This post originally appeared at GoingConcern.com on August 26, 2009. I’ve added updates and additions where available.
Insider trading. Fraud. Money laundering. Falsifying documents. Embezzlement. Tax shelter abuses.
Some say I’m too negative about the audit industry. Occasionally I’m accused of making things up.
Not only is everything I tell you true, but the truth of what these guys do is often stranger than fiction. Each day I can choose from a long list of incidents – egregious violations of personal and professional ethics and accounting standards as well as disregard for legal and regulatory compliance and lack of independence in thought and action.
Here’s a recent rogues’ gallery of some “professionals” not acting very “professionally.”
The Deloitte/Thomas Flanagan case is still pending. Flanagan is a Chicago-based Vice Chairman accused of trading on inside information from his Fortune 100 audit clients. Unfortunately, Deloitte has to sue him to break his partner agreement and is, therefore, forced to air a lot of dirty laundry. In particular, Deloitte has to explain of how Flanagan violated the firm’s independence policies more than 250 times. Mr. Flanagan is an old-fashioned kind of partner – he really is an owner of the firm.
This case was settled recently by the SEC. Flanagan pays $1+ million Apparently, Deloitte gets off scott-free. Here’s my post with an update.
Then there’s the EY partner sucked into an adultery/insider trading ring by an evil hussy who cruelly used him. He’s going to jail.
There’s an update on this one. The guy went to jail but his troubles are not over. Cost $250k plus ignominy.
Fraud and money laundering
“Former” Price Waterhouse auditors S Gopalakrishnan and Talluri Srinivas are still in jail for their part in the PwC/Satyam case in India. They’re accused of complicity in the fraud and money laundering charges against Satyam management. Interestingly, both “professionals” remain members of the Institute of Chartered Accountants of India, although Gopalakrishnan was removed this week from some Committees.
Gopalakrishnan and Srinivas were bailed out. Two of their low level staff were sanctioned by the PCAOB because they refused to cooperate with the investigation. The case is still pending, in spite of PwC’s attempts to get it dismissed in the US in favor of an Indian proceeding and conniving in India to get it dismissed completely because it is becoming tedious to them. In the meantime, partners keep leaving Price Waterhouse India to work for Deloitte.
Stephen J. Nardi was a partner and the Practice Office Assurance Director in the Philadelphia office of BDO Seidman. In anticipation of a QC inspection, Nardi directed a subordinate to retroactively initial and sign a client’s FY 2004 financial statement audit work papers indicating that she had performed a timely detailed review even though she was not involved with the engagement. Nardi also initialed work papers in August 2005 before providing them to the QC reviewers. Nardi backdated these approvals to dates preceding the issuance of the client’s audit report.
This case is interesting because it’s a prime example of what so many complain about in the big firms – the pressure to do things that are unethical or illegal because someone in a very high position controls your career. Mr. Nardi was the subject of a disciplinary proceeding by the PCAOB.
Mr. Nardi has recently been granted a termination to his bar by the PCAOB.
Fascinating story coming out of the UK this past week about a KPMG Director stealing almost $1 million US via expense reports in order to please his second wife. What about all those false expenses passed through to his clients? Is KPMG going to fix that?
And a few weeks ago, a Deloitte manager committed suicide after being convicted of embezzlement of more than $500k, again via false expense reports. Watkins used her company credit card to pay for personal items and was reimbursed for out-of-pocket “business” expenses. Watkins made up false invoices and bogus receipts.
Tax shelter abuses
Don’t get me started about the BDO Seidman partners, including a former CEO of the US firm, all convicted of tax shelter abuses…
The CEO was the same guy who was CEO when BDO Seidman was grossly negligent in its audit of Banco Espirito, resulting in a record $571 million judgment against the firm.
This is only a small slice of the scandal, stories and scoop in the big firms. When money and privilege are taken for granted, arrogance, hubris and plain old idiocy are often along for the ride.