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KPMG and accounting practices

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Re: KPMG and accounting practices

Postby admin » Thu Sep 10, 2015 2:43 pm

The memo outlined a plan that would "target" wealthy Canadian residents worth at least $10 million. It offered them "confidentiality," protection from creditors and the ability to receive money "free of tax."


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In return, KPMG would take a 15 per cent cut of the taxes dodged. Successful KPMG sales agents and accountants were referred to as product "champions."

http://www.cbc.ca/news/business/kpmg-of ... -1.3209838

A wealthy Victoria, B.C., family paid virtually no tax over a span of eight years – and even obtained federal and provincial tax credits – while being involved in an offshore tax "sham" developed by one of the country's most respected accounting firms, the Canada Revenue Agency alleges.

The Canada Revenue Agency (CRA) believes there may be many more like them.

Court documents obtained by CBC News and Ici Radio-Canada show that in 2000, Peter Cooper and his two adult sons, Marshall and Richard, signed up for a KPMG tax product in the Isle of Man that targeted "high net worth" Canadian residents, promising they would pay "no tax" on their investments.

Federal probe of KPMG tax 'sham' stalled in court
Tax havens explained: How the rich hide money
Secret files reveal more Canadians using offshore tax havens
In 2013, the CRA obtained a judicial order demanding KPMG hand over the names of all the wealthy clients who set up shell companies in the Isle of Man, a small, self-governing territory in the Irish Sea between England and Ireland.

KPMG Canada is fighting that decision in federal court.

Documents show that between 2002 and 2010, the Cooper family paid little or no tax, despite receiving nearly $6 million from an offshore company. KPMG lawyers claim any money the Coopers received were "gifts" and therefore non-taxable.

If you have any more information on this story, please e-mail investigations@cbc.ca or contact Harvey Cashore at 416-526-4704.

The CRA alleges that the KPMG tax structure was in reality a "sham" that intended to deceive the taxman – and that both the Coopers and KPMG knew that $26 million hidden in offshore accounts actually belonged to the Coopers.

"The parties to the structure willfully presented its transactions as being different from what they knew them to be," the Revenue Agency said in tax court filings in Vancouver.

The CRA also alleges that the Coopers received federal and provincial tax credits during the years they were not declaring the income from the Isle of Man. In 2009, for example, Richard Cooper claimed the full home renovation tax credit on a home in Victoria.

The CRA has slapped the Cooper family with an order to repay millions in unpaid taxes and penalties in a "grossly negligent" scheme the CRA says was set up to "avoid detection" by tax authorities.

'I'm being drawn into this'


Marshall Cooper
B.C. resident Marshall Cooper said he was unaware of Canadian tax laws when he emigrated from South Africa in the mid-1990s. (Facebook)

When reached at his home in Victoria, Marshall Cooper said he was unaware of Canadian tax laws when he emigrated from South Africa in the mid-1990s.
"I went to the best people in the country. I'm being drawn into this, and I don't think I should have been in the first place," he says.

Cooper referred inquiries to KPMG, which is also representing the Coopers in their appeal in tax court.

KPMG declined to speak to CBC News about the allegations.

"Professional standards and obligations preclude us from disclosing, responding to, or discussing any matters that involve clients," Kira Froese, KPMG Canada's director of communications, wrote in an e-mail. "It is inappropriate for us to comment on matters that may be before the courts."

KPMG Canada, which is both a tax and auditing firm, is perhaps best known for helping the federal government crack down on public misspending. Yet in the Coopers' court case, it is alleged the accounting giant's Offshore Company Structure intentionally deceived the federal government. The structure "is a sham and was intended to deceive the Minister," the CRA alleges in court documents.

'For internal use only'

Documents filed in court by the CRA also shed light on a secret internal KPMG marketing campaign that had escaped the scrutiny of tax collectors for more than a decade.


Isle of Man
Court documents obtained by CBC News show that in 2000, a wealthy B.C. family signed up for a KPMG tax product in the Isle of Man, pictured, that targeted "high net worth" Canadian residents, promising they would pay "no tax" on their investments. (CBC)

As far back as 1999, a "product alert" was sent to all KPMG tax practitioners across the country and strictly marked "for internal use only - not for distribution or circulation outside the firm."

The memo outlined a plan that would "target" wealthy Canadian residents worth at least $10 million. It offered them "confidentiality," protection from creditors and the ability to receive money "free of tax."

In return, KPMG would take a 15 per cent cut of the taxes dodged. Successful KPMG sales agents and accountants were referred to as product "champions."

Dennis Howlett, the executive director of Canadians for Tax Fairness, wants to know exactly how much KPMG Canada and its sales agents profited from the offshore scheme.

"They were given the incentive that they could collect 15 per cent of the taxes avoided," he said. "We're talking about millions of dollars here."

KPMG did not respond to specific CBC queries about how many multi-millionaires invested in their "Offshore Company Structure" nor how much money the accounting firm made in sales and commissions.

Marshall Cooper told CBC News he believes there are many more like him. "It's huge - huge," Cooper said, speculating the CRA may find many more KPMG OCS clients.

Millions in undeclared 'gifts'

According to CRA documents filed in court, Marshall Cooper lived in a posh home in Victoria but paid only $3,049 in total taxes between 2002 and 2011.

He even received tax credits worth $5,420, the CRA alleges.

KPMG statement
​Peter Marshall Cooper Notice of Appeal, March 9, 2015
Marshall Cooper Notice of Appeal, March 9, 2015
Richard Cooper Notice of Appeal, March 9, 2015
​CRA vs. RICHARD COOPER Amended Reply, July 10, 2015
CRA vs. PETER MARSHALL COOPER Amended Reply, July 13, 2015
CRA vs. MARSHALL COOPER Amended Reply, July 13, 2015
Government auditors discovered the family invested in excess of $26 million back in 2002 and 2003 with help from KPMG. The money was handed to an offshore company called "Ogral" set up in the Isle of Man, but registered in other people's names.

The CRA alleges the Coopers first "purported to gift their wealth" to the offshore company. However, for years they received millions in non-taxable "gifts" back from Ogral that the CRA alleges were never reported on tax returns.

In their court filings, the Coopers insisted they obtained "substantial professional advice" when KPMG helped to set up the company in the Isle of Man. In their defence, the Coopers also say they consulted the law firm Fraser Milner Casgrain (now Dentons) before proceeding.

In the Cooper case, one CRA court pleading notes KPMG collected $300,000 in fees from the family between 2002 and 2008 based on the amount saved through the tax shelter.

KPMG lawyer Mark Meredith is representing the Cooper family in tax court. In a recent CRA court filing, however, the tax agency names Meredith, as well as now-retired KPMG tax partner Barrie Philp, as being the very ones who "developed the idea of an offshore company structure."

Dalhousie tax professor Geoffrey Loomer says that if the allegations against KPMG hold up in court, the case may have implications for the entire accounting industry.

"It seems to me it's bad from the point of view of the advisors involved, but it's also just, you know, an instance of a larger problem where you have high-wealth, high-income taxpayers arguably not paying their fair share," Loomer says.

"So it just means that more of the tax burden is borne by the middle class."

For more on this story, tune in to The National in the days to come for the documentary "The Isle of Sham."

http://www.cbc.ca/news/business/kpmg-of ... -1.3209838
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Re: KPMG and accounting practices

Postby admin » Mon Nov 10, 2014 9:29 am

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All over the world, tax revenues are under relentless attack. With help from accountants, lawyers and financial advisers, corporations are avoiding taxes through complex corporate structures, profit shifting, dubious royalty and management fee programmes.

The latest revelations come from some 28,000 pages of evidence leaked by whistleblowers. They relate to Luxembourg, a tiny principality surrounded by Belgium, Germany and France. It is a member of the European Union and has a population of around 550,000, but no major industry and is not known for any advances in science, mathematics, engineering, electronics or anything else that can generate mass sales, employment or economic activity.

Winners and losers

Globalisation has created opportunities for these microstates to create laws that provide shelter for footloose capital through tax avoidance schemes. They might secure some additional revenue through company registrations and a few jobs for local accountants and lawyers. But beyond that nothing of any economic value is created.

The rest of the world is the loser when certain countries offer these tax breaks, as without tax revenues governments can’t redistribute wealth or provide education, healthcare, pensions, transport, security or the other essential services for quality of life and social stability. The tax base of other countries is eroded, creating prospects of austerity and social strife and their governments should retaliate accordingly to end these practices.

The leaked documents show that around 340 major corporations, including Amazon, Deutsche Bank, Pepsi, Ikea, Accenture, Procter & Gamble, Heinz, Dyson, JP Morgan and FedEx have used the Luxembourg facilities. These companies want an educated workforce and the ability to dump sick employees onto the public purse. They want government subsidies, grants, legal enforcements of contracts, policing, security and much more. But, it would seem, they want to pay as little as possible for all those things. This “something-for-nothing” culture is facilitated by tax such as like Luxembourg and the tax avoidance industry.

The biggest beneficiaries of tax avoidance are corporate executives who boost their profit-related remuneration. Shareholders may get higher returns, but will also end up losing social rights to education, pensions and healthcare. Consumers, however, have not seen the price of coffee, washing powders, soft drinks, baked beans, postal deliveries or vacuum cleaners decline.

The Luxembourg papers show that tax avoiders are aided by big accountancy firms who devise complex corporate structures and schemes. This tax avoidance industry maintains its innocence, claiming all their business is legal.

Well, actually we don’t know if they are, because tax authorities have shown little mettle in taking judicial action. There is evidence to show that a number of schemes which previously masqueraded as lawful have been declared to be unlawful.

Organised hypocrisy

The annual accounts of the tax avoiding companies do not provide any clues about how they reduce their tax bills, but their annual accounts still receive a clean bill of health from their friendly and well-paid auditors. Meanwhile, these companies boast ethics committees and publish glossy corporate social responsibility reports that give the impression they are highly ethical and socially responsible citizens, but provide no information about their tax avoiding practices. Their reports are now part of a cynical impression management exercise.

Big corporations and accountancy firms are engaged in organised hypocrisy. Their internal dynamics are aimed at maximising their profits through things like tax avoidance, whilst soft words in public documents promise good citizenship. These two practices can’t be reconciled – and periodic revelations of malpractice shatter the public image they try to carefully cultivate. The result is public outrage and erosion of confidence in big business.

Rethinking the corporation

There needs to be a fundamental rethink about the nature of the corporation, its social obligations and public accountability. Public scrutiny can be enhanced by requiring corporations to publish tax returns together with related documents, such as the tax avoidance schemes. Those participating in tax avoidance schemes, especially when they are found to be unlawful, should not receive any taxpayer-funded contracts, grants, loans or subsidies. Persistent offenders, including accountancy firms, should be shut down.

The laws relating to taxation need to be changed so that corporations are taxed in the jurisdiction where their economic activity takes place, rather than where they choose to reside or book their profits. Such a system is known as Unitary Taxation and deserves attention. Devised nearly a century ago, at a time when transnational corporations and tax havens hardly existed, the present system of corporate taxation is unfit for the 21st century.

https://theconversation.com/luxembourg- ... tion-33969
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Re: KPMG and accounting practices

Postby admin » Mon Nov 10, 2014 9:26 am

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Prem Sikka is Professor of Accounting at Essex Business School.

The UK is drowning in a tide of greed and complacency, not least among wealthy, educated people occupying city offices.
Examples of this can be found amongst the big four accountancy firms: Deloitte & Touche, PricewaterhouseCoopers, Ernst & Young and KPMG, which audit 99 per cent of FTSE 100 and 96 per cent of FTSE 250 companies.

Their global income is around £75billion, of which £25billion comes from tax advice.

They have escaped retribution for their role in tax avoidance and duff audits of banks, some would say because they are ‘too big to close’ and wield enormous political power.

The UK’s tax revenues are under attack from major corporations that use ingenious schemes to dodge taxes.
Behind the headlines is a tax avoidance industry often involving the big four firms.
Last year, the House of Commons Public Accounts Committee noted that PwC would sell a tax avoidance scheme which had only a 25 per cent chance of withstanding a legal challenge.
As Labour MP and committee chairman Margaret Hodge put it: ‘You are offering schemes to your clients where you have judged there is a 75 per cent risk of it then being deemed unlawful.’

Big Four auditors face disruption to their bread and butter work ahead of new regulations

30 SECOND GUIDE: The Big Four

'Big four' accounting firms accused by MPs of using 'cosy' links to the Treasury to help rich clients
G20 must halt global game of tax avoidance by fighting anonymous shell companies and tax havens
Representatives of the other three firms admitted to ‘selling schemes they consider only have a 50 per cent chance of being upheld in court’.
The former partners of the big four firms sit on the board of Her Majesty’s Revenue and Customs.

Staff from the big four firms sit on HMRC committees and write porous tax laws.
Numerous tax avoidance schemes marketed by the big four firms have been declared to be unlawful by the courts.
But this has not been followed by any government probes or prosecutions.

Anyone with such a cavalier disregard for public decency would find it hard to secure contracts for collecting rubbish, but the big firms receive public contracts from the NHS, prisons and Private Finance Initiative.

As external auditors they are responsible for auditing the accounts of financial enterprises, but have been very adept at letting the lying dogs sleep.
The UK has experienced a financial crisis in every decade since the 1970s. In every one, auditors appear to have been complicit.
The mid-1970s banking crash exposed frauds at banks and insurance firms.
Accounting firms also collected fat fees and approved dubious accounts.

The same pattern has continued at Johnson Matthey Bank and the fraud-infested Bank of Credit and Commerce International.
This was followed by the collapse of Barings, and the Bank of England investigators were unable to secure access to audit files and personnel at Coopers & Lybrand (now part of PwC) and Deloitte & Touche.

The auditor silence was also evident at Independent Insurance, Equitable Life and Farepak.
The 2007-2008 banking crash showed that major banks indulged in money laundering, sanction busting and interest rate fixing among other abuses.
Their accounts overstated capital, assets and profits but were all approved by auditors.
Escaping retribution? The Big Four accountancy firms - Deloitte, KPMG,PricewaterhouseCoopers and Ernst & Young - take in around £25billion in total from tax advice

Escaping retribution? The Big Four accountancy firms - Deloitte, KPMG,PricewaterhouseCoopers and Ernst & Young - take in around £25billion in total from tax advice
The Co-operative Bank is the latest casualty and its accounts also received a customary clean bill of health on that occasion from KPMG.
A 2011 report by the House of Lords Select Committee on Economic Affairs accused bank auditors of ‘dereliction of duty’ and concluded that ‘complacency of bank auditors was a significant contributory factor’ to the banking crash.
Yet this has also not been followed up by any government investigation or prosecutions.
No government can combat tax avoidance without shackling the big four accounting firms.
The firms should be deprived of all public contracts until they mend their ways and persistent offenders should be closed down.
The big four firms have on a number of occasions failed to deliver meaningful audits of financial enterprises.
Losing out: Numerous tax avoidance schemes marketed by the Big Four accounting firms have been declared to be unlawful by the courts
Losing out: Numerous tax avoidance schemes marketed by the Big Four accounting firms have been declared to be unlawful by the courts
In the interests of financial stability, that task should now be undertaken by the financial regulator, the Financial Conduct Authority, on a real-time basis.
This way there can be no wrangles about access to audit files and personnel.
This reform will also reduce the size of the big firms and encourage meaningful competition for audit of other businesses.
Prem Sikka is Professor of Accounting at Essex Business School.


Read more: http://www.thisismoney.co.uk/money/comm ... z3IgRVB63J
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Re: KPMG and accounting practices

Postby admin » Fri Oct 31, 2014 5:59 pm

Audit firm Ernst &Young to pay $8 million in settlements with OSC | G&M
Accounting firm Ernst & Young admitted no wrongdoing in its audits of Sino-Forest Corp. and another Chinese company, but it has agreed to pay an $8-million penalty to the Ontario Securities Commission (OSC), co-operate with a fraud investigation, and changed its internal policies on emerging markets.
5
The OSC says Ernst & Young was negligent in its audits of Sino-Forest, which failed in 2011, and of athletic shoe manufacturer Zungui Haixi Corp. Both companies traded on Canadian stock exchanges until their shares collapsed after being accused of accounting improprieties. Investors lost millions of dollars.

http://www.theglobeandmail.com/report-on-business/ernst-young-reaches-8-million-settlement-over-%20sino-forest-audit/article20854668/
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Re: KPMG and accounting practices

Postby admin » Sat Dec 08, 2012 9:30 am

The predatory practices of major accountancy firms
Despite the evidence of fraudulent schemes, no firm has ever been disciplined by any professional accountancy body
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Prem Sikka
guardian.co.uk, Saturday 8 December 2012 11.00 GMT
Jump to comments (87)

'PricewaterhouseCoopers devised a scheme to enable a rich entrepreneur to avoid capital gains tax on profits of £10.7m'. Photograph: Garry Weaser for the Guardian
George Osborne's attack on organised tax avoidance is a huge disappointment. Her Majesty's Revenue and Customs (HMRC) is investigating some 41,000 tax avoidance schemes, but there is still no investigation of the industry that designs and markets aggressive tax avoidance schemes.

In contrast to the UK, reports by various US Senate committees have been critical of the predatory practices of the major accountancy firms (for examples, see here, here and here). KPMG was fined $456m (£284m) for facilitating tax evasion and a number of its former personnel have been sent to prison, as have some of the former personnel of Ernst & Young.

Now the public accounts committee (PAC) chair Margaret Hodge has PricewaterhouseCoopers PwC, Ernst & Young, KPMG and Deloitte in her sights. The PAC should investigate the role of these firms in organised tax avoidance. An earlier internal HMRC study estimated that these four firms "were behind almost half of all known avoidance schemes".

Some of the evidence about their predatory practices is on the public record. In November 2012, a tax tribunal threw out an Ernst & Young inspired scheme that enabled Iliffe News and Media to create a new asset – newspaper mastheads. This asset was created for a nominal sum of £1. It was leased back to its subsidiaries who paid the parent company over £51m in royalties and thus reported lower profits. No cash left the group but the companies now sought tax relief on royalty payments to reduce their corporation tax bill. The company's board minutes stated that Ernst & Young, who audited the company's financial statements as well, confirmed that the use of the scheme would also "significantly lessen the transparency of reported results".

PricewaterhouseCoopers devised a scheme to enable a rich entrepreneur to avoid capital gains tax on profits of £10.7m. A tax tribunal heard that the scheme involved a series of circular and self-cancelling transactions resulting in the creation of assets and disposals which somehow managed to generate a loss of £11m and thus cancelled out the profit. The scheme was thrown out by a tribunal, and in August 2012 by the court of appeal. The presiding judge said that "there was no asset and no disposal. There was no real loss". This scheme was sold to 200 entrepreneurs and if successful, would have enabled them to avoid capital gains tax on profits of around £1bn.

KPMG devised a scheme for an amusement arcade company to avoid paying VAT on its operations. The scheme was not developed in response to any request from the company; KPMG cold called the company. Its presentations were subject to a confidentiality undertaking being given. A 16-page report cited by the tribunal said that by using Channel Islands entities, the company's profits could improve by £4.2mn. KPMG charged £75,000 plus VAT for an evaluation report and counsel's opinion, and a fee of 25% of the first year's VAT avoided, 15% of the second and 5% of the next three year's VAT avoided. KPMG felt that the UK tax authorities would regard the scheme as "unacceptable tax avoidance" and would challenge the arrangements, but still sold it. The case subsequently went to the high court and the European court of justice and the scheme was quashed.

We are all suffering from the bankers' follies. But Deloitte devised a scheme to enable bankers to avoid income tax and national insurance contributions on £91m of bonuses. More than 300 bankers participated in the scheme, which operated through a Cayman Islands-registered investment vehicle. A tax tribunal threw out the scheme and the presiding judge said that "the scheme as a whole, and each aspect of it, was created and coordinated purely for tax avoidance purposes".

The above only provides a tiny glimpse of the predatory practices of major accountancy firms. They create sham transactions, phoney losses and phantom assets to enable their clients to dodge taxes. Despite the evidence, no accountancy firm has ever been disciplined by any professional accountancy body. Despite spending millions of pounds to quash predatory schemes, the UK Treasury has never sought to recover the legal costs from the promoters of the schemes. Instead, the big accountancy firms continue to receive taxpayer funded contracts.

No government will be able to effectively tackle tax avoidance without shackling the designers and enablers. It is hoped that the public accounts committee will investigate the role of the big accountancy firms in tax avoidance.

http://www.guardian.co.uk/commentisfree ... ancy-firms
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Re: KPMG and accounting practices

Postby admin » Mon May 09, 2011 12:00 pm

Swindlers: Cons & Cheats and How to Protect Your Investments from Them. 2010. By Al Rosen and Mark Rosen, CFA, Madison Press Books, www.madisonpressbooks.com. 264 pages, $34.95.

Reviewed by Martin S. Fridson, CFA
Book Review Editor: Martin S. Fridson, CFA

Abstract
The authors argue that the good intentions behind the International Financial Reporting Standards can be easily subverted through ruses that may be used anywhere in the world. Therefore, it behooves investors everywhere to know how to spot such trickery and protect their investments.

Full Text
Effective 1 January 2011, the International Financial Reporting Standards (IFRS) became mandatory for Canadian public companies. Proponents of IFRS adoption argued that it would enhance global comparability of financial statements. The authors of Swindlers: Cons & Cheats and How to Protect Your Investments from Them argue, on the contrary, that “differences in laws, regulations, taxes, cultures, education, ethics, training, traditions, enforcement, and optimism make uniformity an opium dream.”
Al Rosen, professor emeritus of accounting at York University, and his son, Mark Rosen, CFA, a partner at Accountability Research Corporation, further claim that IFRS will not even ensure comparability among Canadian companies. Certain provisions are overpermissive, they say, meaning that some companies will take liberties that overstate their profits and balance sheet strength relative to their peers. One example of the wide discretion afforded by IFRS is allowing assets to be reported on the basis of historical cost, fair value, or something in between.
Although the authors acknowledge that IFRS represents an improvement in accounting quality for some countries, Canada has taken a step backward in their judgment. Reviewing files from their forensic accounting practice, they find that in cases in which their plaintiff clients received financial settlements, convictions or settlements would have been either impossible or highly unlikely if IFRS had been in force.
None of this is to suggest that the previous Canadian accounting standards protected investors particularly well. One weakness widely exploited by issuers of financial statements involved minimal requirements for reporting related-party transactions. Unscrupulous executives perfected such abuses as arranging for private companies they owned to buy goods and resell them to the public corporations they managed “at cost.” The so-called cost included overhead charges that consisted largely of salaries for the executives and their relatives. The IFRS rules for related-party transactions are even looser than Canada’s old rules.
The authors list several institutional factors that underlie Canadian investors’ heavy exposure to financial reporting manipulation. For one thing, Canada has no national securities regulator, unlike the United States, which created the Securities and Exchange Commission in 1934. Canada has begun moving toward setting up a national regulator but has put in charge of the project a former provincial regulator who argued against the need for national regulation until shortly before his appointment.
Second, the Supreme Court of Canada ruled in 1997 that the purpose of audited financial statements does not include helping investors make informed stock purchase decisions. Rather, the justices decided that financial statements are intended only to enable existing shareholders to evaluate management’s performance. The Supreme Court thereby determined that auditors have no duty of care to prospective new investors. This ruling encouraged auditors to cater to corporations, which hope to inflate their share prices, with little fear of being sued by investors who relied on misleading financial statements in buying shares.
The authors catalog a number of outlandish flimflams perpetrated in an environment they see as inadequately policing financial disclosure. VisuaLABS, a company based in Calgary, Alberta, Canada, rose to a C$300 million market capitalization on the basis of technologies that included combining several plasma television screens to form a larger viewing surface. The prototype turned out to be one large screen that had been etched with a glass cutter to make it look as though it had been assembled from smaller screens.
Cross Pacific Pearls claimed to have a proprietary technique for growing pearls in mussels. When the mussels it had transported from the southern United States to California failed to produce a single pearl by the scheduled date, the company claimed that the bivalves had fallen asleep in the cold waters of a northern California lake and were hibernating. Eventually, it emerged that Cross Pacific had lent much of the proceeds of its debt and equity financing to two Panamanian companies that disappeared.
In addition to describing classic scams in such businesses as energy exploration, mining, and scrap yards, Swindlers details many telltale warning signs of financial reporting irregularities and deceptions. Particularly helpful is the discussion of cash flow, which some investors regard as inherently more reliable than net income. The authors show how companies can mislead readers of financial statements by netting items on the cash flow statement.
The authors also list a number of classic techniques for overstating revenues. One involves overcharging on shipments to a customer and then rebating the excess to the customer’s employees in the form of expensive dinners or sports excursions. Another gambit consists of booking essentially uncollectible fees for the renegotiation of loans to failing companies.
Because these ruses can be used anywhere in the world, Canadians are not alone in benefiting from reading Swindlers. In addition, with more than 100 companies now permitting or requiring the International Financial Reporting Standards, it behooves investors everywhere to know how the good intentions behind the new rules might be subverted. Al and Mark Rosen deliver the goods with clarity and surprisingly high entertainment value for a book on a subject commonly thought to be dull.
Reviewer Information
Martin S. Fridson, CFA, is global credit strategist at BNP Paribas Asset Management, New York City.
Book Review Editor Information
Martin S. Fridson, CFA, is global credit strategist at BNP Paribas Asset Management, New York City.
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Re: KPMG and accounting practices

Postby admin » Thu Apr 07, 2011 8:46 pm

NEW YORK TIMES
April 7, 2011 at 8:22 PM ET

How Secrecy Undermines Audit Reform

HIGH & LOW FINANCE

By FLOYD NORRIS

For the auditing industry, the financial crisis was really not that bad.

While nearly every other group involved in the financial system — banks, mortgage brokers, bond rating agencies, derivatives dealers and regulators — faced severe criticism and new legislation, auditors largely escaped unscathed.

There were, to be sure, a few discordant notes. The Lehman Brothers bankruptcy trustee blasted Ernst & Young for allowing Lehman to use a dubious accounting method to hide its leverage in the months leading to its demise, and the attorney general of New York filed fraud charges against Ernst. Robert Herz, then the chairman of the Financial Accounting Standards Board, complained that auditors had allowed banks to violate the rules on off-balance sheet entities in order to hide assets and liabilities.

But the Dodd-Frank law did nothing to the auditors.

That was in sharp contrast to the previous round of scandals — the Enron and WorldCom accounting frauds that led to the enactment in 2002 of the Sarbanes-Oxley law. That law established the Public Company Accounting Oversight Board to audit the auditors. With a second set of eyes looking over their shoulders, it was hoped, auditors would do a better job.

While auditors may be doing a better job, that does not necessarily mean they are doing a good one.

This week James R. Doty, the new chairman of the P.C.A.O.B., let loose a blast at the job the profession had done — and was doing.

In a speech to the Council of Institutional Investors, Mr. Doty said the board had gone back and inspected the audits of many companies that later failed or were bailed out. “In several cases — including audits involving substantial financial institutions — P.C.A.O.B. inspection teams found audit failures that were of such significance that our inspectors concluded the firm had failed to support its opinion,” he said.

That is, it should be noted, not the same as saying the financial statements were wrong. It is possible that the audit firm did not do enough work to know if the statements were accurate but that they would have been acceptable even to a proper audit.

Moreover, as Mr. Doty noted, “Auditors were not charged with enforcing good risk management practices at financial institutions.” But they were supposed to make sure the statements reflected the conditions at the time. That appears not to have happened at Lehman Brothers, at least when it came to leverage, and it might not have happened at other banks.

What’s worse, the problems seem to be continuing.

In the wake of the financial crisis, no accounting issue has been more critical than the valuation of financial assets. In some cases, banks are now required to report the fair value — normally the market value — of securities they own. That is not easy for securities that rarely trade, and it was made all the harder by the complexity of some securities that Wall Street invented during the boom years. Banks claim, with some justification, that markets became unduly fearful at the height of the crisis, and that market values fell too low.

Investors and regulators could, if they chose, make allowances for depressed markets. But they need to be able to compare banks with one another, and to do that they need to have confidence that financial statements are comparable.

But the accounting oversight board does not think that has happened. In the board’s report of its 2009 inspection of PricewaterhouseCoopers, which concerns 2008 audits conducted at the height of the financial crisis, the board wrote that “in four audits, due to deficiencies in its testing of fair values of investment securities and/or derivatives, the firm failed to obtain sufficient competent evidential matter to support its audit opinion.”

It had similar complaints about each of the other members of the Big Four — KPMG, Ernst & Young and Deloitte & Touche.

Unfortunately for investors, the board has not revealed the names of any clients involved.

Nor do the auditors appear to have gotten everything right in later audits, at least in Mr. Doty’s view.

“Although the 2010 reporting cycle is not yet complete, so far P.C.A.O.B. inspectors have continued to identify significant issues related to the valuation of complex financial instruments, among other areas,” he said, adding that the “inspectors have also identified more issues than in prior years.”

In 2002, when the auditing firms had been humiliated by audit failures, their efforts to prevent any regulation failed, but they did win one crucial victory in the details of the Sarbanes-Oxley law. The oversight board must keep secret its most critical assessments of audits unless a firm fails to respond to the criticism. And the board’s disciplinary actions remain secret until they are resolved by the board and the Securities and Exchange Commission has ruled on any appeal.

It is as if the fact a man was suspected of robbing a bank had to be kept secret until after he was not only convicted but failed in his appeal.

That secrecy was justified as necessary to protect reputations that could be tarnished by charges that might later be disproved. In practice, board officials complain, it has led to stalling tactics by firms that figure they can avoid negative publicity indefinitely. The board has asked Congress to change the law, but that seems unlikely.

In his speech this week, Mr. Doty said that several precrisis audits were “the subject of pending P.C.A.O.B. investigations and may lead to disciplinary actions against firms or individuals,” but he of course gave no details. As a result, all firms are tarred, not just those the board thinks acted irresponsibly.

To be fair, the accounting rules give the firms a difficult job in evaluating a bank’s estimate of fair value of securities that rarely trade. Banks have some flexibility in determining how to make those estimates, and the auditor is supposed to satisfy itself that the methods used are reasonable. The board makes it clear in the publicly released sections of inspection reports that banks use varying methods.

As a result, even if every audit were done properly, there would be no assurance that the results would be comparable.

One reason the board exists is that investors were shocked by disclosures in the Enron scandal that local auditors for Arthur Andersen — the fifth member, now defunct, of what was then the Big Five — had felt free to ignore advice on accounting standards from the firm’s technical experts, who worked in what is known in the industry as the national office.

Other firms assured me at the time that nothing comparable could happen in their operations.

But perhaps it can.

In his speech, Mr. Doty quoted from two assurances given by auditors to clients, and discovered by board inspectors. He did not name either firm involved.

One firm promised that the auditors on the scene would “support the desired outcome where the audit team may be confronted with an issue that merits consultation with our national office.”

At least that firm seemed to leave open the possibility that the national office would prevail. Another pitch for audit work went further. It promised, Mr. Doty said, that audit decisions would be “made by the global engagement partner with no second guessing or national office reversals.”

Abraham Briloff, a longtime professor of accounting at Baruch College and a critic of misleading accounting practices — and a man whose articles I had the honor of editing many years ago when I worked at Barron’s — used to tell a joke about a chief executive interviewing prospective auditors and asking, “What is two plus two?”

The winner, he said, responded, “What number were you looking for?”

Now it is board audit committees, not chief executives, who are supposed to hire auditors. But the fact that accounting firms thought such promises would help — and were willing to put the pitches in writing — is evidence that too little has changed since the accounting oversight board was established.

One can hope most firms would never stoop that low to win business, and that most audit committees would summarily reject any firm that pursued such a course. But because board disciplinary actions can remain secret for years, we have no way of knowing which firm or firms have partners willing to make such offers, or which companies accepted them.
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Re: KPMG and accounting practices

Postby admin » Wed Dec 22, 2010 12:34 pm

Blame the Accountants — and Deregulation
Posted: 21 Dec 2010 04:03 AM PST
I never want to make excuses for the excesses of Wall Street or the horrific judgment exercised by iBank management — you cannot, its inexcusable — but it long past time we begin holding the Street’s grand enabler’s responsible for their actions.

Which brings me to the accountants.

The New York attorney general may be bringing a civil fraud lawsuit against Ernst & Young, “accusing the accounting firm of helping Lehman mislead investors,” according to the WSJ.

The accountants were the pushers to the Street’s junkies. They allowed all manner of shenanigans to go on, under their imprimatur of legitimacy. From WorldCom to Tyco to Enron and now to Lehman Brothers, most of these frauds would not have been possible without the loving assistance of large and credible accounting firms.

And they did it for the money. Ernst & Young earned approximately $100 million in fees for its auditing work from 2001 through 2008 for Lehman Brothers.

Some people assumed that the death penalty for Arthur Anderson would have kept the industry in line. But such restraint was not to be. Thanks to yet another piece of radical deregulation, the accounting industry was given carte blanche to run wild. The Securities Litigation Reform Act of 1995 had created a civil liability out for the accountants. It allowed them to legally become Wall Street’s pushers, no longer answerable to Investors who were defrauded due to their accounting audits. It practically decriminalized accounting fraud.

Here is a piece of trivia about this ruinous legislation: Prior to becoming SEC Chair, Christopher Cox was one of the authors of the Securities Litigation Reform Act. When a radical deregulator becomes Wall Street’s chief cop, what could possibly go wrong?

Here is what I wrote in Bailout Nation about the Securities Litigation Reform Act of 1995:

“This legislation was supposed to be a way to eliminate class action lawsuits that were the bane of public companies’ existence. Buried in the legislation was a little-noticed clause that eliminated “joint and several liability” for those who contribute to securities fraud. The consequences of the change were significant. It removed liability for fraud from the accountants who audited quarterly statements for public companies.

What do you think happened once accountants were no longer liable? An explosion of accounting fraud! The accounting scandals of the late 1990s and early 2000s were directly attributable to this small legal change. So too was the collapse of Enron, which led to the corporate death penalty for Arthur Andersen. We can probably pin the subsequent enactment of Sarbanes-Oxley, which is undoubtedly having all sorts of its own unintended consequences, on that same clause. These all trace back to what the industry itself had requested.

As the saying goes: Be careful what you wish for; you may get it.“

We are left to wonder: Who else has questionable accounting . . .?


See Also:
Auditors Face Fraud Charge
LIZ RAPPAPORT And MICHAEL RAPOPORT
WSJ, December 20, 2010
http://online.wsj.com/article/SB1000142 ... 69366.html

A Lehman Case Emerges More Than 2 Years After Collapse
PETER LATTMAN
NYT, December 20, 2010
http://dealbook.nytimes.com/2010/12/20/ ... y-be-next/

Ernst & Young Said to Face Fraud Suit Over Lehman
Karen Freifeld and Linda Sandler
Bloomberg, December 20, 2010
http://noir.bloomberg.com/apps/news?pid ... FUd6bUfTvo


http://www.ritholtz.com/blog/
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Re: KPMG and accounting practices

Postby admin » Thu Apr 02, 2009 8:23 am

KPMG Sued by New Century Trustee Over Subprime Lender’s Demise
By Sophia Pearson

April 2 (Bloomberg) -- KPMG International, which oversees the fourth-largest U.S. accounting firm, was sued by the trustee for bankrupt subprime lender New Century Financial Corp. over claims it failed in its role as “gatekeeper.”

Negligent audits and reviews by KPMG LLP, the U.S. member firm of KPMG International, led to New Century’s collapse, according to lawsuits filed yesterday in state court in Los Angeles and federal court in New York. The suits, filed against both KPMG International and KPMG LLP, seek at least $1 billion in damages.

“Once an auditing firm lacks independence, then their audits aren’t worth the paper they’re written on,” Steven Thomas, an attorney for New Century Trustee Alan M. Jacobs, said yesterday in an interview. “KPMG had a duty directly to New Century and a duty directly to the public. It was acting as a gatekeeper for a company that was at the center of the housing boom.”

New Century, once the second-biggest U.S. subprime mortgage lender, filed for bankruptcy in April 2007 after state regulators revoked its lending licenses and federal officials started two investigations. The company won court approval of a bankruptcy liquidation plan in July that pays unsecured creditors as much as 17 cents on the dollar.

‘Business Failure’

KPMG spokesman Dan Ginsburg said the company hadn’t yet seen the complaint and denied any wrongdoing.

“Any implication that the collapse of New Century was related to accounting issues ignores the reality of the global credit crisis,” Ginsburg said yesterday. “This was a business failure, not an accounting issue.”

More than a dozen shareholder lawsuits have been consolidated in federal court in Los Angeles. The suits accuse New Century of violating securities laws by concealing the company’s deteriorating financial condition. A consolidated complaint alleges KPMG acted fraudulently as it failed to detect accounting and underwriting practices that helped the company deceive shareholders.

KPMG served as New Century’s auditor from 1995, when the company was formed, until April 27, 2007, when it resigned after issuing 12 unqualified audit opinions on the company’s financial statements, according to the New York complaint filed yesterday. The suit is the first to accuse KPMG International of wrongdoing in the New Century case.

“As New Century’s auditor, KPMG failed its public watchdog duty. The result was catastrophic,” according to the complaint.

Dissenters Silenced

KPMG’s audits of New Century violated both professional standards promoted by its international body and regulatory requirements, according to the complaint. Dissenters within the auditing firm were silenced by senior partners to protect the firm’s business relationship with New Century and KPMG LLP’s fees from the company, the complaint said.

One KPMG specialist who complained about an incorrect accounting practice on the eve of the company’s 2005 annual report filing was told by a lead KPMG audit partner “as far as I am concerned we are done. The client thinks we are done. All we are going to do is piss everybody off,” the complaint said.

Ginsburg said this e-mail was taken out of context. The next sentence, which was omitted from the examiner’s report, “indicated that the firm’s national office had already reviewed and signed off on the issue, complying with the firm’s normal procedure,” according to the KPMG spokesman.

KPMG then allowed New Century to file its annual report with the U.S. Securities and Exchange Commission before the audit work was complete, according to the complaint. Ginsburg said this claim was inaccurate.

Loan Growth

New Century increased loan originations from $14 billion in 2002 to $60 billion in 2006, selling many of those mortgages in securities underwritten by banks. In 2005, the company expanded its business and issued $56 billion in loans.

KPMG International, “as the principal, is responsible for the severely reckless and grossly negligent acts of its agent,” according to the New York complaint.

KPMG advised New Century to alter the way it calculated reserves for repurchasing mortgage loans that didn’t meet certain conditions, according to the Los Angeles complaint. New Century’s calculations for required reserves were wrong and violated generally accepted accounting principles, the complaint said.

Mistakes in calculation grew to more than $300 million and repurchase requests soared to $8 billion once New Century’s true financial condition was known, the complaint said. The company could no longer borrow money to finance its lending business and collapsed owing billions.

‘Professional Standards’

“Any claim that we acquiesced to client demands is unsupportable,” Ginsburg said. “KPMG acted in accordance with professional standards in New Century, and we will vigorously defend our audit work.”

Last year, a report by bankruptcy court examiner Michael J. Missal concluded KPMG could be accused of professional and negligent misrepresentation although the firm had possible legal defenses to such claims. The 581-page report, unsealed in March 2008, didn’t conclude that KPMG engaged in fraud.

Thomas, the trustee’s attorney, won a $521.7 million verdict in a similar lawsuit brought by a Portuguese bank against BDO Seidman, the seventh-largest U.S. accounting firm. A jury found in August 2007 that the firm failed to detect a fraud leading to the collapse of a client of Banco Espirito Santo SA, Portugal’s third-largest bank. BDO Seidman is appealing the jury award, said spokesman Jerry Walsh.

The cases are New Century Liquidating Trust and Reorganized New Century Warehouse Corp. v. KPMG LLP, BC410846, Superior Court of the State of California (Los Angeles) and New Century Liquidating Trust and Reorganized New Century Warehouse Corp. v. KPMG International, 09-3144, U.S. District Court, Southern District of New York (Manhattan).
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Re: KPMG and accounting practices

Postby admin » Thu Apr 02, 2009 8:04 am

(Advocate comments........to create the perfect economic storm, one needs a combination of failures at many levels. Financial experts must fail to be professional, accounting experts, legal experts, and finally government and regulators. Once all of these players are in place, nearly any high level scam is possible, as we have no doubt seen lately. This forum topic is intended to shed light into the failure of professionals to do their jobs, and instead turn into self seeking fraudsters. We all accept that lawyers and financial professionals would stoop to this. When we finally accept that certain regulators and even certain governments that hire them are also in on the game, then we will truly start to understand. Then we will start to protect ourselves.)


Ex-KPMG Manager Larson Gets 10-Year Prison Term in Shelter Case
By David Glovin

April 2 (Bloomberg) -- Former KPMG LLP senior manager John Larson was sentenced to 10 years in prison and former partner Robert Pfaff got eight years for selling illegal shelters that helped wealthy clients evade more than $100 million in taxes.

Larson was also fined $6 million yesterday in Manhattan federal court, Pfaff was fined $3 million and both were immediately jailed. Lawyer Raymond Ruble, a former partner at Brown & Wood LLP, was given a 6 1/2-year sentence. The three were convicted on Dec. 17 of tax fraud and other charges.

“All three defendants were central” to the tax shelter scheme, U.S. District Judge Lewis Kaplan said in court. “They were instrumental in moving it through the KPMG bureaucracy.”

Prosecutors told Kaplan that Larson and Pfaff, 66, should get from 19 years and 6 months to 24 years and 3 months. They said Ruble, 63, should be sentenced to 15 to 19 1/2 years.

The convictions, which the defendants said they will appeal, came in a case that narrowed significantly since 2005, when it began as the largest tax-shelter prosecution in U.S. history. The government initially accused 17 ex-KPMG executives, including former Deputy Chairman Jeffrey Stein, and several others of selling shelters that cost the Treasury $2 billion.

Kaplan, who presided over the case, dismissed charges against 13 defendants saying prosecutors violated their right to counsel. The trial resulted in the acquittal of former KPMG tax partner David Greenberg.

Big Four Firm

Charges against New York-based KPMG, one of the Big Four U.S. accounting firms, were dismissed in January 2007 after it paid a $456 million fine. Among those who pleaded guilty to tax charges in the case were the government’s key witness, David Amir Makov, ex-KPMG partner David Rivkin, and former HVB Group accountant Domenick DeGiorgio.

Larson and Pfaff left KPMG in 1997 to create Presidio Advisory Services, a “tax-shelter mill” in Denver that sold hundreds to wealthy clients, prosecutors said at the trial. They worked with Ruble, who wrote letters vouching for the shelters’ legitimacy.

In shelters known as BLIPS, FLIP and OPUS, clients falsely claimed to have taken large loans to buy stock, prosecutors said. Clients seeking a certain amount of losses paid fees equal to 7 percent of that amount. The convictions only related to the BLIPS form of shelter.

Repaid the Government

Kaplan ruled that the scheme caused losses of more than $100 million. Most of the defendants’ clients have repaid the U.S. government, defense lawyers said.

Prosecutors said that the entire fraud generated hundreds of millions of dollars in phony tax losses for the defendants’ wealthy clients and cost the U.S. treasury more than $1 billion in lost tax revenue.

Prosecutors said in their brief that it cost the government almost $1.6 million to bring the prosecution, the largest expense of which was an almost $1.4 million repository of documents.

Kaplan said that the defendants were “motivated by greed” and said the crime was “so raw, so brazen, so outrageous” that it clearly “passed the line” separating faulty accounting from criminality.

The judge said he wanted to send a message to other professionals considering similar wrongdoing and criticized those who seek a “real or imagined loophole” in the system “to make a fortune.”

Kaplan ordered Larson and Pfaff jailed immediately because they may flee the country. Ruble may remain free while his appeal is heard, the judge said.

Larson and Ruble didn’t speak at the sentencing. Pfaff said he wouldn’t flee if allowed to remain free for a brief period.

‘Cherish my Country’

“I cherish my country,” Pfaff said.

In a separate trial now under way in Manhattan federal court, prosecutors said Ernst & Young employees including Robert Coplan helped wealthy clients evade millions of dollars in taxes.

The case is U.S. v. Stein, 1:05-cr-00888, U.S. District Court, Southern District of New York (Manhattan).
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Postby admin » Thu Oct 30, 2008 7:54 am

It just got harder to keep score
Accounting Rules

Hugh Anderson, Financial Post

Thursday, October 30, 2008

Many a sports coach with a losing team might dream of changing the rules for keeping score. Canada's banks are about to realize that dream, just in time for their Oct. 31 year-end. Changes to accounting rules rushed through will allow banks and other financial institutions to postpone recognizing losses on what have come to be known as toxic assets.

Canada's Accounting Standards Board recently short-circuited its normal procedure for introducing new rules of the game and approved the changes in short order. The draft of the changes got cursory public exposure for just one week before getting the nod.

What's important to investors is that the banks will be able to reclassify financial assets that previously required declines in fair value to be recognized immediately in net income, so-called mark-to-market accounting. These are loans and investments for which the market has all but disappeared. Interestingly, the changed rules can be used for accounting periods beginning on July 1 this year. That timing means that banks can use the new rules in their fourth-quarter and yearend reports.

It's quite possible that such reclassifications will enable banks to report substantial net income boosts from reversing previous writedowns. Simultaneously, assets off the balance sheets will grow.

How should investors regard such profit increases? Surely the answer is with a jaundiced eye. Now you see the losses on bad bets, then you don't. Incidentally, you may not have noticed that in the recent congressional bailout package the U. S. Securities and Exchange Commission was given the authority to suspend mark-to-market rules at any time it feels it should.

In the government-dominated financial system cobbled together to save Wall Street and Bay Street, these changes in how to keep score are another of the developments that will make it more difficult for investors and their advisors to figure out what's going on. If it's impossible to tell which of the players is losing and which is a winner, good luck in telling clients what to buy or sell or hold.

And you thought you had figured out how to do that when you aced the CFA examinations. Welcome to the financial revolution. You have nothing to lose but your map and your compass.

-Hugh Anderson is a freelance financial journalist and a former investment advisor.
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Postby admin » Fri Oct 17, 2008 6:25 pm

Ex-KPMG Executives Sold Illegal Tax Shelters, Prosecutor Says
By David Glovin

Oct. 16 (Bloomberg) -- Wealthy clients, using ``a magical tax-elimination scheme,'' evaded hundreds of millions of dollars in taxes with the help of three former KPMG LLP executives and a lawyer, a prosecutor told jurors at the start of a trial.

Assistant U.S. Attorney John Hillebrecht told jurors at the opening of the trial of former KPMG executives Robert Pfaff, John Larson and David Greenberg and lawyer Raymond Ruble that they sold four illegal shelters to hundreds of wealthy clients in a massive scheme to cheat the U.S. Treasury.

They made ``the tax bills of some of our nation's richest citizens disappear,'' Hillebrecht told jurors in Manhattan federal court. ``The tax shelters were out-and-out frauds.''

Hillebrecht's opening came in what was once the largest tax fraud prosecution in U.S. history. The case began in 2005 when prosecutors accused 17 ex-KPMG executives and two others of selling illegal tax shelters from 1996 to 2005, costing the U.S. Treasury at least $2 billion. U.S. District Judge Lewis Kaplan later dismissed charges against all but four defendants because prosecutors violated their right to counsel. After long delays, the remaining four defendants went on trial yesterday.

Charges against New York-based KPMG, the fourth-largest U.S. accounting firm, were dismissed in January 2007 after it paid a $456 million fine. Among the charges facing the four men are tax evasion and conspiracy.

Phony Losses

According to Hillebrecht, KPMG executives realized in 1996 that they ``could make a lot of money'' in the ``tax products'' business. They began creating investments which, while carrying no real risk, generated ``paper losses'' that clients could use to offset income and reduce taxes, he said.

``The trick is to generate a loss on paper that counts as a loss for tax purposes,'' Hillebrecht said.

Larson and Pfaff left KPMG in 1997 to create Presidio Advisory Services, a ``tax shelter mill'' in Denver that sold hundreds to wealthy clients, Hillebrecht said. They worked with Greenberg, a KPMG partner, and Ruble, a partner at the Brown & Wood law firm who wrote letters vouching for the shelters' legitimacy, he said.

Presidio offered ``a magical tax elimination scheme'' in which clients seeking a certain amount of losses paid fees equal to 7 percent of that amount, Hillebrecht said. The shelters appeared to have legitimate underlying transactions but didn't, he said.

FLIP, OPUS

In shelters known as FLIP and OPUS, for instance, clients falsely claimed to have taken large loans to buy stock, he said. Banks including HVB Group and Deutsche Bank AG helped Presidio, Hillebrecht said.

``You can't lie to the government to evade taxes,'' he said. ``It's that simple.''

In the first defense opening, Larson's lawyer, Thomas Hagemann, told jurors that his client acted in ``good faith'' amid the confusion and uncertainty of the ``tax world.'' He said it was appropriate in the mid- and late-1990s to sell ``loss generators'' that would help wealthy clients lessen their taxes.

``This trial is about what people believed, in good faith, was allowed under the law,'' Hagemann said, pointing to a stack of books that comprise the tax code and Internal Revenue Service regulations.

Hagemann said that ``extraordinarily talented'' senior executives at KPMG had approved three of the shelters at issue. He didn't mention that three of the executives he named were indicted in the case and had their indictments dismissed by Kaplan.

Lawyers for the other defendants were scheduled to give their opening statements today.

The case is U.S. v. Stein, 05-CR-888, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in New York federal court at dglovin@bloomberg.net.

Last Updated: October 16, 2008 00:01 EDT
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Postby admin » Wed Sep 19, 2007 8:08 am

Standards needed
As Canada moves toward national regulation of securities, it needs uniform standards for the accountants who watch those investments

Brian Hunt
Financial Post



Wednesday, September 19, 2007
Federal Finance Minister Jim Flaherty has again made it known that the Conservative government is committed to a single national securities regulator. This proposition is long overdue, and it's one that Ontario's Chartered Accounting profession should fully support. Having a patchwork quilt of regulators and regulations has hampered and diminished the attractiveness of our capital markets for decades -- both for domestic and international enterprises.

If this move toward a more consistent regulatory system is to work, however, it must be accompanied by a single system of nationally uniform public-accounting professional standards. Currently, there are no nationally consistent qualification and conduct requirements for providers of audit and assurance services. Consequently, in some provinces, people who don't even have accounting designations are allowed to sign off on financial statements.

This is troubling when you stop to consider what public accounting is really all about:

It's the business of expressing independent assurance on financial statements and other financial information of enterprises of every size, to ensure that the information truly reflects their financial condition. Large and small investors, financial institutions and other third parties then use that assurance to help them make informed investment and lending decisions. Many of those decisions involve investments in mutual funds, RRSPs or pension funds, making the practice of public accounting -- to a standard recognized by our major trading partners --important to just about every Canadian.

In the past, this may have been of less importance because the majority of business was done in the provinces that maintained the highest professional standards for auditors, primarily Ontario and Quebec. Today, however, with the rise of Western Canada as an economic force to rival the East, it's more important than ever that all provinces move to establish public accounting qualification and conduct standards of equivalent rigour to those found in this country's traditional economic heartland.

Therefore, as we move toward a single regulator, Canada's federal and provincial governments should also work to ensure that this progressive step is accompanied by consistently high public accounting standards across the country. In a world where sound corporate governance is becoming increasingly crucial, our trading partners demand that Canada continue to practice financial reporting in a manner that meets the needs of investors around the world. There is no benefit to taking down barriers to the mobility of investment capital within Canada if, by perpetuating this uneven regulatory regime for public accounting professionals, we effectively put up barriers to commerce and investment between ourselves and the rest of the world.

There are many compelling public policy arguments in favour of developing nationally consistent public-accounting qualification and conduct standards. As noted, currently there are significant inconsistencies in standards from province to province. Public accounting requires a license only in Ontario, Newfoundland, Prince Edward Island and Nova Scotia, although Quebec uses legislation to restrict its practice and is effectively at the same level as those other four provinces. From there, standards vary to the point that, in several Western provinces and the three territories, there is no regulation whatsoever.

Having no standards for public accounting qualification and conduct has never sold on Bay Street and it is never going to be acceptable on Wall Street, or the markets of the United Kingdom, the European Union, Asia and elsewhere. Therefore, if the rules governing the securities market in Canada become nationally standardized, so too should rules governing the professionals charged with ensuring that this market functions in the interests of all stakeholders in our capital markets and the broader public interest as well.

For example, the United States has already taken steps to ensure nationally consistent public-accounting standards of qualification and conduct. If the United States can achieve high, consolidated standards across 50 states, then there is no excuse for Canada not being able to achieve the same. In fact, for many companies doing business in the States, the Sarbanes-Oxley Act has made moving toward higher standards a fait accompli, as it requires foreign public companies listing on U.S. exchanges to meet the same standards for reporting and compliance as domestic American companies. All of Canada's jurisdictions would benefit from following the example of Ontario, where the Public Accounting Act of 2004 has managed to open up the practice of public accounting to all accounting designations that qualify, without lowering its internationally recognized high standards. To get permission to issue public accounting licences, recognized accounting bodies must develop qualification and conduct standards that are substantially equivalent to those of the current public-accountant licensees, Chartered Accountants. In drawing up the new act, Ontario has balanced the need for fairness between the designations and the protection of those high standards required by investors and our capital markets. This is an approach that should be emulated across the country.

In doing so, however, we must ensure that this new playing field is "levelled up" to one that matches the current best practices of our major domestic capital markets and, more importantly, those of our international trading partners. Certainly, our largest trading partner, the United States, will never accept financial statements signed off by people who do not meet their own high standards for licensing as a public accountant.

Moving to a single national securities regulator for Canada is a positive move; one that will be enhanced by creating corresponding uniform standards for public-accounting licensing that are recognized and accepted by our major trading partners, to ensure that those who invest anywhere in Canada are given the same level of assurance on the soundness of their decision.

---- Brian Hunt is president and chief executive, Institute of Chartered Accountants of Ontario.

© National Post 2007
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Postby admin » Wed Sep 12, 2007 8:40 am

Executives don't need to break rules, just bend them
Accounting standards useless if not enforced; Al Rosen

Financial Post



Wednesday, September 12, 2007
Canada is slowly moving towards adopting International Financial Reporting Standards (IFRS) over the next three to four years. The aim is that by 2011, financial statements will supposedly be comparable between Canada and likes of France, Australia, Korea, and even Russia, to name a few. It sounds like a useful advancement, but it's doubtful whether many investors will even notice given our long history of accounting apathy.

Canadian accounting rules have in fact already changed significantly over the past decade, and many investors have remained blissfully unaware. The definition of income has changed too many times to even count. Nevertheless, some investors continue to take accounting figures at face value, hoping that either their quantitative models are somehow immune to the resulting errors, or that the majority of investors are just as equally unaware.

Canada has not always aimed to adopt IFRS. Just a few years ago, we were still trying to converge our standards with U.S. accounting rules. As recently as this year, in fact, Canada proposed a rule to place pension deficits on company balance sheets (matching a move made by the U.S. last year). Then rather abruptly, the proposal was dropped altogether --another example of the indecisiveness that investors have endured in Canada.

At times, we have introduced accounting rules that were completely out of step with both U.S. and international standards, only to reverse course after several years of unfortunate financial reporting consequences.

Other times, investors have had to wait in vain for accounting rules that were sorely needed to address Canadian-specific issues like income trusts, but which never came in the end.

Canada has chosen to go the IFRS route for so-called ideological reasons, believing that its current standards are more "principles-based" rather than "rulesbased" like in the United States.

One commonly-cited knock against rules-based standards is that people will always find loopholes in the accounting rules, and that still more rules will be needed. Whereas some might describe this simply as progress, critics also charge that rulesbased standards did nothing to prevent accounting scandals in the United States such as Enron. Easily forgotten, it seems, is that failures have taken place under IFRS as well. Nevertheless, what's done is done, and Canada has chosen to continue with its principles-based approach to accounting standards.

The major factor needed to make principles work is trust. In other words, broad accounting concepts are laid out for executives to follow, with the hope that their moral senses guide them through all the resultant grey areas and slippery slopes.

__________________

PRINCIPLES-BASED

STANDARDS RELIES

ON ENFORCEMENT
__________________
Not surprisingly, not everyone proves to be so trustworthy, and disputes naturally arise between executives and investors who routinely have conflicting objectives. Investors of course have little recourse when they claim foul. Executives don't need to break accounting rules to manipulate markets in Canada.

They simply need to bend accounting principles that are pliable by design.

Thus, a major piece of investor protection necessary in any country that follows principles-based accounting is a securities commission that will punish companies for steering offside when it comes to interpreting vague accounting principles. Unfortunately, we don't have that level of enforcement in Canada.

In an ironic twist, Canada's securities regulators also claim to follow a principles-based approach, the major advantage of which is usually cost savings (whether in accounting or securities regulation). The push for lower costs always comes from the companies themselves. Corporations are allowed to cut corners when it comes to compliance costs, and the accountants and regulators hope that the downside of such is manageable.

With the accountants and regulators each following the same head-in-the-sand approach, they actually end up mitigating each other's downside. The accountants placate their clients by not setting many rules and keeping accounting costs down. Meanwhile, without concrete accounting rules in place and by not questioning the lack of standards, regulators can't be accused of letting companies violate the would-be rules. They thus satiate corporate cost cutters by not spending money on what would be futile enforcement efforts.

It's quite a convenient quid pro quo arrangement when you think about it. Basically, the securities regulators trust the accountants to trust the executives to not screw over the shareholders who are placing their trust in the regulators in the first place.

Companies may end up saving money on compliance costs by following IFRS, but who knows how much of that will get diverted to executive pockets via ill-conceived bonus structures defined by the same vague accounting rules. Therefore, it just won't matter what accounting standards Canadian companies follow if the regulatory enforcement isn't there for investors to trust the numbers in the end.

-Al Rosen is a forensic accountant at Accountability Research Corp., an independent equity research firm.

alrosen@accountabilityresearch.com

© National Post 2007
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from www.canadianfundwatch.com

Postby admin » Wed Aug 01, 2007 5:10 pm

Chartered Accountants Recommend Better Disclosure To Help Income Trust Investors? After about $8 billion in retail investor losses, the virtual demise of the trust sector and more than 3 years of pleading by investor advocates, the CICA proudly announced on July 18th, 2007 a minimal set of recommendations to protect small investors. Shame! Where was the CSA while the misrepresentations were piling up?
http://www.cica.ca/client_asset/documen ... B70D94.pdf and http://www.cica.ca/3/8/7/8/1/index1.shtml
“As a leader in establishing best practices in reporting and disclosure, the CICA is filling this gap in financial reporting that has put investors in income trusts at undue risk. The focus of our guidance is to give investors information to answer two specific questions: Where did the cash come from that funded their cash distributions and, in arriving at the amount available for distribution, has the income trust made the investments necessary to maintain its operations.” - Kevin Dancey, FCA, president and CEO of the CICA. For other fantastic tales visit http://www.ripleys.com/

“It's ugly," declared Al Rosen of forensic accountants Rosen and Associates. "When you needed this [ new CICA trust reporting standards] – and in a tougher form – would have been at least five years ago. To put it out now, and to try to delude seniors, I'm really outraged." Source: L. Wright, New accounting guidelines under fire, Toronto Star, July 19, 2007

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