If you’re thinking about stock fraud, you don’t want to do it in the US where the SEC has both prosecutorial power and a desire to exercise it.
One other point to consider from the SEC’s latest prosecution: it is possible to pursue individual auditors for missing signs of fraud they should have caught, without destroying the audit firm in a repeat of the Arthur Andersen collapse.
Washington D.C., Sept. 9, 2015 — The Securities and Exchange Commission today charged national audit firm BDO USA with dismissing red flags and issuing false and misleading unqualified audit opinions about the financial statements of staffing services company General Employment Enterprises.
How might Chinese fraudsters be stopped? SkyTides, an investment firm started by a former auditor, has a suggestion: Special Attestation Reports.
The reason is that auditors live by two words: material and reasonable. So while they need to keep an eye out for fraudulent-type behavior, it is not their central preoccupation. Read more
Isn’t that the big question here?
Given that this story — about the auditor firing a partner over “providing non-public client information to a third party, who then used that information in stock trades involving several West Coast companies” — has now slammed straight into the Herbalife story. Read more
Is this the watershed moment for international audit firms in China?
The SEC’s announcement it was launching administrative proceedings against the Big Four audit firms (plus BDO)’s Chinese affiliates was dramatic, but big audit firms in China have for some time been stuck between a rock and a hard place, because Chinese law prohibits audit work papers being moved out of the country. Read more
That’s €51.8bn (how precise) from Roland Berger… and €62bn from Oliver Wyman…
Update — Here are the reports in full (click images for docs): Read more
Let us know if you can make sense of this boardroom drama at Nasdaq-listed e-learning company ChinaCast Education:
As previously disclosed in a Form 8-K dated March 26, 2012, the Company terminated Ron Chan as chief executive officer and effected his resignation as a director. In connection with his termination, the Company actively sought to reach Mr. Chan to conduct an orderly transition of his management functions to interim chief executive officer Derek Feng. This transition was meant to include, among other things, the return of the company seals, business licenses and financial seals of the Company’s Chinese subsidiaries relating to its e-learning and training services business and one of its universities, which items the Company believes are in Mr. Chan’s possession or persons under his direction. Under PRC law, the company seals, financial seals and business licenses are necessary for these Chinese subsidiaries to enter into contracts, conduct banking business, and take official corporate action, including registering the change in management with the relevant authorities in China. Mr. Feng and interim chief financial officer Doug Woodrum made a number of unsuccessful attempts to contact Mr. Chan in connection with his termination to conduct this orderly transition. Read more
The UK arm of PwC, the auditor, has been fined £1.4m and severely reprimanded for its failure to discover that billions of dollars of client money had not been ringfenced properly at JPMorgan Chase, the FT reports. The fine is the largest yet for a UK accountancy firm, but it is far smaller than the penalty mooted by regulators as appropriate, which could have run into tens of millions of pounds. As auditor to JPMorgan Securities Limited, a UK-regulated arm of JPMorgan, PwC had told regulators the company complied with the separation rules in 2002-08. But in that period, JPMorgan Securities had inadvertently placed up to $23bn of client money with its own, albeit without loss to customers. The lack of disciplinary action against individual auditors was criticised by an industry tribunal, which also raised concerns over whether a deal had been struck to protect PwC partners. In November, lawyers representing the Accountancy and Actuarial Discipline Board said that the penalty on PwC should not be “vastly disproportionate” to the £33.3m fine imposed on JPMorgan in 2010. The case was referred to an independent tribunal that adjudicates on AADB investigations, which disagreed with the suggestion that the fine be based on PwC’s profits along the lines of JPMorgan Securities’ penalty, saying the method would have yielded a penalty of £44m.
The European arms of the four biggest accountants are being threatened with a break-up under sweeping European Commission reforms to be unveiled on Wednesday, the FT says. Michel Barnier, the EU internal market commissioner, wants to split the profession’s “Big Four” – PwC, Deloitte, Ernst & Young and KPMG – into separate audit and consulting arms in Europe as part of a package of measures designed to improve the vetting of accounts. A plan to force those groups to share work with their smaller rivals through “joint audits” has been dropped, but Mr Barnier won support for rules compelling companies to rotate auditors at least every six years. The Commission is also proposing stricter limits on “non-audit” work than are currently in force in the US, but the proposals could be altered before they become law, the newspaper adds.
Chinese regulators have told Big Four auditors working in the country to prepare an urgent review of work completed for Chinese companies listed on US markers, Reuters says. China’s move will be seen as a response to US official attempts to extract audit data for Longtop Financial, a firm hit by concerns over accounting, and as a way to stop documents leaving the country. The Chinese authorities asked auditors to report on whether they had released documents to send overseas, according to two industry sources.
French auditors have been lambasted by the UK’s leading accountancy regulator for their performance during the Greek debt crisis. Stephen Haddrill, chief executive of the Financial Reporting Council, criticised the way French banks and insurers had been allowed by their auditors to post smaller losses on Greek government bonds than some European rivals. Mr Haddrill told the FT the lack of “strong auditing” there showed that moves to introduce a more French approach to auditor regulation across the European Union were misguided. EC proposals for a new approach to auditing leaked last month included measures to force big companies to have more than one auditor and banning some auditors from doing consulting work for clients. The French banks’ stance has also been challenged by Hans Hoogervorst, chairman of the International Accounting Standards Board.
The business model of the Big Four accounting firms is under attack from the European Commission, which is pushing for tough rules that would force the firms to abandon their consultancy businesses and share audit work with smaller rivals. The FT says a draft regulation it viewed would force companies with balance sheets greater than €1bn to hire two auditors, including at least one firm outside the Big Four of Deloitte, PwC, Ernst & Young, and KPMG. It would also prohibit auditors from working for the same company for more than nine years. aims to transform the accounting sector in the wake of the financial crisis and restore “trust” in financial reporting. It has the backing of Michel Barnier, internal market commissioner.
The business model of the Big Four accounting firms is under attack from the European Commission, which is pushing for tough rules that would force the firms to abandon their consultancy businesses and share audit work with smaller rivals. A draft regulation, seen by the Financial Times, aims to transform the accounting sector in the wake of the financial crisis and restore “trust” in financial reporting. It has the backing of Michel Barnier, internal market commissioner, whose officials have decided the audit world is in the grip of an oligopoly. Under the plans, which are to be unveiled in November, companies with balance sheets greater than €1bn would be forced to hire two auditors to conduct a “joint audit” of their books, including at least one firm outside the Big Four of Deloitte, PwC, Ernst & Young, and KPMG.
Ernst & Young faces a fresh threat to its reputation after an Irish accounting regulator said it would hold a disciplinary hearing to examine E&Y’s auditing of Anglo Irish Bank, a lender that had to be rescued by the Irish government in 2009, the FT reports. Already contesting a US lawsuit over its vetting of Lehman Brothers’ accounts, E&Y’s handling of the Anglo Irish audit has been challenged in three key areas by a special investigator hired by the Chartered Accountants Regulatory Board. The Irish arm of E&Y on Wednesday said it would defend itself vigorously, saying it “fundamentally disagrees” with the decision to initiate a formal disciplinary process.
Luminar, the ailing UK nightclub operator, has dropped its auditor a week before debt-covenant tests it is widely expected to fail. The FT reports the company told shareholders on Tuesday that PwC had resigned after the board decided “a fresh audit relationship would benefit the Luminar group moving forward”. Luminar will hire KPMG instead. PwC, which has worked with Luminar since 2003, declined to comment. The move comes a week before tests on its banking covenants set for next Wednesday. Lloyds Banking Group, Barclays and Royal Bank of Scotland, Luminar’s lenders, agreed to waive the tests in May to give time to “determine the appropriate basis for a longer term restructuring of the group’s debt arrangements in light of continued challenging trading conditions”, the company said at the time.
Much like the rating agencies, many auditors have suffered a crisis of creditability in recent years.
That will make their reaction to the IIF’s proposed financing offer for Greece all the more interesting. Read more
The SEC is investigating a range of large and small accounting firms over their auditing of US-listed Chinese ‘reverse merger’ companies, sources have told the WSJ. Auditors have been included in its probe. Since February, around 40 Chinese stocks listed in the US have either disclosed accounting problems or seen trading halted over accounting investigations. The concerns focus on “specialist” auditors and lawyers that specifically targeted China small-caps looking to list in America, says FT Tilt, which notes that US firms audited three-quarters of reverse mergers since 2007.
Accounting-geeks (like us) might remember that at the start of last year there was much discussion as to whether Britain’s big four auditing firms — PwC, Deloitte, Ernst & Young, and KPMG — would be able to sign off the 2008 end-of-year accounts of the country’s beleaguered banks.
At the time banks’ assets were difficult or impossible to value, their shares were volatile, and no one really knew what was to become of the financial institutions. Read more
Some auditors have been signing off on the financial statements of big clients before finishing their work, an industry watchdog has revealed in a critical assessment of the way checks on company accounts are carried out, the FT reports. Auditors were still not sceptical when reviewing management assertions on company accounts, the report by the Audit Inspection Unit of the UK’s Financial Reporting Council found. City AM says the unit also criticised the big four accounting firms for the “disappointing” quality of their audit work. See FT Alphaville for more.
Ernst & Young, the Big Four auditor, is to appoint non-executive directors to its global advisory board for the first time as accountancy firms come under mounting regulatory pressure over governance, the FT reports. The decision by E&Y, at the centre of regulatory scrutiny over its audit of Lehman Brothers, which collapsed in 2008, comes in response to an audit code that was issued this year.
In a Tuesday discussion paper, the UK’s Financial Services Authority proposes what experts say could be a shake-up of the UK auditing profession that could be as dramatic as the Sarbanes-Oxley reforms that increased regulation of US auditors after the Enron and WorldCom crises, the FT reports. FT Alphaville has more on the FSA’s aim of ‘professional scepticism’ for bank auditors.
Here’s a discussion paper to strike fear into the hearts of prompt debate among audit firms — another analysis of their failings in the banking crisis, carried out by the UK’s financial regulator, the FSA.
It comes at a particularly bad time for auditors. Read more
Bank auditors face being forced to blow the whistle on irregularities in their clients’ accounts under plans to be discussed this week with the UK’s Financial Services Authority, the FT says. A new discussion paper – the most in-depth study so far of auditors’ role in the financial crisis – is expected to suggest they work more closely with prudential regulators after government inquiries raised questions about the value of audit.
Repo 105 and the role played by Ernst & Young has once more focussed attention on the small world of international accountancy – and as with Enron and other instances of ‘creative accounting’, the sector has not emerged unscathed. So why does Moody’s sound like it wants to take on an informal audit role, FT Alphaville asks. Read more
The biggest UK audit firms must appoint independent non-executives to help reduce the risk of an Andersen-style collapse, according to a radical new UK governance code to be published on Monday. The Audit Firm Governance Code – drawn up at the request of the Financial Reporting Council – is the first time the “big four” accounting firms will be required to adopt a code similar to that governing the companies they audit in the UK.