Tag: Independence

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.

In close race for No 1, Deloitte, PwC grow apace [Reuters]

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 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.

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.”

PwC boss seeks debate on regulation [FT]