Accountants now “Breaking Bad”, Creating Synthetic Numbers

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

Postby admin » Wed Oct 27, 2021 9:23 am

House Hearing: PricewaterhouseCoopers Signed Off on Evergrande’s Books, Which Counted “Unbuilt and Unsold Properties” as Assets

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Pam Martens and Russ Martens: October 27, 2021

In 2012, short seller Citron Research released a 57-page report alleging fraudulent accounting at China Evergrande Group, the now teetering Chinese property development conglomerate that is causing severe anxiety in global markets. After spelling out six specific forms of accounting fraud that it believed to be taking place, the Citron report noted the following: “Meanwhile, Evergrande’s auditor, PricewaterhouseCoopers (Hong Kong office) has continued to provide an unqualified opinion.”

The author of the Citron report, Andrew Left, received a 5-year trading ban in Hong Kong by the Hong Kong Market Misconduct Tribunal over what it alleged was a false report.

On November 30, 2016, GMT Research, an accounting research firm that focuses on Asia, released a report titled: “China Evergrande: Auditors Asleep.” The report found that Evergrande had overcapitalized interest and classified its own commercial premises as an investment property.

Yesterday, those previous charges of accounting irregularities were given new meaning when a specialist from the Congressional Research Service, the research arm of Congress, testified before a House hearing and leveled her own charges.

The hearing was conducted by the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. It was titled: “Taking Stock of China, Inc.: Examining Risks to Investors and the U.S. Posed by Foreign Issuers in U.S. Markets.”

Karen Sutter, a Specialist in Asian Trade and Finance at the Congressional Research Service, told Subcommittee members the following about Evergrande’s accounting:

“Counting unbuilt and unsold properties and interest payments as assets. About 60% of the firm’s assets are unbuilt and unsold properties, and the firm counts loan interest payments as assets. This inflates the firm’s position and increases risks if property values fall…

“Using previously-financed deals as collateral for new loans. This practice allowed the firm to accumulate debt and become leveraged…

“Investing in unrelated sectors beyond the core business. Some Chinese firms use insurance, trust, and wealth management businesses to earn higher returns and invest offshore. The Shenzhen government is investigating Evergrande’s insurance business.

“Use of complex offshore structures tied to the CEO. Evergrande uses overlapping contracts and shareholding to facilitate financial flows that make it difficult to assess liabilities. The CEO and his family reportedly hold a large share of the firm’s offshore debt.”

A report released five days before the hearing by the Congressional Research Service, assessed Evergrande’s debt levels and ability to repay creditors as follows:

“Evergrande owes about $305 billion in debt (2% of China’s GDP). The firm is obligated to repay $124 billion this year—including $19.3 billion in bonds—but may only have 10% of this amount in cash on hand. The firm is said to owe money to 171 domestic banks and 121 financial firms. Off-book liabilities have not been disclosed. As China’s largest issuer of high-yield dollar denominated debt, Evergrande was an attractive investment, despite known risks, because it paid annual interest rates of 7.5% to 14%.”

The Congressional Research Service report noted that the Evergrande situation presents critical questions for Congress, including: “Evergrande’s situation raises questions about the full scope of its liabilities and the potential direct and indirect exposure for U.S. and other firms. The role of U.S. and other underwriters and auditors of Chinese firms also raises questions about whether risks are sufficiently assessed and disclosed to investors.”

Since Evergrande was first listed on the Hong Kong stock exchange in 2009, major Wall Street firms have been among its stock underwriters, including: Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs and UBS. As recently as last October, Credit Suisse, Bank of America, Huatai International and UBS arranged a secondary share offering for Evergrande. Investors will certainly be questioning the caliber of due diligence that was done by the underwriters and their legal counsel.

For almost two decades, China has stonewalled U.S. regulators over access to the work papers of auditors of publicly traded companies that are based in China but listed on U.S. stock exchanges. China has taken the position that the audit work papers hold state secrets and it prohibits audit firms from releasing the documents directly to U.S. regulators.

This past December, Congress finally addressed this critical problem. Both houses of Congress unanimously passed legislation called the Holding Foreign Companies Accountable Act. The legislation requires that the Securities and Exchange Commission (SEC) identify companies that are listed in the U.S. which the Public Company Accounting Oversight Board (PCAOB) cannot “inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.”

The legislation also requires the listed companies to provide documentation showing that they are not owned or controlled by a governmental entity. It also mandates that the SEC prohibit the trading of the company’s stock in the U.S. if its audits cannot be inspected for three consecutive years.

Evergrande’s stock trades in Hong Kong and has lost 84 percent of its value since February. As of early this morning, its bonds are trading at 20 to 30 cents on the dollar.

Related Article:

U.S. Mega Banks Were Sitting on $6.56 Billion of Chinese Education Stocks that China Just Eviscerated
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Sat Jun 05, 2021 1:50 pm ... 32709.html

U.S. SEC ousts head of accounting watchdog, puts rest of board on notice
Chris Prentice and Katanga Johnson
Fri, June 4, 2021, 4:10 PM·2 min read

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FILE PHOTO: The seal of the U.S. Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, D.C.
By Chris Prentice and Katanga Johnson

WASHINGTON (Reuters) -The U.S. Securities and Exchange Commission (SEC) on Friday said it had removed the head of the oversight board that sets standards for audits of public companies and planned to replace the rest of the board in due course.

The SEC said in a statement that it had voted to remove William Duhnke III as chair of the Public Company Accounting Oversight Board (PCAOB), a role he has held since January 2018, effective Friday. The other four members of the board will stay on, but the SEC -- which oversees the accounting watchdog -- is soliciting resumes for those roles.

Duhnke's ouster is a warning shot by the new SEC chair Gary Gensler, who took the helm at the markets regulator in April. The PCAOB, which was created by the 2002 Sarbanes-Oxley Act following major accounting scandals, has long been criticized by Democrats for being toothless.

The PCAOB has also come under criticism by hawks who wanted it to take a tougher stance on Chinese auditors of U.S.-listed Chinese companies which have generally evaded U.S. oversight.

"The PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act," Gensler said in the statement.

Democratic Senator Elizabeth Warren and Independent Senator Bernie Sanders last month pressed the SEC to immediately replace the board, which they said has fallen down on its job of overseeing audit firms meant to keep publicly-traded companies in check.

While the SEC did not disclose the breakdown of the vote, Hester Peirce and Elad Roisman, the Republican members of the five-person commission, said in a statement that Duhnke's ousting established a "troubling precedent."

Former SEC chair Jay Clayton overhauled the PCAOB in 2017, appointing five new members including Duhnke, after the board's staff leaked confidential information to one of the audit firms it oversees.

Duane DesParte, who also joined the board in 2018, will serve as acting chair, the SEC said.

(Reporting by Chris Prentice and Katanga Johnson; Editing by Leslie Adler, Michelle Price and Sonya Hepinstall)
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Thu Jul 30, 2020 6:07 pm ... dium=Email
Today. regional and super-regional banks are telling you that they are very sensitive to changes in the commercial real estate market. So sensitive that the CARES Act – you know, the one that was designed to help families and mom and pop small businesses? – includes a provision to allow them to suspend GAAP accounting and treat troubled debt as deferred, with much more favorable capital treatment.

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Thirteen-year-olds are the meanest people in the world. They terrify me to this day. If I’m on the street on like a Friday at 3PM and I see a group of eighth graders on one side of the street, I will cross to the other side of the street. Because eighth graders will make fun of you, but in an accurate way.

They will get to the thing that you don’t like about you. They don’t even need to look at you for long. They’ll just be like, “Ha ha ha ha ha! Ha ha ha ha ha! Hey, look at that high-waisted man, he got feminine hips!”

And I’m like, “NO! That’s the thing I’m sensitive about!”

Yesterday I read a social media post from Dana Carvey, who played a version of the recently departed Regis Philbin on SNL in the early 90s. Darrell Hammond did a later version that – like many of his impressions – relied a bit more on physical resemblance. Jimmy Fallon once did a version in 2011 that – like all of his impressions – relied more on a late-Millennial audience’s willingness to see his constant breaking as endearing instead of obnoxious. For my money, Carvey’s impression is still the standard.

In later conversations between Dana and Regis, they discussed the “Regis persona” that Philbin had created. He described it as an “exaggerated version of himself.” That made Carvey’s impression an exaggerated version of an exaggerated version of Regis.

When the 2016 Disney film Moana was being cast, the composer of some of its original songs – Lin-Manuel Miranda, of Hamilton fame – sent a draft score and demo tape to the actor who would ultimately voice the senicidal giant crab Tamatoa. Jemaine Clement, that New Zealand actor, later recounted that the demo was a recording of Lin-Manuel doing an impression of Jemaine’s impression of David Bowie. If you listen to the song Shiny from the film, you are listening to Jemaine Clement doing Lin-Manuel doing Jemaine Clement doing David Bowie.

When it comes to the stories we hear and tell, this kind of thing isn’t uncommon.

Sure, sometimes the extremes of what everyone knows everyone knows about a person or thing can be unfair and counterproductive. After all, with as many pixels as we light up on your machines with warnings about narrative abstractions, you won’t find us arguing in favor of applying our exaggerations as proxies. You can’t boil down David Bowie to a singing style in which you create an abnormally large cavity in the central sound-shaping part of your mouth to lengthen every vowel and a staccato approach to every consonant and plosive. You can’t boil down Regis Philbin to going halfway on a Kermit the Frog impression.

Extremes can be misleading.

Extremes can also be revealing. You learn a lot when you learn what thing a person or institution is sensitive about.

The extremes of a global pandemic have revealed a lot about what our political and corporate leaders and institutions are sensitive about.

For months, the Federal Reserve and White House have told anyone paying even the remotest attention that they were very sensitive to the price levels of risky assets, even at the risk of a variety of other considerations that they are theoretically or statutorily required to be sensitive to. Not that any of this is new, of course, but sometimes it’s good to appreciate the small things, like not having to update your priors for the better part of a decade or so.

Today. regional and super-regional banks are telling you that they are very sensitive to changes in the commercial real estate market. So sensitive that the CARES Act – you know, the one that was designed to help families and mom and pop small businesses? – includes a provision to allow them to suspend GAAP accounting and treat troubled debt as deferred, with much more favorable capital treatment. We’ve written more about this for our ET Pro subscribers, and will have a lot more to say about it.

Regulators and policymakers have told you that they are very sensitive to permitting the loss of equity value in certain industries and utterly indifferent to it in others. Remember when certain corners of the investment community told us that it was unfair and unjust that owners of airline stocks might permanently lose value because of government-instituted lockdowns, and then when those restrictions largely relaxed we were still operating at just a little over a 20% of normal capacity?

Even now, after most COVID-19-related fears have settled into the familiar ennui of 2020, investors are telling you that they are still very sensitive to the perception of a company’s ability to survive and thrive in an extended stay-at-home world. So sensitive, in fact, that the manifestation of beta – systematic risk – today looks more like beta exposure to that ability than to a traditionally accepted expression of market risk. It is a fascinating phenomenon that Arik Ben Dor’s quant equity research team at Barclays wrote about yesterday. We don’t have permission to post it here, but institutional investors should reach out to your Barclays rep and ask for “Betas Reshaped: The COVID-19 Effect”.

Some of the lessons have been business lessons, too. Asset managers told you they were very economically sensitive to loss in management fee revenue associated with even brief declines in risky asset prices. Hedge fund managers told you with their pricing that they are very sensitive to all of your moves to allocate away toward other alternative investment vehicles.

It has been a busy few months.

In the end, COVID-19 too, shall pass. Like all extremes, treating all of this as a proxy for the world we will live in for the rest of our lives will be misleading. Yes, some things we thought could never change will be permanently different. And some things which we thought might be permanent will be only temporary. But in the midst of that, a lot of the institutions that should matter to you as an investor and citizen told you what they were sensitive about.

As the financial world emerges from one of the strangest periods in most of our careers, we cannot forget those lessons.
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Fri Feb 07, 2020 9:03 pm

Oh, those bankruptcy trustees, closely related to accounting firms at times, and seen so often to be involved in finding secret connections, and hidden ways to profit from some rather large financial failures:

For example, see the following:

Nortel, Sears Canada, . . .

Every exempt market real estate investment failure in Canada, seems to go through the same judge (in Calgary cases) and is assigned to the same trustee, and the same financial magic seems to drain the company and then pass it to the same folks at pennies on the dollar....(at least that is the story I hear in many such cases)

From: "Sikka, Prem" <>
Date: February 7, 2020 at 5:34:37 PM EST
To: "Sikka, Prem" <>

Subject: Regulatory Corruption
Dear All,

This article may interest you

“The insolvency regulator is in bed with the industry”; ... -industry/

As always there is more on the AABA website ( )


Prem Sikka




AABA Website:

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Prof Prem Sikka: The insolvency regulator is in bed with the industry
Prem Sikka
4 February, 2020 (4 days ago)
Workers and taxpayer lose out as usual.

For decades, accounting firms have been delivering dud audits, but have collected millions of pounds in fees.

In pursuit of fees they have shown little respect for the rules. Ineffective regulators levy puny fines, which have become just another cost of doing business and have made little, if any, difference to the quality of audits.

The same woes have long been evident in the insolvency industry, another state guaranteed market reserved for lawyers and accountants belonging to a select few accountancy trade associations.

The latest evidence comes from Deloitte’s handling of the insolvency of Comet, a major UK electrical goods chain.

Last week Deloitte were fined £925,000 and two of its former partners – the administrators responsible for winding down Comet – were fined £50,000 and £25,000 by the Institute of Chartered Accountants of England & Wales (ICAEW) for failures of independence.

The background is that after a series of losses Comet entered administration. Three Deloitte partners were appointed administrators on 2 November 2012.

Comet owed £232m to its unsecured supply chain creditors who recovered little from the insolvency. As administrators, Deloitte were required by law to hold consultations with 7,000 employees before any redundancies, but did not do so.

An employment tribunal ruled against Deloitte and enabled employees to claim compensations for unfair dismissal.

However, as Comet was bankrupt, redundancy payment of some £26m were met by taxpayers. HMRC failed to collect another £26.2m in VAT, PAYE and National Insurance as it is an unsecured creditor.

Deloitte partners subsequently became joint liquidators. In the period to 2019, the firm is estimated to have collected over £15m in administration and liquidation fees.

Some of its partners were charged out at up to £1,160 per hour. Some of the cheapest labour was charged out at the rate of up to £370 per hour.

Deloitte made another £1.4m from advising Opcapita, the backer of Hailey Acquisitions, Comet’s parent company, before the chain entered administration.

Hailey Acquisitions was a client of Deloitte. Despite apparent conflict of interests, Deloitte became administrators and liquidators of Comet.

In July 2014, the UK Business Secretary referred Deloitte’s appointment to the ICAEW on two counts. Firstly, a potential conflict of interest as the three partners had previously advised the company and parties connected with Comet.

Secondly, the £26m cost inflicted on taxpayers by Deloitte. In the words of the Business Secretary, “There can be no excuse for failing to comply with the law which is very clear in this area”.

The insolvency industry has around 1,300 active practitioners who handle all UK personal and business insolvencies.

They are licensed and regulated by five trade associations, mainly accountancy bodies, under the supervision of the Insolvency Service which is part of the Department for Business, Energy and Industrial Strategy.

None of the regulators have any independence from the industry. The ICAEW is one of these regulators. Big accounting firms provide its council members, officeholders and personnel for major committees. The ICAEW frequently opposes reforms at the behest of big firms.

On 30 January 2020, some five and half years after referral from the government, the ICAEW announced the outcome of its inquiry.

A full report is not available. Instead, a three and half page disciplinary report says that Deloitte and its partners did not comply with the rules on independence and conflicts of interests. A £1m fine has been levied.

No questions are asked about the exorbitant charge-out rates. Stakeholders cannot corroborate anything as insolvency practitioners’ files are not publicly available.

The ICAEW disciplinary report does not say anything about the issue of violation of the rights of Comet employees and the £26m bill footed by taxpayers.

Courts do not normally negotiate fines wrongdoers, but the ICAEW generally levies fines after consultation with big firms. Details cannot be ascertained as the ICAEW and other insolvency regulators are not subject to the freedom of information legislation.

The £1m fine will not be used to lighten the burden on Comet’s unsecured creditors or taxpayers. Instead, it fills the coffers of the ICAEW because it licensed the errant insolvency practitioners. It is directly benefitting from their failures.

The same thing has happened to the fines levied on audit firms for delivering dud audits. The ICAEW pocketed millions in fines from pre-2016 investigations.

In the insolvency industry non-compliance with the rules is very profitable. Deloitte and its partners failed to comply with the rules but made over £15m in fees.

The puny fines invite firms to game the system as they can generate big fees and easily pay puny fines. The ICAEW’ s coffers swelled by £1m from failures of its own members. Deloitte’s failures landed taxpayers with a bill of £26m but the government has not taken any against the firm.

The regulation of insolvency is not fit for purpose. Regulators have no independence and take years to complete any investigation. The insolvency industry has a licence to print money, has a history of abuses and lacks public accountability.

Deloitte declined to comment.

Update: This article was updated on 5th February to make it clearer that not only accountants are insolvency practitioners and the ICAEW has supported some reforms in the past.

Prem Sikka is a Professor of Accounting at the University of Sheffield and a contributing editor to Left Foot Forward
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Mon Jan 27, 2020 5:59 pm

Note from a reader:
neither the OSC and / or the Inv. Executive reporter, Greg Dalgetty, have reported how IFRS accounting practices allowed Clayton Smith

Clayton Smith, the founder and sole director of Crystal Wealth, had misappropriated $11.8 million from both funds.

to misappropriate $11.8 million from both funds.

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Accounting firm to pay $3.5 million for substandard audits of Crystal Wealth

A portion of the settlement agreement with the OSC will go to defrauded investors
By: Greg Dalgetty January 24, 2020

The Ontario Securities Commission (OSC) has reached a $3.5-million settlement agreement with BDO Canada LLP for BDO’s substandard audits of two investment funds’ financial statements.

According to the agreement, BDO was the auditor of Crystal Wealth Management Systems Limited and its two privately offered mutual fund trusts, the Crystal Wealth Media Strategy and the Crystal Wealth Mortgage Strategy.

BDO’s audits of the funds’ financial statements in 2014 and 2015 valued the media fund and the mortgage fund at approximately $50 million and $40 million, respectively. But it turned out that Clayton Smith, the founder and sole director of Crystal Wealth, had misappropriated $11.8 million from both funds.
In 2018, Smith reached a settlement agreement with the OSC in which he admitted to defrauding investors in the funds that BDO had audited.

In its settlement agreement with BDO, the OSC said
BDO failed to adhere to generally accepted auditing standards by not gathering sufficient evidence to corroborate the valuations of the Crystal Wealth funds, failing to undertake its work with sufficient professional skepticism and not completing quality control reviews.

“Investors rely on auditors to carry out their work with professional skepticism and proper oversight,” Jeff Kehoe, the OSC’s director of enforcement, said in a statement. “When auditors fall short, investors lose confidence in the integrity of financial reporting, a cornerstone of our capital markets.”

The OSC did not allege that BDO acted dishonestly or engaged in intentional misconduct when it audited Cyrstal Wealth’s financial statements. The OSC also noted that BDO has “taken a number of steps” to ensure adherence to accounting principles since 2015.

In addition to paying an administrative penalty of $3.5 million, BDO has agreed to pay $500,000 in costs. Upon court approval of the settlement, the OSC will recommend that $2.5 million of the penalty be allocated to Crystal Wealth investors.

“This settlement holds BDO accountable for failing to adequately carry out its role as a gatekeeper,” Kehoe said.
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Re: Accountants now “Breaking Bad”, Creating Synthetic Numbe

Postby admin » Wed Jan 15, 2020 2:15 pm

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


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

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

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

Full article:

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

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

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

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

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

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

Ties That Bind

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Promises Unfulfilled

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

The Public Company Accounting Oversight Board, Explained:

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

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

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

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


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

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

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

Captured: Financial Regulator At Risk

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Botched Audits: Big Four Accounting Firms Fail Many Inspections

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

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

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

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

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

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

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

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

By Sweet’s account, he got the message.

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

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

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

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

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

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

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

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

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

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

Whittle recounted that conversation in similar terms.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The following year, Holder again obtained inside information.

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

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

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

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

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

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

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

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

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

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

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

Then it all unraveled.

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

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

“I was trying to cover my tracks.”


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“No,” he answered.

“Why is that?” he was asked.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Public anger towards auditors alarms UK expert reviewing sector

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

Kate Beioley in London OCTOBER 4, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Worlds Apart: Supreme Court rulings vs. Canadian reporting standards

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Investor protections have been stripped away, says Al Rosen

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

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

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

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

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

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

The Supreme Court of Canada’s record

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

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

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

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

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

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

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

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

Why are we remaining silent?

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

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

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

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

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

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

~Prof Emeritus Prem Sikka ... -partners/

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

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Why do we keep rubber stamping failure?

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

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

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

A rotten sector

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

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

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

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

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

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

The rot is global

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

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

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

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

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

Patronage of the state

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

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

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

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

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

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

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

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

Current value accounting is fuelling a Ponzi scheme market

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IFRS is fundamentally extreme accrual accounting, says Al Rosen

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~Prof. Emeritus Prem Sikka

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

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

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

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

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

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

Fishbowl survey of KPMG employees about SEC scandal

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

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

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

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

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The KPMG cheating scandal was much more widespread than originally thought

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

KPMG also received an SEC censure each time.

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

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

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

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

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

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

Washington D.C., June 17, 2019 —

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Both auditors have denied wrongdoing.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

(Reporting by Aditya Kalra in New Delhi; Editing by Euan Rocha and Alex Richardson)
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