Last year the Government Accountability Office issued a report that called attention to the SEC’s accounting system (or lack thereof). Reuters now reports that the SEC will admit in testimony tomorrow that the material weaknesses in their accounting system are largely due to technology that would make your grandparents laugh.
“These material weaknesses are unacceptable,” the SEC’s top division directors said in prepared testimony that was viewed by Reuters. They added the “root causes” of the problems stem from “years of underinvesting in financial system technologies.”
It should be noted that while the accounting systems were not quite up to snuff for the GAO, the equipment used by employees was sufficient for viewing a metric asston of porn, which we just learned moments ago, was even more widespread than initially thought.
Maybe color blindness is the reason everyone misses the “red flags.”
The Securities and Exchange Commission charged a supplier of body armor to the U.S. military for engaging in what it called “massive accounting fraud.”
The SEC alleges that DBH Industries, now known as Point Blank Solutions Inc. (PBSOQ), “engaged in pervasive accounting and disclosure fraud through its senior officers and misappropriated company assets to personally benefit” its former chief executive, David Brooks.
The regulator also charged outside directors Jerome Krantz, Cary Chasin and Gary Nadelman for their parts in the scheme, saying they were “willfully blind to numerous red flags” signaling the fraud.”
“As the fraud swirled around them, Krantz, Chasin, and Nadelman ignored the obvious and submitted to the directives and decisions of DHB’s senior management while themselves profiting from sales of the company’s securities,” said Eric Bustillo, director at the SEC’s Miami office.
The corporate watchdog has received just 168 complaints alleging corporate fraud in the first 6½ months of the program’s existence, according to data the SEC provided to The Post through a Freedom of Information Act request. The tally is from July 22, 2010, when the program was launched, through Feb. 2, 2011. At that rate, the SEC is receiving less than one tip a day — hardly the flood that led the agency to delay staffing the program while it pleaded with lawmakers for more funding. [NYP]
Namely, the Commission would like a bigger budget because Dodd-Frank is making their lives increasingly difficult but since they got such bad marks from the GAO the Times reports that it might be just a tad inappropriate since, ya know, the SEC’s own numbers are, arguably, unreliable:
Since the commission began producing audited statements in 2004, the Government Accountability Office has faulted its reporting almost every year. Last November, the G.A.O. said that the commission’s books were in such disarray that it had failed at some of the agency’s most fundamental tasks: accurately tracking income from fines, filing fees and the return of ill-gotten profits.
“A reasonable possibility exists that a material misstatement of S.E.C.’s financial statements would not be prevented, or detected and corrected on a timely basis,” the auditor concluded.
The auditor did not accuse the S.E.C. of cooking its books, and the mistakes were corrected before its latest financial statements were completed. But the fact that basic accounting continually bedevils the agency responsible for guaranteeing the soundness of American financial markets could prove especially awkward just as the S.E.C. is saying it desperately needs money to increase its regulatory power.
“I don’t think the SEC’s culture is one that will make this effective one iota,” said Sherron Watkins, a one-time vice president at Enron, referring to expanded protections for whistleblowers included in the Dodd-Frank financial reform law. If she was in the same situation today as 10 years ago, when Watkins approached government authorities about accounting fraud at Enron, she would probably instead take her information to an organization like WikiLeaks, Watkins said. [Paper Trail]
Convergence may not be that far off after all, here it is 2011 and now we finally have U.S. and U.K. audit harassment agencies working together to share information and polish up that whole bit about protecting investor confidence in capital markets. It may or may not have something to do with the collapse of Lehman Brothers (personally I think the paranoid mistrust in foreign accounting systems – or perhaps just ours – goes back a tad more than that) but soon enough the PCAOB will have an in (after at least one failed attempt) and get a chance to harass inspect foreign firms. We anticipate that this announcement will bring it with it a fantastic new acronym so we can all keep track of who is who.
The Public Company Accounting Oversight Board today entered into a cooperative agreement with the Professional Oversight Board in the United Kingdom to facilitate cooperation in the oversight of auditors and public accounting firms that practice in the two regulators’ respective jurisdictions.
This agreement provides a basis for the resumption of PCAOB inspections of registered accounting firms that are located in the United Kingdom and that audit, or participate in audits, of companies whose securities trade in U.S. markets. The PCAOB previously conducted inspections in the United Kingdom with the POB from 2005 to 2008, but has been blocked from doing so since that time.
Acting PCAOB Chairman Daniel L. Goelzer welcomed the arrangement, which will lay the foundation for the PCAOB and POB to work together to promote public trust in the audit process and investor confidence in capital markets.
The PCAOB can thank the Dodd-Frank WSCRA which amended SOX to permit the PCAOB to share information with foreign audit agencies under certain conditions.
In light of this event, we’re wondering what happens when the two work together sharing “information.” Does it get a brand new acronym that celebrates this new dawn in inter-obnoxious-regulatory-gossiping (IORG) or does it become a hybrid acronym like the Public Professional Company Oversight^2 Board Board or PPCO^2BB? Surely we can do better.
Party at the PCAOB DC office this evening to celebrate, bring your own acronym suggestions and IFRS pocket guide.
~ Update 2 includes statement from PCAOB and clips from the SEC press release.
The SEC is set to make announcement circa any minute this afternoon and rumor has it that there might be last minute changes that amount to “horse trading among commissioners.” Intrigue at the SEC that has nothing to do with porn! Who knew?!?
The SEC is expected to name John Huber, former director of the SEC’s Division of Corporation Finance, Lewis Ferguson, former general counsel to the PCAOB, and Jay Hanson, national director of accounting for audit firm McGladrey & Pullen, to three seats that have been open at the PCAOB for more than a year. It’s not clear whether one of those three will be appointed chairman, or whether that title will be granted to Daniel Goelzer, the acting chairman who has held down the fort since Mark Olson resigned in July 2009.
Granted, there are lots of rumors swirling about this “horse trading” so we wouldn’t be surprised if one of these guys (i.e. Huber, Ferguson or Hanson) got dropped for [fill in the blank].
UPDATE 2: And now, perpetually acting PCAOB chair Dan Goelzer:
“I am very pleased that the SEC has appointed three outstanding individuals to the Board. I look forward to working with Jim Doty, Lew Ferguson, and Jay Hanson in continuing to carry out the Board’s mission to protect investors and promote public confidence in audited financial reporting.
“At the same time, I want to thank the retiring Board members, Bill Gradison and Charley Niemeier, for their immeasurable contributions as founding members of the Board and for their years of dedicated service. Investors owe them a debt of gratitude.”
So the trade was Huber for James Doty (who is taking the Chairmanship), the former SEC General Counsel. INTERESTING (at least in some circles). Fro the SEC press release:
Mr. Doty is currently a Partner at Baker Botts LLP in Washington, D.C. He has represented clients on a wide range of securities law matters. He also counsels boards of directors and audit committees on problems arising under the Sarbanes-Oxley Act and related issues. Mr. Doty served as the SEC’s General Counsel from 1990 to 1992. He received an LL.B. from Yale Law School, an M.A. from Harvard University, an A.B. from Oxford University, and a B.A. from Rice University.
Police may be called on to investigate reports [New South Wales] [Members of Parliament] or their staff accessed websites containing sexually explicit images of young people.
The findings were contained in an independent report by Ernst & Young, commissioned in September after an unauthorised audit of computer use in the NSW parliament showed “adult” websites had been visited from the offices of some MPs.
The report, tabled in parliament yesterday, says that of the 72 most-used websites on parliamentary computers over a 10-month period, 35 “appear to be adult-related sites”.
Nine contained sexually explicit images of young people, some of whom may be under 16.
Nearly 50% of the most-used sites over a 10 month period? And some that could involve minors (in NSW)! That’s impressive even by SEC standards.
~ Update includes clarification of partner’s employment status and statements from accused’s attorneys via MarketWatch.
~ Update at circa 7:20 pm ET includes statement from Deloitte
If you thought all this insider trading fun was just for hedge funds you would be sorely mistaken. Deloitte seems to have another case of a partner who can’t seem to control himself when he gets some insider info. Earlier this year, former Deloitte Vice Chairman Tom Fla > shelled out $1.1 million to settle charges with the SEC.
This time around, it’s still a family affair – husband, wife, wife’s sister and brother-in-law job – and it went overseas:
The Securities and Exchange Commission today charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme.
The SEC alleges that Arnold McClellan and his wife Annabel, who live in San Francisco, provided advance notice of at least seven confidential acquisitions planned by Deloitte’s clients to Annabel’s sister and brother-in-law in London. After receiving the illegal tips, the brother-in-law took financial positions in U.S. companies that were targets of acquisitions by Arnold McClellan’s clients. His subsequent trades were closely timed with telephone calls between Annabel McClellan and her sister, and with in-person visits with the McClellans. Their insider trading reaped illegal profits of approximately $3 million in U.S. dollars, half of which was to be funneled back to Annabel McClellan.
The UK Financial Services Authority (FSA) has announced charges against the two relatives — James and Miranda Sanders of London. The FSA also charged colleagues of James Sanders whom he tipped with the nonpublic information in the course of his work at his London-based derivatives firm. Sanders’s tippees and clients made approximately $20 million in U.S. dollars by trading on the inside information.
So not a bad haul. The kicker is, Annabel was also employed at Deloitte, working in the London, San Jose and San Francisco offices. The McClellans provided information to the Sanders on several companies including Kronos, Inc., aQuantive, Inc. and Getty Images.
The SEC brass gave their standard scolding. First, Enforcement Chief, Robert Khuzami, “The McClellans might have thought that they could conceal their illegal scheme by having close relatives make illegal trades offshore. They were wrong.”
And San Fran Director Marc Fagel, “Deloitte and its clients entrusted Arnold McClellan with highly confidential information. Along with his wife, he abused that trust and used high-placed access to corporate secrets for the couple’s own benefit and their family’s enrichment.”
But the real story here is the second instance of insider trading charges against a Deloitte partner this year. The firm successfully sued Tom Flanagan back in January but you have to wonder if there isn’t some flaw with the firm’s internal oversight. Not long after the Flanagan suit, we reported on the 475 reprimands for internal noncompliance in 2009. Those reprimands did not mention insider trading specifically but over 200 of them were related to independence violations. Pattern? You can weigh in below.
Anyone with any knowledge on this story is invited to get in touch with us. as it is not clear if there has been any internal repercussions yet. Messages (including voicemail, carrier pigeon and morse code) left with Deloitte have not been returned (see statement below).
Lawyers for Arnold McClellan denied charges Tuesday by the Securities and Exchange Commission that the former Deloitte Tax LLP partner was involved in a big insider trading scheme. “Arnold McClellan denies the SEC’s claims and will vigorously contest them,” Elliot Peters and Christopher Kearney of Keker & Van Nest LLP said in a statement on behalf of McClellan. “He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone.” McClellan “had no financial incentive to commit the actions alleged,” the lawyers added. “He is a conscientious, law-abiding professional with a 23-year unblemished track record of client service at Deloitte to prove it. We will see the SEC in court.”
And just to clarify, McClellan is no longer with Deloitte, leaving the firm in June of this year. Deloitte spokesman Jonathan Gandal emailed us the firm statement (see below) still hasn’t returned our call (busy day, right?) but managed to give a statement toand was quoted by Reuters, saying that he was “shocked and saddened” by the allegations and “If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies.”
UPDATE 2: Here is the full statement from Deloitte:
“We are shocked and saddened by these allegations against our former tax partner and members of his family. If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies. Deloitte is committed to safeguarding non-public client information and has cooperated with the SEC throughout its investigation. The SEC does not allege any wrongdoing by Deloitte in this unfortunate matter.”
“These material weaknesses are likely to continue to exist until the SEC’s accounting system is either significantly enhanced or replaced, key accounting activity in other systems is fully integrated with the accounting system at the transaction level, information security controls are significantly strengthened, and appropriate resources are dedicated to maintaining effective internal controls.”
That being said, Jim Kroeker will have you know that things are going along swimmingly, per the Commission’s press release:
“The staff has invested significant time and effort in executing the Work Plan, and we’ve made great progress to date,” said SEC Chief Accountant Jim Kroeker. “This progress report emphasizes the importance of transparency in the staff’s activities, and can help the public’s understanding of the magnitude of this project and the staff’s progress.”
So make no mistake; the SEC is on this. However, they do have some concerns, “[W]hether the international accounting rule maker is truly independent and whether IFRS is high quality.”
So if you could address those two things, that would be appreciated. Sir David.
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Last year the Government Accountability Office issued a report that called attention to the SEC’s accounting system (or lack thereof). Reuters now reports that the SEC will admit in testimony tomorrow that the material weaknesses in their accounting system are largely due to technology that would make your grandparents laugh.
