Accountants now “Breaking Bad”, Creating Synthetic Numbers

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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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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/

[admin]

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).

[admin]

(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).

[admin]

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.

[admin]

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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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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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

[admin]

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

from www.canadianfundwatch.com

[admin]

The New York Times
--------------------------------------------------------------------------------

July 6, 2007
Documents Show KPMG Secretly Met Prosecutors
By LYNNLEY BROWNING
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.”

[urquhart]

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.

© National Post 2006

[admin]

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.

[admin]

March 9, 2006
Bond Is Set at $25 Million in KPMG Tax Shelter Case
By LYNNLEY BROWNING
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."

[admin]

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

[admin]

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