When accounting goes unaccounted for
From saving money to possibly the single biggest complete waste of money. Vote on which firm did the best job of humiliating every single employee associated with the Big 4. If you called in sick yesterday due to a cocktail flu or other ailment, get caught up: PwC, KPMG, E&Y, Deloitte.
Vote, after the jump
The 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]
Want more twists out of the asylum known as Overstock.com? You got it.
Overstock.com filed an amended 8-K yesterday — after the markets closed — that included a letter from GT to the SEC. The letter, in so many words, says that OSTK lied about GT’s knowledge about the hocus-pocus accounting i rdinary, every day case of client and auditor going their separate ways, the auditors letter would basically say, “Yeah, we’re cool and we’re moving on.”
But in this case, since we’re dealing with Patrick “I’ll open this letter with Nietzsche” Byrne, we’ve got an auditor saying, “Um, yes, this is what happened. In CRAZY TOWN.”
To wit (our emphasis):
We disagree with the Company’s statement in paragraph 7 “that upon further consultation and review within the firm, Grant Thornton revised its earlier position” regarding the previously filed 2009 interim financial statements. This statement is not accurate. The Company brought the overpayment to a fulfillment partner to Grant Thornton’s attention in October. After additional discussions with the Company, the predecessor auditor and receipt of additional documentation from the Company we determined that the Company’s position as to the accounting treatment for the overpayment to a fulfillment partner was in error. Further the Company’s statement does not address the fact that the consultation noted in paragraph 5 was in relation to the ongoing incomplete review of the September 30, 2009 interim financial statements.
Hang in there, GT isn’t done:
We have also read Item 4.02 of Form 8-K of Overstock.com, Inc. (“the Company”) dated November 16, 2009 and disagree with the statements concerning our Firm contained therein. During the course of our incomplete review of the Company’s September 30, 2009 financial statements, we advised the Company that disclosure should be made to prevent future reliance on its March 31, 2009 and June 30, 2009 financial statements. We advised the company to make the disclosure because we became aware that material modifications should be made to the previously filed 2009 interim financial statements to conform with US GAAP. Such modifications are necessary due to the Company having reduced its cost of goods sold in the first quarter of 2009 by receipt of a refund of an overpayment to a fulfillment partner.
There you have it. Grant Thornton, in extremely diplomatic manner, is calling Patrick Byrne and Overstock.com liars.
Now after considering both the humble servant’s story and GT’s letter, our instinct tells us to go with GT. Obviously we’re partial to the servants of the capital markets but the other mitigating factor is, let’s see, Patrick Byrne is off his rocker.
Undiagnosed mental conditions aside, we wish we could give GT more credit for calling BS on a slimy client. Fact of the matter is, they were warned by Sam Antar back in March — when they took OSTK on as a client — that they were in for trouble:
I wish that I can wish you luck with your new client. However, I cannot wish you luck because you apparently ignored the basic “smell test” in evaluating Overstock.com as a potential client.
…
Apparently Grant Thornton, like your predecessor, PricewaterhouseCoopers, did not carefully examine false claims about Overstock.com’s financial performance, dating back almost ten years by CEO Patrick Byrne. You would have discovered that Byrne has no problem habitually lying to the investors, the news media and the public.
So as you can see, this is all very awk. In GT’s case, they were explicitly warned to stay the hell away from OSTK. And any auditor worth their salt would take one look at this company and get a feeling like their body was covered in centipedes.
As for Patsy and OSTK, well, as Gary Weiss notes, “Overstock will be tossed onto the pink sheet ant hill where it really, seriously folks, really belongs.” Indeed.
We asked for a show of hands yesterday on who you thought would roll the dice with Pat and Co. and so far KPMG has the lead which seems a tad ludicrous. But hey! We’re not one to argue with the voice of the people.
Voting remains open until the end of today, so check out the latest tally and throw support behind the next firm to get tangled in the Patrick Byrne web. We’ll continue to update you on this horror show as it develops.
Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error [White Collar Fraud/Sam Antar]
Grant Thornton to SEC: Overstock.com Lied [Gary Weiss]
Also see: The Auditor Disagrees With Overstock.com [Floyd Norris/NYT]
Overstock’s Fired Accounting Firm Says Overstock Is Lying [Silicon Alley Insider]
Big day tomorrow for Hank Paulson as he finally gets to set the record straight re: Ken Lewis’s kneecaps. Our feeling is the threatening of bank CEO’s while taking a leisurely bike ride is second nature for Colonel Jessup Paulson and he probably doesn’t give a damn what you think you’re entitled to. But since you clowns at Oversight and Government Reform went ahead and called the big guy to testify, he’ll humor you just this once:
Former Treasury Secretary Henry Paulson plans to tell lawmakers he acted appropriately in warning Bank of America Corp. Chief Executive Kenneth Lewis that the firm’s management could be ousted if it walked away from its deal to buy Merrill Lynch, saying such a move would have suggested a “colossal lack of judgment.”
We’re done here.
Paulson: Comments to BofA’s Lewis ‘Were Appropriate’ [WSJ]