Pointing Fingers

It used to be that the accounting firms and their partners stuck together. In fact the, only crack anyone ever saw was the almost universal animosity for Arthur Andersen. Ask anyone at one of the other firms if they were sorry AA was torpedoed. Not!

In the era of government regulation by the PCAOB, which replaced the gentlemanly self-regulation scheme of the AICPA, this togetherness is no more.

Curiously, even though enormous time and taxpayer money are being spent to regulate the industry by the PCAOB in an independent and objective way, a few strange things are occurring:

1)The accounting firms are still conducting peer reviews – one firm reviewing a sample of audits of another. Is this an attempt to maintain the infrastructure of a scheme they hope will return or is the sharing of information regarding clients, fees, personnel costs and other proprietary information bordering on non-competitive activity or potential collusion in either the labor and/or service market?

2)Why is the PCAOB still only hiring primarily former Big 4 (not even next-tier firm veterans from GT or BDO, for example) partners and senior managers on their inspection teams? The rationale is that given the public scrutiny of the PCAOB, only professionals with this kind of background will have the credibility to judge the audit firms’ work. However, there is more to the inspections that just technical quality reviews of audits.

Which brings us to the third curious thing…

3) Why was the Sarbanes-Oxley Law passed with a confidentiality clause related to the inspections by the PCAOB of the audit firm’s operations? Although the results of inspections of a sample of audits for quality are part of the public report, other comments, criticisms and findings related to the firms operations (systems,independence, business alliances, compensation policies, etc.) is allowed to remain private, not subject to Freedom of Information Act requests and not disclosed to the investor public?

SEC. 104. INSPECTIONS OF REGISTERED PUBLIC ACCOUNTING FIRMS.g) REPORT- A written report of the findings of the Board for each inspection under this section, subject to subsection (h), shall be–

(1) transmitted, …; and

(2) made available in appropriate detail to the public (subject to section 105(b)(5)(A), and to the protection of such confidential and proprietary information as the Board may determine to be appropriate, or as may be required by law), except that no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.

Deloitte blames Grant Thornton By Andrew Parker in New York
Published: January 3 2005 02:00

Deloitte, one of the “big four” accounting groups, has accused Grant Thornton, a second-tier firm, of withholding information during audit work on Parmalat, the Italian dairy group which collapsed amid allegations of widespread accounting fraud.

Bill Parrett, global chief executive of Deloitte, acknowledged that it had taken his firm three years to spot the alleged fraud at Parmalat, but claimed Grant Thornton had made Deloitte’s task more difficult.

Former KPMG employees suing firm
BY JAMES DORAN, WALL STREET CORRESPONDENT

FORMER KPMG accountants accused of fraudulently helping wealthy clients to avoid paying taxes in the United States are suing the firm for millions of dollars in legal fees. In a lawsuit filed in New York this week, 16 former accountants claim that KPMG stopped paying their legal fees under pressure from US prosecutors, who urged the firm to cut them off to avoid being prosecuted. Firms such as KPMG generally hold insurance policies that pay legal fees when partners are sued in relation to their work. It has been alleged that American prosecutors threatened KPMG with a criminal indictment unless it stopped helping the former accountants to pay their fees. The lawsuit comes after a legal ruling by US district Judge Lewis Kaplan, who said that US government prosecutors had violated the accountants’ constitutional rights by urging KPMG to stop paying their fees.

KPMG says PwC caused audit crisis
By Richard Northedge
KPMG has launched a stinging attack on PricewaterhouseCoopers, blaming its accountancy rival for the current audit crisis. KPMG wrote to the auditing regulator last week, accusing its larger competitor of being responsible for reducing the choice for large companies to just four firms.
“The current situation is a direct result of regulators permitting the Price Waterhouse/Coopers & Lybrand merger,” KPMG’s head of risk management, Neil Lerner, told the Financial Reporting Council. He said the disintegration of Arthur Andersen after the Enron collapse was less significant.
The Big Four firms – the others are Deloitte and Ernst & Young – had been expected to present a united defence of their position but KPMG has chosen to attack the market leader over its merger eight years ago. “It is difficult to see how this merger was in the public interest, specifically in the UK, or more generally,” wrote Lerner.

KPMG and PwC braced for Shell grilling
By: By Adrian Michaels in New York, FT.com site
Published: Apr 22, 2004

Royal Dutch/Shell’s auditors are braced for tough questions from regulators about their oversight of the Anglo-Dutch oil company’s accounts in light of disclosures that internal controls were deficient.

KPMG and PwC, Shell’s joint auditors, are both expecting in the coming weeks to be forced to justify their work to the Securities and Exchange Commission, the chief US financial regulator.
But an internal report prepared for Shell by law firm Davis Polk & Wardwell added internal control problems to the company’s list of issues. Independent auditors must verify that a company’s internal controls are adequate and provide numbers that can be used in an outside audit. The Davis Polk report says overbooking reserves was possible only “because of certain deficiencies in the company’s controls”. It says the internal reserves audit function was “understaffed and undertrained”.

The US Sarbanes-Oxley Act of 2002 significantly adds to auditors’ responsibility on internal controls and increases the chances that regulators will sanction them for oversight failures. But even prior to the act – Shell’s problems pre-date the new requirements – auditors had to try to issue a clean audit opinion and were required to flag problems in internal controls.

Regulators will want to be satisfied that with two auditors doing the work, problems were not assumed to be the other side’s responsibility. The people close to the issue said that KPMG and PwC maintained an integrated audit team that reported to two co-heads of audit.