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Tag: Independence
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]