This Auditor Was Duped

Checking the stats the other day, I noticed that someone from Cooley Godward Kronish had been looking at my posts regarding the trial of Dan Stulac, former Arthur Andersen  auditor for Peregrine.  

A little while ago, they had searched on the name of the attorney for Stulac, Michael Attanasio.  This time they had searched on Stulac, looking for updates.  

That prompted me to check for the status of the case.  

After two hung-jury trials, a federal judge has dropped the criminal charges against a former Arthur Andersen accountant and an accounting manager who worked on Peregrine Systems' financial statements while fraud was going on at the software company.

On Tuesday, U.S. District Judge Thomas Whelan dismissed six counts of conspiracy, securities fraud, and wire fraud charges against Daniel Stulac, the ex-Andersen partner, and Patrick Towle, Peregrine's one-time revenue accounting manager.

Mr. Attanasio:  Wipe that smirk off your face.  Ok, you're a hero...

A little background...

Daniel F. Stulac, one of the first outside auditors in the post-Enron era to go to trial against allegations of direct collusion with corrupt management. The jury announced yesterday that it was deadlocked  following the six-week trial, with six jurors voting not guilty on all charges.   Mr. Stulac faced a maximum of 30 years in prison if convicted.

Mr. Stulac, formerly a partner of the former Big 5 accounting firm Arthur Andersen LLP, was charged in October 2004 by the U.S. Attorney's Office in San Diego with securities fraud, wire fraud and bank fraud in connection with the financial reporting of Peregrine Systems, Inc. Peregrine was a San Diego-based software company that filed for bankruptcy in 2002 after it announced that it was conducting an internal investigation of possible misstatements in previous financial reports. The investigation resulted in the resignations of Peregrine's CEO and CFO. At the time of the indictment against Mr. Stulac and ten other defendants, the U.S. Attorney described the case as "the largest fraud in the history of the Southern District of California."

As many of you know, I am not a big fan of the, "I was duped," defense.  As I explained it to someone recently, my cynicism is not specific to this case, but general cynicism regarding this type of defense being used by the firms.  

I am sorry that it's come to this... Auditors, the  last resort, if you'll indulge me, using "I was duped" as a defense is  unfortunate to say the least. Duped by "smarter" corporate executives such as in KPMG and Fannie Mae, "duped" by their own partners such as in the KPMG tax shelter case, "duped" by the Russians such as in PwC and  Yukos....It's pathetic.

Even Mr. Stulac's 42 year old super brilliant attorney, Michael Attanasio, had to admit the double-edged sword of his defense while at the same time basking in his accomplishment:

Attanasio acknowledged that convincing the jurors of Stulac's innocence wasn't easy, even though the majority of both juries voted for his acquittal. "Several jurors had the impression that because my client was a CPA and because he worked for a large accounting firm at the time and he was well-educated, he should have known or must have known of the fraud given his role as an outside auditor," Attanasio says. "It was tremendously difficult to dispel that notion in the jury selection and throughout the trial."

Unfortunately for Mr. Stulac and the others that use this defense, their success comes with having folks realize that the auditors are not as smart as they look or should be.  Maybe that's the price of getting off the hook, but I'm sure it's a bitter pill for Mr. Stulac to swallow.

It's my understanding that, although this criminal trial is over, Mr. Stulac is still defending himself  against civil charges and potential sanctions by the SEC.  

Let's hope for Mr. Stulac's sake, Mr. Attanasio can pull some more rabbits out of his hat.

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KPMG Makes M&A Staff in UK "Redundant"

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How I like the quaint terms they use in other parts of the world to express the ugly fact... People are losing their jobs and the firms won't admit it.  

You'd think they were chatting at a tea party.  The Big 4 are as vulnerable to an economic downturn as any of their clients, especially when they over-hire and under-manage.

What do I mean by "under-manage?"  What about all those programs they have implemented that involve "Coaches", "Mentors" "Relationship Partner", etc.   Do they really improve quality and help to make the average staff person feel "connected" to Partners? 

Well, I found it all to be a bunch of hooey.   Staff with only a few years experience were assigned as coaches and mentors to entry level staff and, in the end, only partners knew or had control over salaries, bonus and future at the firm.  Staff are out at client sites most of the time on their own, with only a Manager or, if they're lucky, a Senior Manager/Director checking in once and a blue moon.

Planning and forecasting are left to professionals who have never done it before and no one mentors in the real ways to do critical tasks related to the business of auditing and consulting in the Big 4, let alone for handling technical issues and conflicts.  Information trickles up, is lost and filtered, diluted and diverted, until what the partner has left, if anything, to decide is irrelevant.

Unfortunately, the staff that will lose their jobs in KPMG M&A in the UK will probably have to go to turnaround and bankruptcy firms on the outside or maybe the companies they put together in the deals they did at the firm.  At least they may know a lot about the numbers that justified these combinations and how to achieve them. That way they won't end up "redundant" once again.

Credit crunch sees KPMG axe 90 staff
KPMG to axe 90 staff as the first concrete signs of the credit crunch start to show

KPMG is to shed around 90 staff from its corporate finance and transaction service teams in the first concrete sign of the damaging effects of the credit crunch.

The move will send chills through the transactions departments of other firms. The lack of deals means corporate financiers are not in strong demand.

KPMG has not formally announced the number of redundancies. A spokesman confirmed there had been ‘a number’ of job losses in the two divisions. ‘This is related to market conditions that we and other organisations are encountering.’ There were currently no plans for firm-wide redundancies, he said.

The firm had announced strong performance in both corporate finance and transaction services in 2006/2007, growing 16% and 25% respectively. Last year’s numbers would not have reflected the credit crunch greatly, however, with the firm’s year end in September.

The last major wave of job cuts in the firms followed the collapse of Andersen and a market downturn in 2002, during which KPMG shed around 1,000 staff.

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re: The Auditors on The Corporate Counsel.Net

Broc Romanek over at The Corporate Counsel.Net has blogged  about re: The Auditors twice today.  

He links to a podcast he asked me to tape recently on the Ernst and Young restructuring outside of the US.  

For the original post that caught his attention, go here.

He also liked my take on his poll about access, or the lack of access, to Board of Director's minutes by external auditors. 

re: The Auditors is flattered by his attention.  

If you could see me now, you'd see me blushing.

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Mail From Across The Miles

I like having this one as my 500th post.

Dear re: The Auditors Readers,

My name is James Ford and I am currently residing in Itapúa, Paraguay. On the suggestion of Francine, I am writing you today to tell you a little about myself, how I found this blog, and why I continue to come back and recommend it to others.

I hold a BS in Accounting from the University of Connecticut and am starting my Masters at the same school this month. As an undergraduate I was president of my chapter of Beta Alpha Psi, an honors business fraternity, and had extensive contact with the accounting industry in Connecticut. During my undergraduate career I had the opportunity to do an internship. Although I interviewed with several firms, I found myself pulled toward the allure of a Big 4 experience. I chose to pursue a tax internship, as opposed to most of my fellow students who went into audit, because I believe that anyone, no matter their level within the firm, can be proficient if they study and become knowledgeable in the code and regulations.

I started my Big 4 internship in January 2005 and worked until I had to return to school in the fall. I had experience preparing supporting documentation, worksheets, and tax returns for corporations and high net worth individuals. I also lived through the busy season, with winter being what it is in Connecticut, not getting to see the sun on some days. Altogether, though, it was fun and new and a great experience.

After graduation, however, I decided that I was not ready to accept an offer for full time employment. At 21 years old is anyone ready to sit in a cubicle all day? I had known a few former Peace Corps volunteers and ended up joining Peace Corps Paraguay as a Rural Economic Development Volunteer. In this role I have had the opportunity to teach proper accounting and control techniques and to help prepare the financial statements for a small cooperative. I learned, first hand, how important control is in a country that is constantly rated among the worst transgressors by Transparency International.

As my service comes to an end this fall, I have considered my options and decided to return to the Big 4 firm where I was an intern. Due to my interest in international assignments and my preference for working with clients in more of a face to face environment, a tax partner recommended that I enter the firm in an audit role. I was told that there were always opportunities abroad for auditors and that it would help me develop a good background working with the financial statements, which would make switching to another department such as tax or advisory easier if I wanted to.

Although I look forward to the new environment and transition, I do worry. My friends from school are now a couple of years into their lives as auditors and complain about their lack of free time. Even the tax partner who recommended that I start in audit told me that he had hated it as a new associate with the firm. It will be a bit of a change of pace to say the least.

I found the blog re: The Auditors when I was contacted by Francine through twitter.com. I had mentioned a New York Times story about New Century and KPMG, which she had been writing about. I found that she had done consulting in South America and that we both hold similar interests in culture, travel, and corporate responsibility. We’ve started a correspondence via Twitter, gmail and instant messaging. It’s pretty amazing to both of us that it’s so easy given where I am. 

Although I've only recently come across her blog, I have quickly taken a liking to both its content and presentation and find myself checking back frequently for updates. Francine's insights into the accounting practice are sharp, witty, and well thought out. I continue to check back on re: The Auditors for both the stories and the links to other sources, many of which I have also found very interesting and continue to check. I believe that having a resource such as re: The Auditors will help my transition back to be that much easier. Based on Francine’s recommendation, I have already been more proactive in getting in touch with the firm where I intend to be working so as to be a little more prepared for the move. I want to congratulate Ms. McKenna for a great service that she provides that I look forward to following no matter where in the world I might end up next.

Check out my web page if you're interested in learning more about my work, Paraguay or the Peace Corps.

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Cyclone Nargis (Burma) Update

Click here for the American Jewish World Service update on the cyclone in Burma.  

(Pro-democracy activists still refer to Myanmar as Burma to protest military rule there.)

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Wow! The Big 4 and Iraq

How did I miss this? Accounting Web has a special series on the Big 4 and Iraq. Part 1 was published in November 2007 and Part 2 just yesterday.

It's fascinating reading.

I'll be commenting later...

An excerpt:

Ernst & Young had rushed to open a Baghdad office, of which it made much political capital, full of optimism for the new Iraq. Back in the US, it was awarding entrepreneurial awards to some of the private security companies working for the CPA (one of which went to Custer Battles, was later dogged by accusations of illegal profiteering). Its first contract, for the Debt Reconciliation Office, was a non-controversial one which saw it helping to implement US foreign policy on Iraqi debt.

Contrast this with KPMG, still working largely out of its Bahrain office, which found itself working for the IGC and the out-of-favour Chalabi, and afterwards for Kofi Annan's UN, which was even less popular with the US government. In retrospect, given the political landscape, KPMG may have been drinking from a poisoned chalice. Within two years, the DFI audit was quietly handed over to Ernst & Young (who, it should be said, continue to express grave concerns).

The other two Big Four firms have taken different approaches. In the US, Deloitte's public relations people have been keen to distance themselves from the country. Officially, "neither Deloitte Touche Tohmatsu nor any of its member firms do business in Iraq," although the firm's website has previously suggested otherwise. Meanwhile, the biggest and most profitable of the Big Four, PricewaterhouseCoopers, has remained conspicuous in its absence.

Perhaps PwC has decided that auditing in Iraq is more trouble than its worth. The former head of Iraq's Supreme Board of Audit (SBA), Ihsan Karim, would doubtlessly agree, if he was still alive. The CPA appointed Karim to head the Iraqi side of the oil-for-food investigation alongside Ernst & Young. After the CPA pulled out Karim lasted for five days before being assassinated.

Iraq is a country where auditors can know far too much.

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File This Under Dumb

KPMG (Singapore) is an equal opportunity employer. We offer our employees a stimulating working environment, and an attractive package of training and career opportunities.

I'll say...

Three different Google Alerts pointing me to reports on the "off  peak party" held by KPMG Singapore for its auditors.

The first one, entitled, KPMG Mafia Night, had this excerpt and has photos.

Games like beer drinking, best dressed mafia and the ultimate lap dance done by the staffs in front of their boss were some of the highlights that sent the crowd wild. Definitely an eye opener for me because I've never attended a company function before...

The second one also has pictures and this excerpt:

...There was no more food left when we reached (abt 8+), thus we were all drinking on empty stomach....

Finally, this one has lots of other info about this auditor, including her disappointment at not being able to go to the US.

...it was also a shocking night, HAHA Jialing will know why! We just saw a lot of stuff that are super surprising, amusing and hilarious! The GAs went really crazy after getting high on drinks/shots & whoa, I am impressed by some of their dancing skills. Oh yes the GAs offered us shot but we didn't dare to drink cos we didn't wanna test our limits that night and get wasted away! & boy, the food that night was horrid, really not to my liking...

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Friday Searches - Learning and Growing

I learn a lot from the Google searches that bring readers to my blog.

I learn what people are looking for.
I learn whether the right page is showing up on Google and why or why not based on keywords.
I learn how many different ways people search for the same information.
I learn about things people are monitoring for mention in the media that may not yet be generally known.
I see new visitors, like my IBM buddy, who while looking for one thing found me and all the rest and became a new supporter and, maybe, a mentor.

I also validate my belief that layoffs are on the mind and in the hearts of my readers and that they are going on in full force in at least three of the Big 4, based on the level of detail people are looking for. The only firm that doesn't seem to be the subject of an "X firm layoffs" search is Ernst and Young. If that's because they are taking advantage of the others' misery to develop a robust crew and a competitive advantage like they did with their non-US restructuring, well then, Yea! for them.

And now, the searches that brought folks to re: The Auditors in the last 24 hours. 

The link is to the page they landed on.

admin salary big 4
aig layoffs
auditing standard 5
auditor blog
auditor blog layoff
average starting salary in big four in 2008
bdo big 4
bdo florida litigation
bearingpoint layoff
behavioral questions big 4
big 4 accounting firm rates
big 4 accounting salaries
big 4 layoff
big 4 partner salary
big 4 salary
big 4 tax partner average salary
billie williamson
can auditors audit a company whose family member own stock
change in aig auditors
compensation at pwc advisory
crazy eddie underbidding auditor
deb harrington and kansas
deloitte layoffs
deloitte layoffs new york 2007
excellence is not
francine mckenna
goldman sachs auditors
good pay at big 4?
headhunter chief auditor latin america
history of internal audit
it audit blog
kpmg layoff 2008
kpmg layoffs
kpmg overtime lawsuit
lausd sap
london fashion week pwc
manager salary at big 4
new century financial kpmg
problems at deloitte
professions with lowest layoff rates
profits per partner big 4 accounting firms
pwc layoff
pwc vietnam
retheauditors layoff
richard breeden
roy katzovicz
saratoga resident charged with stock manipulation
servile pwc
shinyung oh and wilson
siemens kpmg
standard severance package
starting salaries 2008
subprime auditor
walmart, independent accounting firm, audits, ernest and young
what do big 4 partners make

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Big 4 Corollary Is The Non-Selling Senior Manager or Director

Whether without selling skills or "hobbled by those above her who were worried that clients would prefer her over them"*, the Senior Manager or Director who does not have clients or new engagements to their credit is a most expensive burden for the accounting firms. It may also be that experienced hire that realizes too late that half the contacts and potential business referrals she had are "independenced" out, another 25% are already working with the firm but in another office and "they don't need your help", and the remaining 25% are "of no interest to us."

Notwithstanding the fact that since the partners never show up at the client unless there is an Audit Committee meeting and someone has to be running things, including the numbers and the billing, and the staffing, it's hard not to see it from the partners' point of view. Less people equals more profit per partner. 

Some firms have already selectively cut these resources. Frankly it makes a lot more money sense to cut higher paid, more demanding folks than a bunch of 1+ year associate sheep. More bang for the buck. Damn the quality or work-life balance issues.

Senior Managers and Directors, however, are usually a little more savvy and have more relationships as a result of their many more years of experience than the firms sometimes count on. 

God forbid they should end up at one of the firm's clients after being let go! 

Yeesh!  That would be uncomfortable.

Law Firms and Layoffs: Who Are the Most Vulnerable?

...The firing of Shinyung Oh, which has been the talk of the biz this week (click here for an interview with her and here for her performance review), points up just which big-firm lawyers might be most-vulnerable in this economic malaise.

It’s not the partners with the big books of business. They’re more in demand than ever. And it’s probably not the super-junior associates, either. Firms have just spent a fortune recruiting them and still don’t know their potential. “You can’t identify that early who’s not going to be a good performer,” says Dan Weiner, co-chair of the personnel committee at Hughes Hubbard, with whom we spoke about this brouhaha yesterday. You’d be “cutting them before you know their performance capabilities, which is not good business.”

No, the most vulnerable are the folks in the middle, lawyers say. These are the junior partners, counsel and senior associates who are paid a lot and so have to be super productive to justify their salaries.

It’s an issue that was spotted earlier this year by Dan DiPietro at Citi and Brad Hildebrandt in their joint report on the industry. The report flagged a concern about the cost to firms of “income partners” and other non-equity lawyers. “Many firms are now bloated with some income partners performing mostly associate-level work while, at the same time, generating less overall profitability.”

Weiner (who was talking generally and not about current conditions at Hughes Hubbard) says that when times get tough, firms look at “expensive people who are underutilized” starting with partners and then “going down to counsel and senior associates” based on performance...

*See comments to the WSJ Law Blog post.

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Count On The Lawyers...

As has been discussed here many times before, the reason you don't see more news about the Big 4 and next tier layoffs is because no one except me wants to talk about it.

Duh, fm, you say.

But the contention I have made that in many cases the firms lay off or terminate under the guise of "poor performance" when that claim is often trumped up, papered over, and completely self-serving to the firms who have the inarguable upper hand, seems to be also true of law firms.

They shame you into not wanting to talk about it.

Well, they're sadly mistaken in that assumption, in some cases.

;)

I should not be surprised and neither should you be.

Partnerships are like that.

Fraternal, secretive, opaque, arrogant, self-serving, short-term oriented, etc.

She should sue. A woman, a pregnancy, a minority... Sounds like a triple whammy.

Fired Paul Hastings Associate Talks to Law Blog

The BigLaw story of the week has without a doubt been about a mass email sent by an associate at Paul Hastings in San Francisco who was fired on April 30 — six days after having a miscarriage — allegedly for poor work performance. (See earlier LB post here, the ATL post that started it all here.)

We caught up with the former associate, Shinyung Oh (University of Chicago ’93, Georgetown Law ’98), a commercial litigation lawyer, who says she sent the now-infamous email because she didn’t want other associates who may be laid off because of downsizing by the firm – but told it is because of their performance – to doubt their own abilities.

“I want them to feel like they’re not completely alone and not to worry about their own performance when it’s the firm doing something for economic reasons” and because of a “desire to increase partner profits,” she said.

Oh said two other associates who were widely believed to have been fired recently from her office had “left the firm with their tails under their legs,” and that she didn’t “want to walk out under the guise that I’d done something wrong.”

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PwC and AIG - Beyond Ludicrous

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Why was PwC given the job again when they've clearly not been doing their job?

Why does the SEC and PCAOB allow the comedy of errors and contradictions that is an adverse opinion on internal controls and a clean opinion on the financial statements? Especially now that the audit and opinion are supposed to be integrated?
I asked Christopher Cox and he gave a non-answer.

Why is PwC still the auditor of this mess of a client? What's in it for them?
Oh, I forgot. $45 million in fees. Sure must be giving some partner over there a headache. I hope his wife has adequate life insurance because he's headed for a heart attack or worse...

Why is everyone allowing AIG to help PwC by saying they were duped? When does this become a non-excuse? If there's lack of proper tone at the top, isn't this the reason an audit firm does everything in its power to protect itself, including resigning?

I'm incredulous.

Pricewaterhouse's Squeeze Play
AIG Says It Misled Auditor, As Greenberg Cites Review Clearing Internal Controls

American International Group Inc.'s lengthened laundry list of accounting woes shines the spotlight more brightly on the role played by its outside auditor, PricewaterhouseCoopers LLP.

In an unusual admission of accounting impropriety, AIG disclosed late Sunday that accounting problems are likely to cut its net worth 3.3%, or by $2.7 billion, considerably more than the $1.77 billion estimate of a month ago. The new figure came as AIG said it would postpone filing its annual financial statement with the Securities and Exchange Commission, already delayed twice, until as late as the end of this month. The increase stems largely from a slew of improper accounting practices identified during the past month as its internal probe continued. The company also faces investigations into its accounting by state and federal authorities.

The insurer's latest release offered some relief for the accounting firm: It noted that "in certain instances," improperly booked transactions "may also have involved misrepresentations to management, regulators and AIG's independent auditors."

Specifically, the company said Pricewaterhouse wasn't told in full about AIG's ties to or dealings with two offshore reinsurance companies that AIG, because of the internal reviews, now plans to consolidate into its financial statements. That change alone could account for most of the $1.2 billion hit to AIG's book value from "risk-transfer matters."

Still, "at a certain point, if auditors can only find out about [improper accounting] if management tells them about it, then what do we have auditors for?" said Lynn E. Turner, a former SEC chief accountant and managing director of research for proxy-advisory concern Glass Lewis & Co. "The reason we have auditors is to give investors confidence that an outside third party has looked at them and found things that might turn out to be big errors."

...AIG also acknowledged that former executives at times had been able to "circumvent internal controls over financial reporting." As a result, AIG said Pricewaterhouse likely will fault the insurer's internal financial controls in the annual report to come even as it is likely to give the insurer "unqualified" opinions on its financial statements as well as its assessment of its internal controls. AIG said its shortcomings constitute "material weaknesses" under regulatory guidelines. Internal controls are processes to ensure accurate financial reporting.

AIG said one reason its internal controls didn't pass muster was the ability of "senior management" to get around the safeguards. AIG said it is has begun strengthening the controls.

In a statement, David Boies, an attorney for former AIG Chairman and Chief Executive Maurice R. "Hank" Greenberg, said a finding of weak internal controls would be "inconsistent with the conclusions" of Pricewaterhouse and AIG's audit committee "after extensive review." A spokesman for Mr. Greenberg's lawyers said that, in a report to AIG's audit committee on March 7, after 50,000 hours of work auditing AIG's internal controls, Pricewaterhouse at that point "was unambiguous as to its finding that there were no material control deficiencies." Mr. Greenberg was pushed out in March amid the mounting scrutiny.

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PCAOB Pushes Auditing Standard 5 - How's That Working Out For You?

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Hot on the heels of Christopher Cox"s emphasis on Auditing Standard 5 at the recent US Chamber Briefing,  Compliance Week reports that the PCAOB will be making sure that auditors are using the new standard with their clients and using it well, via its inspection process.

Well... Call me skeptical.  

Ok, fm, you're skeptical.

Although I was surprised and pleased to see Auditing Standard 5 so high on Cox's agenda when he spoke, I realized it was because he was advertising for the study his economists are working on to measure costs and benefits of Sarbanes-Oxley, not because of the merits of the standard itself.   He spoke at length about Auditing Standard 5 as an antidote to high costs of Sarbanes-Oxley. Companies have been complaining and the SEC is nothing but responsive to corporate executives and, theoretically,  (and I mean a long way down the road,) the investors that are paying the bills. Someone forgot that the Act was intended to protect investors from these same executives.

The PCAOB is conducting crash courses for its inspectors in AS5, teaching them how to spot whether judgment and a risk-based approach was used in conducting the audit and internal controls assessment which is now embedded in it. They are charged to call out any rote, tick-the-boxes type of audits and cite them in inspections of auditor's work.

Unfortunately, Auditing Standard 5 assumes a level of confidence and trust in the company's controls that will allow auditors to depend on that company's decisions regarding vendors to support them, their organization of the projects required to complete SOx documentation and testing, their tone at the top, the controls over their IT organization, assuming they have sufficient IT infrastructure for their business, and their past record, or lack thereof, of quality financial reporting.

Since many companies are still new to the process and many more will cycle in and out as their status as listed companies changes, there will always be stubborn holdouts to "the program." Hell, there are still multibillion dollar companies that are stubborn holdouts to "the program", still kicking and screaming about someone forcing them to have policies and procedures, adequate internal controls over financial reporting and executives that walk the talk. 

So what makes the SEC and the PCAOB think that the auditors are going to trust these problematic clients as far as thy can throw them if the auditors are in the bull's eye for both the inspections by PCAOB and potential shareholder lawsuits if something is or goes wrong?

The auditors are going to keep doing as much work as they deem necessary to cover their tush, unless or until they get liability relief.   And when the PCAOB cites the first firm for doing not enough work because they followed AS5 and trusted their client instead of doing additional tests and procedures, you'll hear the auditors yell and scream about being stuck between a rock and a hard place.

And they are. 

Sorry to say. 

It's not an easy job being an auditor of public companies. Just as it's not an easy job being an officer or Director of a public company. But those that choose to serve are well compensated and are doing, hopefully, the job that realizes their talents in the best way.   And it's never easy to do a job well, beyond reproach, best in class. Many company executives are working on the "just good enough" principle. Do only enough, just good enough, so we can take some money out of the market and I can get mine. 

And some auditors are working on the same principle. After I make partner, do my ten to fifteen years, stay out of trouble, make no trouble, then get the hell out. No more long hours, no more clients, no more headaches, and hopefully still the respect of my peers and the community. It's when they worry too much about getting their money out during these partner years, worry about earning as much or more money as some of their clients, that their values become skewed. Most auditors will never make as much as either their clients or the lawyers of the same age that are suing them. (That's why some of them were, and still are, naively attracted to becoming "consultants.")

Are the auditors required to implement Auditing Standard 5 even when a client isn't ready for it? It sure seems like it from this article. However, I highly doubt that they will. The auditors hold the final judgement over the financial statements and it's the only real card they hold. They should use it judiciously to bring more companies "on the program" and all of our lives will be easier. When audits go back to being routine commodities, like in the 90's before dot-com, the audit firms will find something else to make money on.

If they ever do and if the audit firms are still around.

PCAOB Promises Hard Push on AS5

With year-end financial reporting now winding down, audit inspection teams are hitting the ground under strict orders to see whether Auditing Standard No. 5 is indeed taking root at audit firms.

The Public Company Accounting Board went so far as to hold a special two-day training session for its inspectors in April to indoctrinate them in the ways of AS5. They will now be checking audits of 2007 financial reports to assess how auditing firms embraced the standard, which was issued last year to alleviate companies’ struggles with Sarbanes-Oxley compliance.

This will be the first round of audit firm inspections following the arrival of AS5. Given the backlash against its much-maligned predecessor, Auditing Standard No. 2, the PCAOB is under pressure to get things right this time around.

“There’s been some effort to make sure everyone is singing from the same hymnal,” PCAOB board member Daniel Goelzer admits. “We can’t just issue a standard and then sit back and see what happens.”

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Who Knew Compliance Folks Could Be Funny?

Ok, at least humorous. Droll? Witty?

Be there or be square.

Or squarer...

Register here.

Top 10 Reasons to Attend Compliance Week 2008

10. SEC Enforcement Director Linda Thomsen will give you tips on how to stay out of hot water;

9. Talk with risk and compliance leaders at Starbucks, Yahoo, HP, Pfizer, Kyocera, Prudential, Merck, PepsiCo, and many others;

8. Come see where FDR wrote his “fear itself” speech, where Harry Truman resided, where J. Edgar Hoover had lunch every day for 20 years, and where every inaugural ball has been sponsored since Calvin Coolidge;

7. A look at the future of financial reporting, with SEC CIFR Chairman Robert Pozen, PCAOB Director Tom Ray, former SEC Chief Accountant Scott Taub, and others;

6. Tons of networking opportunities, and a new series of small-group “Conversations” for intimate off-the-record discussions with your peers;

5. FCPA program insights from compliance officers at companies that have been through the wringer, including Chiquita Brands, Baker-Hughes, and Pride International;

4. Our annual much-anticipated keynote from former SEC Chairman Harvey Pitt;

3. The dirty martinis at the Mayflower Hotel'’s famous Town & Country bar;

2. Practical guidance on ERM from corporate executives who are leading the charge at Pfizer, Northern Trust, Pitney Bowes, and elsewhere;

1. Attendees can get 12 CPE credits, 12 CLE credits, and ISS director credits that will result in an upward adjustment to your company'’s Corporate Governance Quotient.


Join Compliance Week, SEC & PCAOB directors, DoJ officials, and literally hundreds of GRC executives as we explore critical issues related to risk management, FCPA compliance, program effectiveness, reliable financial reporting, and much more at Compliance Week 2008.

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New, New Things

Luke Mullins is an Associate Editor at US News and World Reports, blogging on white collar crime. I was surprised and pleased when I got a note from him yesterday. Seems he found me via Kevin Funnell and the Bank Lawyers Blog.

(It pays to keep Kevin on your good-enough side, lemme tell ya..)

Luke not only became an anthologized journalist at a tender age, but he's a Peace Corps veteran who also coached baseball in the Dominican Republic.

Sounds like another long lost half-brother.

Luke said he has added me to his Favorites and I will do the same. Have to encourage the good guys.

Here's one of his fun posts.

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With A Trial Comes The Truth

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I almost deleted this Google Alert, yet another summary of the BDO, BES case. It seemed it was only regurgitating the facts and describing again for us the sword hanging over BDO, ready to come down and annihilate them if their appeal of the verdict fails.

But as I read to the bottom, I saw a few more details and tidbits that were of interest. They reminded me of how rarely cases like this go to trial and, so, how seldom we get to hear the firms and their lawyers try to defend the conundrum of their "global networks." And again, how fragile the position next tier holds as ccompetitors-in-waiting to the Big 4 really is.

BDO case may set precedent for umbrella bodies' liability
BDO Seidman faces a £264m bill in the US, following a claim from Banco Espirito Santo that it was negligent in its audits of factoring company Bankest

...The case now hinges on a ‘right to control’ issue which, if proved, would be the first instance of a network facing punishment for a member firm’s problems...

‘This case looks at the way these big accountancy firms set themselves up and advertise to the world that they are one big firm, but distance themselves when problems occur. It’s going to be the same whether you’re talking about KPMG, PwC or any of the big firms,’ said Thomas.

Auditors from BDO Seidman were accused of ‘accounting malpractice’ and being ‘grossly negligent’ in audits between 1998 and 2002. Banco ES claims BDO International had ‘the right to control’ BDO Seidman. ‘BDO International controls BDO Seidman right down to how they type their letters,’ said Thomas.

BDO International claims control relationships were not so strict, with only ten people working at the umbrella body, and described the control claims are ‘puffery’.

Rhett Traband, representing BDO International at the appeals court argued that the network’s audit manual, which all BDO firms follow, does not apply to all audits.

‘The only agreement between the parties specifies that [the rules] only apply in limited circumstances to trans-national audits rules and inward referred work, neither of which were the Bankest audit.’

Traband added: ‘[BDO International] cannot come in during an audit and say to them “do it this way”.’

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Auditors' Access To BOD Minutes - A Corporate Counsel.Net Poll

The Corporate Counsel.Net recently asked readers, " What is the common practice when an independent auditor asks a client to review their board minutes?"

I have answered the poll as I believe one of my former clients would have. Full access.

Per Broc Romanek, there have been 168 responses to the poll, including mine, thus far.

This former client, still completing several years of restatements, having made a fairly recent change in auditors, subject of internal and SEC investigations, defendant in more than a few lawsuits, and the recipient of assorted Sarbanes-Oxley material weakness and significant deficiencies, has no choice but to do whatever their new auditor asks. I believe their auditor has them by the short-hairs.

However, it looks like there are more than a few companies, more than 65% of the respondents to the poll, that believe that keeping information from their external auditors, perhaps under the guise of privilege, is ok and good policy.

Who, in heck's name, are their auditors?

To take the poll, go to The Corporate Counsel.Net

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Opinion Polls & Market Research

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"A Judgment Too Important to be Left to the Accountants"

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The Harvard Law School Corporate Governance Blog is often good for some interesting discussions and points of view. With all due respect to some of the distinguished commenters and the fact that they have linked to me once, I don't always agree with the opinions expressed.

Take Mr. Peter Wallison's op-ed piece from the Financial Times of May 1, 2008, reprinted in the HLCG blog yesterday. Mr. Wallison argues that banks, in particular, are seeing their balance sheets "distorted" by fair value accounting because many of of the securities they hold are falling in value.

So what?

It's disingenuous to be fine with fair value accounting when asset values are rising and to proclaim it the villain when asset values are falling. He says that, "rising housing values made banks and other mortgage lenders look flush. Inflated balance sheets and income statements supported more borrowing and more leverage; suddenly, the markets were awash in liquidity and risk premiums fell to unprecedented levels."

One may have also blamed fair value accounting for the inaccurate picture of bank's balance sheets and income statements when asset values were rising, but interestingly enough, no one was complaining. Were the bankers making exorbitant profits and paying unprecedented bonuses complaining? Was the previously happy investor in bank stocks, which I suspect Mr. Wallison is, complaining? Were those who were riding the gravy train of inflated housing values, such as the mortgage companies and those that invested in the derivatives instruments derived from these soft securities, complaining? I do not recall any whining then.

Mr. Wallison says the judgment is too important to be left to accountants. I agree with this, at least. Even with the rules at their fingertips, the accountants, the Big 4, did not accurately interpret and enforce them. As a result, you now see the dramatic corrections as failures and collapses such as New Century, Northern Rock, and Bear Stearns make paying the piper impossible to put off any longer.

But the judgment is not too important to be left to accounting.

Mr. Wallison: Instead of principles and standards, consistent over time, who are we to leave this judgment to?

Fickle politicians, think tank pontificators and self-serving business leaders?

Judgment Too Important to be Left to the Accountants

The Financial Times recently published the following op-ed piece of mine, entitled Judgment too important to be left to the accountants.

By Peter J. Wallison
Financial Times
May 1, 2008

Two serious asset bubbles–the dotcom explosion of the late 1990s and the recent dizzying ascension in housing prices–have developed in the US economy within the past decade.

Given their damaging consequences, it is time to look for causes. One area that merits attention is fair value accounting, which was adopted as policy by the accounting profession in the 1990s.

This accounting convention requires financial intermediaries to carry their assets at market values, even if those assets are not being held for trading purposes.

When the dotcoms were in vogue, the assets of securities firms and other equity intermediaries were inflated, just as, more recently, rising housing values made banks and other mortgage lenders look flush. Inflated balance sheets and income statements supported more borrowing and more leverage; suddenly, the markets were awash in liquidity and risk premiums fell to unprecedented levels. It could be argued, then, that fair value accounting was the hothouse in which these bubbles bloomed; when prices are rising this system seems both to stimulate and ride the wave of irrational exuberance.

But matters look much less agreeable when the same asset values are falling. Then, the process works in reverse, and the spiral points downwards...

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