Kill the Audit Industry, Says Ex-Auditor
In the WaPo opinion pages yesterday one Duncan Mavin, who got his start in the 90s, says the best way to solve the audit industry’s many conflicts is to kill it altogether. He starts the piece summoning the ghost of Enron, as all writers do when discussing what happens when audit goes wrong. Bringing things […]
Did the SEC’s Acting Chief Accountant Have EY in Mind When He Wrote This?
The Australian Financial Review reported today that EY had hoped to temporarily share the EY brand name between a new independent consulting firm and its existing auditing firm if a decision is made to split the two businesses into separate entities. But according to a statement this week from SEC acting chief accountant Paul Munter, […]
Here’s the Deck EY Put Together to Sell the Audit/Consulting Split to Staff
Australian Financial Review has published slides shown to EY staff in a July global webcast led by Carmine Di Sibio and in them we learn more about EY’s plan — code-named Project Everest — to split off consulting and audit. First up, the why. “The transformative forces reshaping professional services are evolving at unprecedented speed and […]
EY Is Leaving $10 Billion in Consulting Fees On the Table If It Doesn’t Split, Says Global Chairman Carmine Di Sibio
In comments to Financial Times, EY Global Chairman and CEO Carmine Di Sibio says splitting consulting and audit “would win its consulting division up to $10bn in extra fees by liberating it from conflicts of interest that block partnerships with the world’s largest tech groups.” Those consulting fees are as yet out of EY’s reach […]
Big 4 Conflicts of Interest Are in Regulators’ Crosshairs, EY Tops the Independence Naughty List
There’s a story in the New York Times today about how EY “devised an elaborate arrangement” for nonprescription drugmaker Perrigo to avoid more than $100 million in taxes, an arrangement that was questioned by Perrigo’s then-auditor BDO. Perrigo did what any reasonable tax-avoiding nonprescription drugmaker would do and dropped BDO for EY, hence totally resolving […]
Robot Auditors Won’t Have a Problem Giving Clients Bad News
Here’s something that won’t surprise anyone: A study from the University of Missouri found that auditors defer to information provided by management. In the study, nearly 50 senior auditors from major accounting firms were asked to assess the cost of an explosion at a client’s facility based on memos provided by the company’s finance chief. […]
PwC Is in the Midst of a Independence Quagmire
Independence: its complicated. Except it isn’t, really. Audits firms are conflicted because they’re paid by the organizations who they’re supposed to be independent of audit clients. Most people, I think, know this yet choose to ignore it. Fine.
Accounting Firms Allowing Side Gigs: Good Idea or Independence Mine Field?
These days, you hear more and more about people juggling multiple projects at once. You know, a day job, the moonlighting gig, a passion project, the "I was just fucking around and it became a thing"1 thing, among others. You would think that accounting firms, known for working people so hard that it renders them […]
PCAOB Member Wants a Closer Look at Tax Services and Auditor Independence
Last week the PCAOB approved its 2016 budget and also its "strategic plan" through 2019. That might sound like a more potent sleeping aid than tryptophan, but sometimes board members say interesting bits worth sharing and, today, we have some for you. Each of the board members made pretty benign statements — quibbles about the […]
Oops: Grant Thornton Lost an Audit Client Due to ‘Inadvertent Scope Creep’
Ahhhh, independence. The albatross around the neck of the audit profession. Or maybe that's the PCAOB. Or maybe it's the technology. Fuck, I don't know. If you imagine all the giant birds shitting on auditors, ugh, that's a horrific thought.
Oh Look, Another Big 4 Audit Firm Settled with the SEC Over Independence Violations
The SEC has fined Deloitte over $1 million for violating auditor independence rules. The consulting side of the house had a thing going with a trustee, Andrew Boynton, of three funds the firm audited. Deloitte did self-report the violation in 2012, although at that point, the firm had been violation for five years. Sounds like […]
Yep, Auditor Independence Is Still a Joke
People like getting worked up about auditor independence. For firms, it's a badge of honor. They like pointing to it as a virtue of their business. You know — objectivity, integrity, all that crap. For audit firm critics, picking a fight over independence is easy. All anyone has to say is, "Audit firms are paid by […]
KPMG Concerned Employees Can’t Resist Banging One Another
According to a tipster, KPMG distributed this the other day, because apparently sleeping with your coworkers is a serious problem over there.
Going Concern Presents: The Worst of Auditing 2014
Another day, another "year in review best of" list. Except this list is actually the "worst of" 2014. It's been an exciting year for auditing. PCAOB inspection rates were some of the worst to date, and then there was that whole thing where an audit partner was banging the Chief Accounting Officer at the client's. […]
Duh of the Day: Consulting Work by Audit Firms Could Possibly Impair Audit Integrity
The rise of non-audit services offered by accounting firms could threaten the quality and integrity of independent audits, said Steven Harris, a key member of the government’s watchdog agency. Although the Securities and Exchange Commission has limits on the kinds of consulting and advisory work audit firms can perform for their clients, that line may […]
Sex and Professional Ethics, Round 2
In case you need to be caught up, the controller at Ventas and the audit partner at EY were banging. So Ventas fired their controller, and Ventas fired EY, and EY fired the audit partner. EY also said that putting the sausage in the ham wallet was a flagrant violation of professional standards. Over the […]
CAQ-Commissioned Study Finds Reasonable Assurance Somewhat More Reasonable These Days
We're sharing the following with you not because we think it is a sign that both clients and their auditors have cleaned up their acts but it is a perfect example of how dangerous data can be in the wrong hands. Let's take a look at the results of the work done by Susan Scholz, […]
Clarifying Sex and Auditor Independence After the EY and Ventas Affair
With all that went down with Ventas and EY1, I needed a little clarification on our independence rules, so I took the initiative to send the following email to the AICPA: Dear AICPA Ethics Hotline, I understand that earlier this month Ernst & Young was fired by Ventas, Inc. due to an inappropriate relationship between […]
The Big 4’s Spurious Independence in One Chart
Mark O'Connor of Monadnock Research wrote an epic post over at re:The Auditors yesterday on the Big 4's advisory performance for 2013 and the resulting "conflict metrics." The whole post is worth a read but this chart sums things up well. […]
EY Tops Big 4 Las Vegas Firms in Hindering Its Advisory Business Growth
In this day and age of professional service firm trends, it's strange to see an announcement that highlights the audit business in the lead paragraph: [On Monday] Ernst & Young LLP’s Las Vegas office celebrates its 10th anniversary. Since its opening here in 2003, it has become the nation’s largest fully integrated gaming and hospitality practice, […]
The New EY: A $50 Billion Revenue Goal, Squishy Independence, and Adios to the Ampersand
Nearly three years ago we surprised everyone with the news that PwC was rebranding itself. It was big news for awhile and not everyone liked the new look, but just like a website, eventually people get tired of bitching about the changes and they move on. Shortly thereafter, we highlighted an obscure report from Marketing […]
The SEC Manages to Get Softer on Big 4 Audit Firms
Incredibly, the SEC has done something I didn't think was possible. It has, in its implicit blessing of Herbalife's selection of PwC as auditor, given the Big 4 and other audit firms more leverage in future debates over independence with regard to past non-audit services. And the last thing the Big 4 needs is more […]
(UPDATE) In Becoming Herbalife’s Auditor, PwC Does a Dicey Independence Dance
~ See update below It seems fitting that PwC would replace KPMG as Herbalife's auditor, doesn't it? On May 21, 2013, the Audit Committee of the Company’s Board of Directors engaged PricewaterhouseCoopers LLP (“PwC”) to serve as its new independent registered public accounting firm to audit the Company’s financial statements for its fiscal year ending […]
PCAOB Member Jay Hanson Repeats His Belief That Auditor Rotation Is Not Gonna Happen
The Brits can do whatever they want; Mr. Hanson has a story and he's sticking to it: Having reviewed the comment letters and feedback from the round table panelists and others, it is clear to me that there is little support for mandatory audit firm rotation. As I noted in my statement when we issued the […]
The PCAOB Chairman Is Still Talking About Auditor Rotation
Generally speaking, there are two camps when it comes to the idea of auditor rotation or "term limits" as some like to call it. There is the camp that sees it as an area worth exploring as part of a larger conversation around auditor independence and objectivity. And then there is the camp that does […]
The SEC Investigation into Ernst & Young’s Lobbying Activities Isn’t Going to Amount to Much
Late yesterday, Sarah Lynch and Dena Aubin at Reuters reported that the SEC was poking around Ernst & Young's lobbying activities on behalf of audit clients. Apparently the investigation has been going on since Reuters first broke the story back in March that the specialized advisory group of Washington Council Ernst & Young was trotting around […]
Being an Independent Auditor Is So Much Easier (and Effective) If You Are a Total Prick
I love HGTV in fact but not in appearance. No one looks at me and thinks, "I bet that guy TiVos Yard Crashers, Curb Appeal, and House Hunters," but I do. And although I think Hilari was robbed in Design Star All Stars, I never really talk about it with anybody. Fortunately, there is no […]
Independence Questionnaires Are the Worst
I haven't had to fill out an "Independence, Integrity, and Objectivity" questionnaire since 2009. Just for kicks, I had a buddy send me a copy of one and I can't even read through it–partly because it's incomprehensible, but mostly because of the rage. Here's the first of 70 [!!!] questions: Have you performed, during the […]
Sometimes Being Fired for an Independence Snafu Isn’t That Hard of a Pill to Swallow
Late on Friday, TransMontaigne Partners, L.P.*, "a terminaling and transportation company," issued a press release announcing that they had successfully filed its 10-K for 2011. Not a big deal really, but reading further one discovers that the company had very recently fired KPMG as its auditor: As previously disclosed, the audit committee of our general partner […]
Deloitte Netherlands CEO Is Resigning After Stupidly Violating Independence Rules
Not exactly the best way to start a new job: Deloitte said the chief executive of its Dutch arm had stepped down with immediate effect after breaking internal rules on owning stakes in companies whose books are audited by the accountancy firm. Deloitte Netherlands CEO Piet Hein Meeter, who took up the job on Jan. 1, […]
Someone Convinced KPMG and GE to End Their Little Loan Staff Arrangement
Last fall, we reported that KPMG had issued an internal preservation notice to its employees in regards to "General Electric's Loan Staff Arrangements." As you may remember, this arrangement consisted of KPMG employees being loaned to GE to help supplement the work of the world's best tax law firm. Oh, and KPMG is the auditor […]
Someone Is Curious About All Those KPMG Employees Working on General Electric’s Taxes
You may remember earlier this year when The New York Times broke a little story about General Electric’s tax savvy ways and the best tax law firm the universe had ever seen (aka the GE tax department).
The report�������������������� href=”http://www.goingconcern.com/2011/03/jon-stewart-reacts-to-ges-tax-savviness/”>a few people to get bent out of shape because the Times said GE was enjoying $14.2 billion in profit while “claim[ing] a tax benefit of $3.2 billion.” What that “benefit” really entailed was a mystery but many people jumped to the conclusion that it was a “refund” and ProPublica (possibly a little peeved that they got scooped) tried to set the record straight on the Times story.
Despite all the back and forth, everyone was pissed at GE. The company lost a Twitter joust with Henry Blodget and then a bogus press release went out claiming the company was returning the “refund” of $3.2 billion and the Associated Press ran it. Slightly awkward.
Francine McKenna also did a write-up on KPMG’s role in this little soap opera, as the firm has been the auditor for GE since Bill Taft was maxing out the White House bathtub.
The latest twist comes from a tip we received earlier about a “Preservation Notice” sent to all KPMG employees yesterday from the firm’s Office of General Counsel (“OGC”).
URGENT TARGETED PRESERVATION NOTICE: GENERAL ELECTRIC’S LOAN STAFF ARRANGEMENTS
Please be advised that until further notice from KPMG LLP’s (KPMG or firm) Office of General Counsel (OGC), you are hereby directed to take all steps necessary to preserve and protect any and all documents created or received from January 1, 2008 through the date of this Notice relating or referring to the loaning, assignment or secondment of tax or other professionals to General Electric Company and its direct and indirect subsidiaries, affiliates and divisions (collectively “General Electric’s Loan Staff Arrangements”).
As Klynvedlians know, these preservation notices come out so often that you barely even notice them. When you do notice them is when the partner in charge of your team informs you about it before it hits your inbox. What follows is basically the biggest CYA exercise you’ve ever seen. They roll in giant dumpsters and every last scrap of paper you’ve ever written on gets throw in and eventually it gets shipped off to OGC. Your life doesn’t really change all that much other than you’re not allowed to delete another email EVER. At least that’s how I remember it.
ANYWAY, this notice seems a little different. Why exactly? Here’s a excerpt from McKenna’s post:
In defiance of [Sarbanes-Oxley] provisions, KPMG – GE’s auditor – provides “loaned staff” or staff augmentation to GE’s tax department each year. These “temps” perform tasks that would be otherwise the responsibility of GE staff. Sources tell me KPMG employees working in GE tax have GE email addresses, are supervised by GE managers – there is no KPMG manager or partner on premises – and have access to GE employee facilities. They use GE computers because the software required for their tasks is GE proprietary software.
This type of “secondment” to an audit client is never allowed. KPMG should know better.
YEESH. So any documents going back to January of 2008 that relate or refer to someone being assigned under this allegedly dubious arrangement must be preserved. You don’t have to be John Veihmeyer to know that’s a METRIC ASSTON of documentation. It’s not that GE’s tax needs are seasonal; they’re more like “perpetual” or “infinity times infinity.” A company with the best tax law firm already in house that also has an arrangement with a their auditor to throw a few more people at the problem indicates that they are working on this shit 24/7. For KPMG, it amounts to a nice little revenue stream and it keeps lots tax staff busy throughout the year.
But what caused the notice? That’s the question. Our tipster speculated that the PCAOB and SEC might be up to something but per standard operating procedure, neither will confirm nor deny the existence of any investigation or inquiry. KPMG spokesman George Ledwith did not respond to an email seeking comment.
Like we stated previously, these preservation notices are a dime a dozen but because this one deals with General Electric and presumably their tax compliance it qualifies as outside the norm. If you’re in the know or know of someone in the know or have anything else to add, email us or comment below.
PwC, Deloitte Enjoying Their Booming Advisory Businesses, Thankyouverymuch
This morning we linked to a Reuters report about the horse race between Deloitte and PwC for the biggest of the Big 4. It reports virtually nothing new that we haven’t discussed here already including Deloitte jumping P. Dubs last year by a whopping $9 million (thanks mostly to keeping their consulting business in house), the hiring sprees, the acquisitions, and oh! the audit business sucks:
With audit revenues leveling off in developed markets, the firms have been making a push in growing countries such as China and India and plowing ahead with investments in consulting, where business is growing after a recessionary slump.[…] The big four are expected to report their fiscal 2011 revenues in coming weeks and any significant growth will likely once again be in the consulting area, said Jonathan Hamilton, managing editor of Accounting News Report. “The audit business, while certainly the staple of all these firms, is a slow-growth business,” Hamilton added.
In other words, the consulting advisory business is hot and audit is not. And what causes some people to fly off the handle is how the firms have sold everyone on the idea that they can still miraculously be the bastion of good business principles ethics. Well, maybe not everyone:
More worries loom from stepped-up regulatory scrutiny. As consulting revenues grow, complaints are surfacing again that firms will be tempted to go easy on audit clients for the sake of winning or keeping a consulting job — a charge the audit firms deny.
Last week, European Union lawmakers approved a report that calls for barring auditors from providing audit and non-audit services to the same client. The report is nonbinding but could shape a draft law in the works.
PwC and Deloitte both said there was no conflict of interest in the consulting services they provide. Much of their consulting is done for companies they do not audit and they follow regulators’ standards and companies’ own restrictions on the kind of consulting they do for audit clients.
The report doesn’t mention many things that have cropped up (some recent, some not so much) including the nearly 500 reprimands Deloitte had in 2009, the rash of insider trading, or PwC’s incestuous Satyam scandal but talking points are also used to address those issues. These firms didn’t get to where they are without figuring out how to play the media game.
One thing is for sure – the firms are going to depend on their consulting/advisory businesses for growth until someone banishes audit firms from offering any other services at all. And God knows what that will take.
Who Has Thoughts on Mandatory Auditor Rotation?
Because the PCAOB is giving you until December 14th to make your views known.
“One cannot talk about audit quality without discussing independence, skepticism and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor,” said PCAOB Chairman James R. Doty.
“The reason to consider auditor term limits is that they may reduce the pressure auditors face to develop and protect long-term client relationships to the detriment of investors and our capital markets,” Chairman Doty added.
Don’t fret anti-rotaters, the Board did invite everyone to weigh in on the idea that they “should consider a rotation requirement only for audit tenures of more than 10 years or only for the largest issuer audits.”
[PCAOB]
PCAOB Chairman James Doty Is Concerned That Some Auditors Either Don’t Care or Are Completely Ignorant About the Notion of Independence
As you may have heard, PCAOB Chairman Jim Doty gave a speech at the University of Southern California yesterday where he discussed among other things, the possibility of mandatory auditor rotation and changing the standard auditor’s report. The prospect of these two changes aren’t exactly something auditors are stoked about but some people are of the opinion that a) auditors like to get a little too chummy with their clients which leads to b) not taking the “independence” thing too seriously and c) the auditor’s report, in its current form, its pretty much worthless.
You can read Doty’s entire speech over at the PCAOB website where touches on all of these but here’s one example around independence that probably qualifies for, in Doty’s words, “[an] approach [to] the audit with an inappropriate mindset”
[An] audit partner’s self-assessment claimed that he “overcame long-standing barriers against non-audit services at [two audit clients] with a series of well-planned meetings and supporting presentations with the Audit Committee Chair, the full Audit Committee, the CEO and the CFO at both companies.”
In response, his reviewing partner noted that he was –
highly alert to cross service line opportunities and has successfully penetrated both of his accounts where few services had been
provided in the past. The results of these efforts were a number of proposals and wins but the efforts will likely impact FY 11 in [a] more significant way.
Anyway, there are other stories of bad auditor behavior, so check the whole speech if you feel so inclined. And while Chairman Doty admitted that “We don’t see these problems in all the files we look at,” it causes he and others to wonder if “these audit partners are unaware of, or simply unconcerned about, the independence rule that should make such considerations irrelevant to their compensation, and why a firm would allow such unawareness or unconcern to continue unabated.”
So flagrantly bending the rules to the point where they might as well be breaking or stupidity? Neither is too flattering.
Are Audit Committees Really Independent of Management?
A reader – who is a partner at a Big 4 firm – sent this to me awhile ago and I dug it out this week:
Question for you. Why is it OK for audit committee members to be selected and paid by management? Why is it OK that they are paid in the stock of the Companies that they govern? Considering the fact that the SEC has such disdain for the slightest perception of a lack of independence on the part of the auditors that report “directly” to the Audit Committees, it is odd that the governing body can be owners of the company as well. [By the way, let’s be real, management hires the auditors. The audit committees just accept it.]
Time to jump in – These questions feel rhetorical but I’ll take a stab at answering them anyway. If you look at a brief history of audit committees, you’ll see that the idea goes back nearly as far as the Securities and Exchange Acts of ’33 and ’34, first being endorsed by the NYSE in 1939. The SEC first made the recommendation that public companies compose their audit committees of independent directors in 1972. That was followed by the NYSE’s requirement for audit committee members to be independent in 1977. What does all this mean? Basically, it appears that it’s okay that management selects and pays audit committee members because it’s always been done that way. Similarly, it’s okay to pay them in stock because companies have always issued shares to directors, regardless of their respective committees. As far as who “hires” the auditors, our source has a better frame of reference than I but this probably varies from company to company. While many companies have audit committees that have no problem throwing their weight around, there are others whose members probably couldn’t find cash on a balance sheet.
Anyway, our source has some ideas:
If the regulators want to create a TRUE independent structure, why not create an Audit Committee Oversight Board (or the ACOB), and pay these members in shares of a Mutual Fund that’s tied to the overall performance of the stock market? Audit Committee members should be overseen by the SEC – perhaps indirectly by this ACOB. Now – this would empower the Committees, empower the auditors even further, and empower the shareholders of Companies with the knowledge that the Audit Committees were truly independent of management. This would be a stunning show of real governance in corporate America. Wouldn’t this be a true step toward preventing further financial crashes in America? What do you and your readers think?
I like the progressive ideas presented but if there’s one thing I’ve learned from the massive amount of media I’ve consumed in the last 2+ years, it’s this – the ideal regulation and what it politically feasible are often miles apart and in the process of reconciling those differences, the final product is not at all what was intended. The SEC (who hasn’t exactly been on top of their game the last few years) is already fighting for every nickel and no amount of litigation releases will get representatives like Darrell Issa to back down from cutting their budget. Thus, a regulatory agency with shaky credibility has an uphill battle.
So would an Audit Committee Oversight Board, compensation changes and other reforms to the process be a “true step toward preventing further financial crashes”? Maybe. But as long as “fiscal responsibility” continues to be a political talking point, the SEC won’t have the ability to suggest reforms until we have another crisis and chances are, they’ll be the scapegoats…again.
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 [email protected] 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.
Ex-Deloitte Partner, Son To Shell Out $1.1 Million to Settle SEC Insider Trading Charges
Last we had heard of Thomas Flanagan, Deloitte had just taken him to the woodshed, successfully suing him for breach of fiduciary duty, fraud, and breach of contract related to Tom’s insider trading activities of Deloitte clients.
Now it’s the SEC’s turn to get in on this sweet action. The Commission charged Flanagan and his son, Patrick Flanagan for insider trading of Deloitte clients including Best Buy, Sears, Walgreens and Motorola.
Why Flanagan, the 38-year veteran of Deloitte and Vice Chairman of Clients and Markets, who thought that in the twilight of his career, the best move would be to engage in some insider trading is still a mystery. Since he was presumably pushing 60, one couldn’t help but wonder if perhaps his memory was going and he just totally spaced the independence thing.
But actually, no. Turns out, Tom Flanagan is just a liar:
According to the SEC’s complaint, Thomas Flanagan concealed his trades in the securities of Deloitte’s clients and circumvented Deloitte’s independence controls. He failed to report the prohibited trades to Deloitte, lied to Deloitte about his compliance with its independence policies, and provided false information to Deloitte’s personal income tax preparers about the identity of the companies whose securities he traded.
Flanagan & Son will be paying over $1.1 million in disgorgement and fines for their little stunt. And Robert Khuzhami had a little reminder for anyone else out there that thinks they can get cute, “Flanagan’s insider trading violated one of the most fundamental rules of public accounting. All audit firms should learn from this unfortunate episode and employ vigorous controls designed to ensure compliance with the SEC’s auditor independence rules.”
SEC Charges Former Deloitte Partner and Son With Insider Trading [SEC Press Release]
SEC Complaint Against Thomas Flanagan and Patrick Flanagan [SEC Complaint]
PwC’s Ian Powell Will Have You Know That His Firm Is Turning Away Millions in Business in the Name of Independence
It could be argued that the Big 4 is on some thin ice re: independence by trying to grow their advisory businesses. But hey, can you blame them? The audit and tax service lines alone can’t keep the lights on of a multi-billion dollar firm (but not really one firm, it’s actually a network of firms that operate under a single name, JSYK).
And besides, if you were to ask Ian Powell, the UK Chair of PwC, he’d tell you that they have to beat off clients with a stick that want that PwC experience all over them. But you know what? Independence is far too crucial tenant of the business to be jeopardized by some overeager clients that are throwing a few million clams at P. Dubs. THEY. DON’T. NEED. IT.
Mr Powell put down his binoculars to give an interview to the Financial Times where the “affable and youthful-looking” Chair dispelled any idea that the consulting business posed any risk to PwC losing its independence merit badge:
Mr Powell thinks the traditional skills of consulting can still have great value, such as in “sourcing, outsourcing, supply chain and workforce efficiency” – areas PwC has been investing in – “that can demonstrate a short term payback”.
Here again he faces controversy – persistent claims since the collapse of Enron that the Big Four’s growing consulting practices could affect their audit independence.
He responds: “We will not take on any assignment that we believe either will bring us into any independence issue, but even more so would bring us into any perceived independence issue – so we turn away millions and millions of pounds worth of business each year.”
Deloitte Report: 475 Reprimands for Internal Noncompliance in 2009
How’s your Thursday morning going Sons and Daughters of Deloitte? Busy? Swamped, you say? Thought so. Well, whatever it is, it can wait.
YES. IT. CAN.
Barry Salzberg needs your full and undivided attention to an important matter today: compliance with internal policies, specifically independence and ethics. During the throes of busy season, you adherence to these important values must not waiver.
Are you trading in client stock in your Scottrade account? Ghost-ticking workpapers? Ramming meaningless numbers into that tax return? Stop it right now. Bar knows that sometimes you can’t just help yourselves, so he dropped a little reminder into your inbox this morning (we were told) with the subject “A must-read for everyone”.
Today, we have an important challenge that we simply cannot ignore. Our level of compliance with our internal policies – specifically our independence and time reporting policies – is not where we need it to be.
Please take a few minutes to read Beyond the Numbers: Our Independence, Ethics & Compliance Imperative from Mike Zychinski, our Chief Ethics and Compliance Officer. The report, which I consider to be a must-read for everyone, addresses concerns from our regulators, what we are doing as an organization to address them, and what you can do to meet your individual compliance requirements.
When it comes to issues of compliance, we must meet the expectations of our clients and regulators. What’s more, we must fulfill our own high expectations of ourselves. Thank you for taking a few minutes to read the report and for your focus on meeting your individual compliance requirements.
Regards,
Barry Salzberg
CEO
Deloitte LLP
Bolding is ours. After this email, a 2,100 (give or take) word report follows from Chieftain of Ethics Mike Zychinski. Despite the high standard that Deloitte holds you to — higher than the SEC, PCAOB, and the AICPA, we might add — this happend, “Based on our own reviews and that of the PCAOB, we believe compliance with our independence policies is not what it should be, and the PCAOB has, in fact, questioned our commitment to adhere to our own policies. This is clearly not acceptable.”
Our contributor Francine McKenna reminded us that Deloitte didn’t think too much of the PCAOB’s report from last year, “They [are] the same firm that famously responded to the PCAOB’s latest inspection report, ‘How dare you second guess us?‘”
Based on the following list of reprimands, perhaps the PCAOB has a leg to stand on?
Four hundred seventy-five total reprimands were issued for noncompliance issues, including:
31 reprimands for independence-related violations of SEC or AICPA rules
174 reprimands for noncompliance with Deloitte independence policy
218 reprimands for failure to meet mandatory training requirements
45 reprimands for CPE noncompliance
7 reprimands for noncompliance with Deloitte CPA Licensing policy
Is 475 a lot or a little? An improvement from last year or is it worse? We’re not really sure. We haven’t received any comment from Deloitte and their Transparency Report doesn’t have more details. But since Barry Salzberg never seems to be satisified with anything, we’re guessing you can do better.
Let’s Go Over this Independence Thing One More Time
To be fair, Thomas Flanagan — having been a partner at Deloitte for 30 years — probably didn’t remember the day that his auditing professor covered independence. If you figure that Tom was in college in the late 1960s, it’s surprising that he remembers anything.
Also, as the vice chairman of the firm, his job was to remind people of their duty to remain independent of the firm’s audit clients. He didn’t actually have to be independent himself. What good is insider information if you’re not going to use it, amiright?
Deloitte had sued Flanagan in Delaware Chancery Court in October 2008 for breach of fiduciary duty, fraud, and breach of contract, saying the 30-year partner who had risen to vice chairman of the firm had secretly hidden trades in shares of Deloitte’s audit clients and lied about it to the firm.
“Because an auditor sells, at base, its independence and integrity, the firm relies heavily on the purported honesty and independence of its professionals,” Vice Chancellor John Noble, of the Delaware Court of Chancery, wrote in his opinion.
Deloitte said in its complaint that starting as early as 2005, Flanagan had made more than 300 trades in shares of Deloitte’s audit clients, including several clients for which he was Deloitte’s advisory partner.Meanwhile, Flanagan specifically told the firm he was not trading in client stocks, which are restricted under the firm’s independence policies, according to the complaint.
Tom must have been a choir boy prior to getting the Vice Chair gig. How else could he have gotten to be such a bigwig if he wasn’t a poster child for integrity? Was he that good of a liar?
Never mind that for a sec. What’s really curious is why the hell a Vice Chairman needed the extra scratch. A comic book collection that would rival Nic Cage’s? Financing a business opportunity? A spendy wife/mistress/pool boy? If you’ve got any thoughts, discuss below and if this story doesn’t clear things up on independence, start crack the auditing textbooks.
Deloitte wins insider trading suit vs. ex-executive [Reuters]
Should Auditors be Able to Take Credit for Selling Non-audit Services?
The partner track is a challenge, as we’ve discussed. The competition in the UK is fierce enough that some directors and manager in the UK have taken it upon themselves to ignore their firm’s policies regarding cross-selling:
Authorities frown upon cross-selling, which involves an auditor selling non-audit services to their audit client. The practice is a potential threat to auditor independence and the Big Four explicitly prohibit the practice from being considered in staff appraisals.
But that didn’t stop Big Four firm Deloitte’s audit directors and managers referring to cross selling when trying to secure a promotion, according to the [Audit Inspection Unit].
“A number of audit directors and managers referred in their performance evaluations to cross selling non audit services to their audit clients,” the report stated.
Maybe this isn’t as much of a problem Stateside, since the SEC has addressed services that are definitely off-limits, and a company’s audit committee has to approve all non-audit work performed by the auditors. If there was a perceived independence issue, one would hope the committee would say no dice and that would be the end of it.
However, if a potential service doesn’t fall into the SEC banned list and the audit committee gives the non-audit service the thumbs up, should a manager be allowed to point to the business that he/she introduced to the firm?
After all that hoop jumping, it would be hard for any manager to resist pointing to business that the firm eventually won. Since the Big 4 have policies against cross-selling coming up in appraisals, it might all be moot but any potential partner still wants to be able to show that they can drum up the business.
If you’ve got feelings or experiences on the matter, discuss in the comments.
Big Four partners seek promotions for cross selling [Accountancy Age]
KPMG UK Head of Audit Explains Rentokil Arrangement
KPMG’s new arrangement with Rentokil has brought some differing opinions amongst the firms, even prompting PwC to take a not-so direct jab at the Radio Station for scooping Rentokil.
Today, KPMG’s head of audit in the UK, Oliver Tant, wrote a piece for Accountancy Age explaining the firm’s new “extended assurance”:
Continued, after the jump
Under the service, those responsible for corporate governance may ask KPMG to perform work beyond that which is required for the statutory audit, for example by testing a larger sample of controls or additional transactions and balances of lower value than the materiality level set for the statutory audit.
This work does not replace, conflict with or undermine the independence of the external audit it simply extends our understanding of the business and its controls and hence the breadth and depth of insight we can offer. That is why we call it extended assurance.
Mr. Tant also cites the savings passed along to the client, which is so hot these days. He also explains what “extended assurance” is NOT:
The service is not about merging the external and internal audit functions. A company can continue to have its own internal audit function and those charged with corporate governance will still be responsible for assessing the overall adequacy of a company’s control environment and the need for skilled internal audit expertise.
Ethical standards do not prevent the auditor from doing more than the bare minimum to support the audit opinion. We will identify and plan the work necessary to support our audit opinion independent of any further work we may be requested to perform.
As we mentioned, PwC has already made their opinion known and E&Y’s head of assurance in the UK, John Flattery has stated that they will not be “mirroring the arrangement.”
It’s already been speculated that this type of arrangement would not be allowed in the U.S. but there has been no indication that the U.S. firm is pursuing such arrangements.
Since independence is kinda, sorta important for auditors, and many of you are ramming these rules into your brains as we speak (or just waiting to see if you learned anything) discuss in the comments how you feel about the arrangement. Would it pass the smell test Stateside? Is KPMG evolving to the market or are they on thin ice? Are P. Dubs and Ernie being self-righteous dicks since they didn’t think of it first? Feel free to get ugly about it.
KPMG audit head defends controversial Rentokil role [Accountancy Age]
PwC Calls Out KPMG
Awhile back, we mentioned how KPMG didn’t seem so concerned about the appearance of independence. Well now it appears that P. Dubs might be getting a little self-righteous about the whole issue or they’re just bent out of shape that the Radio Station swiped the Rentokil audit by lowballing the proposal:
More, after the jump
KPMG’s arrangement was able to shave 30% from Rentokil’s audit, but it was the manner in which the firm brought about the cost saving that raised eyebrows. Audit guidelines warn against two threats when an external auditor takes on internal audit work. The first threat, known as the self-review threat, warns against the external auditor relying heavily on its own internal audit work. The second threat, known as the management threat, warns against the internal auditors assuming the role of management.
KPMG says it’s totally fine because that’s where the client’s interest was:
KPMG said it was fielding interest from potential clients. ‘Unequivocally we have found interest,’ says Oliver Tant, KPMG’s UK head of audit. ‘We will be discussing it with more people, undoubtedly as will other competitors.’
PwC, at present, seems to be taking the highroad, even though we’re pretty sure they think Rentokil are a bunch of cheapskates:
PwC, would not be drawn on its opinion on the Rentokil audit, citing its policy not to comment on clients, but did say: ‘It is vital that we maintain our independence from – and in no way are seen to act as part of – management infrastructure…Internal audit can often be regarded as acting as part of that infrastructure.’
Typical passive-aggressive accounting rhetoric but it still sounds like P. Dubs is calling bullsh*t on KPMG. Feel free to defend your firm’s position by whatever means necessary (we suggest low blows and name calling) or get on your soap box about independence.
Debate rages on over KPMG’s cut-price Rentokil audit deal [Accountancy Age]
KPMG Thinks the Appearance of Independence is Overrated
The Radio Station is throwing caution to the wind in the UK, accepting a new arrangement with Rentokil Initial, that brings out the ghosts of accounting scandals past. Under the new agreement, the firm will serve as both the external auditors and take on internal audit work, working alongside the client’s internal audit staff.
Prior to the new agreement with KPMG, Rentokil’s external auditor was PwC and internal audit services were provided by Deloitte.
Last we checked, audit textbooks still state that external auditors are to be independent in fact and appearance but KPMG UK must have got their hands on an edition that was printed in auditor bizarro world.
Rentokil’s KPMG deal raises eyebrows [FT.com]
More PCAOB Comment Letters Need to Complain About the Issuer-pay Model
If you're like us, you've been anxiously awaiting comment letters on the PCAOB's auditor reporting model proposal. There's nothing better than self-righteous firms penning letters filled with thinly-veiled condescension. Plus, the U.S. Chamber owes us all an honest effort after phoning in their initial response. So far none of the major accounting firms, the AICPA, CAQ, […]