Are These Misses Or Intentional Overlooks?
Two interesting cases shed light on the potential for complicity by the Big 4 when developing countries pull the wool over the eyes of organizations like the IMF and World Bank.
And they beg the question… Did the respective international firm know what their far flung “affiliates” in the “global network” were doing?
PwC ‘missed’ Tajikistan bank loans
The central bank of Tajikistan was able to guarantee lending to the country’s troubled cotton sector in part because of a failure by accountants at PwC to spot that such central bank pledging was occurring, the International Monetary Fund has claimed.
Last week, the IMF ordered Tajikistan to repay $47.4m (€30.35m, £23.32m) of loans for breaching its reporting rules, a sanction that could threaten both the financial solidity and reputation of what is already central Asia’s poorest country. Mohsin Khan, director of the IMF’s Middle East and Central Asia Department, told the FT that Tajikistan’s misreporting occurred “over a number of years” but the IMF continued to support the country because “we were totally unaware of this”.
He added: “The question is why we didn’t catch it. We were shown the balance sheet of the national bank and it had unqualified reports from PwC in Rotterdam. PwC told us that these accounts were fine so we took them at face value. For several years we were just going by the audits…”
WB refutes media reports
The World Bank (WB) has refuted media reports which claimed that prior approval was not sought from it for the release of payment to KPMG, the consulting firm in a WB-funded financial sector restructuring programme implemented by the Nepal Rastra Bank (NRB). “World Bank procedures do not require prior clearance by us for payments made against contract conditions agreed between the implementing agency in this case Nepal Rastra Bank – and the firm it hired for consulting services,” the World Bank said in a press statement released Thursday, adding that execution of contracts is the responsibility of the contracting party and payments are governed by the terms and conditions of the contract.
The Bank further said it reimbursed this contract payment of US$52,538.32 on November 8, 2006 to NRB.
“The World Bank made this payment from a grant window. Our technical experts found that the work done by the consulting firm was satisfactorily carried out against the terms of their contract,” the release added.
KPMG, Sri Lanka, was the consulting firm in the World Bank-funded project. But when it failed to sent seven consultants as stated in the agreement, NRB had unilaterally terminated the agreement with it.
The Supreme Court on Tuesday convicted suspended NRB Governor Bijaya Nath Bhattarai and Executive Director Surendra Pradhan of corruption while handing the project and slapped Rs 34,49970 fine on them.
The Commission for Investigation of Abuse of Authority (CIAA) had filed a case accusing the two of embezzling US$ 51,538 as they had not taken immediate action against KPMG for failing to turn up as per the agreement and because of which NRB was deprived of the benefits of financial sector restructuring project. They were also accused of not claiming compensation from KPMG after terminating the agreement…
The instant answer is likely neither PwC or KPMG US Firms had any direct knowledge or involvement in either affair. Rather, it appears the Netherlands firm of PwC were the auditors of the Tajikistan (“K”) central bank, and the KPMG project was so insignificant that it would not even show up on the radar. So you can now put away your Bob Woodward notepad, and stop thinking about Three Days of the Condor type conspiracies.
I did not even follow the logic on the KPMG thing. Looks like for reasons best known and understood by the KPMG consultants, they decided not to show up. Maybe they got cold feet, maybe they got a “better offer”, who knows. And it looks like the client terminated the contract.
The PwC thing seems a bit messy. But it really goes back to an earlier post about client acceptance. I’m not that smart, but even I recongize the ruling class of Tajikistan is not really known as high integrity business people that strive for full disclosure and transparency. There are signifcant systematic economic issues as well. In any event, why would ANY ONE IN THEIR RIGHT MIND accept this type of engagement. What was the upside for Netherlands PwC? A few extra Euros? bad idea, bad client, bad results, and they (PwC) deserve to be hung out to dry on this one.
This leads to an interesting side note – most of the Big 4 firms push (hard) the concept of Enterprise Risk Management (think COSO II on steriods). But does each country of each Big 4 Firm even have any reliable/meaningful ERM processes? Have they even defined what their risk “appetite” might be on an enterprise level (i.e., the entire practice). The answer of course, is no. The Big Four is selling lots of “shoes” (services), but their own “children” (the partners of each firm) are “shoeless”…
Final Four Guy
@Final Four Guy – The KPMG thing is interesting because they got paid even though they didn’t show up, looks like the partners of the KPMG Sri Lanka firm are already in trouble for getting reimbursement for a project that didn’t happen and KPMG billed for a project that didn’t happen and kept the money. Although the amount is small, obviously when it involves an institution like IMF or World Bank it makes the papers and carries significant penalties. No, it’s too small to be on the radar of the international firm for money alone, but don’t you agree projects with sovereign governments and these institutions should be on the radar of global leaders no matter how small, per your ERM theory?
Yeah, PwC Netherlands had a long engagement to audit T’s central Bank. Go figure…Money talks…
With regard to your comment about ERM-type activities in the Big 4… I can’t write about PwC’s activities as my knowledge of their initiatives or lack thereof came as part of my activities there. Suffice it to say, none of the firms can initiate an ERM type activity without a lot of lawyers and privilege issues entering the room. If they do it, it’s only out of raw knuckles necessity and tough to do on a global basis. The firms don’t run like a regular business. The lawyers are involved in almost everything and in not nearly enough things.
What they all do and have pretty good knowledge of are their “partner matters,” that is pending and potential litigation. The calculations of this exposure, amount of reserves and source of these reserves (from an independence perspective) should be required disclosures before any liability cap discussion goes any further in any forum.
Final Four Guy, if you’re a Chicago guy, I hope you’ll let me buy you a drink Friday at Erie Cafe. A no name tags policy will be strictly enforced.
Francine
I usually find myself in Chicago once or twice a year, so I will let you know. I set up a private email account for this blog; “final.four.guy@gmail.com”
In any event, I misunderstood the KPMG situation. Now it looks like they took the money and ran.
With respect to loss accruals for litigation, I have a couple of thoughts. First, a loss accrual is mereely a reflection of known items that have occurred in the past, so once that is recorded most people believe that it will spent, but we all know there is an element of incurred but not reported (IBNR) embedded in the portfolio. But getting back to the point, what you (and regulators who contemplate the liability cap issue) will want to know (besided the loss accruals) will be the actual spend trend on ptractice protection, settlements and lawyer fees per year, say over the last 10 years. The amount, as computed on a per-partner basis, are simply shocking. And by the way, this cost of the attest practice causes great friction within each Firm, as the tax and consulting practices believe they are getting screwed over because they get assessed as well (one Firm, one profit pool regardless of function). This cost was less when insurance was available, but as mentioned earlier, today there is no insurance availability for attest work.
Therefore, if I were in charge of a Big Four Firm, I would recognize some basic facts: 1) liability reform is really like chasing the Holy Grail, 2) Since I can’t get insurance, that should tell me something about how an objective entity (i.e., the underwriters) think about the business model (i.e., makes no sense in the long term), 3) the sins of the past continue to be made. With that recognition, then you decide whether you want to stay in the audit business or not. If you want to stay, then we need to have a big change in the way the attest practice is managed and executed. What is needed is a culling of the questionable clients, termination of non-performing professionals, a total revamping of the client acceptance practices (less is actually more), and serious consideration of spinning off the attest practices for each Firm, so that conflicts that arise withing the Firms between the tax/consulting function are eliminated and a pure focus can be placed on doing quality audits for quality companies.
Sorry for the rant, but this ties into my ERM comments. You would think the Big Four leaders would get on board with this, since it is obvious to all the model does not work well, and S-O Act, along with the creation of the PCAOB is a real indicator the regulators are taking us to that place anyway. However, leadership continues to cling to the old ways. Do I hear tick…tick…tick…???
Final Four Guy
Failure can’t be avoid on any company that’s why we need of the best people or accountant itself. With this kind of situation, IMF will surely ask for some repay to be done