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Another KPMG fail?

In the Enron debacle, one of the most disturbing disclosures was that Arthur Andersen’s technical accounting experts were overruled by the engagement partners in Houston, allowing accounting decisions to be approved even though Andersen’s experts knew they were wrong.
Other auditing firms assured me that no such thing could happen on their watch.
Today the bankruptcy examiner for New Century Financial — a subprime lender whose collapse just a year ago got the current mess going — is out with his report. Parts of it are reminiscent of the bad old days, pre-Sarbanes Oxley. Here is an excerpt, with italics added by me:

“The KPMG engagement team acquiesced in New Century’s departures from prescribed accounting methodologies and often resisted or ignored valid recommendations from specialists within KPMG. At times, the engagement team acted more as advocates for New Century, even when its practices were questioned by KPMG specialists who had greater knowledge of relevant accounting guidelines and industry practice. When one KPMG specialist persisted in objecting to a particular accounting practice on the eve of the company’s 2005 Form 10-K filing — an objection that was well founded and later led to a change in the company’s practice — the lead KPMG engagement partner told him in a e-mail: ‘I am very disappointed we are still discussing this. As far as I am concerned we are done. The client thinks we are done.’”

A KPMG spokesman told me the firm had not had time to review the report. When I asked if it was KPMG practice to allow engagement partners to overrule the company’s accounting experts, he had no immediate comment. I’ll add to this blog when I get comment from him...
The report says that KPMG’s Department of Professional Practice, or DPP, which is what they call the national office, did sign off on the accounting, over the objections of the firm’s experts on derivatives accounting. It does not give enough detail to determine whether that was a principled decision, or a decision to avoid offending a client.
Addendum at 7:20 p.m.
KPMG put out another statement, referring to the e-mail quoted in the report:

“This e-mail standing alone is misleading because it leaves out the fact that in this case our national office was fully consulted and provided guidance to the lead partner. In accordance with protocols, the lead partner followed national guidance.”

Source: The NY Times

Big 4 to be the factory of CFOs

The Big Four have reaffirmed their finance director factory status as the proportion of FTSE finance chiefs who have previously worked for one of the accounting giants reached two thirds.

According to Accountancy’s latest ‘old boys’ survey, published in our March issue,

66 out of 97 FTSE 100 finance chiefs,

including Cairn Energy FD Jann Brown, can boast at least one Big Four firm on their CV.

This was five more than the previous year, and is the highest since Accountancy began the survey in 2003.

The increase is partly explained by changes in the companies that make up the exclusive FTSE 100 club, but will add fuel to the audit choice debate.

Jeremy Newman, managing partner of mid-tier firm BDO Stoy Hayward, said:

‘It’s one of the barriers that we have to fight against, one of the issues that is a challenge to us.’

He added that the trend could take a long time to unwind, but saw changes already lower down in finance and tax departments.

Clive Davis, regional director at recruiter Robert Half, said the findings were not a surprise but added investors often expected finance directors to have a Big Four background.

Source: Accountancy

Deloitte young professionals to go to Opera House

Firm signs up for £1.75m five-year partnership
Deloitte has signed up to a five year sponsorship deal with the Royal Opera House in a bid to widen access to the arts.
The centrepiece of the £1.75m deal will be an annual three day festival targeted at young professionals – this year the festival will be inspired by the human senses and includes work by interactive performance artists Blast Theory, Julian Opie, well known for his paintings of Blur, and a club night by DJ Scanner, a popular drum and bass musician.
The festival, Deloitte Ignite, is set to take place from 12 – 14 September and will run alongside the launch of the ROH’s 2008/9 season.
John Connolly, Deloitte senior partner, said:

‘The Royal Opera House partnership particularly appealed because it brings together our appetite for innovation and focus on young people with a commitment to widening access to the arts.’He added that the sponsorship would offer entertainment opportunities for the firm’s clients, staff and partners.

Tony Hall, chief executive of the ROH, said:

‘Deloitte Ignite is all about bringing a new audience into the Opera House – young professionals who are currently under-represented here – and offering something contemporary and different to inspire them to become excited about opera and ballet.’

The deal will neatly balance Deloitte’s other major sponsorship programme, that of its involvement with the 2012 London Olympics, which will go live next year.

Source: Accountancy

Big 4 to be the best place for gay and lesbian people

The Workplace Equality Index (WEI) 2008 features the Top 100 employers in the UK for lesbian, gay and bisexual people.
The organisations listed here in WEI those that scored highest in a 20-question survey that covered 9 policy and practice areas and was designed to sample workplace culture. The Top 25 organisations have also been through an independent consulting process, during which their workplaces were visited and gay staff were able to voice personal views on their organisation.
IBM the first among The Professional Services Group, PwC to be the second.

All of the Big 4 companies were successfully added to the index. But, PwC achieved the highest score among the Big 4.

True-life story about KPMG, paper based audit and other matters

From: *
Sent: Tuesday, November 27, 2007 11:49 AM
To: *
Subject: KPMG Questions

Thank you for letting me e-mail you. Staci has been very helpful with my questions about KPMG, but I was wanting an opinion from someone currently working for the firm. I am having a hard time deciding on who to go to work for in Dallas. I am getting a lot of fluff answers from recruiters. Is it okay if you give me the true scoop on how it is working for unnessary? The following are very important questions to me:

1. What is KPMG's policy on flex-time/part-time? When would I qualify?
2. Does KPMG have a Woman's Initiative Program/Working Mothers Program? Deloitte has a program in place that allows women to leave the workforce for as long as they want (1-5 years) and still be able to hold their position within the firm. When they come back, they can decide if they want to work part-time or flex-time and progress within the firm that way. Deloitte would sometimes even let you work at home. Does KPMG have the same fort of program?
3. When is KPMG going to go entirely paper-less?
4. Do you feel like KPMG's lack of technology is slowing down your development and progress in your career?
5. I have heard that KPMG is at the bottom of the Big 4 and might be fading away after the controversy a couple of years back. I have also heard that KPMG is losing their clients like mad due to excessive and unnecessary fees from lack of technology among other things. What are your thoughts on these comment?
6. What did you like most about working in the KPMG Dallas office? The people? The hours?
7. Could you tell me again about how many hours a week you worked during busy season?
8. How many hours a week you worked the rest of the year at KPMG?
9. What is KPMG's employee turnover rate?
Thanks!

From: ****, *****
Sent: Wednesday, November 28, 2007 4:12 PM
To: ****, ***
Subject: RE: Help
This is how I would respond

Dear ***
When is KPMG going paperless? I don’t know but I hope soon.
Earlier this year I was flipping through some work papers and I got a nasty paper cut. The cut caused me to bleed all over the general ledger. We didn’t get it electronically because unbeknownst to KPMG, typewriters don’t receive electronic mail messages, so I had to ask the client for another one.
Well let me tell you, the client was so angry at the request, not to mention the bloodshed, that he went to his boss, who went to the CFO, who went to the audit committee, and they dropped us as auditors mad fast.
When this happened the partner was so angry that we lost the client he made me work for 27 days straight. I didn’t mind these hours because this was half of the hours I was working during busy season and the people I was working with were great, when they weren’t yelling at me, and fun to be around, in-between the games of who can hit me in the eye with a paperclip the most times in a minute.
And flexibility; are you kidding? The team was totally flexible on when I could take my one personal phone call and two bathroom breaks. They would even let me combine two of them for an extra long break. You would be surprised at how much you could get done in 10 minutes.
KPMG has great Mothers-in the workplace program. In fact it’s so great that even though I’m a guy I wish I could be a part of it.
And whoever told you that 1-5 years is “as long as they want” was totally mistaken. I heard of this one girl who worked at KPMG and she had kids when she was 25 and didn’t return until she was 55. KPMG was so excited to have her back after missing her for 30 years that they immediately promoted her to partner.
Also I don’t know where you heard that KPMG was the bottom of the big four, but remember if you start from the bottom the only way you can go is up!
In closing, I might not have answered all of your questions but with the information I have provided I am confident you will make the right decision.

Can’t wait to work with you!

Ex-KPMG Partner Charged in Saipan Scheme

IRS and U.S. attorney say Robert Pfaff conspired to defraud U.S., along with a company on the Pacific island, via tax-shelter fees.
Former KPMG partner Robert Pfaff was charged in a two-count indictment with participating in a conspiracy to defraud the Internal Revenue Service by concealing tax-shelter fee income, and with conspiring to defraud a company based in Saipan.
In October 2005, Pfaff had been among 19 individuals named in a superseding indictment described at the time as the largest criminal tax case ever filed.
Last July, charges were dismissed against 13 former KPMG executives after the judge determined their former employer shouldn't have refused to pay their legal fees.
According to the new indictment, between 1993 and 2002 Pfaff and others arranged for various entities and individuals — including individuals in the Philippines and Norway, and senior officers of the company in Saipan, which is part of the Commonwealth of the Northern Mariana Islands — to participate with U.S. and Saipan taxpayers in certain tax shelter transactions.

Between 1993 and 2000, Pfaff received more than $3.75 million in fees from those tax shelter transactions, according to the announcement. He allegedly used the money for personal expenses such as buying Colorado residences in Englewood and Breckenridge, a home for his mother in Wisconsin, and various automobiles, including a Porsche for himself, a Mercedes Benz for his sister, and a Subaru for his wife.

He also allegedly purchased mutual funds and fund trusts for his children, while making gifts to family members and paying initiation fees at his Denver-area country club, renovating and landscaping, pay dentist bills, and purchase a Steinway piano and Hawaiian artwork.
Pfaff — charged with one count of conspiracy to defraud the U.S. and to commit tax evasion and wire fraud, and one count of endeavoring to obstruct and impede the IRS — faces a maximum sentence of five years in prison on the conspiracy count, and three years in prison on the IRS obstruction count. He also faces, on each of the counts, a fine calculated at twice the gross gain or loss from the offenses, or $250,000, depending on which is greater.
Source: CFO.com

The scorecard of Big 4 banking clients

Recent post of Ms. McKenna pays special attention that The Big 4

are now inextricably tied to their clients' fortunes

. Lawsuits are flying fast and furious as soon as any particular situation appears to be deteriorating.
Let's review the scorecard:

From November:

Merrill and Bear Stearns share Deloitte as an auditor, who also had American Home.
Merrill (Deloitte) and Citibank (KPMG) have already seen suits filed.
And now:
Northern Rock (PwC) has been nationalized.
Countrywide (KPMG) seems to think "The Little Engine That Could" is a strategy role model. And Bank of America (PwC) has bought the farm on that one.
Morgan Stanley (Deloitte, again) is drawing from the Fed's discount window because it is "paranoid".
And KPMG and New Century move to the land of "that's a big stretch."
Credit Suisse (KPMG, who was a hero for them recently) is tanking because of "rogue traders."

Where have I heard that before?
Rogue traders figure into SocGen (Deloitte) and MF Global's (PwC) issues, according to them.

And The Sheriff of Wall Street is no longer on the job...

Audit market concentrated, but needs no action

The audit market for large public companies has become more concentrated among the Big Four firms, but not enough to require corrective action, according to a survey by the Government Accountability Office.
The GAO found that 82 percent of large public companies saw their choice of auditor as limited to three or fewer firms, while about 60 percent view competition in the market as insufficient.

Most small public companies, however, said they were satisfied with the auditor choices available.

The largest accounting firms audit 98 percent of the more than 1,500 largest public companies, those with annual revenues of more than $1 billion. In contrast, midsize and smaller firms audit almost 80 percent of the more than 3,600 smallest public companies, those with annual revenues of less than $100 million.

Audit fees have also grown significantly in recent years, but companies attribute that to the increased compliance requirements and higher costs of personnel. Company officials also acknowledged that audit quality has increased in recent years.

Loss of another of the Big Four firms, however, would reduce the auditor choice for companies even further and raise fees more.

Smaller accounting firms face challenges in competing with the big firms for public companies, but large public companies surveyed by the GAO said the smaller firms lack the capacity and technical expertise they require. Smaller audit firms also face challenges in finding additional qualified staff and increasing their name recognition. As a result, many are joining networks with other firms, the survey confirms.
Source: WebCPA

Non-Big 4 preventive contracts with Bankers will be monitored.

Stock-market quoted companies could have to explain why they have selected an audit firm and disclose contracts they may have with their bankers which prevent the appointment of non-Big Four firms such as Grant Thornton and BDO Stoy Hayward.

Accounting regulator the Financial Reporting Council is attempting to open up the audit market since almost all London's top 300 quoted companies are audited by PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young, which earn hundred of millions of pounds a year from the assignments.

In a consultation paper, the regulator is proposing that companies' audit committees, usually made up of three or four non-executive directors, provide "information relevant to the auditor selection decision".
More contentiously, it is proposing the audit committee "disclose any contractual obligations to appoint certain types of audit firms".

The single biggest hurdle to smaller firms winning big audit contracts is the fact that many City banks insist companies hire a Big Four auditor as a "comfort" when they are making loans.

Such contracts implicitly suggest that banks believe that either Big Four audits are more reliable or that a Big Four firm is easier to sue in the event of things going wrong.

The FRC is keen to open up the audit market and break the stranglehold of the four major firms because it fears the consequence of one of the Big Four quitting the market - either through choice because of the threat of litigation, or spiralling insurance costs, or forcefully as in the demise of Arthur Andersen following its auditing of the scandal-hit Enron.

The regulator hopes that major companies will look outside the Big Four but has admitted the current structure of the market offers little incentive to switch.

Source: Evening Standard

Congratulations to all ladies-auditors and consultants!

Office energizer

Dear Big 4 fellows, I couldn't stop myself from sharing this funny VERY FUNNY video with you.

PwC Pays $30M to Settle Claim of Faulty Audit

In Metropolitan Mortgage case, accountancy was charged with helping disguise the now-bankrupt company's problems with an offshore investment scheme.
PricewaterhouseCoopers agreed to pay $30 million to settle claims stemming from its audit of Metropolitan Mortgage & Securities Co., a financial conglomerate that went out of business four years ago.
The Big Four accounting firm was accused of helping Metropolian Mortgage disguise its problems by creating an offshore investment scheme that wound up being what was called "a cleverly disguised tax shelter," according to the trust that brought the lawsuit against PwC. An account of the settlement appeared The Spokesman-Review, in Spokane, Wash., Metropolitan's base...

...The trust that worked out the deal had alleged that PwC violated its duty as independent auditor in 1999 and 2000. The investors claimed that the audits failed to show serious financial problems and the company's poor preparation to enter the high-risk commercial lending business, according to the report.

PwC also was accused of

helping Metropolitan create the tax shelter, even using an Isle of Man office.

Details on source: CFO.com

I Love Big 4 poster