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Posts Tagged ‘Arthur Andersen’

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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On Thursday at lunch with fellow professors at Concordia (journalism and accounting), the topic turned to whether an aspiring business journalism should study journalism or business.  I asked if the journalism curriculum included a study of famous or popular journalists.

The journalism prof responded, “No, we just teach students to write.”

My first thought was to wonder if that is reasonable.  Shouldn’t a study of great journalists be an essential component of any aspiring journalist’s education? The benefit, I suppose, would be to provide examples of journalists for students to pattern themselves after.

My second though was to wonder if I am like this journalism prof.  Am I limited to teaching students how to account?  Or do I hold up great accountants for students to learn from?  Great accountants can serve as role models.

(more…)

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On Wednesday, March 14, 2012 (10th year anniversary of audit firm Arthur Andersen’s felony charges), the Chicago Tribune published an editorial titled, “Andersen Died in Vain.”  As is the way with all editorials, what followed is the editor’s opinion.

Take heed, the Chicago Tribune and its editor are wrong on this. The Arthur Andersen audit firm didn’t die to accomplish a great purpose, or to make the world a better place.  It died because it couldn’t survive its punishment.  And if anyone or anything has ever deserved punishment, it was Andersen.

Arthur Andersen’s death was not intended to prevent defrauded investors from being  victimized in the future.  The death was intended to prevent Andersen from doing it again.  And in that Andersen’s punishment has been successful.  Its death was not in vain.

In the editorial, the  Chicago Tribune does a fairly decent job of summarizing the history surrounding Andersen’s demise:

In the beginning, Andersen was a watchdog. Founder Arthur Andersen made the firm’s name stand for something nearly a century ago, when he refused a client’s demand to approve a ledger that falsely inflated profits. For decades thereafter, an auditing opinion from Andersen was the gold standard for corporate books and records. If Andersen said the numbers were solid, then investors, bankers, regulators and the public at large could count on it.

Over time, greed corrupted Andersen. Its leaders became more devoted to collecting hefty fees than keeping books straight. Clients paid a fortune for Andersen’s consulting services, making its basic function of auditing into little more than an afterthought. The firm’s most experienced accounting technicians, the sticklers who maintained its principles, saw their status plunge in the partnership’s hierarchy. As Enron ran wild, Andersen’s Professional Standards Group proved too weak to intervene. Money had trumped honest services.

Enron’s executives were able to lie about their business performance and prospects because Andersen went along. When the lies caught up with its client, instead of admitting its failure to safeguard the public trust, Andersen engaged in a cover-up. Its employees shredded not just a few Enron-related documents, but box after box, day after day, for a period of weeks.

The Enron debacle followed a series of debacles at Andersen, which had bungled audits atWaste Management Inc.and Colonial Realty Co., to name but two prior scandals that cost investors dearly. Prosecutors who previously had stopped short of bringing charges against Andersen came to believe that its leaders considered civil penalties and promises of reform to be mere speed bumps on the road to ever-greater profits.

A decade ago this month, Andersen’s brass arrived in Washington for Enron-related settlement talks — myopic, arrogant and devoid of remorse. Justice Department officials concluded that the repeat offenders across the table would offend again if they weren’t stopped.

If anything, the Tribune is underplaying the wrongdoing.  Andersen was dirty, very dirty.  Charged with protecting the public interest, Andersen instead unzipped its pants and metaphorically peed all over it.  There ought to be a law.  Shouldn’t justice prevail in the end?  In this case it did.

The Tribune goes on to say,

Did Andersen’s demise serve the public interest? No.

There were thousands of innocent victims, the out-of-work employees.  … [The resulting] Sarbanes-Oxley legislation … has proven to create problems, substantially raising compliance costs for law-abiding public companies, which pay more now in audit fees to Andersen’s onetime competitors.

The greatest tragedy of Andersen’s fall? It fell for nothing. What a loss for Chicago, and what a disservice to all those like Arthur Andersen himself who never would sell their integrity, at any price.

The world is worse off because Arthur Andersen and the other largest audit firms forsook their duty to investors and the American public.  If Arthur Andersen had been doing the right thing in the decades preceding its death, perhaps I wouldn’t have lost much of my life’s savings in 2001-2002.

Andersen deserved its punishment.  I shed no tears for it.  Its death was not a tragedy.  Its forsaking the public trust was the tragedy.  There ought to be a special place for those who violate the public trust.

Andersen’s death means only that it was not allowed to continue making the world a worse place.  A positive from its death is that there have been no Andersen audit failures since 2002.

The Chicago Tribune errs in labeling Andersen employees as victims.  The employees were part of a seedy culture, and it was the culture that supported the actions which merited the punishment.  The employees could have left.  If anything, Andersen principals should have been banned from ever serving American capital markets as corporate officers or auditors.

The death of the Arthur Andersen audit firm marks the end of a sad chapter in American history.

Debit and credit –  – David Albrecht


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Do you remember where you were when you saw the famous cartoon that killed Arthur Andersen?  I received a copy via e-mail, and soon had a print up on my office door.

How could it be that a cartoon killed Arther Anderson (once of the mighty Big 8,7, 6, and 5, but not the Big 4)?

First, a bit of history for those of you too young to have been there.  Arthur Andersen was declared dead officially June 15, 2002, when it was convicted of criminal obstruction of justice.  Arthur Andersen entered a vegetative state in March, 2002, when criminal charges were filed against it.  Arthur Andersen was seriously wounded in October, 2001, when it began shredding documents.  Reports Unmesh Kher of Time,

… Nancy Temple, a lawyer with the company, sent a memo reminding employees of Andersen’s document-retention policies on Oct. 12. The memo, observers suspect, was a tacit order to start the shredding.

And now, to add a new twist to the scandal, plaintiffs’ lawyers involved in the deposition of Duncan’s former assistant Shannon Adlong told TIME last week that the shredding of documents actually began on Oct. 13 — 10 days before Andersen admitted it started and a day after Temple’s memo. Adlong, who was responsible for ordering extra bags for the shredded papers, said so much evidence had to be destroyed that 32 “trunks,” each the size of a football locker, were hauled off by a shredding company.

Word of shredding leaked out quickly, and soon I received an e-mail with the following cartoon attached:

After this cartoon spread around the world, AA had no chance.  It’s fate was sealed.  The cartoon welded Andersen’s crime to an immensely popular TV advertising campaign.  Whenever Sprint aired its ads, at least some viewers would think of Andersen and shredding  Overnight, Andersen was guilty in the court of public opinion.  It would be only a matter of time before a court of law caught up with it.

I remain convinced it was the circulation of this cartoon that prompted the SEC subpoena on December 1, 2001, for Andersen’s remaining documents.  That, and the fact that Andersen really did the crime.

Eventually, Andersen’s shredding made it into a real commercial advertisement.  The following commercial was first aired on November 28, 2002, after Andersen was officially dead.

Thanks to the Grumpy Old Accountants and Going Concern for reminding me of the 10 year Enron anniversary.

Debit and credit – – David Albrecht

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The year was 2002.  Arthur Andersen was charged with, and convicted of, felony obstruction of justice.  Most clients fled it.  States rescinded its license to practice there, and eventually AA turned in its national certificate.  Although never officially dissolved, Arthur Andersen was no more.

To the thumping of a foot, the guttural melody of the Queen classic would come pumping out of many accountants, “Another one bites the dust.”  It was reminiscent of gallows humor, except no AA accountant had a noose slipped down around the neck.

Laventhol and Horwath (LH) was the first.  In 1990, it was number seven nationally, next behind the Big 6.  It was a big deal.  Its Philadelphia office, by itself, would have ranked in the top ten.

Now, BDO Seidman is in the news.  It has been sued for $10.7 BILLION USD.  It is not a laughing matter, although my first thought is to wonder if BDO represents Biting Dust Ok.  A copy of the lawsuit is here.

BDO is number 7 in the US, behind the Big 4, McGladrey, and Grant Thornton.  It is a bid deal.  BDO has long wanted to be one of the big guys (i.e., Big 4).  The magnitude of this lawsuit makes it the Big 1.

All BDO employees must be going through a difficult time.  We know how painful it was for those at LH.  A well written newspaper story,  “1990: The other big accounting firm meltdown,”  describes the last days.  Employees had already taken a 10% cut in pay.  Retirees were hit even harder.  Partners and senior employees received daily calls to donate money to prop up the firm’s cash position.  After the bankruptcy, partners and senior employees had to pay an additional $75,000 on average.  Retired partners had to pay, also.  Those able to keep working were OK, the retirees weren’t.  Many went back to work, some into their 80s.

BDO employees will be in a better position, because it is a limited liability partnership, a form of business not available to Laventhol and Horwath.  Their homes should be safe.

Although the potential for an accounting firm’s death is essential for the audit model to function as intended, it doesn’t make it any less cruel.

BDO, I wish you the best.

Debit and credit – – David Albecht

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