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Archive for the ‘Scandal/ethics’ Category

Candor.  No, I’m not talking about condor, a bird.  I’m talking about clear and unbiased communication.  The Merriam-Webster definition uses the words fairness and honesty.

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Pic credit – Merriam-Webster

Do some corporate communications appear to contain more candor than others?  Yes, based on a proposed metric.  Does this appearance prove their candor?  Those on the outside will never know.  I’ve sometimes heard that the best corporate policy is the appearance of honesty.

Rittenhouse Rankings attempts to measure candor in corporate shareholder letters for a sample of 100 companies selected from the S&P 500.  The sample group “was selected ten years ago based on industry grouping, capitalization size and financial reputations.  Candor is quantified systematically by awarding points for informative, relevant disclosure and deducting points for jargon, confusing statements and clichés.”

Recently, the Rittenhouse Rankings 2012 Candor and Corporate Culture Survey™ was released.  In the release, it is claimed that the ten most candid companies as a group earned a greater return on a stock investment than the ten least candid companies as a group.  The difference in return appears to be large.

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Pic credit – Rittenhouse Rankings

Does candor in the corporate shareholder letter prove anything about honesty in financial statements?  No, it doesn’t.  Form inferences at your own risk.  But the list of ten companies with least candor (as defined by Rittenhouse Rankings) is interesting.  You can find a list of these companies at the right IN RED.  Two or three of these companies have been mentioned in the press for alleged financial reporting difficulties.

I, of course, recommend honesty in all things.

Wouldn’t it be great if all corporate financial statements were honest and free from bias and manipulation?  What a wonderful world it would be.

Debit and credit – – David Albrecht


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empty_congress_2013_6_7

Congress in session as it passes ‘No Forced Auditor Rotation’ act.

I just received word that the U.S. House of Representatives (Congress) has passed a bill banning mandatory auditor rotation.  Before you start to think that perhaps Congress has done something great and wonderful, a few words of wisdom should be remembered.  I’m posting some of the more accurate descriptions of Congress penned throughout the centuries:

  • Suppose you were an idiot, and suppose you were a member of Congress; but I repeat myself. –Mark Twain
  • You can lead a man to Congress, but you can’t make him think. –Milton Berle
  • We have the power to do any damn fool thing we want to do, and we seem to do it about every ten minutes.” –J. William Fulbright
  • There is no distinctly American criminal class – except Congress.
    –Mark Twain
  • Being elected to Congress is regarded as being sent on a looting raid for one’s friends. –George Will
  • There is more selfishness and less principle among members of Congress than I had any conception of, before I became President of the U.S. –James K. Polk
  • When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. –P.J. O’Rourke
  • With Congress, every time they make a joke it’s a law, and every time they make a law it’s a joke. –Will Rogers
  • I don’t mind what Congress does, as long as they don’t do it in the streets and frighten the horses. –Victor Hugo
  • I have come to the conclusion that one useless man is called a disgrace, that two are called a law firm, and that three or more become a congress. –Peter Stone
  • This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer.
    –Will Rogers

My generation uses a rhetorical question whenever we spot something particularly loony, “What were you smoking?”  Well, Congress, what were you smoking when you banned auditor rotation?

Debit and credit – – David Albrecht


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Mark Twain opined, “Politicians and diapers must be changed often, and for the same reason.”  I’m guessing that Rihanna wishes he had advised her that accountants also must be changed frequently.  PCAOB please take note.

Rihanna is a popular singer whose recordings and tours have produced millions in revenues.  According to her lawsuit against Berdon, LLP and accountants Michael Mitnick and Peter Gounis.  She hired the firm in 2005 when she was young (16), famous, and newly arrived in the USA.  No kid aged 16 truly understands finances, budgeting and accounting.  I might add that few college kids taking accounting courses understand those, either.

Now facing an IRS audit and the prospect of paying back taxes and fines (I wonder if jail is in the picture), she is suing the accounting firm and the two accountants for mismanaging her finances. Note, she fired the accounting firm in 2010.

Who, on the outside, knows who is at fault here–Rihanna or her accountants?  I certainly don’t.

Rihanna, I’m sorry much of your fortune has dissipated.  In the future, I advise you to change accountants fairly frequently, and then hire someone (such as a forensic accountant) to check up on the accountant.

For more on this, please read:

Debit and credit – – David Albrecht


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Jonathan Russell, city diary editor for London’s Telegraph Group, has an interesting story on today’s Telegraph website. It is titled, “Ernst & Young ‘Covered Up Judge Bribe Case.’

My write-up is based on Russell’s story, and his story is supposedly based on court documents.  I have no personal knowledge of anything other than Russell’s story.  I am not alleging anything, only summarizing what has been reported.

Russell writes,

Mr [Cathal] Lyons was a partner with E&Y’s Russian practice when the alleged wrongdoing came to light. It was originally investigated by James Mandel, E&Y’s general counsel in Moscow. In a witness statement supplied in support of Mr Lyons’s case, Mr Mandel said he suspected the payment may have been corrupt and wrote a report to that effect.

“I had the suspicion that this payment was not a proper payment for legal fees, but was an illegal payment possibly made to facilitate a positive outcome of a tax case,” he claimed in his witness statement.

He suspected that the €120,000 payment via a Russian law firm was made to influence a 390m rouble (£8.4m) court case brought by Russian tax authorities investigating a tax avoidance scheme E&Y was using to pay its Russian partners. E&Y was later cleared of liability in the case.

Russell continues,

Mr Lyons claims that after he reported his concerns about the case to E&Y’s global head office, his medical insurance was withdrawn and he was dismissed.

In his writ he says the dismissal flowed from “personal animosity against him rising from a discussion in late 2010 between the claimant and Maz Krupski [E&Y’s director of global tax and statutory] regarding alleged corruption by the practice.”

Mr. Lyons is suing for 20 years continuance of medical support, stemming from serious injuries sustained in a 2005 automobile accident.  The medical support payments are valued at $6,000,000.

I will make an effort to retrieve relevant British court documents.

In an interesting coincidence, Jonathan Middup, partner at Ernst & Young (UK) Fraud Investigation & Dispute Services, has a piece in Friday’s growthbusiness.co.uk titled, “The UK Bribery Act One Year On.”  In this article, Middup “… looks back on the first year of the UK Bribery Act to see if the British perception of corrupt practice has changed.”

Debit and credit – – David Albrecht


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I’ve been writing about the Spanish bank crisis (“Spanish Non Sequitur” and “Followup to the Spanish Non Sequitur“) because it is related to mainstream financial reporting and auditing.  How so?

The Spanish government recently hired all of the Big 4 (still don’t know from which countries) to tidy up the financial statements from many banks in the industry.  I’ve written about how this is a novel strategy to cleaning up faulty financial statements.

In addition, this is related to the push for global accounting standards.  If IFRS doesn’t work well in a mid-size European country, then how can it work as the primary tool for regulating banks world wide?

Nathalie Tadena, of the Wall Street Journal, wrote yesterday on “Moody’s Cuts Ratings on 28 Spanish Banks.”  Moody’s has downgraded bank ratings to one notch above junk.  Ouch.  In part, this is because of Spain’s sovereign debt crisis, and in part this is because “banks … have been hollowed out by a five-year property slump that has left them exposed to hundreds of billions of dollars in loans to builders and developers.”

The U.S. has experience in dealing with bank difficulties caused by economy shaking issues in real estate. The 1980s Savings & Loan Crisis and 2008 Subprime Financial Securities Crisis come to mind.  Both American crises showed that banks easily succumb to temptation in hiding losses from investors, and that auditors are loathe to alert investors to going concern difficulties.

Spain, welcome to the club.  It is dealing with its bank crisis by hiring Big 4 audit firms to clean up the financial statements of larger banks in its banking industry.  Undiscussed, though, is why Spain is hiring the same audit firms which previously had been a party to issuing unflagged misleading financial statements.

I’m glued to the newswire looking for the next development in this story.

Debit and credit – – David Albrecht


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The auditor disciplinary arm of the Financial Reporting Council (FRC) of the UK has concluded its investigation and on June 22, 2012 announced that Ernst & Young (EY) is not to be penalized for its audit of the November 30, 2007, financial statements of Lehman Brothers Holdings Inc (LBHI).

Executive Counsel considers that there is no realistic prospect that a Tribunal would make an adverse finding against Ernst & Young LLP in the UK or Members within that firm. The investigation will therefore be closed and no further action taken.

Coupled with an earlier announcement from the Securities and Exchange Commission (SEC) of the US that no legal proceedings are likely to be initiated against EY or its employees, this marks the end of one the darkest chapters in recent accounting and auditing history.

Although EY will not be penalized for failing to alert investors to LBHI’s sophisticated scheme to manipulate its financial statements, it has embarrassed itself and shamed all of us in the accounting and auditing industry.

EY has showed itself to be no better than Arthur Andersen.  Ernst & Young, shame on you. 

The FRC is the regulator and standard-setter in the UK responsible for corporate governance and financial reporting as well as the audit, accounting and actuarial professions.  It is not a governmental unit, but a private organization.  It operates in the public interest.

The FRC operates in a manner similar to the Financial Accounting Standards Board (FASB) and Public Company Accounting Oversight Board (PCAOB) of the US.

A unit of the FRC, Accountancy and Actuarial Discipline Board (“AADB”), has investigated Ernst & Young over the LBHI matter.  This is its summary of the investigation:

  1. On 10th June 2010 the Accountancy and Actuarial Discipline Board (“AADB”) considered the matter of Lehman Brothers (“Lehmans”) and decided, pursuant to paragraph 5(8) of the AADB Accountancy Scheme (“the Scheme”), that the matter should be investigated by the AADB.
  2. Lehman Brothers Holdings Inc. (“LBHI”) sought Chapter 11 protection in the United States of America on 15thSeptember 2008. The US Bankruptcy Court nominated an Examiner, Anton R. Valukas, who published his report into Lehmans’ collapse on 11th March 2010. The report made criticisms of Lehmans’ auditor, Ernst & Young, for failing to question and challenge improper or inadequate disclosures in Lehmans’ financial statements. The Examiner’s criticisms specifically related to the use by Lehmans of transactions known as Repo 105 and Repo 108 transactions. The report did not specify whether the criticisms related to the primary auditor of LBHI, which was Ernst & Young in New York, or Ernst & Young generally.
  3. Repo 105s and Repo 108s were used by Lehmans to raise short term funds and, by virtue of compliance with US Financial Accounting Standard 140 (“FAS140”) which requires certain transactions to be treated as sales instead of financing transactions, enabled Lehmans to reduce its balance sheet and leverage ratios. The Examiner found that whilst the use of Repo 105/ 108 transactions may not have been inherently improper its sole function as employed by Lehmans was balance sheet manipulation.
  4. The scope of the AADB investigation was as follows:“The conduct of Members and a Member Firm in relation to: (a) the preparation and audits of the financial statements of Lehman Brothers Holdings Inc.and UK operations including Lehman Brothers International (Europe) for the year ended 30th November 2007;and (b) the use and accounting treatment of transactions known as “Repo 105s” and “Repo 108s” by Lehman Brothers Holdings Inc. and UK operations including Lehman Brothers International (Europe).”
  1. The focus of the investigation was the audit by Ernst & Young LLP in the UK (“EYUK”) of Lehman Brothers International (Europe) (“LBIE”) and of Repo 105 and Repo 108 transactions which were conducted through LBIE.  EYUK audited the trial balance of LBIE prepared under US GAAP for consolidation into LBHI’s consolidated financial statements. The audit of LBIE’s trial balance formed the basis of a ‘Specific Scope Conclusion’ to Ernst & Young in New York.
  2. In the course of the investigation, the investigation team obtained and reviewed EYUK’s audit files; hard copy documentation; information from EYUK staff members’ laptops and emails, and information from other regulators. The team also interviewed EYUK audit team staff and former members of staff of Lehmans.

Debit and credit – – David Albrecht


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Following journalists and bloggers has become part of my daily routine.  I pay attention to what is written and to its impact.  In accounting, there tends not to be too much impact, because regulators, corporate executives and audit firm managers seem impervious to what other people say.  They always do what they darn well want to.

Dena Aubin, David Ingram and Sarah N. Lynch, however, have been able to see the power of their pens.

Dena Aubin is a journalist for Reuters who writes on auditing.  David Ingram is a Reuters journalist who writes on lobbying and business.  Sarah N. Lynch is a financial regulatory reporter.  In various combinations, they have partnered on an interesting series of articles:

In today’s post I’ll write about the first and third of their series.

In  “Ernst & Young tightropes between audit, advocacy,” Aubin and Ingram write about Washington Council Ernst & Young (WCEY) and reactions to their activities.  Aubin and Ingram report that WCEY (a unit of Ernst and Young) provides lobbying services valued at $12 million per year.  WCEY does enough business that I had become aware of its existence.  Some of its clients also engage Ernst & Young to audit their financial statements.

And that’s the rub.  It is a violation of both common sense and professional ethics that I find shocking.

Aubin and Ingram reported that Senators Carl Levin and Jack Reed were now expressing concern.  Aubin and Ingram were unable to receive public comment from the SEC and PCAOB on the issue.

On March 8, I was skeptical that anything would happen to dissuade Ernst & Young from this practice.

On Friday, May 4, I received a pleasant surprise.  In “Ernst, clients, cut auditing ties-records.”  Ingram and Aubin report that an examination of reports filed under the Lobbying Disclosure Act revealed that some of Ernst’s audit clients were no longer lobbying clients.  None of the companies, nor Ernst & Young, would comment on the relationship changes.

However, the cause and effect seems obvious.   The first story apparently showed enough light on the Ernst & Young lobbying activity that it changed what it was doing.

Congratulations Dena and Dave!

Also included in the article are comments from the SEC:

The chief accountant for the U.S. Securities and Exchange Commission, James Kroeker, speaking at a financial reporting conference at Baruch College in New York on Thursday, said SEC rules state an auditor should not act in an advocacy role for a company it audits and lobbying would be inconsistent with that.

Kroeker did not mention any audit firms by name.

He said: “If you think about lobbying in the traditional sense, you would say, ‘wouldn’t somebody that’s lobbying be placing themselves in a position to be an advocate?'”

Asked whether the SEC was looking into E&Y’s lobbying activities, an official in the agency’s enforcement division declined to comment because its investigations are not public.

“We are aware of it and we are cognizant of what the rules are,” said Howard Scheck, chief accountant of the SEC’s division of enforcement, on the sidelines of Thursday’s conference.

“If there’s a violation that we find, we’ll certainly do something about that,” he said, without referring to E&Y.

I’m impressed with these journalists, Aubin, Ingram and Lynch.  Their articles have shown original fact finding, effective organization, and a steady flow from start to finish.  I’m adding them to the list of business journalists whom I follow.

Debit and credit – – David Albrecht


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