned of its concerns and decided that Mr. Allen’s letter was misleading. On Aug. 4, the Department of Housing and Urban Development, which oversees Ginnie and the FHA, suspended Taylor Bean’s authority to make or service FHA-insured loans. HUD said Deloitte had found “certain irregular transactions that raised concerns of fraud.”

Deloitte declined to comment, as it is their policy not to, on client matters. Okay but we’ll say, pret-tay, pret-tay, prety-tay good job Deloitte. Our faith has been restored. For now.
For Lender, a Fast Fall From Audit to Collapse [WSJ]

Do You See What Happens?

accountant.jpgThe PCAOB was kind enough to issue a couple of examples this week of what happens when you don’t take your role as auditor seriously.
We wouldn’t dream of putting them both in one post so we’ll give you one in the morning to ponder and save the second for later right about the time you’re ready to flip out, so hang in there.
We’ve also done you the courtesy of reading (sort of) both of the orders so that you can remain fully chargeable (not counting the time you take to read this post of course):
Thomas Linden was a partner in the Chicago office of Deloitte and lead engagement partner on Navistar Financial Corporation (NFC). At the 11th hour, prior to filing the fiscal year 2003 10-K, the engagement team realized that assets, revenues, and net profits were overstated by $19.7 million.
Check out the rest, after the jump


Having a typical over-confident management team, NFC had already taken the liberty of announcing the fourth quarter earnings prior to filing the 10-K.
Because Tom Linden was a Big 4 Partner and thus impervious to any challenge he encounterd, he took the following action (all our emphasis):

• Initiated an increase of approximately 50 percent in Deloitte’s planned tolerance for misstatements in NFC’s reported financial results
• Authored, with the assistance of a member of the NFC engagement team, an NFC auditwork paper that inaccurately characterized the reasons for and circumstances surrounding the increase
• Failed to evaluate adequately the risk that NIC’s financial statements were materially misstated due to error or fraud
• Otherwise failed to act with the requisite due professional care and professional skepticism

Okay, so the last two are boring but the first two kinda, sorta give us this impression of what happened:
Dude finds out the numbers are bunk, client isn’t cool with telling their analysts (who NFC told that they had a kick ass quarter) that said numbers are bunk, so Dude up and decides to ABBACADABRA make the tolerance for misstatement 50% higher than it was for the entire audit (read: that’s a lot).
Then, after probably putting the proverbial (or possibly literal) gun to head of the “member of the NFC engagement team”, they wrote a workpaper that supposedly explained why the tolerance was all of sudden 50% higher but the rationale was something to the effect of “because we said so”.
So for all that tomfoolery (snap!), Linden gets fined $75,000 and can’t be associated with a registered accounting firm for two years and which point he can petition to be to be reinstated. Yow-za. To better times, Tom.
ORDER MAKING FINDINGS AND IMPOSING SANCTIONS In the Matter of Thomas J. Linden, CPA, Respondent. [PCAOB]