Piling Up For PwC

Update for breaking news:

The Wall Street Journal’s Michael Rapoport reports tonight that the PCAOB is looking into PwC’s tax advice to Caterpillar for auditor independence violations. The schemes were the subject of a hearing held last April by Senator Carl Levin where PwC partners made some embarrassing admissions.

The regulator’s review dates back several months and hasn’t previously been reported. The review follows an April request from Sen. Carl Levin (D., Mich.) for the PCAOB to look at the matter after he alleged earlier this year that Caterpillar had deferred or avoided $2.4 billion in taxes under strategies devised by PwC.

Neither PwC nor Caterpillar have been charged with any wrongdoing. PwC and Caterpillar have said that PwC’s advice and Caterpillar’s actions complied with all tax laws.

In April, Sen. Levin sent a letter to the PCAOB requesting that it “conduct a formal review” of the services that PwC provided to Caterpillar. The letter, a copy of which has been reviewed by The Wall Street Journal, also asks the PCAOB to review whether its rules should be strengthened to prohibit an auditor from auditing a company’s tax obligations when those obligations rely on a tax strategy developed by the same firm.

Maybe they can also take a look at the 100+ other audit clients PwC provided tax advice to under the Luxembourg program disclosed by the #LuxLeaks revelations.

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Every once and a while someone accuses me of targeting one Big Four firm more than the others, singling one out when, after all, they all get sued, they all fail at audits, they all compromise integrity to maintain client relationships, and they all have been complicit in their clients’ crimes, whether through incompetence or willful coverup, or worse.

The stories appear as the news rolls in, though, so occasionally one firm seems to be hitting on all cylinders, showing up more often than the others, in more trouble than usual. That’s the case right now for PricewaterhouseCoopers. It’s a good thing its new US PR lead, Caroline Nolan, is a lawyer. Every public statement by the firm will have to be made, now more than ever, with the utmost attention to potential liability.

I’ve already written about the Luxembourg tax leak case. There are 28,000 documents and I have several more stories to write on the subject, as do others. The story is not going away soon. It’s interesting to notice, though, how well PwC has done in keeping their name out of or way down in any stories written about the leaks in the US press. There are two ways this is done. PwC was well aware the story was coming out, so I am sure that firm professionals worked the phones with the reporters who regularly write about the industry and tax (a small group). They put the firm’s position that the documents were “stolen”, old, and not well understood out there early and often. (The Wall Street Journal had a good balanced perspective in its version.)

The firm also has an easy time convincing many business reporters that it did nothing wrong in Luxembourg. After all, there is nothing wrong with a corporation “maximizing shareholder value by minimizing taxes.” That’s the line of baloney Bloomberg reporters and editors allowed in with no challenge from a lawyer in a story about Warren Buffett’s latest deal for Duracell. We all know there is nothing in the law that imposes a duty on directors or officers to maximize shareholder value or minimize taxes but this Energizer Bunny of a tale just keeps on going because of gullible journalists…

Tesco is another case, in the UK, that’s not getting much media coverage here in the US, considering how big and awful it is for PwC, the auditor. Warren Buffett did lose a lot of money on his investment in Tesco so that did get mentioned a bit. I wrote a few weeks ago at Medium.com about the Tesco fraud.

Tesco’s latest annual report, published in May, says that PwC warned Tesco’s audit committee that commercial income, the income statement line where the problems were hidden, was an “area of focus…”

PwC told investors and other users of the financial statements:

“We focused on this area because of the judgment required in accounting for the commercial income deals and the risk of manipulation of these balances.

PwC missed the fraud anyway.

This case highlights a few interesting things that the PCAOB will cover in this week’s Standing Advisory Group meeting.  What is the auditor’s obligation to detect and report on fraud? Should the auditor provide more information about critical matters in the audit opinion? The Tesco case does highlight the efficacy of additional disclosures by the auditor that are now mandated in the UK but heavily resisted here in the US.

In fact, PwC, in particular, doesn’t like the PCAOB’s proposals for additional auditor disclosures.

We believe that there are unintended consequences to implementing the requirements as currently proposed, most importantly for audit quality, but also in terms of unnecessary costs. As acknowledged in question 27 on page 46 of Appendix 5 of the release (Q27), the proposed auditor reporting standard would require auditors to communicate critical audit matters that could result in disclosing information that otherwise would not have required disclosure under existing auditor and financial reporting standards. This is in conflict with one of our fundamental principles that the auditor should not be the original source of factual data or information about the entity, a principle which has broad acceptance by various stakeholders. As explained further below, we believe that diverging from this principle is likely to have a negative impact on audit quality.

Unintended consequences. Unnecessary costs. A negative impact on audit quality. That’s the triple play of talking points if your goal is to defeat auditor transparency and accountability.

You may have heard that regulators on both sides of the Atlantic will settle with six banks over foreign exchange trading manipulation schemes. Barclays, a PwC audit client, is still negotiating. PwC audits three of the six banks implicated. This is on top of Libor manipulation, mortgage fraud, commodities market schemes, tax fraud and several other criminal acts these banks have paid to make go away. Why and how does an auditor prevent, detect, and inform shareholders of illegal acts that happen on the trading floor? Think Jerome Kerviel, Kweku Adaboli, and the JPM “Whale” traders. If the auditor allows trading floor controls to be subverted, and internal auditor reports to be ignored, it’s “good night Irene”.

In another case right here at home in the US, Hertz Global Holdings Inc., a PwC audit client since 1987, will revise its financial statements from 2011 through 2013 and continue a review that has found $87 million of errors so far. Bloomberg reports:

The board’s audit committee is “looking into the tone at the top” and management’s influence over those mistakes. Hertz said it was advised in June that it was being investigated by the U.S. Securities and Exchange Commission. The rental-car company has found that its internal controls had at least one material weakness and that it had ineffective procedures as of Dec. 31, according to a filing , and the shares fell.

There were “reportable events” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K) during the fiscal years ended March 31, 2014 and March 31, 2013 and the subsequent interim period through November 6, 2014, as follows. On September 2, 2014 (U.S. time), the Company announced that the Audit Committee concluded that the consolidated financial statements for the years ended March 31, 2011 and 2012 included in Logitech’s Annual Reports on Form 10-K for the fiscal years ended March 31, 2013, 2012 and 2011 and for the three months ended June 30, 2011 included in Logitech’s Quarterly Report on Form 10-Q for the three months ended June 30, 2011 can no longer be relied on due to an accounting misstatement for inventory valuation reserves for Logitech’s now discontinued Revue product.

The restated fiscal year 2012 consolidated financial statements are included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014. In addition, as previously disclosed in the Company’s Annual Report on Form 10-K/A for the fiscal year ended March 31, 2013 (the “2013 Annual Report”), the Company’s management concluded that material weaknesses existed as of March 31, 2013, as follows:

•The Company did not design and maintain effective controls over the review of supporting information to determine the completeness and accuracy of the consolidated statement of cash flows, the consolidated statement of comprehensive income (loss) and disclosures in the notes to the consolidated financial statements; and

•The Company did not maintain effective controls related to developing an appropriate methodology to accrue the costs of product warranties given to end customers, including an on-going review of the assumptions within the methodology to determine the completeness and accuracy of the warranty accrual. In addition to these material weaknesses, which continued to exist as of March 31, 2014, as a result of the Audit Committee’s investigation and the restatement of the Company’s financial statements the Company’s management concluded that two additional material weaknesses existed as of March 31, 2014, including:

•The Company did not maintain an effective control environment as former finance management exercised bad judgment and failed to provide effective oversight, which resulted in ineffective information and communication, whereby certain of the Company’s finance personnel did not adequately document and communicate accounting issues across the organization, including to our independent registered public accounting firm. Additionally, there was an insufficient complement of personnel with appropriate accounting knowledge, experience and competence, resulting in incorrect conclusions in the application of generally accepted accounting principles; and•The Company did not design and maintain effective controls to consider all relevant information and document the underlying assumptions in our assessment of the valuation of finished goods, work in process and components inventory, including non-cancelable orders for such inventory, related to our now discontinued Revue product.