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How Accountants Took Washington’s Revolving Door to a Criminal Extreme
and How Hundreds of Others Have Taken It for a Spin
JANUARY 14, 2020


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(Illustration: CJ Ostrosky / POGO)
This piece is part of a series. See the full series, or skip ahead to the next part, Captured: Financial Regulator At Risk.

Kai Bernier-Chen and Aadam Barclay contributed research for this story.
On a spring day in 2015, his last day on the job at the board that oversees corporate auditors, Brian Sweet stuffed an external hard drive containing confidential board records into his computer bag along with hard copies of other confidential board documents.

Then Sweet said goodbye to his life as a regulator inspecting the big accounting firm KPMG and walked through the revolving door to a new job at KPMG’s Park Avenue offices in New York. The partnership at KPMG came with pay of $525,000, more than double the approximately $240,000 he had been getting at the oversight board.

Full article:

This piece is part of a series. See the full series, or skip ahead to the next part, Captured: Financial Regulator At Risk.

Kai Bernier-Chen and Aadam Barclay contributed research for this story.
On a spring day in 2015, his last day on the job at the board that oversees corporate auditors, Brian Sweet stuffed an external hard drive containing confidential board records into his computer bag along with hard copies of other confidential board documents.

Then Sweet said goodbye to his life as a regulator inspecting the big accounting firm KPMG and walked through the revolving door to a new job at KPMG’s Park Avenue offices in New York. The partnership at KPMG came with pay of $525,000, more than double the approximately $240,000 he had been getting at the oversight board.
Only a thin, porous border separates the auditing regulator from the auditing industry.
As Sweet would later testify, his bosses at KPMG soon made clear how they expected him to earn it.

KPMG had been performing disastrously on inspections conducted by the Public Company Accounting Oversight Board (PCAOB), and it was under pressure to improve. In the annual inspections, the oversight board scrutinizes a sample of the audits that major accounting firms perform on companies listed on U.S. stock markets. Advance word of which audits the PCAOB planned to inspect would give KPMG an edge.

On Sweet’s first day at the firm, over lunch at a posh Mediterranean restaurant, KPMG brass pumped him for information on the PCAOB’s inspection plans.
His second day on the job, in a tête-à-tête in an executive conference room, as Sweet recalled, his boss’s boss referred to the uneasiness Sweet had shown divulging such information and told him he needed to remember where his paycheck came from.
His fourth day on the job, while Sweet and his new boss, Thomas Whittle, walked back to the office from lunch at a Chinese restaurant, Sweet told Whittle that he knew which audits the oversight board planned to inspect that year—and that he had taken PCAOB documents with him.

That evening, “Thomas Whittle came by my office where I was sitting and he leaned against the door and asked me to give him the list,” Sweet testified.

Ties That Bind

Brian Sweet was part of a pipeline that funneled confidential information from KPMG’s prime regulator to KPMG.

The conspiracy took Washington’s notorious revolving door to a criminal extreme. According to the Justice Department, KPMG partners hired PCAOB employees, pumped them for inside information on the oversight board’s plans, and then exploited it to cheat on inspections.

Meanwhile, PCAOB employees angled for jobs at KPMG and divulged regulatory secrets to the audit firm.
The case laid bare inner workings of the revolving door in detail seldom seen.
The case has led to a series of convictions and guilty pleas—and a $50 million administrative fine against KPMG. It also laid bare inner workings of the revolving door in detail seldom seen.

Beyond the conduct labeled as criminal, in little-noticed testimony the case revealed a series of side contacts between senior KPMG partners and top officials of the PCAOB—one, or in some cases two, members of its five-member governing board. The low-profile meetings at locations such as the Capital Hilton, which is steps from the PCAOB’s Washington headquarters, gave KPMG leaders a preview of questioning they would later face at periodic meetings with the full board.

But all of that is just part of a larger picture: The supposedly independent regulator is inextricably tied to the industry it oversees, a Project On Government Oversight (POGO) investigation found.
Hundreds Pass Through Revolving Door

Based on an analysis of profiles from the professional networking site LinkedIn, as of November 2019, it appeared that more than 40% of PCAOB employees had worked for the so-called Big Four audit firms—Deloitte & Touche, Ernst & Young (EY), KPMG, and PricewaterhouseCoopers (PwC),
POGO found. The Big Four overwhelmingly dominate auditing of the biggest corporations.

A search of LinkedIn turned up more than 340 people whose profiles said that they were currently employed at the PCAOB and that they previously worked for at least one of the Big Four. The oversight board’s budget for 2019 included a staff of 838.

At the same time, LinkedIn profiles showed more than 160 people working for the Big Four who had previously worked for the PCAOB. Scores have gone back and forth.

The numbers may not be complete; they include only people on LinkedIn whose profiles POGO could locate and access.

For current employees who went directly from the Big Four to the PCAOB or vice versa, half of the LinkedIn profiles indicated they did so with a gap of two months or less.

Ties like those may help explain why a supposedly strong and independent regulator has a history of bending to industry.

How an Agency You've Never Heard of Is Leaving the Economy at Risk

A federal watchdog you’ve probably never heard of is supposed to be protecting your financial security. But in key respects it’s been doing a feeble job.

For example, as POGO has documented, the accounting oversight board has a weak record of disciplining Big Four auditors for apparent violations identified by its own staff. When it does take disciplinary action, it has shielded auditors and their clients from public scrutiny by withholding key information from public records.

Though Congress empowered the oversight board to write new rules for auditors, the PCAOB has to a significant extent preserved the industry-written rules it inherited—rules that can make it difficult to hold auditors accountable. Recently, it has watered down rules meant to keep auditors relatively independent from the companies they audit.

In addition, the oversight board has ultimately refrained from adopting some of the most far-reaching reforms it has considered, such as requiring companies to periodically change audit firms. That would assure that, from time to time, new firms would step in with a strong incentive to expose any fraud or error their predecessors condoned or overlooked—lest they become liable for those problems themselves.

PCAOB spokesperson Torrie Matous did not respond to questions for this story.

Promises Unfulfilled

The PCAOB was created after accounting scandals at major companies such as Enron and WorldCom wiped out thousands of jobs and cost investors billions of dollars. Its mission is to protect investors, including anyone who is depending on a pension fund, 401(k) account, or individual retirement account to support them in retirement. It oversees the audit firms that certify corporate financial statements. More specifically, it is responsible for writing, checking compliance with, and enforcing auditing rules. The goal is to reduce the danger that companies will cook their books or otherwise mislead investors.

The Public Company Accounting Oversight Board, Explained:

When Congress designed the oversight board in 2002, lawmakers said it would provide an independent check on corporate auditors. They said it would end a system in which corporate auditors largely regulated themselves.

“This legislation establishes a strong independent accounting oversight board, thereby bringing to an end the system of self-regulation in the accounting profession which, regrettably, has not only failed to protect investors, as we have seen in recent months, but which has in effect abused the confidence in the markets,” Paul Sarbanes (D-MD), the chairman of the Senate Banking Committee at the time and chief author of the legislation, said on the Senate floor.

“This legislation builds a strong and independent board to oversee the accounting industry,” echoed Senator Mike Enzi (R-WY). “It will eliminate the climate of self-regulation that has historically guided accounting.”

As the connections between the regulators and the regulated illustrate, the promises of independence were overstated.


The revolving door is hardly unique to the PCAOB. It’s endemic to Washington, and it’s one of the reasons federal Washington is known as a swamp.
Though the revolving door is subject to various ethics rules, it’s not inherently illegal.

It can infuse regulatory agencies with knowledge of industry and expertise. It also comes with risks. Will revolvers use regulatory power to serve the public interest or to advance the private agendas of once and future employers in the private sector? Can regulators who come from industry escape the culture, values, and world view of the firms that shaped them?

When they move from agencies to industry, will they use the knowledge and relationships they developed working as regulators to help their employers game the system and gain an unfair advantage? Fundamentally, will the regulatory agency be captured by the industry it regulates?

Captured: Financial Regulator At Risk

The revolving door between the Big Four audit firms and their regulator, the Public Company Accounting Oversight Board, spins in many troubling ways.

To some extent, it may be unsurprising that people who oversee corporate auditors have a background in corporate auditing, and that people who leave the regulatory agency go on to earn livelihoods that draw upon their professional knowledge and experience.

“It is essential that regulatory bodies understand market developments and that firms incorporate regulators’ views when implementing new technologies and techniques,” Julie Bell Lindsay, executive director of Center for Audit Quality, an industry-funded advocacy group for audit firms, said in an unsolicited statement for this story. Lindsay was responding to inquiries POGO had made to audit firms.

Ernst & Young spokesperson John La Place expressed a similar view.

“In the ordinary course of its business, EY hires qualified professionals who have prior experience at government entities,” he said by email in response to questions from POGO. “These individuals contribute valuable insights and diverse perspectives that enhance the firm’s quality of service to clients in addition to addressing risks, complying with regulations and upholding our values and commitment to independence.”

But in the depth and breadth of its ties to four huge firms that wield highly concentrated power, the accounting oversight board appears to take the revolving door to an unusual extreme.

The agency and any agency employees contemplating future private-sector careers related to auditing are exceptionally dependent on the very oligopoly they are responsible for overseeing.

Combined with the PCAOB’s extreme lack of transparency and public accountability—it operates largely in secret, makes limited public disclosures, and is immune from the Freedom of Information Act—it’s a recipe for trouble.

By the end of 2014, KPMG was in deep trouble with its overseers. That year, the firm failed 54% of its inspections.

At a December 2014 meeting with the PCAOB’s governing board, KPMG leaders were sharply rebuked.

Looking back on it from the witness stand, a senior KPMG partner named Thomas Whittle remembered the meeting as “sort of a punch in the gut.”

Whittle shared managerial responsibility for improving the firm’s inspection results, and his turnaround strategy included recruiting a PCAOB employee named Brian Sweet. Sweet understood KPMG’s problems better than most, because he was one of the people assigned to inspect the firm.

To welcome Sweet to the firm, several KPMG partners, including David Middendorf, the head of the firm’s national office, took him to lunch at Avra, a Greek restaurant near KPMG’s Manhattan executive offices where the current fare includes octopus carpaccio and tuna tartare. By Sweet’s sworn account, the conversation moved far beyond pleasantries. As they sat in a curved booth, Sweet testified, Middendorf and another partner asked him about the PCAOB’s still secret inspection plans for the year.

In Sweet’s telling, he acknowledged that he knew which audits the oversight board planned to inspect.
They asked if a company called Stonegate Mortgage was one of them. Sweet recalled that he “confirmed it to them without trying to just come right out and say yes.” Middendorf asked if a big block of time the PCAOB had already indicated it had reserved for an inspection in San Francisco was for Wells Fargo.

Botched Audits: Big Four Accounting Firms Fail Many Inspections

In the most recent annual inspections of the U.S. arms of the Big Four for which the oversight board has reported results, inspectors found that each firm botched at least 20% of their audits.

“I remember kind of shrugging my shoulders and indicating, ‘Well, could it be anyone else?’” Sweet testified.

As Sweet recalled, Middendorf slapped the table and exclaimed, “I knew it.”

Why didn’t Sweet just say yes? “Because I knew that by directly answering ‘yes’ was a very clear violation of the PCAOB's ethics code because it was such confidential information,” Sweet testified when Middendorf went on trial last year for his role in the affair.

Testifying in his own defense, Middendorf described the lunch in more benign terms. He testified that he told Sweet, “I only want you to share what you’re allowed to share.” He added that he did not feel he pressured Sweet.

The day after the lunch, Sweet met with Middendorf in an executive conference room. Middendorf was Whittle’s boss. As Sweet recalled, Middendorf referenced Sweet’s uneasiness confirming Stonegate Mortgage and indicated “that while I might have felt that that was a gray area, that I was there at the firm to share insight and add value wherever I could and that was his expectation of me.” Middendorf urged him to maintain strong contacts with his former colleagues at the PCAOB, Sweet testified.

“I remember that David Middendorf also indicated or told me that I needed to remember where my paycheck came from and that I was now a partner at KPMG,” Sweet testified.

According to the Justice Department, KPMG partners hired PCAOB employees, pumped them for inside information on the oversight board’s plans, and then exploited it to cheat on inspections.

By Sweet’s account, he got the message.

Later that week, as Sweet and his immediate supervisor, Whittle, walked back to the office from lunch at a Chinese restaurant, Sweet told Whittle that, not only did he know the PCAOB’s inspection plans for the year, but also he had taken PCAOB documents with him. That evening, “Thomas Whittle came by my office where I was sitting and he leaned against the door and asked me to give him the list,” Sweet testified.

Sweet told Whittle he needed a few minutes. In part, he needed time to think. Then, he fished out one of the documents he had taken with him from the PCAOB, a partial list. “I went over to Tom's office and went to his desk and handed him the list.”

Sweet described taking the document back and then returning to his hotel room for the night.

Whittle remembered those events somewhat differently. According his testimony, as best he could recall, the list didn’t come up until he stopped by Sweet’s office, and he initially balked at accepting it. Before taking such a serious step—a step he thought was wrong—he wanted to check with Middendorf, he testified. According to Whittle, Middendorf told him to get the list.

There’s no dispute over what happened the following morning. By email, Whittle asked Sweet to give the list to his executive assistant. “Brian, could you have Lisa scan and send me the banking selection list? Thanks,” Whittle wrote.

Sweet gave Whittle’s assistant more than just the list of bank audits the PCAOB planned to inspect.
"I’d appreciate the team’s discretion to make sure it isn’t too widely disseminated."

“Just so you know, it is actually the full list of anticipated inspections (including non-banks),” Sweet told Whittle by email. “I’d appreciate the team’s discretion to make sure it isn't too widely disseminated,” he added.

"Brian, got it and understand the sensitivity,” Whittle replied. “Have … a great weekend. Enjoy your DOM.”

The “DOM,” Sweet explained, was a bottle of Dom Perignon champagne the firm had sent to welcome him as a newly minted partner.

But, during Sweet’s early days at the firm, Whittle also offered a warning, Sweet testified. “I remember him telling me that I was most valuable to him the first day that I joined KPMG and effectively that I had less value as time went on.” In other words, “That my usefulness was only because of the role that I played in the PCAOB and that the utility of what I knew, the benefit that the firm got from what I knew would decline over time.”

Whittle recounted that conversation in similar terms.

“I told him that he was of most value because he had just come from the PCAOB and knew how they operated and knew what their issues were, but over time that information will be less relevant as they make changes in personnel and they come up with new issues,” Whittle testified.

Whittle also said he wanted to make sure that, as time passed, Sweet was “seen as adding value to the firm in other ways.”

Sweet and Whittle pleaded guilty to federal charges and testified for the prosecution as cooperating witnesses when Middendorf stood trial in early 2019. The case offered a view of the revolving door’s inner workings and showed that only a porous border separated the auditing regulator from the auditing industry.
“Anonymous Email”

Sweet was part of an expanding network that connected KPMG to the PCAOB, according to his testimony and other evidence presented in court.

When Sweet decided to leave the PCAOB for a partnership at KPMG in 2015, he recalled, he shared the news with a PCAOB colleague named Cynthia Holder, who, like him, worked on inspections of KPMG.

“She was very happy for me but also told me that if the firm, KPMG were hiring other people, that she also wanted to leave the PCAOB and would love to join KPMG,” Sweet recalled.

During his first days at the firm, Sweet called Holder and requested a favor. Could she remind him about some information that he had helped draft for a report the PCAOB was preparing about KPMG?
“She was very happy for me but also told me that if the firm, KPMG were hiring other people, that she also wanted to leave the PCAOB and would love to join KPMG.”

Less than two weeks after Sweet arrived at KPMG, he got an email from Holder’s personal AOL email account. The subject line: “Anonymous Email.” The body of the email contained only a smiley face. But attached was the information Sweet had requested.

It was, he testified, “very valuable” to KPMG.

Within several weeks of arriving at KPMG, Sweet testified, he got a call from Holder on a different matter. Holder was working on a PCAOB inspection of a KPMG audit, and she wanted Sweet’s advice. She was considering citing a potential problem with the audit, and she wanted his opinion, Sweet testified.

Sweet said he advised her not to write it up. He testified that she agreed, saying, “OK, yeah, that’s what I thought too.”

Later that year, Sweet testified, he helped Holder get a job at KPMG. Following his example, he said, she brought confidential PCAOB records with her.

KPMG made a concerted effort to recruit others from the oversight board, and the firm tapped Sweet to identify candidates, Sweet and Whittle testified. Like Holder, some were involved in inspecting KPMG and had expressed an interest in joining the firm.

One sent Sweet a copy of his résumé—and then cut KPMG slack on an inspection, Sweet testified.

The recruitment effort yielded 10 or more hires, Sweet estimated.
“Stealth” Cleanup

At KPMG, Holder maintained a running dialogue with a colleague of hers still at the PCAOB named Jeffrey Wada, who fed her information, Sweet testified.

On March 28, 2016, Holder texted Sweet to phone her as soon as he could, “with three exclamation points,” Sweet recounted. When they connected, Holder told him that Wada had given her the names of the KPMG bank clients whose audits the PCAOB would inspect in 2016.

“She explained to me that Jeff had gone into the PCAOB's IIS system [Inspections Information System] and had accessed the planning information for the PCAOB's KPMG inspection team and had specifically gone into the schedule,” Sweet testified.

Sweet said he understood that the audits on the list had already been completed but were still in the 45-day window when KPMG could revise or augment the audit documentation without flagging the changes.

What ensued was an urgent, “stealth” effort by KPMG personnel to scrutinize the records of the audits on the list that had the highest stakes, Sweet testified.

“I remember Tom Whittle specifically saying that we needed to maintain a circle of trust, that only the people in that room were to know the real reason for why we were doing these re-reviews,” Sweet said.
“This was confidential information that had been stolen from the PCAOB, and rather than report it back, we were deciding to take action to do things to improve, potentially manipulate the PCAOB's inspection results.”

“This was confidential information that had been stolen from the PCAOB, and rather than report it back, we were deciding to take action to do things to improve, potentially manipulate the PCAOB's inspection results,” Sweet said.

As part of the effort, Sweet recalled proposing changes to audit records.

The review of one audit uncovered “very significant audit deficiencies,” prompting KPMG to change the conclusion of its audit, Sweet said. By preemptively flagging problems at that company, KPMG deterred the oversight board from inspecting that audit.

The covert program succeeded, Sweet said. Generally, inspections of the audits subject to the “stealth rereviews” showed “significant improvement,” Sweet said.

In a presentation KPMG prepared for a meeting with the PCAOB, the audit firm attributed the improvement to its internal quality control efforts. The results, the presentation said, had been “terrific.”

But Whittle worried that the success might be hard to repeat. “On the one hand, I was very pleased that our inspection results were so—were so good, but also concerned that if we didn’t have that same information in a subsequent period, that we could see a return of deficiencies that would be difficult to explain,” he testified.
“Sell Myself to KPMG”

The following year, Holder again obtained inside information.

On January 9, 2017, Holder told Sweet that Wada had given her a list of audits the PCAOB was likely to inspect that year, and she conveyed the information.

After midnight that night, Wada poured out his hopes and frustrations in an email to Holder.

“I am now trying to sell myself to KPMG,”
Wada typed.

The email included a copy of his résumé and brought into sharp relief what a tangled web connects the oversight board and the industry it oversees.

Wada had gone from the big audit firm Deloitte to the PCAOB, and said he dreamed of moving to a new job at KPMG.

“It’s funny how I was on the fast track to partner and clearly recognized for my talents at Deloitte and then I ended up at this effin place with all the BS politicking that I loath [sic] and now I can’t get a GD promotion to save my life just because I refuse to kiss people’s asses and spread the political rhetoric,” Wada wrote. “God, this place sucks."

As potential references, Wada cited KPMG auditors whose work he had inspected—people over whom he had served in a watchdog role.

“I can give you a list of names of the partners I inspected over there in Tokyo. One of the senior partners on the Honda Engagement Team really liked my style and respected my approach,”
Wada wrote.

In the late-night email, Wada asked, “Please let me know what else you need from me.”

Weeks later, Wada texted Holder, “Okay, I have the grocery list.” Then, a minute later, “All the things you’ll need for the year.”

The next day, in a 48-minute phone call, Wada read Holder the complete confidential list of KPMG audits to be inspected by the PCAOB in 2017, according to an indictment.
Barbecued Evidence

Then it all unraveled.

In February 2017, as he moved to exploit the extraordinary information, Sweet got careless. Going outside the tight circle of trust, he told members of KPMG audit teams that their audits were slated for inspection. One was appalled that the firm had acquired and planned to act on inside information. As she reported it up her chain of command and word spread, others were similarly outraged. KPMG initiated an internal investigation.

Holder, a former FBI agent with experience in organized crime cases, coached Sweet on how to carry out a cover-up, Sweet recalled. “Cindy suggested that we get burner phones. Cindy and I talked about using Instagram as a code that if either of us posted a picture, like a direct message in Instagram of a college football team picture, that that would be a code to then dial into a conference call number,” Sweet testified.

“I was trying to cover my tracks.”


Holder claimed to have hidden confidential PCAOB information in an electrical socket, Sweet said.

Sweet resorted to more basic tradecraft. After being questioned by a KPMG lawyer, he burned some of the evidence in his backyard barbecue.

“I was trying to cover my tracks,” he testified.

“KPMG immediately notified regulators and took decisive action to separate partners and personnel who behaved inappropriately from the firm, and cooperated with the government and our regulators to investigate and remediate this matter,” KPMG spokesperson Andrew Wilson said in a statement to POGO. “We learned from this experience and we are a stronger firm today due to the steps taken to strengthen our culture, governance and compliance program.”

Firms typically settle enforcement actions brought by the Securities and Exchange Commission (SEC) without admitting or denying wrongdoing. Extraordinarily, in 2019, when KPMG agreed to pay $50 million to settle the SEC’s administrative case, the accounting firm admitted the facts laid out by the SEC. KPMG also acknowledged that its conduct violated a rule requiring it “to maintain integrity” and “to comply with ethics standards,” the SEC enforcement order said.

It appears that, in reaction to the scandal, KPMG has changed its hiring practices.

"We do not recruit directly from our regulatory agencies, nor directly hire anyone who worked on KPMG matters in a regulatory capacity,” Wilson told POGO by email. “In the rare instances when we hire professionals with regulatory experience for our Audit practice, our goal is to ensure that our firm and our clients are up to speed on the latest professional standards and regulations so that we can continue to deliver high quality audits that the capital markets can rely upon.”

Wilson wouldn’t say when or why KPMG adopted that approach to hiring.

Lawyers for Sweet, Holder, and Whittle did not respond to emails for this story.
Airport Rendezvous

KPMG had another special channel to the PCAOB. It went straight to the oversight board’s governing board.

There’s no suggestion it involved any criminality, though when it came up in court there were questions about how it comported with the PCAOB’s ethics code.

In 2015, the two seats on the PCAOB governing board reserved for accountants were held by Jay Hanson and Jeanette Franzel. Franzel was formerly a government auditor; she had worked at the Government Accountability Office. Hanson had spent more than three decades at the accounting firm McGladrey & Pullen, now known as RSM, where he rose to the position of national director of accounting.

Called as a witness for the defense when KPMG’s Middendorf went on trial, Hanson was asked about a series of contacts he had with Middendorf and other senior KPMG partners. Those contacts preceded periodic meetings at which KPMG leaders faced questioning by the PCAOB’s full governing board.

Hanson said he invited the contacts. “Sometime after I started with the board in 2011, I was approached by a member of leadership of another firm with just a request that they wondered if I would be willing to meet with them before their scheduled meeting with the board to share my personal views on what I thought was most important to get out of the meeting,” Hanson testified. “And after having several meetings like that with other firms, I made it known to all firms that I could that if anybody wanted to talk to me before the meeting, phone call or meeting, I would be willing to do that.”

Hanson said he believed that the so-called “preboard” meetings would help KPMG be better prepared for the actual board meetings. He said he generally reviewed the agenda with Middendorf for the upcoming board meeting.

Under questioning, Hanson said Franzel sometimes accompanied him to the preboard meetings.

“Generally other than Ms. Franzel, I did not make it a habit of telling my fellow board members about the meetings,” Hanson said.

One meeting took place at the Capital Hilton, about a block from the oversight board’s Washington headquarters. Another took place at the elegant Hay-Adams hotel, just north of the White House and only slightly farther from the PCAOB.

On a third occasion, the men from KPMG met Hanson outside Terminal B at Washington’s Reagan National Airport, at a spot called Cibo Bistro & Wine Bar. “I recall that they flew in to meet with me,” Hanson testified.

At each of those preview meetings, Hanson—or Hanson and Franzel—“handed us a draft agenda of the meeting with the PCAOB board that would take place sometime after,” Middendorf later stated.

There was also a preview by phone, the result of a request Middendorf made by email on September 6, 2016.

“Jay, I hope you had a great Labor Day weekend,” Middendorf wrote. “I wanted to reach out and see if you and Jeanette would have some time to meet with Scott Marcello [of KPMG] and myself before the meeting with the board to help us prepare and get some idea of what may be on the agenda.”

“We have not had our internal prep meeting yet and I can’t find that it has been scheduled,” Hanson replied. “However, let’s get something on the calendar to talk.”

KPMG was officially given copies of the agendas shortly before the board meetings. The meetings with Hanson gave KPMG more time to prepare, Middendorf testified.
“I don’t believe what I did was wrong. I thought it was probably stretching the limits in a gray area, but not something that I did wrong.”

Hanson testified that he didn’t “recall specifically” whether at any of the preboard meetings he gave draft agendas to Middendorf.

“My general practice was meeting with the firm when they had the agenda in their hands, and sometimes just for pure logistics to get something on the calendar . . . expecting that by the time I came, the firm would have the agenda from the board—or from the staff . . . as a basis for the discussion,” Hanson said.

“I do recall a meeting where, to my surprise, the agenda had not been provided to the firm yet and I used my personal copy of the draft agenda with my views of what the agenda should be,” Hanson said.

With supporting exhibits, Middendorf described returning to New York with the fruits of encounters with Hanson and Franzel and promptly meeting with KPMG executives such as the CEO, the chief operating officer, and a vice chair to go over the information. He recounted that, after one of his trips to Washington, KPMG executives sprang into action to prepare for their upcoming meeting with the full PCAOB board. He said they wrote a script.

In a similar vein, Whittle said he recalled “at least one time we did get a draft or something through one of the board members.” Whittle said KPMG used it “as if it was the actual agenda, and we tried to prepare remarks that would be responsive to it.”

Section EC9 of the PCAOB’s ethics code says: “Unless authorized by the Board, no Board member or staff shall disseminate or otherwise disclose any information obtained in the course and scope of his or her employment, and which has not been released, announced, or otherwise made available publicly.”

At Middendorf’s trial, Hanson was asked if he violated that rule during the meeting where he acknowledged using his copy of the draft agenda.

“No,” he answered.

“Why is that?” he was asked.

“I had the draft that I believed should be the agenda and discussed my views on that but did not represent it as a board agenda, represented it as my personal agenda,” he said.

Pressed as to whether he actually told Middendorf that he was merely expressing his personal view, Hanson waffled.

“I don’t recall explicitly doing that,” he said.

Hanson abruptly resigned from the PCAOB on December 23, 2016. When he testified in March 2019 during Middendorf’s trial, he described himself as retired.

During the trial, at a sidebar conference with lawyers in the case, the judge said that information that might have been used to impeach Hanson—in other words, to challenge his credibility—was filed under seal. “I can say it relates to the terms of Mr. Hanson’s separation from the PCAOB. Beyond that, I don’t think I can go into it,” the judge said.

POGO tried unsuccessfully to contact Hanson via telephone, LinkedIn, and FedEx.

Interviewed for this story, Franzel declined to discuss the preboard contacts in any detail. “As a regulator I had contact with the firms because we regulated the firms,” she said. “And it was always in the context of my regulatory role and responsibilities.”

Since leaving the PCAOB governing board in 2018, Franzel has joined an advisory board of the Center for Audit Quality. That group describes itself as an advocacy organization for audit firms. The advisory board offers “a forum for dialogue and a source of guidance” for a program on research grants, the group’s executive director, Lindsay, said in a statement.

Franzel also became an adviser to Ernst & Young (EY), one of the Big Four audit firms.

“Her insights and experience are of great value to EY as we deliver on our commitment to the highest quality in audits,” John La Place, the spokesperson for EY, said in an email to POGO. “EY and Ms. Franzel are aware of the ethical requirements resulting from her role as a former PCAOB Board member, and we are confident of her and our ongoing compliance with those obligations,” he added.

Under the PCAOB ethics code, people who leave the oversight board “shall not practice before the board” on particular matters they worked on while at the board and must wait a year before practicing before the board on other matters.

Franzel deflected questions about her relationships with EY and the industry group.

Today, Middendorf is free on bail while appealing his conviction. He has been sentenced to a prison term of one year and one day—not for his meetings with Hanson, but rather for participating in what the Justice Department has summarized as a scheme to steal confidential PCAOB information and cheat on inspections.

Middendorf had no comment for this story, his lawyer Nelson Boxer said.

However, in court, Middendorf reflected on his role in the effort to exploit inspection secrets. If nothing else, his defense reflected the values of one former boss at one of the major audit firms.

“I don’t believe what I did was wrong,” the former head of KPMG’s national office told the jury. “I thought it was probably stretching the limits in a gray area, but not something that I did wrong.”
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Sat Oct 05, 2019 9:13 am

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Public anger towards auditors alarms UK expert reviewing sector

Donald Brydon accepts performance must improve in the wake of high-profile corporate collapses
Donald Brydon, Chairman of the London Stock Exchange.
Donald Brydon: 'I’m a little troubled by the current
mood that reaches for a shotgun aimed at auditors
every time there’s a corporate problem' © Charlie

Kate Beioley in London OCTOBER 4, 2019

The public are reaching for “a shotgun aimed at auditors” when companies fail, according to the leader of a UK government-ordered probe into the role and quality of the audit market.

Speaking publicly for the first time since starting his review, former London Stock Exchange chair Donald Brydon said on Friday he was “troubled” by people who pinned too much blame on auditors for recent high-profile corporate blow-ups. But he acknowledged that the sector must improve.

“It is not auditors that cause companies to fail, that’s the result of the actions of directors,” said the City veteran. “I’m a little troubled by the current mood that reaches for a shotgun aimed at auditors every time there’s a corporate problem.

“Audit needs to be an attractive profession that attracts the brightest and the best who can have confidence that a good piece of professional work will not be misdescribed in times of stress.”

Sir Donald was asked in December to lead a review of audit standards, including considering how to make auditors more effective and more reputable in the wake of high-profile corporate collapses and audit issues.

Recent scandals have included PwC’s £6.5m fine last year by the UK accounting watchdog over misconduct in relation to the firm’s audit of retailer BHS two years before it collapsed. This week it emerged that the Financial Reporting Council was investigating EY’s audit of Thomas Cook, the latest UK household name to collapse.

In July PwC and Grant Thornton were singled out for criticism by the regulator after between a third and a half of their largest audits fell below expected standards.

Sir Donald said he was considering whether to widen auditors’ responsibilities to those other than shareholders and requiring auditors to report in greater detail on risk and corporate governance issues.

Political debate over the future of audit is intensifying as the government considers whether to break up the Big Four following a review by the competition watchdog in April, and weighs reform proposals put forward by former Treasury mandarin John Kingman last year.

Sir Donald said he had encountered frustration with a “narrow, backward-looking” approach to audit rules, and stressed that high quality audit required “more than the following of prescriptive standards and the completion of files”.

“There is a hunger for audit to be informative and not just evidencing compliance,” he said, adding he was “seeking for audit to become more informative and not just a compliance-checking function, and one which helps to maintain and grow trust in business as a whole”.

Sir Donald received 120 formal submissions to his call for evidence amounting to 2,500 pages of suggestions from auditors, regulators and members of the public. He said it was vital to look “not just at auditors” but audit committees, boards and management too.
He is due to submit his report by the end of the year.

In response to a question as to whether inward UK investment could be affected by tough new rules, Mr Brydon said “the greater the trust in the corporate sector, the probability is that you will attract investment”, noting the greater challenge was to “help the world move at the same pace”.

He also appeared to show some sympathy with individual auditors concerned about liability.

“I think it quite odd,” he added, “that the firms have been able to find mechanisms to limit liability while the audit partner remains on the hook with unlimited liability, that seems to be a strange concept.”
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Fri Aug 23, 2019 7:56 pm ... -standards

Worlds Apart: Supreme Court rulings vs. Canadian reporting standards

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Investor protections have been stripped away, says Al Rosen

Aug 23, 2019
Author: Al Rosen
TORONTO – Do money managers comprehend the disjunction between Canadian financial reporting standards and the rulings of the Supreme Court of Canada? Evidence convincingly shows that a batch of financial tricksters know the vast difference well and became the beneficiaries. Investigators regularly see the huge separation when corporate financial failures occur, when prosecutions of alleged frauds are road blocked. In contrast, the average investor appears unaware of absent protections, and suffers the surprise consequences of lost savings.

Contrary to our accounting profession’s assertions that the objective of financial information is to be “useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity,” the Supreme Court has erected serious barriers to curtail investors’ financial recoveries.

Most civil lawsuits, if pursued, are forced to be commenced by the failed company itself, which too often was governed by the alleged financial tricksters, who helped to bankrupt the company. Thus, ways have to be devised by lawyers to circumvent, if possible, the unfathomable Supreme Court version of alleged narrow objectives of reporting and investor protection.

Extensive consequences continue to arise in Canada. For example, knowledgeable investors do not bother to invest in Canadian public companies, when tricksters can so easily steal one’s savings (including pension money). Investment dollars and jobs are being sent to other countries.

The silence from our lawmakers in not having drastically revised Companies Acts and Securities Acts, in light of Supreme Court biases, sends a clear message to those who choose to prolong their thievery.

How did Canada drop to this dismal current state, where maximum risk has to be borne by investors and creditors?

The Supreme Court of Canada’s record

It began with an Supreme Court decision in 1997 involving Winnipeg’s Hercules Managements. Its auditors successfully argued that the purposes of audited financial statements were not as advertised by public accountants. Their purpose was restricted to shareholders (not potential investors) using financial statements to evaluating management.

Corporate management was authorized by the Supreme Court to prepare financial statements that shareholders would have to use to evaluate the competence of this same management. Such a philosophy bears a strong resemblance to eight-year-olds being permitted to prepare their own school report cards to take home to their parents. Financial accounting in Canada simply allows too many choices for the Supreme Court decision on the topic to make even tiny sense.

Rather than seeing an outcry to such an Supreme Court decision, silence in Canada continues to prevail. Worse, external auditors did not raise concerns that the 1997 decision was contrary to the Canadian standards, which stress the importance of investor and creditor decision-making. Two decades of accountants and auditors have come into the profession without being taught about the vast gulf between Supreme Court decisions, and what Canadian standards require.

The decade following 1997 is now famous for the failures of Nortel, Livent, the business income trusts and much more. A coincidence? The decade thereafter has brought forth Sino-Forest Corporation, Poseidon Concepts and many others. Some pensions and savings have vanished.

The worst was yet to come. Christmas 2017 saw the Supreme Court’s decision on Livent, which stripped away remaining protections, especially those that existed in securities acts across Canada. Lower court decisions since the Livent decision can only be described as depressing for investors. Yet no correction to the Court’s narrow objectives of financial reporting have been enacted by lawmakers.

Perhaps more puzzling is why Canada’s external auditors are somehow not comprehending that they are “self-inflicting” oncoming deep injuries. Audited financial statements are essentially obsolete, given the Supreme Court’s decisions. Investors are being pushed away as consumers by auditor silence. In turn, we are telling foreign investors not to invest in Canada, because we do not intend to devise legislation that shares risks and protect investors.

In the last 10 years, the TSX has been one of the worst performing stock markets in the entire world. As Maclean’s Magazine put it, “if you were unlucky enough to buy into the stock market at the peak in 2008, just before the financial crisis hit full force, your gains (excluding dividends) wouldn’t buy you much more than two loaves of price-fixed bread at Loblaws and a bag of President’s Choice sour grapes.”

Some pundits blame the collapse of oil prices. Others blame the lack of vibrant tech sector and champions. Is it possible, however, that foreign investors avoid Canada and its Wild West reputation?

Why are we remaining silent?

Individual accountants who can see what is occurring are unprofessionally remaining quiet. Lawmakers today are ignoring growing crises in marijuana, REITs, pension and other loose Canadian financial reporting. Instead, time is being wasted on archaic distractions such as a national version of provincial securities commissions that have clearly been failures at minimizing investor losses, through their inaction.

Yes, serious topics such as global warming are important and complex. But the outright swindling of investors in Canada is a serious, homegrown problem that can be cured by us, if lawmakers have the political will.

The views and opinions expressed by contributing writers to Canadian Accountant are their own. Canadian Accountant and its parent company bear no responsibility for the accuracy and opinions of contributing writers.

Dr. Al Rosen, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE, provide independent, forensic accounting investment research. They are the co-authors of Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth. Learn more at Accountability Research Corporation and Rosen & Associates Limited. ... -standards
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Sat Jul 13, 2019 7:36 am

Remember how audit failures contributed to the banking crash, collapse of BHS & Carillion. People lost jobs, pensions, savings & investments; taxpayers bailed out banks. Audit quality is just as bad now and audit reports remain a cruel deception.

~Prof Emeritus Prem Sikka ... -partners/

How rotten audits are enriching accountancy firms and their partners
Prem Sikka
July 12, 2019

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Why do we keep rubber stamping failure?

Here is a question: how would you feel if you learnt that surgeons routinely botched 25%-50% of say, surgical operations, or aircraft maintenance works were deficient?

There would be a public outcry. Surgeons and airlines would be inundated with lawsuits and put out of business.

The same situation has persisted in the auditing industry for years – but with little action.

A rotten sector

The latest evidence comes from the audit quality inspection reports published by the Financial Reporting Council (FRC), the UK’s accounting and auditing regulator. The FRC’s sample showed that 25% of the audits carried out by Britain’s seven largest audit firms failed to meet even the light-touch standards of the UK. At Grant Thornton, the firm that audited Patisserie Valerie and failed to report frauds, nearly 50% of the sample audits were found to be deficient.

Only 65% of the FTSE350 audits carried out by PricewaterhouseCoopers (PwC) were found to be of acceptable standard. The firm audited BHS, where its audit partner spent just two hours on the job to conclude that it was a suitable enterprise. Last month, PwC was fined £4.55 million over botched audits at Redcentric plc.

At KPMG, the firm that audited Carillion, 80% of the audits were found to be an acceptable standard. Earlier this year, the firm was fined £6m for botched audits of Equity Syndicate Management Limited.

75% of the FTSE350 audits performed by Deloitte were considered to be satisfactory compared to 79% the year before. Earlier this month, the firm was fined £6.5m for audit failures at Serco Geografix Limited.

And 78% of the audits performed by Ernst & Young, the firm that rubber-stamped London Capital & Finance, were considered to require no more than limited improvements, compared with 67% in 2017/18. That still makes 22% deficient. In 2017, the firm was fined £1.8m for audit failures at Tech Data Limited.

This state of affairs has existed for years. Puny sanctions have made no difference. Personal liability could force the firm partners to rethink, but it is almost impossible for injured stakeholders to sue audit firms for negligence, as in general they owe a duty of care to the company only. Meanwhile, fees keep rolling-in and partners in large firms are raking up £700k-£800k a year.

The rot is global

Earlier this month, US regulator fined KPMG $50m for altering past audit work, after receiving stolen information about audit inspections of the firm that would be conducted by the regulator. The aim was to improve the firm’s audit quality ratings by preventing inspectors for discovering deficiencies.

The regulator found that twenty-eight KPMG audit professionals, including some senior partners, cheated on internal training exams by improperly sharing answers and manipulating test results. A number of former KPMG personnel have been charged with theft and may receive prison sentences.

Big accounting firms continue to be promoted by the World Bank and the International Monetary Fund. To attract foreign investment, India has been obliged to open its audit market to big western firms. In 2018, following failure to report $1.7bn fraud at Satyam Computer Services, India banned PriceWaterhouse from auditing any listed company for a period of two years.

The collapse of the IL&FS Financial Services Limited (IFIN) is one of the biggest financial scandals to rock India. The company was audited by Deloitte from 2008/09 to 2017/18, and by a KPMG affiliate, BSR & Associates, from 2017/18. The revelations of mammoth frauds focused attention on auditors.

The Indian government is now seeking to ban both firms from doing audits of listed companies for a period of five years. Its court filing alleges that the firms “deliberately” failed to report fraudulent activities at IFIN and that “the fraud committed at IFIN is nothing short of organised crime, actively aided and abetted by the statutory auditors”. Both auditors have denied wrongdoing, saying their audits were conducted in full compliance with professional standards and regulations in India.

Patronage of the state

The big firms rely upon the patronage of western governments to shield them from the consequences of alleged wrongdoing.

The US is trying to save auditors’ bacon in India, with the US ambassador informed the Indian government that “any move to ban Deloitte and other big auditing firms would disrupt businesses and investment inflows into the country” as foreign investors make their decision to invest globally on the advice and guidance from the Big Four networks.

Other countries are however levying large fines and imposing bans on failed audit firms. There is little effective action in the UK. Despite audit failures at banks leading to the 2007-08 crash, BHS, Carillion and elsewhere, no meaningful reforms have been introduced.

In December 2018, the Competition and Markets Authority proposed modest reforms of the audit industry. I and my colleagues also submitted a report to the Shadow Chancellor on much needed reforms. The big firms are furiously lobbying against reforms and the government’s response is further consultation with the audit industry.

The Financial Reporting Council says that its aim is to ensure that 90% of the audits meet acceptable standards i.e. accept an audit failure rate of 10%.

I’m sure you’d be relieved at surgeons only routinely botching 10% of operations…

Prem Sikka is a Professor of Accounting at University of Sheffield, and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor for Left Foot Forward and tweets here.
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Thu Jul 04, 2019 11:25 am

Current value accounting is fuelling a Ponzi scheme market

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IFRS is fundamentally extreme accrual accounting, says Al Rosen

Jul 2, 2019 Author: Al Rosen
TORONTO – Should professional accountants in Canada be actively sponsoring a financial reporting system that supports, in my opinion, the widespread use of Ponzi schemes? Such schemes promote the sales of additional debt or equity money from the public, which is then used to pay interest, or dividends, or returns of principal to those who previously purchased an entity’s dubious debt or equity.

Ponzi schemes are sometimes referred to as “borrowing from Peter to pay Paul.” Repayments ought to be from real cash earnings to be labelled as legitimate. They should not be from the “money circling” that is part of the scheme. A fine line can sometimes exist between borrowing for serious expansion purposes versus borrowing because no real cash earnings have been generated to pay debts.

For years, what constituted “real cash earnings” was defined as including, with few exceptions, revenues less expenses that arose from enforceable third-party contracts being agreed upon. Management estimates were to be kept to a minimum when fair market values were not otherwise verifiable. Some professional judgment from accountants and auditors was permitted but was largely confined within the word “professional” and its duty to the public.

Reporting’s focus in Canada prior to 2011 was concentrated upon “what actually happened,” much like the scores recorded at a sporting event, like baseball. The concept underlying the past-based focus was that the past results could be useful inputs showing trends for possible current investments.

For investment purposes, more than just records of past events obviously are required. Estimates beyond financial reporting have to become involved. These personal estimates might be based on a variety of factors, perhaps including records of actual past financial periods. Legitimate bases for the estimates, however, should be verifiable.

But what happens when the past contracted third-party events (“what actually happened” tabulations) become mixed, or included in, one set of financial statements, which include corporate management’s extensive, perhaps biased, estimates of their “hoped for” corporate future? The “what actually happened” records (containing a few necessary estimates) no longer exist. Having only one mixed or combined set of past, present and future time period financial statements for each year obscures third-party actual transactions (e.g., who came first, second and third and by how much?). History is abandoned.

The concept of “current value accounting” can make sense for various specific purposes. But current values have to have some validity in the marketplace. Did other sales occur at these prices? When?

The reality is that many figures now incorporated into audited financial statements have largely been “pulled out of the air.” The dollars selected can easily cover up a disastrous year for a company when the dollars are combined into just one set of financial amounts (e.g., poor actual rental results, combined with management’s “fair value” estimates of buildings, and together called “profits”).

Proof of the above is everywhere, it seems. The cannabis sector is a prime example but there are others. Many major pension plans “value” their pension assets on what is called a “Level 3” valuation basis (i.e., no direct selling price data is available). Adding to the speculation is that many of the pension assets are “infrastructure” in nature, with cash flow returns often not expected for years ahead. Yet, pension holders are told that the fund’s expected liabilities are protected by these “valued” assets.

In summary, a “current value” reporting system is frequently used for audited financial statements in Canada, in the absence of reasonable verification of the dollars being chosen. Sales of infrastructure projects may be decades away. Cash flows expected are also estimates with wide variability. What is believable in this kind of market?

Canada’s current value reporting under IFRS is, in my opinion, similar to a Ponzi scheme. Money is being attracted to more than just pension plans, based on their alleged, audited reported investment successes. Companies listed on stock exchanges are paying high dividends (which help to increase stock prices) on their bloated, IFRS-based “income.”

IFRS is fundamentally extreme accrual accounting. Few cash market-tested transactions are required to be in place to limit or control “value” extremism in reporting. Profits can be accrued and recorded today but related cash may have to be reported, bit-by-bit, over the next 20 years, based on equipment performance, or similar. Meanwhile, the cash to operate the entity has to be borrowed. We have seen this management tactic growing rapidly over at least the past decade.

Contrary to the repeated assertions of the audit industry, IFRS is not a natural extension of old Canadian GAAP. It is virtually the exact opposite in serious and crucial ways and it is creating an investment market rife with Ponzi schemes.

The views and opinions expressed by contributing writers to Canadian Accountant are their own. Canadian Accountant and its parent company bear no responsibility for the accuracy and opinions of contributing writers.

Dr. Al Rosen, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE, provide independent, forensic accounting investment research. They are the co-authors of Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth. Learn more at Accountability Research Corporation and Rosen & Associates Limited. ... eme-market
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Tue Jul 02, 2019 11:57 am

KPMG staff embarrassed to work at the firm. Nearly a third of KPMG employees aren’t surprised by latest scandal. Does anyone take KPMG audit opinions seriously? Big audit firms have been mired in scandals for years and have done little to address matters.

~Prof. Emeritus Prem Sikka

KPMG JUNE 28, 2019
Survey Finds That Nearly a Third of KPMG Employees Aren’t Surprised by Latest Cheating Scandal

In the competitive world of Big 4 recruiting, sometimes reputation is everything. Oh who are we kidding, the firms are all mostly the same — from work-life balance, pay, and even prestige — regardless of what PwC recruiters may tell you. At the end of the day, Big 4 firms are in a constant race to the middle amongst themselves to recruit top talent without sticking their necks out too far. Jeans Fridays? Sure. Radical vacation policies that staff are actually allowed to utilize? You must be trippin’.

So when one firm which already has the reputation of being the red-headed stepchild of the profession finds itself embroiled in yet another scandal, you have to wonder how its employees feel. Are they shocked? Embarrassed? Nonplussed by the whole thing?

Thankfully, Fishbowl asked its userbase this very question. Y’all should know what Fishbowl is by now, but if you don’t, basically the accounting board is what the Going Concern comment section was circa 2010-14 minus the fascist dictator mod (hey, what’s up?) and cat pictures.

In a June 13 survey, Fishbowl asked users one simple question: How does the $50 million SEC settlement scandal affect your perception of the firm?

The results are … surprising? Surprising in the sense that many had no opinion whatsoever. I know if our overlords at Accountingfly were in the news for cheating, I’d be pretty shocked and humiliated, so it speaks quite a bit to KPMG employees’ indifference that it was just another day for many of them.

Fishbowl survey of KPMG employees about SEC scandal

In case your chart-reading skills are rusty, here are the results:

29.8% of KPMG employees said the news confirms their perception of the company.
28.9% of KPMG employees said the news changes their perception of the company.
41.4% of KPMG employees said they have no opinion.

Looking at some of the chatter surrounding the survey, it’s clear that some folks in the “no opinion” camp didn’t think it was that big of a deal. After all, it’s old news. Thing is, $50 million isn’t just some light slap on the wrist for a momentary lapse in judgment. And a reasonable person might argue the behavior and subsequent fallout is in fact a symptom of a wider culture of corner-cutting and cheating that we’re now coming to expect from KPMG, what with that whole PCAOB scandal not too long ago.
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Sun Jun 23, 2019 9:17 am ... b_0pKMMV4g

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The KPMG cheating scandal was much more widespread than originally thought

Record-tying $50 million fine was expected, but additional details cause experts to wonder if anything will actually change

A $50 million fine against KPMG LLP for its use of stolen regulatory information to cheat on audit inspections wasn’t a surprise: The Wall Street Journal warned last week that the Securities and Exchange Commission was ready to impose such a move, and the scandal had been known about for more than a year.

The record fine was a solid jab but no knockout punch. But then came a left hook out of nowhere.

The SEC revealed Monday a much larger scandal than was previously known: KPMG auditors, including some senior partners in charge of public company audits, cheated on internal tests related to mandatory ethics, integrity and compliance training, sharing answers with other partners and staff to help them also attain passing scores. In addition, for a period of time up to November 2015, some audit professionals, including one partner, manipulated the system for their exams to lower the scores required to pass.

Twenty-eight of these auditors did so on four or more occasions. Certain audit professionals lowered the required score to the point of passing exams while answering less than 25% of the questions correctly, the SEC says.

“The new test-cheating scandal suddenly seems more alarming than the ongoing PCAOB ‘steal the exam’ scandal because the unethical behavior went on longer and is potentially more widespread,” Matt Kelly, editor of the Radical Compliance newsletter and a longtime observer of corporate governance and compliance issues, told MarketWatch.

“There’s plenty of evidence of chronic, widespread and intentional illegal behavior by senior partners including some leading public company audits for the firm,” Kelly said. ”And yet, prosecutors can’t really impose criminal charges against the firm.”

Five former KPMG officials — including its former national managing partner for audit quality and professional practice — and one former PCAOB official were charged last year in a case that alleged they schemed to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG. The SEC said the senior KPMG partners sought and obtained confidential PCAOB lists of inspection targets and then led a program to review and revise certain audit work papers after the audit reports had been issued in order to reduce the likelihood of deficiencies being found during inspections.

Three have pleaded guilty, two were found guilty and one is still pending trial.

The SEC’s order says KPMG must “cease and desist” violating the securities laws and is required to evaluate its quality controls relating to ethics and integrity and identify audit professionals that violated ethics and integrity requirements in connection with training examinations within the past three years. KPMG must also hire an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation of the cheating scandal.

KPMG admitted the SEC’s allegations. Calls to KPMG for comment were not returned.

Largest SEC fine is small compared with other punishments
This latest fine ties the largest ever imposed by the SEC on an audit firm, but is dwarfed by other recent fines and settlements absorbed by audit firms with no hiccup.

In 2003, KPMG and five of its partners — including the head of the firm’s department of professional practice — paid a $22 million fine in connection with the 1997-2000 audits of Xerox Corp. XRX, -0.54% . That same month, the SEC announced that Deloitte & Touche LLP would pay $50 million — the largest fine the SEC had ever obtained from an audit firm at that time — to settle charges stemming from its year 2000 audit of Adelphia Communications Corp.

The Justice Department fined Deloitte $149.5 million in early 2018 for allegations of False Claims Act violations related to its audit of bankrupt mortgage issuer Taylor Bean & Whitaker, despite no criminal complaint filed. It’s one of the largest audit-related fines, settlements or damages awards ever against an audit firm but got very little media coverage.

In March, the Federal Deposit Insurance Corporation agreed to a $335 million settlement with PricewaterhouseCoopers LLP for professional negligence claims it brought related to the audits of Colonial Bank which failed in 2009. The settlement came after a federal judge held PwC liable for professional negligence for its audit of Colonial Bank after a bench trial and on July 2, 2018, awarded damages of $625 million to the FDIC for its losses. PwC had said it planned to appeal the verdict.

See also: The auditor of Citi, Credit Suisse and Deutsche Bank was tipped off before regulatory inspection

Jim Peterson, a former attorney for defunct global audit firm Arthur Andersen in Europe and author of “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms,” told MarketWatch: “It’s overdue to get the discussion of financial fragility of the global audit firms on the table. There’s no point in talking about a larger penalty. If you made it $1 billion likely KPMG could not raise the money from its own network or outside sources. Between the two violations, and at the scale of $50 million, it seems we are in ‘too vital to kill’ territory.”

The test cheating related to a variety of subjects relevant to the professionals’ audit practices, including additional training required by a 2017 SEC enforcement action that charged KPMG with engaging in improper professional conduct in the audit of the financial statements of an oil and gas client that caused reporting violations. As part of the settlement, the SEC ordered KPMG to ensure its audit staff complete specific training programs in various technical accounting areas and to cough up the audit fees it earned plus interest of $5.1 million.

Will the penalty even matter?
MarketWatch asked SEC officials on a media call if there were any more details on investigations of the impact of both scandals on the audits of public companies. An SEC official would not provide any details about ongoing investigations but instead directed those on the call to SEC chairman Jay Clayton’s statements to the public when the “steal the exam” scandal broke in January 2018.

“Based on discussions with the SEC staff,” Clayton wrote at the time, “I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports.”

Read: KPMG indictment suggests many who weren’t charged knew regulator data was stolen

“The more details that emerge, the more difficult it is to keep believing Jay Clayton’s early statements that investors have nothing to worry about,” said Kelly. “The SEC has provided no details about its investigation of actual impact on issuers, so it strains credulity to think that this egregious behavior wouldn’t affect audit quality somehow.”

“The conduct outlined in the order is so egregious, detailing a culture which is completely unmoored from any ethical foundation, that any company using KPMG as an auditor must ask some very serious questions about not only the quality of the services they have received but also the very foundation of those services,” Tom Fox, an attorney and independent consultant who assists companies with anticorruption and antibribery compliance, wrote on his blog.

“If these partners and staff are willing to lie, cheat and steal to defy the PCAOB and the SEC, what must they be willing to do to please clients and generate more profits?”
Fox told MarketWatch in an interview.

Read also: KPMG won BBVA audit with stolen data about rival’s inspections

For more: KPMG turned to Palantir to help predict which audits would be inspected

In the 2017 case, KPMG also violated Sections 4C and 21C of the federal securities laws, which means they did not possess “the requisite qualifications to represent others,” and were “lacking in character or integrity, or to have engaged in unethical or improper professional conduct” and “willfully violated, or willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations.”

However, in 2014 the SEC had also ordered KPMG to “cease-and-desist” violating the same securities laws it said it violated in 2017 and that the firm violated again in Monday’s order, Sections 4C and 21C of the Securities Exchange Act of 1934.

In the 2014 case, the firm also violated Rule 102(e), which requires auditor independence. For that it was fined $8.2 million, and also ordered, as in 2017 and in Monday’s order, to hire an independent consultant and conduct a review of its weaknesses, including developing new policies and procedures and training to address staff knowledge deficiencies.

KPMG also received an SEC censure each time.

Peterson told MarketWatch that we’ve perhaps run out of effective penalties for the global audit firms.

“If you can’t take penalty steps that include a criminal indictment or a financial penalty that is truly a deterrent, you have consider imposing a forced change in firm leadership. Can the SEC force out an audit firm CEO? Would they?”
asked Peterson.

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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Mon Jun 17, 2019 6:52 pm

KPMG Paying $50 Million Penalty for Illicit Use of PCAOB Data and Cheating on Training Exams

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Press Release
KPMG Paying $50 Million Penalty for Illicit Use of PCAOB Data and Cheating on Training Exams

Washington D.C., June 17, 2019 —

The Securities and Exchange Commission today charged KPMG LLP with altering past audit work after receiving stolen information about inspections of the firm that would be conducted by the Public Company Accounting Oversight Board (PCAOB). The SEC’s order also finds that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results.

KPMG agreed to settle the charges by paying a $50 million penalty and complying with a detailed set of undertakings, including retaining an independent consultant to review and assess the firm’s ethics and integrity controls and its compliance with various undertakings.

“High-quality financial statements prepared and reviewed in accordance with applicable accounting principles and professional standards are the bedrock of our capital markets. KPMG’s ethical failures are simply unacceptable,” said SEC Chairman Jay Clayton. “The resolution the Enforcement Division has reached holds KPMG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors.”

“The breadth and seriousness of the misconduct at issue here is, frankly, astonishing,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “This settlement reflects the need to severely punish this sort of wrongdoing while putting in place measures designed to prevent its recurrence.”

“This conduct was particularly troubling because of the unique position of trust that audit professionals hold,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “Investors and other market professionals rely on these gatekeepers to fulfill a critical role in our capital markets.”

Five former KPMG officials were charged last year in a case alleging they schemed to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG. According to the SEC’s order issued today against KPMG, these senior personnel sought and obtained confidential PCAOB lists of inspection targets because the firm had experienced a high rate of audit deficiency findings in prior inspections and improvement had become a priority. Armed with the PCAOB data, the now-former KPMG personnel oversaw a program to review and revise certain audit work papers after the audit reports had been issued to reduce the likelihood of deficiencies being found during inspections.

The SEC’s order also finds that KPMG audit professionals who had passed training exams sent their answers to colleagues to help them also attain passing scores. The exams related to continuing professional education and training mandated by a prior SEC order finding audit failures. They sent images of their answers by email or printed answers and gave them to colleagues. This included lead audit engagement partners who not only sent exam answers to other partners, but also solicited answers from and sent answers to their subordinates.

Furthermore, the SEC’s order finds that certain KPMG audit professionals manipulated an internal server hosting training exams to lower the score required for passing. By changing a number embedded in a hyperlink, they manually selected the minimum passing scores required for exams. At times, audit professionals achieved passing scores while answering less than 25 percent of the questions correctly.

“The sanctions will protect our markets by promoting an ethical culture at KPMG,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division. “To that end, KPMG will take additional remedial steps to address the misconduct and further strengthen its quality controls, all of which will be reviewed and assessed by an independent consultant.”

In addition to paying a $50 million penalty, KPMG is required to evaluate its quality controls relating to ethics and integrity, identify audit professionals that violated ethics and integrity requirements in connection with training examinations within the past three years, and comply with a cease-and-desist order. The SEC’s order requires KPMG to retain an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation.

KPMG has admitted the facts in the SEC’s order. It has also acknowledged that its conduct violated a PCAOB rule requiring the firm to maintain integrity in the performance of a professional service and provides a basis for the SEC to impose remedies against the firm pursuant to Sections 4C(a)(2) and (a)(3) of the Exchange Act and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.

The SEC’s investigation, which is continuing, has been conducted by Ian Rupell and Paul Gunson and supervised by Rami Sibay.
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Mon Jun 17, 2019 3:13 pm ... icpcF6KLKE

Screen Shot 2019-06-17 at 4.12.28 PM.png

KPMG to Pay as Much as $50 Million to Settle SEC Probe
Fine, stemming from a leak at an audit regulator, would be one of the highest ever imposed by the SEC on an auditor
By Dave Michaels
June 13, 2019
KPMG LLP is preparing to pay as much as $50 million to settle civil claims related to the conduct of former partners who learned which of their audits would be subject to surprise regulatory examinations, according to people familiar with the matter.

Full story here: ... icpcF6KLKE
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Sun Jun 16, 2019 4:15 pm ... fraud-case

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Aiding 'organised crime': India alleges 22 audit violations by Deloitte, KPMG arm in fraud case
By Reuters• last updated: 13/06/2019 - 17:04
Aiding 'organised crime': India alleges 22 audit violations by Deloitte, KPMG arm in fraud case
FILE PHOTO: A bird flies next to the logo of IL&FS (Infrastructure Leasing and Financial Services Ltd.) installed on the facade of a building at its headquarters in Mumbai, India, September 25, 2018. REUTERS/Francis Mascarenhas -Copyright Francis Mascarenhas(Reuters)

By Aditya Kalra
NEWDELHI (Reuters) – India detected at least 22 violations of auditing standards by Deloitte Haskins & Sells and a KPMGaffiliate while investigating a fraud at a financial company, leading it to seek a five-year ban on the auditors, according to government legal filings seen by Reuters.

The failures were detected as part of a wide-ranging probe into alleged fraud and mismanagement at Leasing & Financial Services (IL&FS), which defaulted on its debt obligations last year and sparked fears of financial contagion.

Both auditors have denied wrongdoing.

After the government took over IL&FS, federal investigators began looking into one of its key financial units, IFIN, which was audited by Deloitte between 2008/09 and 2017/18, and by a KPMG affiliate, BSR & Associates, from 2017/18.

The auditing firms gave clean audit reports and “deliberately” failed to report fraudulent activities at IFIN, said a 214-page tribunal filing submitted on Monday by the corporate affairs ministry, which was seen by Reuters and is not public.

Citing an investigation by the Serious Fraud Investigation Office (SFIO), the filing said auditors had “miserably failed to fulfil the duty entrusted to them”, adding they colluded with a group of IFIN officials to conceal facts.

“Simply put, the fraud committed at IFIN is nothing short of organised crime, actively aided and abetted by the statutory auditors,”
said the ministry filing.

In response to an e-mail from Reuters detailing the allegations made in the filing, a Deloitte spokesman said it was confident “it has been thorough and diligent” in its duties as an auditor and looked forward to presenting its position to the courts and relevant authorities.

“The firm stands fully for its audit work which has been conducted in full compliance with the professional standards in India,”
Deloitte said.

KPMG affiliate BSR said it was studying the government’s tribunal filing and would “defend our position in accordance with the law”, adding: “BSR’s audit of IFIN was performed in accordance with the applicable auditing standards and legal framework.”

IL&FS did not respond to a request for comment.

The National Company Law Tribunal on Monday asked Deloitte and the KPMG affiliate to file their responses on the allegations, setting June 21 as the next hearing date, said Sanjay Shorey, director for legal prosecution at the corporate affairs ministry.

The government has urged the tribunal to impose a five-year ban on the two auditors. It has also sought to bar the accounting firms from selling any of their properties while the case is heard, legal filings showed.


Part of the IL&FS group, IFIN was one of the thousands of shadow banking companies in India, whose primary business is to raise funds for lending from banks and the public.

The SFIO probe found IFIN extended loans to companies that did not service their debt. Then, to avoid classifying them as bad loans, it lent funds to the defaulters’ group companies that were used to repay the earlier loans, the filing said.

There were 88 instances of loan disbursals and repayments with an amount totalling 92.8 billion rupees ($1.33 billion).

“The auditors, despite being aware of this modus operandi of fraudulently funding of principal and interest to the defaulting borrowers, had not reported the same in the audit report,”
the government alleged in the court filing.

IFIN also raised funds through debentures: its 2017-18 financial statements showed it had borrowed around 51 billion rupees ($733 million) over the years. The government alleged Deloitte made no reference to auditing how those funds were used in recent years, and BSR too did not do so in 2017-18.

Other alleged violations that the government filing said were detected by the SFIO included a lack of verification through analytical tools, non-compliance with company law provisions and lack of auditing based on central bank inspections of the company.

The probe, which included a review of internal e-mails, also found that a Deloitte partner in 2017 had been offering an accounting service of Deloitte’s consulting arm to IL&FS. In another instance in 2016, a Deloitte partner was providing management consultancy on a transaction.

Deloitte did not respond to a request for comment on these allegations, which the government alleges were breaches of company law rules in India that prohibit auditors from rendering certain other services.

The IL&FS crisis has since last year spooked stock markets and cast a pall over on India’s shadow banking sector, which comprises of more than 10,000 firms with a combined balance-sheet of about $304 billion.

“IFIN may only (be) the tip of the iceberg, as the rest of the IL&FS Group companies are still under investigation,”
the government filing said.

(Reporting by Aditya Kalra in New Delhi; Editing by Euan Rocha and Alex Richardson)
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Fri Jun 14, 2019 11:51 am ... 1560474967

Enter News, Quotes, Companies or Videos

KPMG to Pay as Much as $50 Million to Settle SEC Probe
Fine, stemming from a leak at an audit regulator, would be one of the highest ever imposed by the SEC on an auditor

The SEC is expected to vote this month to approve a settlement with KPMG that would include a fine of as much as $50 million and a requirement that the firm retain an independent compliance consultant for at least a year.

By Dave Michaels
June 13, 2019
WASHINGTON—KPMG LLP is preparing to pay as much as $50 million to settle civil claims related to the conduct of former partners who learned which of their audits would be subject to surprise regulatory examinations, according to people familiar with the matter.

The fine would be one of the highest ever imposed on an auditor in a Securities and Exchange Commission action. The details could change as agency commissioners debate the final details of the settlement.

The SEC and prosecutors pursued civil and criminal charges against five former KPMG officers and a former regulator in January 2018 for sharing confidential information about which of the firm’s audits would be examined by its primary regulator, the Public Company Accounting Oversight Board. The regulator discovered a leak in February 2017, and KPMG fired the partners a couple months later.

Congress created the accounting board to inspect the work of public-company auditors after the accounting scandals that blew up Enron Corp. and WorldCom. The SEC oversees the board’s work and retains the ability to police auditors on its own.

A federal jury in March convicted the most-senior former auditor involved in the matter, David Middendorf, who was KPMG’s national managing partner for audit quality. It also convicted a former board employee, Jeffrey Wada, who gave KPMG officials a confidential list of audits to be inspected. Mr. Wada referred to the inspections as “the grocery list,” according to law-enforcement officials. Both criminal convictions included conspiracy and wire fraud.


KPMG Ex-Partner Convicted In ‘Steal the Exam’ Scandal
(March 11)
SEC commissioners are expected to vote this month to approve the settlement, which would include the $50 million fine and a requirement that KPMG retain an independent compliance consultant for at least a year, the people said.

A spokesman for the SEC declined to comment.

The highest SEC penalty against an audit firm was levied against Deloitte & Touche LLP in 2005. The firm paid $50 million to settle an SEC lawsuit over work it did for Adelphia Communications Corp. The SEC said Deloitte, which neither admitted nor denied the claims, failed to follow proper audit procedures that could have detected a massive accounting fraud at the cable-television company.

In the same year, KPMG paid $22.5 million to settle an SEC lawsuit over work it did for Xerox Corp. The SEC said KPMG, which neither admitted nor denied the claims, permitted Xerox to file misleading financial results over four years that overstated the company’s earnings by $1.5 billion.

KPMG received another black eye over the inspections scandal, which prosecutors compared to a student stealing an exam before taking it. KPMG obtained confidential documents from its regulator as early as 2015 and continued to acquire—aided by a tipster inside the board—inspections data through early 2017.

KPMG fired five partners and one other employee after the accounting board began investigating a leak of its plans to inspect KPMG’s work. Among the partners were Mr. Middendorf, Scott Marcello, Thomas Whittle, David Britt, and Brian Sweet.Cynthia Holder, an executive director who worked for Mr. Sweet, also was terminated.

Mr. Whittle and Ms. Holder have pleaded guilty and, like Messrs. Middendorf and Wada, will be sentenced later. Mr. Britt is scheduled for trial in October, according to court records.

Mr. Marcello, who was KPMG’s vice chairman for audit, was never charged with wrongdoing. Mr. Sweet, a former regulator who was accused of taking confidential information from the accounting board and bringing it to KPMG, pleaded guilty and has cooperated with prosecutors. He also settled the SEC’s claims and agreed to be barred from auditing public companies.

The settlement likely won’t call for expelling KPMG from any audit activities, one of the people said.

KPMG is one of the four big accounting firms that audit 98% of the companies in the S&P 500 index, according to data from Audit Analytics. Its audit clients include General Electric Co. , Pfizer Inc. and Citigroup Inc.

Write to Dave Michaels at

Corrections & Amplifications
The KPMG fine would be one of the highest ever imposed on an auditor in a Securities and Exchange Commission action. An earlier version of this article incorrectly said it would be the highest. (June 14, 2019)

Appeared in the June 14, 2019, print edition as 'KPMG to Pay Record SEC Fine For Auditor.'
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Fri Jun 14, 2019 11:48 am

Begin forwarded message:

From: strat365 <>
Date: June 13, 2019 at 5:55:43 PM EDT
To: Joe Killoran <>
Subject: The Star: CRA officials say settlement on KPMG tax evasion scheme a best-case scenario

Can you believe this???

—in the best interests of the Canadian public?

Prof James MacDonald MBA

CRA officials say settlement on KPMG tax evasion scheme a best-case scenario
The Canada Revenue Agency's headquarters are located in the historic Connaught Building in downtown Ottawa. The agency quietly cut a deal last month with wealthy KPMG clients caught in an offshore tax evasion scheme.

Read in The Star:

CRA officials say settlement on KPMG tax evasion scheme a best-case scenario

Wed Jun 12 18:13:03 EDT 2019

The Canada Revenue Agency’s decision to quietly cut a deal last month with wealthy KPMG clients caught in an offshore tax evasion scheme was made based on a conclusion it was the best likely outcome for the public, a House of Commons committee was told Tuesday.

Last month, CBC’s The Fifth Estate and Radio-Canada’s Enquête obtained tax court documents showing members of a wealthy family in Victoria had reached an out-of-court settlement on May 24 over their involvement in the KPMG scheme.

This was despite National Revenue Minister Diane Lebouthillier promising to get tough on tax cheats.

The scheme, which the Canada Revenue Agency (CRA) has called “grossly negligent,” was organized by accounting giant KPMG and allowed certain clients to avoid paying tens of millions of dollars in Canadian taxes.

It was done by making it look as if they had given away their fortunes to anonymous overseas shell companies and were getting their investment income back as tax-free gifts. The size of the settlement and any details on the case are under wraps.

CRA officials were repeatedly questioned on the settlement by MPs on the House finance committee, which also agreed to invite Lebouthillier to testify at a later meeting.

Assistant commissioner Ted Gallivan told the committee that $24 million was recovered from those caught in the KPMG scheme and that there are “a few” individuals still before the courts.

He said there were indications that the CRA wouldn’t secure a victory in court.

“Sometimes, the judges give us a good idea of what the court is going to be deciding. A tax court, for example, is a specialized court in Canada and the judges give us some idea, based on prior judgments, on what we can expect from them,” Gallivan said.

He said after hearing from the judge and weighing it with information that the CRA had, the agency concluded settling out of court was of “public value.”

“We looked at the precedence, we looked at the evidence. Sometimes very sophisticated schemes are very difficult for us to investigate,” he said. “It is important for us to be able to prove, with the evidence available, that our file is appropriately managed. To do that we have to look at proper risk management.”

Gallivan said the CRA works with the Department of Justice to examine the merits of a case and then decides separately from the minister on whether to settle out of court.

The tax collecting agency was also criticized by MPs for the lack of transparency with the KPMG scheme, particularly with who was involved and whether they ever paid the taxes they owed. The agency has said privacy provisions prevent it from disclosing individual taxpayer information.

“Your lengthy explanation is no comfort to Canadians who still see presumably a set of wealthy Canadians who received a settlement,” said Conservative MP Pat Kelly. “The questions that are unanswered are whether the taxes are paid or not.”

Gallivan, who attended the meeting with commissioner Bob Hamilton, said more could be done to ensure transparency and work was underway with the minister to create a better process.

“I certainly would prefer a situation where we can talk about what actually gets settled, because I believe in any case that I’ve been involved in, the agency does a very good job together with Justice to find an outcome that is in the public interest,” he said.

KPMG is one of the largest accounting firms in Canada, with tens of millions in federal contracts, and has always maintained the scheme was legal.

In 2017, it was revealed the CRA had offered a secret amnesty deal in May 2015 to some of the multimillionaire clients involved in the scheme that entailed them paying back the taxes owed on condition they not reveal the agreement to the public.

Since then, as well as the release of the Panama and Paradise papers, the Trudeau government has vowed to crack down on tax avoiders.

The House finance committee had also shut down its own probe into the KPMG scheme back in 2016 due to concerns from Liberal MPs that it could prejudice court cases. They had argued that testimony and documents should be produced in court and not before the parliamentary committee.

Jolson Lim is an Ottawa-based reporter for iPolitics. Follow him on Twitter: @jolsonlim
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Accountants “Breaking Bad” with Meth Lab Numbers

Postby admin » Sat Apr 20, 2019 7:52 am ... g-missteps
Screen Shot 2019-04-20 at 8.49.59 AM.png

GE Urged to Drop Auditor KPMG Following Accounting Missteps
By Rick Clough
April 16, 2019, 12:05 PM EDT
Updated on April 16, 2019, 1:35 PM EDT
CtW Investment Group is latest to demand accounting overhaul
CEO Culp last year agreed to seek bids, opening door to change

KPMG South Africa Apologizes for Scandals, Seeks Second Chance
Photographer: Simon Dawson/Bloomberg
An adviser to union pension funds is calling on General Electric Co. to drop KPMG as its auditor after a series of accounting missteps and strategic blunders rattled investor confidence in the one-time blue-chip company.

In a letter sent Tuesday to GE’s lead independent director, CtW Investment Group urged the manufacturer to find a new accountant for the 2020 review and commit to changing auditors every 10 years. The group also is seeking stronger oversight of capital allocation following an “ill-considered buyback strategy’’ and poor deal-making in recent years.

The renewed criticism of GE’s accounting oversight piles pressure on the board a year after shareholders signaled displeasure with KPMG. While GE is keeping the firm this year, the company said in December that it would solicit bids for a new auditor, opening the door to ending a relationship that has lasted 110 years. That’s one of many shifts made by Chief Executive Officer Larry Culp as he tries to stem one of the worst crises in GE’s 127-year history.

Track Record

“There are numerous audit concerns that have eroded confidence in the company,” CtW Executive Director Dieter Waizenegger said in a telephone interview. “We feel like there’s a lack of urgency from the audit committee and from the board.”

The group is seeking changes ahead of GE’s annual shareholder meeting on May 8.

A GE representative referred to prior statements on the company’s intention to hold a tender process for its auditor. In a March regulatory filing, GE acknowledged waning shareholder support for KPMG and said it would consider an audit-firm rotation in the future.

GE’s accounting is already under federal investigation in the U.S. That’s one of a litany of challenges for the Boston-based company, from crippling debt to shareholder lawsuits to weak power-generation markets.

CtW -- representing a consortium of retirement funds managing more than $250 billion, including about 21.3 million GE shares -- has sought changes at companies such as Equifax Inc., Chipotle Mexican Grill Inc. and Tiffany & Co. Recently, CtW has pressured Tesla Inc. to diversify its board.

Dwindling Support

GE’s auditor relationship came under scrutiny last year after startling, multibillion-dollar charges in its finance and power businesses raised questions about KPMG’s ability to provide proper oversight. Under then-CEO John Flannery, GE defended its auditor and said dumping KPMG would be costly.

Proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services last year recommended that shareholders reject the auditor at GE’s annual meeting, an unusual decision prompted by the “severity and ongoing nature’’ of accounting issues. While KPMG was ultimately brought back, support dropped dramatically: About 65 percent voted in favor, down from almost 97 percent the prior year.

KPMG has come under fire elsewhere, with the Public Company Accounting Oversight Board saying this year that it found deficiencies in a number of the firm’s audits for various clients.

The issues “call into question KPMG’s independence, fitness, and competency to conduct’’ GE audits, Waizenegger said in the letter. GE’s board, meanwhile, “offers no credible plan to deliver a reliable audit in 2019 or future years.’’

(Updates with CtW comment in fourth paragraph.) ... jones.html
G.E. Dropped From the Dow After More Than a Century

General Electric, the last original member of the Dow Jones industrial average, was dropped from the blue-chip index.CreditJohn Minchillo/Associated Press
By Matt Phillips
June 19, 2018
And then there were none.

General Electric, the last original member of the Dow Jones industrial average, was dropped from the blue-chip index late Tuesday and replaced by the Walgreens Boots Alliance drugstore chain.

The decision is a fresh blow to General Electric, which has stumbled badly in recent years. Last fall, John L. Flannery, the company’s new chief executive, warned that the power-generation unit was reeling. G.E. cut its dividend for only the second time since the Great Depression. In January, G.E. surprised investors by taking a big charge and setting aside $15 billion over seven years to pay for obligations held by GE Capital, the company’s financial services unit, mainly on long-term care insurance policies.

[Read about Mr. Flannery’s goal to make G.E. “simpler and easier to operate.”]

Over the last year, G.E.’s shares have fallen 55 percent, compared with a 15 percent gain for the Dow. G.E., which closed Tuesday at $12.95, has the lowest share price of any of the index’s 30 components.

S. & P. Dow Jones Indices — which owns the Dow — suggested that the slide in G.E.’s stock price contributed to the decision to remove the company from the index, where it had been a member continuously since 1907. The Dow is a price-weighted index, which means higher priced stocks have a greater influence on its direction.

“The low price of G.E. shares means the company has a weight in the index of less than one-half of one percentage point,” said David Blitzer, chairman of the index committee at S. & P. Dow Jones Indices. “Walgreens Boots Alliance’s share price is higher, and it will contribute more meaningfully to the index.”

The move also is freighted with economic symbolism. With the inclusion of Walgreens Boots, the index “will be more representative of the consumer and health care sectors of the U.S. economy,” Mr. Blitzer said.

The removal of G.E., which will formally occur June 26, reflects a shift in the economic composition of the United States, which long ago tilted away from heavy industry and toward services, such as technology, finance and health care.

And it also amounted to a milestone for General Electric. It was the last remaining original member of the index, when the stock market measure was introduced in 1896.

Back then, just a few years after the company was formed through a merger of Thomas Edison’s electric companies with a rival, G.E. was the modern-day equivalent of a technology stock, and the Dow itself was geared heavily toward the growth industries of the day such as railroads. In the more than 120 years that followed, the company was often at the center of American capitalism. And as recently as the 1990s. G.E. was at times the most-valuable American company by market value.

[G.E. mirrored the growth of industrial America from the steam age to the age of electricity and beyond.]

Alphabet, Amazon, Apple, Facebook and Microsoft are the five most valuable companies in the United States today.

After G.E.’s departure from the index, the company with the longest presence in the Dow will be Exxon Mobil, whose corporate predecessor, Standard Oil of New Jersey, joined the Dow in 1928, according to S. & P. Dow Jones Indices.


G.E., the 124-Year-Old Software Start-UpAUG. 27, 2016

Common Sense: Metaphor for G.E.’s Ills: A Corporate Jet With No PassengersNOV. 2, 2017
More in DealBook

Image Credit
Tasneem Alsultan for The New York Times
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Thu Apr 04, 2019 4:05 pm ... KKCN1RD3F4

Screen Shot 2019-04-04 at 5.04.59 PM.png

TUE APR 2, 2019 / 1:08 AM BST
UK watchdog opens first full review of accountant KPMG
Huw Jones
FILE PHOTO: The KPMG logo is seen at their offices at Canary Wharf financial district in London,Britain, March 3, 2016.
LONDON (Reuters) - Britain's accounting watchdog has opened a full review of standards and culture at KPMG, its first such intervention, after the audit firm's role in collapsed construction company Carillion was criticised by lawmakers.

In January, the Financial Reporting Council (FRC) said it had opened a second investigation specifically into how KPMG audited the books of Carillion.

"Following that referral and discussions with KPMG, the FRC, supported by A&O Consulting, has commenced an assessment of the governance, controls and culture within KPMG's audit practice," the FRC said on Tuesday.

Last June, the FRC said KPMG had shown an "unacceptable deterioration" in how it audited top British firms and was first to undergo special supervision.

KPMG said it was now 18 months into an audit quality transformation programme, and it was essential the regulator had confidence the "right outcomes" were being delivered.

"With this in mind, we welcome that the FRC has commenced an assessment of our audit practice. The FRC is being supported by Allen & Overy Consulting, led by Sally Dewar," KPMG said.

"We see this as a valuable opportunity for the FRC to test our progress and to confirm next steps for our audit transformation."

Such "rigour and challenge" will become increasingly common in the sector and is a change for the better, it added.

The FRC said it was the first time it had commissioned an outside body to conduct an independent review of an auditor. It did not say when it would publish the findings.

Separately on Tuesday, British lawmakers called for KPMG, EY, PwC and Deloitte - known collectively as the Big Four accounting firms - to be broken up to improve standards and transparency in book-keeping after audit failures at Carillion and retailer BHS.

(Reporting by Huw Jones; Editing by Mark Potter)
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Thu Mar 21, 2019 4:44 pm ... jm_wgsQgBU

How Deloitte masked scandals in business and politics
By Bruce Livesey in Features, Business | March 5th 2019

Screen Shot 2019-03-21 at 5.42.46 PM.png

People walk past a Deloitte sign outside World Exchange Plaza in Ottawa on Dec. 14, 2018. Photo by Alex Tétreault
Attired in khaki shorts and gray t-shirt, Donald Bayne is at his desk flipping through an evidence binder that contains internal government emails, reading a selection of them aloud. The lawyer is in his cluttered corner office at Bayne Sellar Ertel Carter, a downtown Ottawa law firm, located just around the corner from city hall.

“Senator Gerstein confirmed that his channel into Deloitte is open and is happy to continue assisting us,” Bayne reads to me at one point.

Tanned, with snowy-white hair and the trim build of someone who runs triathlons, the 73-year-old Bayne is one of Canada’s top criminal attorneys. He’s arguably most famous for defending Mike Duffy during the senator’s 2015-’16 trial for fraud and bribery – leading to Duffy’s acquittal.

While researching a story about auditors for The Globe and Mail, I had traveled to Ottawa last spring to meet with Bayne to discuss an overlooked aspect of the Duffy case – specifically the role played by Deloitte, Canada’s largest auditing and management consulting firm. I was trying to find out if an audit commissioned by the Senate into Duffy's expenses, which was carried out by Deloitte, was truly objective – and how its findings were leaked to senior members of former Prime Minister Stephen Harper’s inner circle before the Senate saw them.

Bayne told me the evidence was clear that “(the audit’s) independence was improperly breached.”

“So it was fiction this was an independent audit?” I pressed.

“Right… This was a whole compulsive, coercive, false scenario of pulling one on the Canadian public,” Bayne replied.

Mike Duffy, Donald Bayne, Deloitte
Donald Bayne, lawyer of former Conservative Senator Mike Duffy, puts out his hand to feel for rain as he leaves the Ottawa courthouse followed by Mike Duffy, right, in Ottawa on Thursday, August 20, 2015. THE CANADIAN PRESS/Fred Chartrand
Big Four have evolved into huge conglomerates

The story of Deloitte and the Duffy affair is important because it highlights how the Big Four auditing giants can be open to corruption and political influence. And how they’re often not objective or neutral.

Deloitte is the largest of the Big Four – which also includes KPMG, Ernst & Young and PricewaterhouseCoopers (PwC). Together, these four firms form a powerful cartel that wields tremendous clout in the finance, business and government circles worldwide. Their influence seeps into every aspect of the economy.

Indeed, collectively, the Big Four audit 490 of the S&P 500 companies. In turn, they’ve evolved into huge conglomerates themselves – with combined 2017 revenues of US$134-billion, employing 945,000 people around the world. In fact, according to Forbes, Deloitte is the fourth-largest private company in America.

Moreover, the Big Four are important because modern societies rely on accountants to verify financial records for shareholders, thereby safeguarding the economy at large. “An audit is about a public good,” says Natasha Landell-Mills, a partner with the London, UK-based investment firm, Sarasin & Partners LLP, and a critic of the profession.

Today, however, the Big Four are facing a crisis of credibility of their own making, embroiled in scandal after scandal in multiple jurisdictions. Increasingly, they stand accused of turning a blind eye, and even enabling, corporate fraud and questionable accounting. They’ve also emerged as central players in the creation and abuse of offshore tax havens. And they've become champions of the privatization of government services. And yet they “perform their duties with relative impunity,” writes Richard Brooks, a British journalist in his recent book, Bean Counters: The Triumph of the Accountants and How They Broke Capitalism. “They are free to make profit without fearing serious consequences of their abuses.”

In Canada, court cases, scandals and insights from experts in the field indicate that Deloitte is the most egregious of the lot. “Deloitte sells the public an image that they are wonderful, they’re up-to-date, they are professional, they are experts,” says Prem Sikka, an accounting professor at the University of Sheffield in the UK whom I spoke to when researching my Globe article. “But at the same time, there is a dark side.”


Deloitte Canada head office in Toronto
Deloitte Canada's head office is in downtown Toronto. Photo by Bruce Livesey
Forced to pay almost $200-million for frauds they missed

Founded in the UK in the late 1800s, Deloitte is now a privately-held giant with global revenues of (US) $43.2-billion, 264,000 employees in 150 countries and headquartered in London, England.

The company says on its website that it has a global impact by championing communities and creating opportunity through more than US$217 million in investments during the 2018 fiscal year through donations, volunteering, pro bono work and management costs.

The Deloitte Foundation also runs projects in a range of areas such as fundraising for charitable causes, environmental protection, and community investment.

Like all of the Big Four, Deloitte is not only an auditing firm, but offers management consulting, legal and IT services, as well as conducting corporate investigations.

Yet all of Deloitte’s subsidiaries are locally and independently controlled. As a result, Deloitte Canada is owned by its 957 Canadian partners. With 9,947 employees, 60 locations and annual revenues of $2.3-billion, Deloitte Canada is headquartered in a shiny new blue-glass and steel tower in downtown Toronto. Lately the firm has been shelling out a lot of money for its screw-ups. Over the past three years, Deloitte Canada has paid almost $200-million in damages due to its failure to warn investors about corporate frauds in the cases of Livent, Philip Services and Mount Real. Given that Deloitte is self-insured, this money had to be paid directly from the pockets of its own partners.

The company likes to paint itself as a progressive employer. In 2017, Deloitte Canada’s CEO, Frank Vetesse, wrote an op-ed in the Globe and Mail entitled “White on Bay Street: Corporate Canada must do more” in which he urged captains of industry to be more inclusive towards women and visible minorities.

Ironically, the piece was penned while Deloitte was the target of a lawsuit that accused the firm of being insensitive on these very matters.

In 2014, Deloitte bought a Toronto-based company, ATD Legal Services Professional Corp., which offers law firms document review services for a lower cost than they pay articling students. ATD hires lawyers to do this work – more than 400 people during the period of the lawsuit’s class period. But after Deloitte bought ATD, they cut lawyers’ wages from $50 an hour to as low as $43, while declaring they were independent contractors instead of employees. In so doing, Deloitte said the lawyers were not entitled to certain benefits.

Andrew Monkhouse, the Toronto lawyer spearheading a $20-million lawsuit against Deloitte on this matter, says a large portion of the ATD lawyers were minorities and women. “It’s very much higher skewed percentage-wise to visible minorities and women at document review companies versus the average Bay Street law firm,” he says.

As a result of the suit, Deloitte has reinstated the original wage and paid back some money to the lawyers. The lawsuit is continuing and its allegations have not been proven in court.

Turning a blind eye to corporate criminality

Deloitte’s biggest failing is not calling corporate clients out on their bad behavior, often costing shareholders vast fortunes. In fact, Deloitte has a long history of missing serious criminality under its nose.

In 1997, Deloitte was asked to do an audit of YBM Magnex Inc., an industrial magnet company headquartered in Pennsylvania, prior to it raising money from investors on the Toronto Stock Exchange (TSE). By then, YBM had fallen under suspicion that it might be a fraud.

Yet Deloitte issued a report that gave YBM a clean bill of health, the New York Times reported in 1999.

“Deloitte was engaged to do a high risk audit so they were put on notice that there were concerns,” notes Joe Groia, a Toronto securities lawyer. “So they went in with their eyes wide open.” After Deloitte gave YBM its seal of approval, the company raised $150-million from investors.

When evidence and rumours of YBM’s ties to organized crime intensified, Groia was hired by YBM’s board to investigate in the summer of 1998. He quickly discovered the company was controlled by the violent “boss of bosses” of the Russian mafia, Semion Mogilevich (who was soon near the top of the FBI’s most wanted list). Deloitte had failed to discover Mogilevich's involvement with YBM. “Certainly based on the work we did I was surprised that Deloitte did not uncover a number of the problems that we uncovered,” says Groia. YBM collapsed soon afterwards, after raising about $890 million from its shareholders. Most of these funds were lost.

Philip Services Corp. was a $1.7-billion Hamilton, Ont.-based industrial services company that went insolvent in 1998. Deloitte had been auditing its books for seven years. One reason Philip got into trouble was one of its executives concocted a fraud to siphon money into companies he owned, enriching himself to the tune of $18-million. The company also admitted $90-million of copper had gone missing. Yet Deloitte failed to notice the scam and other problems (the executive was eventually sent to prison). As a result, Deloitte was sued by Philip’s lenders, including CIBC and the American billionaire Carl Ichan — who had bought up Philip’s debt - saying they relied on Philip’s flawed financial statements before investing in the company. The lawsuit was fought over for 17 years before Deloitte settled it for a whopping $122-million two years ago.

Then there was Mount Real Corp., a Montreal-based financial management company run by Lino Matteo, a highly controversial businessman who was also embroiled in the Cinar fraud.

Matteo attracted 1,600 investors to Mount Real’s promissory notes, mostly seniors who handed over $70-million on promises of fantastic returns. Yet, from 1987 until it collapsed in 2006, Mount Real was a Ponzi scheme. Deloitte was Mount Real’s auditor for 10 of those years, from 1991 to 2002 (overseen by a Montreal-based partner, Angelo Bracaglia, for at least four years). To this day, there’s no evidence any of the investors’ money was actually ever invested.

Yet Deloitte and other auditing firms signed off on Mount Real's books, despite the fact “the glossy financial statements... masked a catastrophic financial situation," according to a 2014 class action lawsuit launched on behalf of the firm's investors against Deloitte and the other auditors involved. This suit was settled for $43-million in 2016.

In 2017, Matteo was sentenced to five years in prison and hit with a $4.9-million fine. Bracaglia, however, received a five-month suspension last winter – and a fine of $70,000 - by CPA Quebec, the accountants’ regulatory body, and still works for Deloitte. The firm did not respond to a question about this affair. And when contacted, Bracaglia referred questions to Deloitte's media people.

More recently, Deloitte failed to carry out one of the jobs that auditors are supposed to do – warn shareholders if a company is about to go bust.

In the spring of 2015, Sears Canada Inc. received a document from some of its former executives entitled “Why Sears Canada is Insolvent” explaining how the retail chain was technically bankrupt, especially given the company’s books were failing to register hundreds of millions in liabilities. “Sears has no reasonable expectations of future profits,” the report said. The executives were concerned about the employees' pension plan, which was being underfunded and relied on by 18,000 retirees. However, Sears dismissed their concerns.


A Sears Canada store in Newmarket, Ontario. Photo credit by Pear285 from Wikimedia Commmons
Sears Canada’s problems largely stemmed from its owner, Edward “Crazy Eddie” Lampert, a controversial American hedge fund billionaire who took control in 2005. Lampert was accused of asset-stripping the company – including paying out $2.9-billion in dividends to himself and other shareholders. Without the cash to modernize, Sears Canada had gone into decline.

In the spring of 2017, Sears Canada issued its annual report, with the company insisting it would be a “going concern” for at least 12 more months. Deloitte, as the company’s auditor, did not dispute this prognosis, which it should have done if it felt otherwise.

Eight weeks later, Sears Canada filed for insolvency, and began to liquidate its assets.

In fact, not once since the former Sears executives issued their warning in 2015 had Deloitte suggested Sears was in peril. “On the surface it doesn’t look like (Deloitte) exercised professional skepticism,” remarks Dimitry Khmelnitsky, head of accounting at Veritas Investment Research Corp., a Bay Street forensic accounting firm. “That’s the role of the auditor – to be skeptical, obviously.” Deloitte did not respond to a question on this matter.

Promoting a tax evasion scheme

The Big Four have played a critical role in the explosion of corporate tax evasion and avoidance. “(The Big Four) have been key drivers of both the offshoring of individual tax liabilities and the creation of questionable structures for multinationals for decades,” explains Alex Cobham, chief executive of the Tax Justice Network in the UK.

In Canada, KPMG has been called out for helping companies and wealthy individuals avoid taxes by using offshore tax havens. But Deloitte has played a part, too.

According to a court filing, Deloitte Canada concocted a tax avoidance scheme in the early 2000s. The way it worked was that certain Deloitte clients, working with a British brokerage house, would claim losses on foreign currency trades. The clients would then use the losses to report a drop in income – thereby owing less in taxes. Deloitte, in turn, skimmed a 20 per cent fee from the tax savings.

In one instance, four Deloitte clients claimed foreign currency losses totaling $25.8-million in computing their incomes for the 2003 taxation year. The total tax savings for the four was over $1.2-million.

In 2004, a CRA auditor stumbled across Deloitte’s scheme and began auditing the four clients who had exploited it. The auditor soon realized Deloitte had at least five other clients who’d taken advantage of the plan. After Deloitte refused to divulge their names, the CRA went to court to find out who they were – with Deloitte strongly resisting.

In 2009, just as the case was about to go to court again, the CRA suddenly dropped the case. Today, the CRA refuses to say why, claiming in a statement that "the confidentiality provisions of section 241 of the Income Tax Act prevent the CRA from discussing specific cases" although other sources say it was due to Deloitte’s political influence in Ottawa.

Deloitte embroiled in political scandals

This would not be surprising. Deloitte wields tremendous political clout, and makes a lot of money selling services to governments.

In Ottawa, Deloitte is the largest recipient of federal government contracts of the Big Four. Between 2006 and 2012 alone, Deloitte was awarded more than $135-million in contracts. Deloitte even hired David Johnston, the retiring governor-general, to be an executive adviser in 2017. Deloitte often conducts projects in conjunction with the Auditor-General of Canada.

Yet in the political realm, Deloitte frequently ends up at the centre of scandals.

In 2017, when Kathleen Wynne was still Ontario’s premier, she faced a political problem: hydro rates had been rising for years. Going into an election last summer, the Wynne government decided to cut hydro rates by 25 per cent to quell discontent. It was called the “Fair Hydro Plan.”

Former Ontario premier Kathleen Wynne delivers a speech in Ottawa on Jan. 18, 2018. File photo by Alex Tétreault
But the government had also promised to balance its books. By cutting hydro rates, it would have to borrow money to make up the shortfall and therefore increase the deficit. “They had to find a way to lower the hydro cost,” says Randy Hillier, a Conservative MPP who was sitting on the province’s public accounts committee, “and not appear to be adding to the debt.”

The Independent Electricity System Operator (IESO), which manages Ontario’s electrical system, was tasked with making the hydro rate cut vanish from the province’s books. In turn, IESO hired Deloitte, KPMG and E&Y. The auditing firms suggested rate-regulated accounting as the solution, which allowed the province to kick the cost of the hydro cut down the road to future ratepayers.

But this plan came with a hefty price tag – it would add $4-billion in additional interest costs to the province’s budget over 30 years.

When Bonnie Lysyk, Ontario’s auditor general, learned of this, she was livid, arguing the scheme violated government accounting standards and was designed to hide how much money was really being borrowed. Hillier, meanwhile, believes the rate-regulated accounting “demonstrates a complete lack of integrity by the accounting firms. (It) was dishonest from the get-go. Here we had the Ministry of Energy and the IESO purposefully, in laymen’s terms, hoodwinking the public and engaged the three (auditing) firms – which were paid significant sums – to create the scheme to hoodwink the public.” Deloitte declined to answer questions about its involvement in the hydro rate cut.

Deloitte leaks audit results to PMO in Duffy affair

Then there was the Mike Duffy affair. In late 2012, the Tory senator found himself the focus of questions about whether he was abusing his Senate expenses.

Mike Duffy, Nigel Wright, Senate expense scandal, Criminal Code, charges
Senator Mike Duffy walks outside the Ottawa courthouse, during a break from his 2015 trial. Photo by Elizabeth McSheffrey.
The Senate’s committee of internal economy hired Deloitte to conduct an audit of Duffy’s expenses to ascertain whether they were appropriate. At the time, the committee said the Deloitte audit would be fully “independent”, conducted with the “strictest confidentiality".

Hiring Deloitte was a conflict of interest, however: Deloitte is auditor for both the Conservative Party and its fundraising arm, the Conservative Fund of Canada, which was chaired by then Senator Irving Gerstein.

Soon after Deloitte was hired, Prime Minister Stephen Harper’s inner circle decided to engage in damage control over the growing Duffy controversy. Nigel Wright, Harper’s chief of staff, set out to shut down the inquiry and Deloitte’s audit – or at the very least influence its outcome. Wright dispatched Gerstein to ask Deloitte to kill the audit, and failing that, script its conclusions. Gerstein, who had no authority to intervene, complied.

Gerstein contacted Michael Runia, an Ottawa-based senior partner at Deloitte (who is now a managing partner). Gerstein knew Runia because the Deloitte partner oversaw the audits for both the Tory party and its fundraising arm. Runia was also a donor to the Conservative Party.

Duff Conacher, director of Democracy Watch, an Ottawa-based NGO, says when Gerstein contacted Runia, “he should have told Gerstein he can’t even talk about it at all, and secondly (Runia) should have filed a complaint with the Senate’s ethics officer that Gerstein was improperly trying to further the interests of Senator Duffy by trying to rig the audit results.”

Instead, Runia agreed to look into the matter and contacted Gary Timm, one of the lead auditors on the Duffy file. Timm later testified he had only one brief conversation with Runia, informing Runia the audit would continue and could not divulge any information about it.

Nevertheless, Timm decided against informing the Senate about Runia’s attempted interference.

However, emails later gathered by the RCMP show that someone within Deloitte fed Gerstein regular updates on how the audit was progressing. They also revealed that Gerstein personally held at least one meeting and was in constant phone contact with someone at Deloitte for weeks, trying to impact the audit’s conclusion. One PMO staffer wrote in an email that Gerstein’s “channel into Deloitte is open and happy to continue assisting us” with “our goal” of having Deloitte state “that their work is done.”

In fact, more than a month before the audit was published, someone within Deloitte leaked to Gerstein that the audit would find no conclusion on Duffy’s residency (and therefore no finding of inappropriate expenses). In other words, weeks before the audit was officially wrapped up and its conclusions delivered to the Senate - “the PMO/Senate leadership backroom conspirators had the gist of the report,” noted Justice Charles Vaillancourt in his 2016 ruling on Duffy’s case.

Today, says Duffy’s lawyer, Donald Bayne, this suggests “an absolute breach of (Deloitte’s) confidentiality and the terms of the retainer.”

Later in 2013, the Senate’s committee of internal economy asked Deloitte’s auditors to appear before them to find out what happened. Tory senators, however, blocked Runia from testifying before the committee.

Efforts by the National Observer to contact Gerstein through the Conservative Party and Mount Sinai Hospital, where he has long been a presence on its board, proved unsuccessful. Deloitte refused to answer any questions about the Duffy audit, and Runia also did not respond to a request for an interview.

Former prime minister Stephen Harper, left, and former Senator Irving Gerstein, right. Photos from the Library of Parliament archives
Duffy was found innocent of all 31 charges of fraud, breach of trust and bribery in 2016.

This was not Deloitte’s only foray into Tory politics, however.

In 2017, the firm was hired by the Conservatives to oversee voting for its leadership race. The ballots were overseen by Deloitte and stored at one of its offices north of Toronto. Two days after Andrew Scheer won in a squeaker over Maxime Bernier, it was discovered there was a mysterious discrepancy of 7,466 votes. Yet the party's chief returning officer ordered all of the ballots destroyed before a recount could occur.

Bernier's supporters were outraged, inferring foul play, especially over the destroyed ballots. The party's president rushed out to defend the vote, saying the results had been “audited” by Deloitte.

This, however, was not true – Deloitte’s contract did not say the firm must audit the vote.

A current senator with ties to the Tories, speaking on condition of anonymity, says the Conservatives use “the cachet of Deloitte as a kind of Good Housekeeping seal of approval and nobody knows what the real story is.” The controversy has lingered: this past April, Bernier released a book in which he suggested Scheer manipulated the vote by signing up temporary members in Quebec. Deloitte, meanwhile, has remained mute on the matter. Scheer did not respond to Bernier's allegation.

Deloitte was also involved in the counting of ballots during the Ontario PC party leadership race last winter, after former leader Patrick Brown stepped down over allegations of sexual impropriety. The leadership race, won by Doug Ford, also ended in controversy after the voting procedure was found to have been plagued with glitches.

In the middle of the voting, Ford’s biggest opponent, Christine Elliott, declined to concede to Ford, citing "serious irregularities" in the race. In a statement, her team said she had won the popular vote and a majority of ridings, and alleged that thousands of votes had been incorrectly assigned to the wrong ridings. Again, Deloitte refused to comment on the matter.

Maxime Bernier, Gatineau, People's Party of Canada, Elections Canada
Federal MP Maxime Bernier drops off an official application for his People's Party of Canada at Elections Canada offices in Gatineau, Que., on Oct. 10, 2018, in preparation for the 2019 elections. Photo by Alex Tétreault
Is Deloitte shaking down companies?

Deloitte’s political power may have prevented the firm from being held to account in another scandal, as well.

Gregarious with a cutting wit, relaxing with a coffee by his fireplace in his basement office, 69-year-old Brian Love has spent more than 40 years in the scrap business. “It’s a rough and tumble industry,” he tells me. Love and his wife live in semi-retirement on a pleasant cul-de-sac in Grimbsy, Ontario. I went to see them last summer when I was researching my auditors story for The Globe and Mail.

Love’s entanglement with Deloitte suggests something alarming – that the auditing firm engages in shakedowns of companies.

In 1999, Love founded Mida International Inc., an electric waste recycling company in Burlington, Ont. It was a success, employing 72 people at its peak. But in 2012, the Ontario government lowered the price it was paying for recycled electrical waste and Mida began losing $500,000 a month.

Love decided to shut down his business, although Mida was not in default of its loans and paying back his debts was not in question (his receivables were insured). “Mine was not a bankruptcy,” explains Love. “What I wanted to do was wind my business up.”

In the summer of 2013, he informed his bank, HSBC, of his plans. One morning soon afterwards, Rob Biehler, a partner with Deloitte, showed up at Love’s office unannounced. “I represent HSBC and we are to be handling the bankruptcy,” Love recalls Biehler saying. HSBC had appointed Deloitte as its consultant on the file.

Love says Biehler told him HSBC wanted a court-appointed receivership – which is far more expensive but also unnecessary where there’s no issue of paying back creditors. Love was surprised Deloitte was even involved, given he'd already asked an insolvency trustee to oversee the wind up.

Love hired a lawyer and successfully fought off the attempt to have his receivership court-appointed.

Brian Love, former president of Mida International Inc., at his home in Grimsby, Ontario
Brian Love at his home in Grimsby, Ontario. Photo provided by Love.
Soon afterwards, Love, Biehler and the insolvency trustee held a meeting. Love and the trustee recall a discussion that Deloitte’s fee would amount to between $30,000-$40,000 – and at most $50,000. Biehler failed to inform Love, however, that Deloitte or HSBC had hired a law firm to consult on the file, which would add considerably to the cost. Nor did Biehler inform Love that the Deloitte partner would be charging $550 per hour for his services.

By October, 2013, Mida was shut down, with all receivables collected and forwarded to HSBC. The bank was now paid off. That’s when Love says Deloitte dragged its heels on closing the file. “It was a make-work project,” for them, he claims.

Finally, Deloitte sent Love its bill – which totaled almost $140,000, which included $32,700 in legal fees that Love had never been forewarned about. Moreover, Deloitte had already paid itself by taking the money directly from the receivables as they came in.

In March, 2014, Love received a call from Biehler telling Love he was going to email him a document. It was a release. A tax refund of $267,000 owed to Mida had been obtained by Deloitte. (Love says the tax refund should never have been intercepted by Deloitte.) Biehler told Love to sign the release or he wouldn’t see his tax monies. The release said Love could not sue Deloitte, or question its bill.

“I am not signing anything,” Love says he told Biehler. “You are holding my money up for ransom.”

Love says Biehler also said Deloitte threatened to cash the CRA cheque themselves and use “my money to sue me”.

“I took it to my lawyers and I said this is blackmail – outright blackmail,” relates Love.

Love sued Deloitte, demanding a reassessment of his bill and his tax refund returned. In fact, Deloitte did cash in the CRA cheque after Love sued the firm. (And even when Deloitte finally handed over the tax money, they withheld $50,000). At the 2014-‘15 trial, Biehler admitted that if Love had signed the release it would have prevented him from being able to review Deloitte’s accounting or its bill.

In his ruling, the judge said the work required by Deloitte was “modest at best” and concluded Deloitte had wildly overcharged for its role in the “simple” receivership. He chopped the bill to Deloitte down to $50,000 and the law firm's bill to $28,516. The judge also ordered Deloitte to pay back the $50,000 in tax monies it had withheld and half of Love’s legal expenses. Deloitte declined to answer questions about all matters pertaining to the Love case, and Biehler referred a query to the firm's media relations office.

Despite this win, Love estimates the whole ordeal cost him $190,000 – for a bill not supposed to be more than $50,000. “It wasn’t a win,” he says. “(But) it was a matter of principle.”

Love then went to the Office of the Superintendent of Bankruptcy in Ottawa and complained about Deloitte’s behavior. “So they brought in a special investigator and they looked at the file and they said ‘Wow, wow, this is blackmail’,” he recalls.

But in 2017, Love says the superintendent’s office told him they were closing the file and to stop making inquiries. However, when contacted by National Observer, the Office said the file is still under review and "a decision on further action, if warranted, is expected by the end of this fiscal year."

Love was puzzled when informed of this. "Something smells," he says.

Deloitte's response

National Observer sent a long list of questions to Deloitte Canada on all of the above matters, including supporting material. Deloitte did not respond to the questions specifically, but sent this reply via Tonya Johnson, the firm's senior manager of PR:

"The cases cited represent a range of Deloitte engagements over the last 20+ years, each of which was planned and executed according to the professional standards in place at that time. While our policies and code of professional conduct prohibit us from discussing information about clients or the work that we do for them, we have commented (to the extent possible and when given expressed consent) on public record in some cases, and we stand by those comments."

"With respect to audits, assessing past events through today’s lens requires a nuanced assessment. Over the last two decades, securities regulation requires more of those responsible for public company governance, and the standards followed by auditors (including those related to the responsibility to assess the possibility of fraud) have advanced. Additionally, the establishment of audit regulators has spurred continuous enhancements to audit quality. As governments, regulators and others work to enhance the effectiveness and relevance of today’s financial reporting, Deloitte is an active and supportive participant with other stakeholders in these discussions."
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