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KPMG and accounting practices

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Postby admin » Fri Jul 06, 2007 6:36 am

The New York Times

July 6, 2007
Documents Show KPMG Secretly Met Prosecutors
When top lawyers for the accounting firm KPMG sat down in secret with federal prosecutors to plead with them not to indict the firm in connection with its work on questionable tax shelters, they faced a life-or-death battle.

“Enron was only $1 billion; this fraud is much bigger,” one of the prosecutors, Justin Weddle, told a senior lawyer for KPMG during a meeting in Manhattan in March 2005, according to recently released notes taken by one of the KPMG lawyers, Joseph Barloon of Skadden Arps Slate Meagher & Flom.

The stakes could not have been higher. An indictment would most likely have meant the firm’s demise, as it did with Enron’s accounting firm, Arthur Andersen, in 2002. KPMG in fact narrowly averted indictment after agreeing to pay a $456 million fine, admit wrongdoing and cooperate with a Justice Department investigation into its former employees, a case that continues to be closely watched by the legal community.

Now Mr. Barloon’s notes of meetings from March through June 2005, which were made public in June in connection with the related criminal trial of 16 former KPMG tax employees, provide a rare and detailed look inside the closed-door process of those dealings.

“We almost never get a front-row seat to a negotiation between a major multinational company and the United States government,” said Stephanie Martz, director of the White Collar Crime Project.

The previously unseen notes convey the twists and turns of a legal drama, for sure — but for some criminal defense lawyers, their language bolsters the contention that the prosecution of KPMG was particularly zealous.

KPMG fulfilled a two-year deferred prosecution agreement with the government last December and avoided criminal charges, but the effects of its ordeal continue.

The handling of the case has significant implications for the prosecution of its former employees, as well as for a criminal case against Deutsche Bank, which is under federal investigation into its tax shelter work. No charges have been filed against it.

The federal judge overseeing the prosecution of the former KPMG employees on criminal tax shelter charges has said that the government was coercive and violated the constitutional rights of the defendants by pressing KPMG to cut off payment of their legal fees as a condition of avoiding indictment itself.

But to other legal observers, the notes of the discussions also highlight the gray areas between coercion and cooperation that typify corporate criminal investigations.

“There’s a lot of posturing going on on both sides,” said Peter Henning, a former lawyer in the Justice Department’s criminal fraud division, after reviewing the notes. “The government was threatening to put KPMG out of business, but I don’t think they were serious.”

The first meeting between KPMG and the prosecution described in the notes took place on March 2, 2005, at the Manhattan office of federal prosecutors for the Southern District of New York.

At that time, the government was furious with KPMG. The firm had effectively withheld information from Congressional and Internal Revenue Service investigators who were scrutinizing tax shelters; it had earlier resisted government efforts to compel it to turn over documents.

Mr. Barloon, the lawyer for KPMG who took the notes, wrote that David Kelley, the lead prosecutor, described the meeting as “a settlement discussion,” saying early on that “KPMG is in a grave situation.”

Mr. Kelley had successfully prosecuted Martha Stewart and Bernard Ebbers of WorldCom. Now he had his sights on KPMG.

Robert Bennett, a top criminal defense lawyer for Skadden Arps who represented KPMG, made an argument he would repeat to prosecutors over the next several months: that bringing charges against the firm or even deferring charges through a deferred-prosecution agreement would create “a death spiral” for KPMG and the American economy.

When another federal prosecutor, Shirah Neiman, asked Eugene O’Kelly, the KPMG chairman at the time, how much the firm was prepared to pay as a fine, Mr. O’Kelly said KPMG had set aside $100 million, or $40,000 of each partner’s average $570,000 annual salary. Mr. O’Kelly then outlined a proposal, short on details, in which KPMG would “acknowledge wrongdoing by former partners,” pay an unspecified fine, restrict its tax practice and cooperate with investigators.

The prosecution left the room for 10 minutes and returned unimpressed. Mr. Kelley, the lead prosecutor, said that he was concerned that a previous change at KPMG, including a shake-up of its top ranks, “doesn’t scrub the culture” and “is more cosmetic than substantive.”

“You keep using the word ‘acknowledge,’ ” Mr. Kelley said. “I don’t like acknowledge, I like admission of guilt.”

Mr. Kelley, who joined a private law firm, Cahill Gordon & Reindel in September 2005, said in a brief telephone interview that “I wouldn’t comment on any of those discussions, but recognize that there is no one in the room taking verbatim transcripts of my discussion, and consequently it would be subject to their own interpretation.”

Mr. Bennett declined comment. Mr. Barloon did not return phone calls seeking comment.

On March 18, KPMG lawyers sat down before prosecutors with their own statement of facts. At the meeting, Mr. Kelley was unimpressed, saying, according to Mr. Barloon’s notes, “you look on the sword but don’t fall on the sword.” Ms. Neiman criticized it as full of “appalling euphemisms” and as “soft and mushy.”

There was a reason for the language. Mr. Bennett, the top Skadden lawyer, said during the meeting that “we did not know all the facts behind any possible wrongdoing because we did not conduct an internal investigation.” The government, concerned about KPMG’s actions in the past, had pressed KPMG not to conduct its own internal inquiry.

Two days later, on March 22, 2005, Mr. Barloon, the Skadden lawyer for KPMG, met with Mr. Weddle.

“I explained that we had modeled our statement on the statements in other agreements,” Mr. Barloon’s notes say, adding, “he wasn’t expecting an admission of guilt, was he?” Mr. Barloon’s notes cite Mr. Weddle as saying, “If you don’t want to draw inferences and make a strong statement, the government will do it for you. It’s called an indictment.”

On March 19, 2005, Joseph Loonan, an internal KPMG lawyer, sent an e-mail message to Mr. Barloon, the Skadden lawyer, saying that the statement of facts that prosecutors wanted KPMG to use as its admission “is not of facts but of conclusions based on some facts, distortions of facts and adverse inferences.”

Calling the proposed statement “false, misleading and unsupportable,” Mr. Loonan urged a strategy of fighting back and cited a trademark line by the singer and songwriter Kris Kristofferson, “Freedom’s just another word for nothing left to lose.”

Ms. Martz, who has criticized what she calls government coerciveness in the case, said that “it remains shocking to me that the Southern District would basically push a statement of fact down KPMG’s throat without the company knowing itself whether everything in it is accurate.”

By April, the situation had gotten worse for KPMG. In an April 26, 2005, meeting with KPMG lawyers, Mr. Kelley now argued that “in the big accounting fraud cases where they play with the books, they are doing a legitimate service wrongly,” according to Mr. Barloon’s notes. “Here this is quite different because the very service being provided was corrupt and criminal.”

A spokeswoman for the Southern District of New York declined to comment yesterday on the notes. A KPMG spokeswoman would say only that “KPMG reached an agreement with the government nearly two years ago to resolve this matter.”

On June 13, 2005, KPMG lawyers and executives met with the deputy attorney general, James B. Comey, and federal prosecutors. It was a highly unusual meeting, Mr. Comey said, according to the notes, adding that he had never met with outside lawyers for a firm facing indictment.

Mr. Barloon’s notes of that meeting show that Mr. Bennett began by quietly but intensely asking Mr. Comey not to indict KPMG. “If we go under, that will disrupt not only KPMG clients but also the national economy,” Mr. Bennett argued.

Mr. Comey countered that the wrongdoing at KPMG “went everywhere — up, down, sideways — at least in the tax business,” and asked Mr. Bennett if the firm had considering pleading guilty and spinning off its tax practice. Mr. Bennett said that the firm had considered but rejected such an idea.

Rod Rosenstein, the deputy assistant attorney general, who was at the meeting, asked whether the Justice Department was “setting a precedent that we can’t prosecute somebody if they come and clean everything up.”

But earlier in the meeting, Mr. Bennett said that “what was really precedent-setting about the case was the conditioning of the payment of legal fees on cooperation. We said we’d pressure — although we didn’t use that word — our employees to cooperate.”

The notes quote him later as saying “what played out” was “a level of cooperation that is rarely done.”
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Accounting Standards Board fails Canada?

Postby urquhart » Wed Jul 12, 2006 9:09 am

Auditors must be held to account
Should be liable when they approve shoddy statements

Al Rosen
Financial Post

Wednesday, July 12, 2006

It's a waste of time to talk about the enforcement merits of a national securities commission, unless our federal politicians are also willing to completely revamp the way in which financial reporting standards are set in Canada.

The favourite tool used by Canadian fraud artists to cover up their scams is undoubtedly the audited financial statement. It's like having the police write a letter of recommendation for a charity scam before the culprit goes knocking on doors. People tend to trust the police, and for some reason, they still erroneously believe that a financial statement audit is worth more than the paper it's written on.

I've said this before and I'll say it again: Financial statement audits are worthless to investors. You cannot sue an auditor for approving misleading or fraudulent annual financial statements in Canada. Audits are simply a risk-free revenue stream for the auditing oligopoly, guaranteed by federal legislation, and cemented into place by a Supreme Court of Canada decision that effectively endorses widespread auditor negligence.

That is why a national regulator will not be any more effective at prosecuting financial statement frauds than the sum of the current work of the provincial commissions, which, by the way, is close to nothing.

Sure, the occasional penny-ante crook or insider trading scam is dealt with by the commissions. But, the problem is that the current commissions couldn't care less about prosecuting, or even correcting, misleading financial reporting. It's not that most accounting scams are over the heads of the provincial commissions. Rather, there is, again, this belief that audited statements should not be questioned by securities regulators. As a result, they are missing more than 95% of the action when it comes to capital markets fraud.

The regulators seem incapable of believing that audited statements can be seriously misleading to investors, or that accounting rules have been deliberately weakened by auditors over the years to diminish their liability to investors, and to protect their revenue oligopoly.

Cooking the books is the forgotten fraud of choice when it comes to the minds of our federal politicians. Federal Finance Minister Jim Flaherty recently remarked about the need for a national securities commission in a speech to the Halifax Chamber of Commerce. After lengthy remarks about the benefits of lower costs and greater opportunities, he gave a passing nod to the prospect of improved enforcement.

However, he mentioned nothing of accounting, and seemed mostly focused on money laundering. Nor could he bring himself to mention Nortel, YBM Magnex, Atlas Cold Storage or the deceptive yield calculations used to market dozens of now-failing income trusts. The closest reference was to Enron, which was essentially downplayed as a largely isolated U.S. occurrence.

How is it that Nortel's auditors have never been asked to explain the repeated financial restatements at the company?

A $3-billion tentative deal was recently reached with former shareholders of Nortel to settle the dispute. The auditors paid nothing in restitution, but continue to collect fees from the company.

How is it that after nine years, our politicians have not acted to legislatively correct the judicial inequity established when the Supreme Court of Canada decided that auditors could sign misleading financial statements without risk of prosecution?

And how is it that the chairman of the Canadian Accounting Standards Board can say that income trust yields are "baffling," "drivel," and an inappropriate overstatement of return on investment -- and yet -- neither the auditors, nor the securities commissions are doing anything to correct the problem?

In fact, the only group doing anything is the Canadian Association of Income Funds, but they are funded by none other than your neighbourhood income trusts and their underwriters. Great -- no conflict there.

In the United States, such a problem would likely be handled by the SEC, which has the power to set its own accounting rules, and can even supersede the independent U.S. accounting rule-setting board. The notion of an SEC-style regulator setting accounting standards in Canada is ideal. But, I tend to agree with Purdy Crawford, who believes that a national securities commission would be limited to merely providing accounting input to our deeply-conflicted, legislatively protected auditors. In effect, little would change.

That is why it is incumbent on our federal politicians to effect change from the bottom up. Only by taking power away from the auditors to set their own self-serving rules and self-limiting agendas, can investors hope to see some accountability return to accounting in this country.

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

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Postby admin » Thu May 04, 2006 9:07 am

attorneys for Brian Mallard have gone to court to try and block an Alberta Institute of Chartered Accountants investigation into potential conflict of interest by KPMG. What interest they have in protecting KPMG is not clear since KPMG has its own legal department.

Allegations were made that KPMG was acting as custodian of Kent Shirley evidence of allegations against Brian Mallard and Assante, while at the same time allegedly having a business relationship with either Assante or Brian Mallard.

This is the third attempt by Mr Mallard's lawyers to silence and quiet any and all investigation related to the Kent SHirley case. Mr. Mallrd and Assante have gone their separate ways recently.
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Postby admin » Thu Mar 09, 2006 6:14 pm

March 9, 2006
Bond Is Set at $25 Million in KPMG Tax Shelter Case
A federal judge granted bail yesterday to a former KPMG partner, David Greenberg, who is awaiting trial for selling questionable tax shelters, even as the judge blasted him over what he called secret partnerships full of ill-gotten gains.

Judge Lewis A. Kaplan of Federal District Court in Manhattan, who first denied bail to Mr. Greenberg after he was indicted in October, citing concerns that he would flee the country, attached unusually severe strings to the release.

Mr. Greenberg is among 19 people, including 17 former KPMG professionals, an outside lawyer and an investment banker, who face federal fraud and conspiracy charges in creating and selling bogus tax shelters. The shelters, sold to hundreds of investors from the late 1990's through recent years, permitted wealthy individuals and in some cases corporations to escape paying billions of dollars in taxes. All 19 have pleaded not guilty.

Mr. Greenberg, who faces 25 years or more in prison if convicted, must post a $25 million bond backed by the entire personal assets of his immediate family, including those of his former wife, father and children. Mr. Greenberg must also surrender his passport, wear an electronic monitoring bracelet, move to Manhattan from California and remain in New York until his trial begins in September. The $25 million bond will be financed by his personal assets and guaranteed by $20 million in real estate from his family.

Judge Kaplan said that under the terms of Mr. Greenberg's release, if he flees the country, "his ex-wife, his father and his children will be financially ruined and stripped of substantially every asset they have."

Mr. Greenberg's lawyer, Richard Strassberg, declined to comment on whether the family members would be able to meet the terms of bail.

Mr. Greenberg, among the most hard-charging and highest-earning members of the KPMG group, headed a tax practice called Stratecon out of KPMG's Los Angeles office that sold aggressive shelters in the late 1990's. KPMG itself avoided criminal indictment in August by reaching a $456 million deferred prosecution agreement.

Mr. Greenberg, the only one of the 19 to be held in jail, appeared in court yesterday unshaven and in blue prison scrubs. He occasionally smiled at family members, including a young daughter, his fiancée, his father and his sister. The daughter wept through the proceedings. His fiancée briefly filed her nails.

Kevin M. Downing, a special assistant United States attorney, argued yesterday that Mr. Greenberg still posed a flight risk. He also introduced evidence asserting that Mr. Greenberg had formed a web of secret partnerships with another KPMG partner, Dale Alfonso, to improperly hide income received through selling questionable tax shelters, mainly ones called S.O.S., or short options strategy.

The partnerships, with names like GG Capital and FP4, were managed by the Goddard law firm in Irvine, Calif., and were run through accounts at Deutsche Bank. The bank is among those being investigated as part of a widening inquiry into the tax shelter industry.

Prosecutors said after the hearing that Goddard's principal lawyer, William Goddard, might be indicted and that the firm had improperly hidden away 20 boxes of KPMG tax shelter documents. They said that Mr. Goddard has been in Portugal since Mr. Greenberg was indicted.

A call to the Los Angeles lawyer representing Mr. Goddard, John B. Quinn, was not returned yesterday.

Judge Kaplan criticized Mr. Greenberg for forging the signature of his former wife, Laura Adams, and his father, Harry Greenberg, on a partnership, Laura Adams L.L.C., to which Mr. Greenberg secretly transferred much of his wealth from other partnerships. Prosecutors have said Mr. Greenberg planned to use the money in the Laura Adams partnership, at least $15 million, to finance a life as a fugitive abroad.

"I continue to have a good deal of concern that I'm playing poker here," the judge said in granting bail. "This is an extremely skilled individual who has spent his whole life trying to figure out how to hide the pea."
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Postby admin » Wed Mar 01, 2006 11:56 am

Who's accountable?
John Gray
Canadian Business Online, February 28, 2006
The Canadian Public Accountability Board — the industry group charged with watching over the accountants who audit Canada's public companies — is wrought with conflicts of interest, lacks transparency and is vulnerable to pressure from the very industry it is supposed to regulate. At least, that's the opinion of the authors of a report recently published earlier by the Vancouver-based Fraser Institute. The best way to rectify the situation, according to the authors, is for the Canadian government to take a more active hand in overseeing the way accountants do their job.

Calling on the government to take a more aggressive role in watching over accountants is nothing new; there has been a fair bit of it since the collapse of Enron, Arthur Anderson and the passage of Sarbanes Oxley legislation in the U.S. But the fact the latest recommendations are coming from the normally laissez-faire Fraser Institute is enough to make you think twice.

"Striking the appropriate balance among market-based, legal and self-regulatory mechanisms is a delicate task," say the authors, law professors Adam Pritchard of the University of Michigan and and Poonam Puri of Osgoode Hall in Toronto. Neither Canada, nor the U.S. has managed that balance well, according to their report, "The Regulation of Public Auditing in Canada and the United States: Self-Regulation or Government Regulation."

The Canadian Public Accountability Board (CPAB) is currently funded by the accounting industry and provincial securities regulators, and is sometimes considered too easy on firms, the report maintains. Its U.S. counterpart, the Public Company Accounting Oversight Board (PCAOB), is also funded with a mix of fees and government funding, but is closely supervised by the U.S. Securities and Exchange Commission (SEC). The PCAOB is often accused of being too rigorous and costly. Both groups were established as a way to restore investor confidence in public accounting following the scandals that destroyed companies like Enron and WorldCom.

The bodies in Canada and the U.S. both certify accounting firms that audit the books of public companies. Both also perform regular audits on accounting firms, checking the quality of their work and looking to ensure there are no ethical breaches among accountants performing audits. Both groups have the ability to discipline firms for any infractions found, levy fines, or ultimately to bar offending firms from auditing the books of public companies. However, while the PCAOB makes its findings public in often scathing reports available on the group's Web site, the CPAB merely summarizes its findings and will only name offending accounting firms if they refuse to comply with its recommendations.

The Fraser Institute study compared the approaches of the two auditing watchdogs and proposes changes that its authors say will increase the oversight of Canada's accountants without imposing the burdensome costs associated with the U.S. regime. The seven recommendations include changing the structure of the CPAB to minimize the influence of accounting firms; increasing the oversight of smaller accounting firms; and looking at increasing the independence of CPAB directors — many of whom currently sit on the boards of public companies subject to audits.

The most striking of the recommendations is to give the CPAB statutory authority to oversee Canada's accountants. That increased power would include the ability to subpoena documents, compel full cooperation from accounting firms, and protect the CPAB and its staff from legal retaliation from accounting firms. Those are powers the PCAOB already has, since the U.S. accounting body is essentially run as an arm of the SEC.

If the findings of the CPAB's own spot checks are any indication, the group could certainly use some additional powers. The three reports already issued by the body that list the findings of its auditing spot checks have uncovered a litany of allegedly questionable practices by Canadian accounting firms. In the most recent report issued in December, the CPAB found that five of the 87 audits it examined were so poorly handled they had to be redone. These were not audits done by small accounting firms, but rather by Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP — four of Canada's largest accounting firms.

More disturbing is the lengths that some accounting firms went to try to stymie the audit of their work. Many firms, citing "legal privilege," removed memos, Power Point presentations and other documents from their files, claiming the material was irrelevant to the work of the CPAB. Not exactly the kind of behavior that instills shareholder confidence.

There were other problems, as well. In several cases, the CPAB uncovered instances where accounting firm partners failed to disclose their personal financial holdings — something that could put them in a clear conflict of interest. At one firm, the CPAB found partners who owned securities issued by 49 of the firm's clients.

The CPAB says the Fraser recommendations are misinformed-and assures investors that accounting firms do not hold undue influence over the group. However, the CPAB does agree with one recommendation: that it needs more government backing to do its job. "It is necessary for CPAB to have a sound statutory basis for its activity, including statutory immunity," said CPAB board chairman Gordon Thiessen in a statement reacting to the release of the Fraser study.

That's not so easy in Canada. Regulation of professional groups is a provincial responsibility, and without a national securities regulator the CPAB needs to negotiate powers with each individual province and territory.

In the meantime, there is nothing stopping the CPAB from implementing at least one of the report's recommendations that could actually help: it could name the accounting firms that violate the CPAB rules of conduct. "Auditors are in the integrity business," the Fraser Institute report states. "Essentially, auditors earn their living by renting their reputation." Unfortunately, the CPAB's own reports show that too many Canadian accounting firms may be renting those reputations out on the cheap.

John Gray is a senior writer with Canadian Business and covers a wide variety of subjects including corporate governance, the media and marketing. Prior to joining the magazine in April 2000, John lived and worked in New York covering the US financial markets for Knight Ridder Financial News
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Postby admin » Mon Jan 30, 2006 12:05 am

69. The irony is rich. Shareholders, alas, are not.
In June, H&R Block announces a review of its recent financial statements, estimating it will find discrepancies in its favor of about $19 million. Two months later it reveals that the review found $77 million in errors -- in the other direction. The company explains that it had "insufficient resources" to identify and report complex transactions in its corporate tax accounting.

http://money.cnn.com/magazines/business ... page6.html
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Postby Dell » Tue Jan 03, 2006 3:13 pm

Accounting firm PricewaterhouseCoopers LLP agreed to settle a class-action lawsuit over how it audited two collapsed mutual funds.

PricewaterhouseCoopers was the accounting firm for Milwaukee-based Heartland Advisors Inc. in 2000 when the investment firm marked down the value of the two funds. The U.S. Securities and Exchange Commission has estimated fund shareholders lost about $80 million. (AP)
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Postby Donald » Sat Dec 31, 2005 9:01 am

The founder of the Pizza Pizza restaurant chain has quietly given $20-million to charity, delivering the news in a year-end filing that showed the donation knocked his private company into a net loss. Michael Overs set up the Tesari Charitable Foundation in September but there was no announcement because the 66-year-old Toronto resident is "a very private person," Curt Feltner, chief financial officer of Pizza Pizza Ltd., said yesterday. Pizza Pizza Ltd., the operating company of Pizza Pizza Royalty Income Fund, said yesterday it had a loss of $7-million in its financial year ended Oct. 2. That compared with profit of $2.2-million in the prior year. Yesterday's report was the first public filing by Pizza Pizza Ltd., necessitated by the $179.5-million spinoff in July of the income fund. CP
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Postby Dorcy » Fri Dec 30, 2005 3:40 pm

Accounting manipulation excuse of the year

It appears PizzaPizza has set a new low in Trust land. It managed to dump its losses onto investors while increasing its sales.

Net earnings (loss) for the period 05$ (6,979) 04$ 2,232

Same store sales (not including inflation) at Pizza Pizza restaurants grew by 6% for the quarter ended September 30, 2005, over the same quarter in 2004.

Paul Waldie of ROBtv shillfully explains PP lost money because the founder created a (charitable) "foundation" (with shareholders money without telling them it appears).
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Postby Donald » Sat Dec 24, 2005 8:20 pm

"Merrill Lynch's U.S. Strategist Richard Bernstein did the math on 1,600 stocks and found total earnings for their third calendar quarter grew 22 percent on a GAAP basis, but 31 percent on a pro forma basis."

"Although the newer regulation is laudable, stocks trade on press releases and conference calls, and not on the formal financial statements that are released weeks after the announcement and call," he wrote. "We think regulation regarding company press releases and conference calls is sorely needed because of the significant deterioration in the quality of announced earnings."

He calls for an end to pro forma earnings, saying they have made U.S. corporate earnings perhaps the most opaque they've been in his 23 years in the business.

"Given the growing competitiveness of global financial markets, it is inconceivable to us why they (regulators) continue to allow U.S. financial reporting to become increasingly opaque," he wrote. (AP)
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Postby Donald » Tue Dec 20, 2005 7:35 am

Auditing lapses uncovered
Regulator finds 'serious deficiencies,' failure of senior staff to follow independence rules

Duncan Mavin, Financial Post
December 20, 2005

Canada's accounting regulator has found "serious deficiencies" in audits conducted by the country's four largest audit firms, as well as an "unacceptable" failure of more than half of the senior managers and partners in those firms to comply with their own auditor independence rules.

The authors of the latest report by the Canadian Public Accountancy Board -- known as CPAB -- also noted that their review was unfairly restricted because the auditors refused to give them appropriate access to their files, citing confidentiality and legal concerns.

"While CPAB understands concerns about legal privilege, any restrictions on its reviews are contrary to the objectives of CPAB," said David Scott, CPAB's chief executive

"The board is seeking statutory authority to have access to privileged information without negating that privilege," he said.

CPAB looked at 87 audit files of Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP, which together audit about two-thirds of Canada's public companies and other reporting issuers that represent more than 90% of the country's stock market capitalization.

Despite the restrictions on their work, CPAB deemed five audit files had fundamental weaknesses and were not in accordance with generally accepted auditing standards.

The files, for example, showed the auditors failed to follow the advice of their own internal experts, failed to complete the steps they had identified in planning their audits, and left "an overall impression of poor supervision and review."

The audit firms have been told to go back to their clients to complete their work, as well as to conduct internal reviews of other work supervised by the senior management responsible for the weak files.

Among the other 82 files reviewed, CPAB found a number in which the quality of work was "below standard," even though the overall files was adequate. It cited the failure to track accounting errors properly or to report them to their clients, the performance of new anti-fraud measures in only "a cursory manner," if at all, and other procedures that were "so superficial as to be of little evidential value."

"While high-quality audit work was evident throughout our inspections," said Mr. Scott, "we were nevertheless disappointed that our inspection work identified such a large number of cases where engagement teams did not fully comply with an aspect of professional standards, or with the firms' own policies and procedures."

CPAB also found that more than 50% of senior staff in the top firms violated their own independence policies and procedures, despite major changes to the profession's independence standards in 2004 to ensure auditors did not have conflicts of interest by owning stocks in firms they audited.

All the firms have implemented procedures to track the private investment holdings of their staff.

But CPAB found several cases of senior individuals failing to report all of their personal investments, including cases where senior auditors had investments in securities that are specifically prohibited by the firm they work for. The report found that at one firm alone there were 49 clients whose securities were held by partners.

Each of the four firms has received a specific report from CPAB, and they each now have 180 days to respond to the recommendations included in that report.

If a firm fails to comply with the findings of the report, CPAB can make its specific findings public, notify securities regulators and the audit committees at a firm's clients, or even, in the most extreme cases, prohibit the firm from performing audits in Canada.
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Postby Dell » Sat Dec 17, 2005 6:53 pm

Even sell side analysts admit accounting fraud is widespread.

"People often talk about how earnings quality has improved a whole lot," Bianco said. "And it has improved from 2001 and 2002, but that's not saying much."

Distrust of corporate accounting has kept stock prices lower than they would be otherwise, he said. "If investors don't believe the earnings quality is good, they're going to put a lower multiple on the earnings, because they don't believe the accounting."

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Postby admin » Tue Aug 30, 2005 8:31 am

Eight former KPMG executives indicted
Firm admits to helping wealthy clients fraudulently avoid billions in taxes
Tuesday, August 30, 2005 Page B9
Associated Press

NEW YORK -- Eight former executives of KPMG LLP were indicted yesterday as the Big Four accounting firm admitted it had set up fraudulent shelters to help rich clients dodge billions of dollars in taxes.
The firm, mindful of how criminal charges wrecked competitor Arthur Andersen in an Enron-related accounting scandal, avoided an indictment but agreed to pay $456-million (U.S.) in penalties.
The U.S. Department of Justice called it the largest criminal tax case ever filed and said the KPMG scam allowed the firm's clients to avoid paying $2.5-billion in taxes.
Internal Revenue Service commissioner Mark Everson said the firm's conduct had exceeded "clever lawyering and accounting" and amounted to plain theft from the people.

"Accountants and attorneys should be pillars of our systems of taxation, not the architects of its circumvention," he told reporters in Washington, D.C.
The eight former executives, most of them onetime KPMG tax partners, were indicted in New York along with an outside lawyer who had worked with the firm on a charge of conspiring to defraud the IRS.
KPMG admitted it helped "high-net-worth" clients evade billions of dollars in capital gains and income taxes by developing and marketing the tax shelters and concealing them from the IRS.
The $456-million fine includes $128-million in forfeited fees that KPMG earned by selling the fraudulent tax shelters.
Under the scheme, KPMG marketed the tax shelters to clients who made more than $10-million in 1997 and more than $20-million a year from 1998 to 2000, according to the indictment of the nine men.
Rather than paying tax on income or capital gains, the client could choose an amount of purported tax losses to offset the gains, paying KPMG and law firms as much as 7 per cent of that amount in fees. The firm then designed tax shelters disguised as legitimate investments, providing the clients fraudulent "opinion letters" suggesting the tax shelter losses would withstand IRS scrutiny, the indictment said.
Among those charged was Jeffrey Stein, who was named deputy chairman of KPMG in April, 2002. His lawyer did not immediately return a call for comment.
Another was Jeffrey Eischeid, whose lawyer, Stanley Arkin, criticized the government for bringing the case.
"The indictment of Jeffrey Eischeid and certain of his partners represents a serious abuse of federal prosecutorial discretion and as well a profound betrayal of its partners by KPMG," Mr. Arkin said.
There was no immediate word on when the men would appear in court. Federal prosecutors and KPMG engaged in what is known as a deferred prosecution agreement, meaning the prosecutors will not seek a grand jury indictment of the firm as long as it commits no further wrongdoing.
KPMG chairman and chief executive officer Timothy Flynn noted that the men indicted in the scheme are no longer with the company.
KPMG must submit to three years of outside monitoring by Richard Breeden, a former Securities and Exchange Commission chairman who also has served as a court-appointed monitor for MCI, the post-bankruptcy incarnation of WorldCom Inc.
KPMG was eager to avoid a criminal indictment. Arthur Andersen was decimated after prosecutors charged it with obstruction of justice, reducing accounting's Big Five firms to a Big Four.
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Postby admin » Sun Aug 28, 2005 9:58 pm

New York Times

August 28, 2005
How an Accounting Firm Went From Resistance to Resignation
The weather was balmy in Orlando, Fla., when partners of the accounting firm KPMG gathered in November 2003 for their annual meeting, but hundreds were glued to television sets.

They were watching C-Span's coverage of a Senate subcommittee hearing into four questionable tax shelters created and sold by KPMG that earned the firm $124 million in fees, but cost the Treasury, according to Senate investigators, at least $1.4 billion in unpaid taxes. Confronted with KPMG e-mail messages and documents that showed tax executives aggressively pushing the shelters to clients, KPMG executives at the hearing were evasive. One irritated senator asked a KPMG senior executive to "try an honest answer."

A current senior executive said later that for the partners, "it was like watching your own house burn down."

Three weeks after the hearings, KPMG's chief executive, Eugene D. O'Kelly, called a meeting of the firm's 15-member board, and there, according to the senior executive, he announced that KPMG was taking "a new direction."

That new direction paved the way for a settlement with the Justice Department over the creation and sale of the arcane tax shelters, which the Internal Revenue Service contends helped wealthy investors illegally hide billions of dollars in taxable income. The agreement, which is expected to be announced tomorrow, calls for the firm to pay $456 million and accept an outside monitor of its operations. Former partners separately may face criminal charges.

The December 2003 board meeting was the turning point for the firm in its seven-year battle with the government. After years of fiercely resisting questions from the I.R.S. and Justice Department about its tax shelter business, KPMG was going to cooperate with the government's investigation. KPMG had realized that its defiance was threatening its existence.

KPMG was not alone in creating and marketing questionable tax shelters in the 1990's. The story of how KPMG got in the government's cross hairs and how it ultimately dodged a bullet is another illustration of how corporate dealings with regulators and investigators have changed significantly since the collapse of Enron in 2001.

Former partners and managers and current executives who were interviewed about the company's recent history were not willing to be named because they feared angering prosecutors. A government official spoke about the case on the condition that he not be named because the investigation is continuing.

The smallest of the remaining Big Four accounting firms, KPMG was a latecomer to the tax shelter business. The stock market boom had spawned scores of dot-com millionaires, many of them keen to shield their new riches from taxes. Accounting firms, seeing a more lucrative business than their traditional auditing practice, were eager to help.

As the report of the Senate subcommittee noted in 2003, "dubious tax shelter sales are no longer the province of shady, fly-by-night companies with limited resources." It had become a big business. Nearly every big and midsize accounting firm created "tax products" that usually involved complex swap transactions to create losses on paper that their individual and corporate clients could use to secretly erase taxable income.

Regulators eventually caught on to such schemes, and a number of firms, including Ernst & Young and PricewaterhouseCoopers, settled with the government early on.


"We came to the party late. We drank more, and we stayed longer," said a former member of KPMG's board.

KPMG went full-bore into creating and selling aggressive tax shelters only around 1997, after it held failed merger talks with Ernst & Young, according to a member of KPMG's board at that time.

The talks afforded KPMG the opportunity to analyze Ernst & Young's books in detail, and it was disturbed by what it saw: a major competitor growing at a rapid rate, and making lots of money, by aggressively selling tax shelters, sometimes to KPMG's own audit clients.

KPMG's chief executive at the time, Stephen G. Butler, and other senior executives decided that the firm needed to copy its competitor, the former board member said. Mr. Butler, who retired in mid-2002, did not return calls to his home in Leawood, Kan. A spokesman for KPMG, George Ledwith, declined to respond to any questions.

To ramp up the tax services business, the firm turned in 1998 to the head of its tax department, Jeffrey M. Stein, a charismatic lawyer who thrived on what an e-mail message released by the Senate subcommittee called "ruthless execution."

His acolyte, Richard Rosenthal, who later became chief financial officer, was known within the firm for sending e-mail messages in 18-point red type that said: "You will do this now."

Throughout the late 1990's, Mr. Stein held mandatory weekly conference calls with KPMG's 500 or so tax partners. A former KPMG senior manager who sat in on the calls and objected to Mr. Stein's approach said Mr. Stein would tell anyone who questioned a tax strategy that they were "either on the team or off the team."

Under Mr. Stein, Mr. Rosenthal and others, KPMG built an aggressive marketing machine to sell tax shelters it created, with names like Blips, Flip, Opis and SC2. From the late 1990's, KPMG operated a telemarketing center in Fort Wayne, Ind., that cold-called potential clients, gleaned from public lists of firms and companies.

The tax department, with more than 10,000 partners and employees, became the golden child of KPMG. By 2002, the firm was deriving nearly $1.2 billion of its $3.2 billion in total United States revenues from tax services - by far a greater percentage than any other large firm, according to a 2003 report by the Government Accountability Office.

Mr. Stein and his lawyer, C. Michael Buxton, declined to respond to questions about the firm's practices.

By 1999, KPMG, like most of its competitors, had wound up on the I.R.S.'s radar screen, as anonymous informants began telling I.R.S. auditors about the tax shelter schemes. In 2002, the agency issued dozens of summonses to KPMG asking it to turn over information about certain tax shelters and their investors.

KPMG refused, later releasing only names of some investors. The firm had come from behind to crush the competition and become a major seller of tax shelters. Now it would try to fight off any scrutiny of its tax shelter business.

"What clearly got them into trouble was their hardball approach," said the former senior manager, who cooperated with the investigation.

With a stable of former I.R.S., Treasury and Justice Department officials in its ranks, KPMG thought it could outsmart or outmaneuver the I.R.S., according to the former partner.

"KPMG viewed its conduct as above reproach, in a sense viewing itself as smarter than the I.R.S. and Department of Justice by developing these creative tax shelters," said Peter J. Henning, a professor of criminal law at Wayne State University Law School.

When Ernst & Young agreed in 2003 to settle a civil claim with the I.R.S. and pay a $15 million penalty, Mark A. Weinberger, at the time the vice chairman for tax services at that firm, said that it had two choices in dealing with the government. "We could have chosen fighting and a protracted battle, which would have impacted our clients and us," he said, "or we could have tried to resolve all the issues and get this behind us."

But when KPMG came under scrutiny, it chose to fight. And it did so after the collapses of Enron and WorldCom, at a time when the tide of corporate history was turning decisively in favor of corporate accountability and government regulators.

"It's a very high-risk strategy to start out stonewalling," said John A. Strait, a criminal law professor at the Seattle University School of Law.

For nearly a year, KPMG's then-outside lawyers, King & Spalding and later, Kronish Lieb Weiner & Hellman, filed scores of procedural documents supporting KPMG's assertion that it did not need to turn over the tax shelter documents. They were so effective at resisting the requests that by July 2002, the Justice Department had filed a civil lawsuit against the firm seeking to force it to comply with the I.R.S. summonses.

Then KPMG hit a wall. The Senate subcommittee report, brimming with internal e-mail messages and documents obtained from informants and through subpoenas, portrayed the firm's tax department as a place where questions about the legitimacy of shelters were barely considered, where the fees from such shelters were seen as outweighing the risks and where clients could be coaxed into buying them. The Senate hearing "was the beginning of the end" for KPMG, said the former senior manager.

The first major house-cleaning step came in January 2004, when KPMG announced the retirement of Mr. Stein, by then the No. 2 executive, reassigned Richard Smith, then vice chairman of tax services, and placed a third senior partner, Jeffrey Eischeid, on leave. Mr. Smith was fired earlier this year.

But the changes were not enough.

One month later, in February 2004, the Justice Department convened a grand jury in Manhattan. Despite overtures by its new lawyers, Skadden, Arps, Slate, Meagher & Flom, KPMG could not avert a criminal inquiry.

For one, KPMG was still resisting turning over important documents. In part, KPMG continued to resist because of major divisions within the firm over how to proceed, according to a government official involved with the investigation.

By May 2004, KPMG had so angered a federal judge in Washington over its continued refusal to turn over certain documents that the judge, Thomas F. Hogan, issued an opinion raising the possibility that the firm was obstructing justice.

KPMG needed more help. In March 2005, it hired Sven Erik Holmes, a former federal judge from Tulsa, Okla., as its vice chairman of legal affairs, bringing him in over Claudia L. Taft, KPMG's top inside lawyer. Mr. Holmes set about cleaning house, firing about a dozen partners and effectively taking over the firm's legal department.

Months earlier, Robert S. Bennett of Skadden, Arps had inherited what he told people was "a disaster of a case," with "the I.R.S. like bees" about KPMG. By June, he was pleading with the Justice Department not to indict the firm. He succeeded, but only after the firm made an extraordinary and unusual admission of "unlawful conduct" in the tax shelter business by former partners between 1996 and 2002.

Because of its resistance, KPMG did not have "the luxury of saying to the government, you're pushing us too far," said a person close to the firm, adding later that the agreement "is about survivability."

Jonathan D. Glater contributed reporting for this article.
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Postby admin » Sun Jun 19, 2005 6:04 pm

unfortunate, but not altogther surprising, given the pervasive element of greed over ethics these days

thanks for pointing out this link

those with an interest will follow it
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