Keeping Up With PwC’s Audit Clients
It’s a full time job.
I’m kidding. I divide my time between at least four firms and all of them have been keeping me super busy lately. Well, not just lately. I’ve been rolling this stone up the hill the last 6+ years.
Can you say “anecdotal evidence” there’s something wrong with the firms at the top of the audit industry?
(At the AAA-Audit Conference in New Orleans a few weeks ago, the first person with a question after my keynote set himself up as the devil’s advocate. He was going to tell me what some in the room may have been thinking about my speech, starting with the fact that my long list of audit failures, frauds, scandals and other illegal activities perpetrated by the firms and their clients in the last few years was just “anecdotal evidence” and not conclusive proof that anything was really wrong with the profession. There’s one in every crowd…)
Last week at Forbes.com, I updated readers on three of PwC’s clients that had been in the news recently for all the wrong reasons – Chesapeake Energy, MF Global, and Caterpillar.
Watchdog PwC never warned investors of faulty management and fraud that’s tanked shares, forced out top executives and resulted in expensive, ongoing private, civil, and potential criminal litigation.
PricewaterhouseCoopers LLP is, for 2012, again the largest accounting firm in the world, according to Big4.com, after losing the crown temporarily to Deloitte in 2010. PwC is also the largest audit firm, a distinction that must be made given the reemergence of the consulting practices at PwC, KPMG, and Ernst & Young ever since the expiration of non-compete agreements signed when their consulting arms were sold post-Sarbanes-Oxley. (Deloitte never sold its consulting arm and has, therefore, enjoyed a distinct advantage to the other firms, not losing any growth momentum between 2002 and 2007.)
All four – Deloitte, PwC, KPMG, and Ernst & Young – audit and consult, advise on taxes and manage bankruptcies, provide due diligence and accounting advice for acquisitions and investigate frauds when deals go wrong. You can’t throw a rock at a fraud or scandal nowadays without hitting three, sometimes all four, of the largest firms performing one role or another. The Big Four global accounting firms make money whether clients survive and thrive or flail and fail…
I could have just as easily written something about the fraud and illegal activities lawsuits and criminal allegations piling up against JPMorgan Chase, Barclays, and Bank of America.
And don’t get me started on a similar list for Ernst & Young, Deloitte and KPMG.
You get the idea… I hope.
Read the rest of, “Clients Flounder And Fail But Auditor PwC Prevails,” at Forbes.com.
The NY Times.com DealB%k posting on 6 February (http://dealbook.nytimes.com/2013/02/06/e-mails-imply-jpmorgan-knew-some-mortgage-deals-were-bad/?hp) summarizing the court filing of emails indicating mortgage backed securities cover-ups at JP Morgan made for some interesting reading. As several people commenting on that article stated, if JP Morgan was considered the best of the investment banks, exactly how bad were the cover-up activities at the other banks? Considering that the profits generated by repackaging and securitizing the mortgages was a significant part of the banks’ total profits, how much work did the external audit firms actually do on auditing the valuations and transactions? If the same actions had been taken in manipulating the general ledger balances directly, there would be no question about fraudulent collusion to cook the books. Even in a “risk based” audit that is basically analytic review, tests of reasonableness, and risk assessment interviews, there are supposed to be audit procedures to check for the controls being in place to prevent that type of activity and substantive procedures to verify valuation, accuracy, and completeness of reported amounts. Based on past defenses of investor lawsuits, no doubt the Big 4 will escape liability on this, as well.
Questions:
If the SOX opinions on the banks were clean during that time and the banks are eventually have to pay off on investors based on fraudulent manipulation of the valuations, are there any consequences for the audit firms from their SOX opinions on internal control systems that are proven after the fact to be ineffective?
If the courts rule that the banks engaged in mortgage securities fraud and there is a large pay off to investors, will the banks and their executives be able to escape SOX penalties, including bonus claw-backs, by treating the whole thing as current period transactions, thus avoiding restatements that would trigger the penalties?
Francine,
I might join that one in the crowd. You make a basic error in assuming that correlation means causation. Yes, there have been many misdeeds at large corporations. Yes, all large corporations are audited by the Big Four. But that does not mean that the Big Four caused the misdeeds. It could just mean that the corporate world is corrupt and the Big Four has nothing to do with it.
Now, I am sure you disagree with that. Should the auditors have caught/stopped the bad behavior? Is that the job of auditors? Are they auditors or corporate cops?
You are right. It’s not “anecdotal”. Its systemic. CPA firms are almost totally immune from loss, even with their own complicity in fraudulent/negligent audits. CPA firms are protected by having state Boards of Accountancy so small in their investigatory staffs that they could not take on a Big Four. Remember that California, with 85,000 licensees, has fewer than 5 investigators. Moreover, the “LLP” form of organization means that only the audit partners’ personal assets are at risk, but not the other 99.9% of the partners.
@Floyd Gibbons
You are misreading me. I do not contend the auditors caused the misdeeds. I contend the auditor did not do its job when it does not properly assess the risk of material misstatement due to fraud and illegal acts. When it does not do that job, well or at all, it misses frauds and illegal acts it could have caught. (See my posts on SEC and PCAOB Satyam enfacement orders against PwC India to understand how “reckless” disregard for the auditors obligation to perform basic activities well or at all such as bank confirmations, allows judgement by the regulators that the auditor was negligent. Also see my posts about the settlement Deloitte made for its role in Bear Stearns failure to see how the legal standard of “recklessness” in performing an audit amounts to “no audit at all” and effectively judges the auditor complicit in the fraud. If Deloitte hadn’t settled the case was going to trial. ) When frauds and illegal acts occur and they become aware of them, they do not do their jobs when they help cover these up and do not report out to the SEC that companies are not addressing the issues. Just look at all the FCPA fines that contend the company continued to commit the crime even after internal and external investigations began. How can auditors say they didn’t know about them or that the company was addressing well if the activities continued until caught and stopped by the Department of Justice?
The PCAOB put out a great document about the auditor’s obligations with regard to fraud and illegal acts. I talk about it and link to it in this speech to the AAA-Audit section. I urge you to take a look.
https://francinemckenna.com/2013/01/21/mckenna-speaks-at-2013-aaa-audit-section-midyear-conference/
The degree of hubris exhibited by the BIG 4 is beyond belief. As Carl says, “CPA firms are almost totally immune from loss.” Someday they’ll be sorry they never made the least effort to mitigate the risks they are taking. Unfortunately, so will the rest of us.
@Oversight – It seems that at least in the UK, the Competition Commission is looking at options to mitigate some of the risk associated with the near monopoly the Big 4 have on the audit market, and the possibility of “recklessness” that comes with servicing long-term clients. (see http://moshiri.me/XpI2Dn). Depending on what “solution” they come up with, I hope there’s enough political courage in the US to address the issue here.
Even though it wasn’t very pleasant reading about four major accountancy firm but that doesn’t mean this blog is of no worth. Being a business owner in the city of London I would invariably seek the help of one of the leading Accountancy firm London and that is where the significance of this blog would come into play. I would have to keep a close eye on the activities of the accounting firm. to save my firm form any sort of fraudulent incident. Thanks for sharing the knowledge.