Archive for Auditing & Regulations
Fri 14 March 08 · Filed under Auditing & Regulations, Writing & Blogging
My book, Essentials of Corporate Fraud, is currently the number one book in the Auditing category on Amazon.com. It’s been floating between number one and number ten all week long. Amazon updates the statistics hourly, so even one book purchase can put you at the top. So I don’t know how much the rankings mean, but it’s fun looking to see how close I am to the top anyway.
And of course, I have the proof because I’ll want to look back on this moment when my book is #52,395 in Auditing… Read the rest of this entry »
Sun 2 March 08 · Filed under Auditing & Regulations
I am reading Cynthia Cooper’s book, Extraordinary Circumstances, which documents her experiences uncovering the massive fraud at WorldCom. I want to finish reading the book so I can write a proper review here and elsewhere. But I admit I’m having a hard time finishing the book due to all the other demands on my time…
Nonetheless, I wanted to share this passage from the book because it illustrates so perfectly the main reason why audits fail to find fraud: Those committing fraud know how to hide it from the auditors. Because of that active concealment, there is little chance of the auditors finding the fraud. Read the rest of this entry »
Thu 21 February 08 · Filed under Auditing & Regulations
Sam Antar made this nice find in regard to materiality, one of many issues at Overstock.com (NASDAQ:OSTK). You see… materiality is an issue because, in addition to “unusual” material items at Overstock, we’ve seen several immaterial “unusual” items as well.
Users of financial statements have a tendency to overlook “immaterial” items, because by definition, they are quite small and likely don’t make much of a difference when you look at the financial statements as a whole
But don’t be fooled. Items deemed small and “immaterial” can in fact be very important to the financial statements. So says the SEC in Staff Accounting Bulleting 99: Read the rest of this entry »
Wed 23 January 08 · Filed under Auditing & Regulations
This one comes from Dennis Howlett’s blog, and to me, it’s hilarious. I’m not sure if you have to be a an auditor or not to think it’s funny. Apparently there are some emails from KPMG associates circulating and here’s an excerpt:
The best question is: 4. Do you feel like KPMG’s lack of technology is slowing down your development and progress in your career? My response: Absolutely. The use of morse-code telephones, word processors and telegraphs is a hinderance to my auditing ability. My developement has suffered too - I cannot speak in full sentences, have forgotten my colors, and can no longer put shapes into their apporpriate slots. My career has suffered as well. After looking around for another job, I am only eligible for jobs at Taco Bell and McDonald’s because they have an automated beeper when to take the fries out. I don’t know how to use this thing called a telephone, and is there a little man living inside, what people refer to as, a “computer”?
Read the rest at AccMan.
Mon 14 January 08 · Filed under Auditing & Regulations
Last week I wrote about Catapult Communications (NASDAQ: CATT) switching from Deloitte & Touche to a much smaller local firm, in a post called Big Four = Big Fees. In that post I referenced the CFO.com article from which I got my information. The article focused on the difference in fees between the firms: $985,000 for Deloitte and $561,000 for the small firm. That big savings was portrayed as the reason Catapult switched.
And in rides Francine McKenna of re: The Auditors. She raises a good point. Why did Catapult go to great pains to detail the reason for the switch from Deloitte to a virtual no-name firm? Was Catapult trying to embarrass Deloitte?
Well I think Francine may have found the answer, one which she suggests CFO.com might have found if they hadn’t just accepted Catapult’s story at face value. You see, in the company’s annual report for the year ended September 30, 2007, it was noted that a material weakness from the prior year was remediated.
What was this weakness, you ask? Well, you can see what the weakness was if you read the fix that was noted in that annual report:
The Company’s Chief Financial Officer performs a detailed quarterly review to confirm that the Company’s accounting for its cash, cash equivalents and short-term investments is in accordance with the requirements of generally accepted accounting principles in the United States.
Uh…. if the “fix” is that the CFO now reviews cash and short-term investments to see if they’re reported in accordance with GAAP, then the weakness was that he wasn’t doing it before! And…. not doing it was deemed a material weakness by Deloitte.
That’s pretty bad. And who knows.. maybe Catapult is upset that Deloitte forced them to fix the problem and make the disclosure.
Francine also notes that Catapult switched auditors in January of 2006, too, dumping PriceWaterhouseCoopers and hiring Deloitte.
Francine and I agree on this: It is not uncommon for companies to go opinion shopping.
Could that be what we’re witnessing here?
UPDATE: More on Dennis Howlett’s take is found here.
Tue 8 January 08 · Filed under Auditing & Regulations
Catapult Communications Corp. in Los Angeles quit their auditors, Deloitte & Touche. And they made public the reason.
Deloitte’s fee for 2008 audit = $985,000
Local firm fee for 2008 audit = $561,000 or less (a 43%+ savings)
The local firm is Stonefield Josephson, a 100 employee firm with 2007 revenues around $40 million. That fee level gets the firm ranked 67th nationally. The claim their fees are lower because they don’t have the same bureaucracy of Deloitte.
Am I surprised? Of course not. Audits are commodities. Auditors sell a clean audit opinion. Businesses, the buyers required to buy those opinions, know that auditors provide little actual value to the company. So why pay higher fees??? Especially when the difference is so big?
The biggest reason why many companies stick with the Big Four accounting firms is for the name. Do the clients really think a big name firm gives them something better? Probably not. But they know that when they’re presenting financial statements to investors and banks, the name lends credibility.
Catapult announced its decision and the huge savings, saying that they don’t believe that the quality of their audit will be affected. See? Commodity. Useful? Not really.
Thu 27 December 07 · Filed under Auditing & Regulations
I’m embarrassed for this auditing firm. Here are their rates:
Non CPA - Staff - $35 / Hour
CPA - Non Partners - California Certified CPA - $50 / Hour
CPA - Partner - California Certified CPA - $85 / Hour
Sorry, but any auditor who charges rates like that is giving you an audit opinion that’s not worth the paper it’s printed on.
Tue 11 December 07 · Filed under Auditing & Regulations
I suppose in the grand scheme, it’s not much of a hit for Deloitte & Touche to receive a $1 million fine, but the publicity ramifications could prove far more costly.
The fine comes along with a censure from the Public Company Accounting Oversight Board (PCAOB) for a 2003 audit. The San Diego partner on an audit of the financials of drug maker Ligand Pharmaceuticals, James Fazio, was deemed not competent to head the audit team.
According to PCAOB, employees at Deloitte had concerns about Fazio in 2003 and thought he might not be qualified to even work for the firm at all. Nonethless, he stayed as partner on the Ligand 2003 audit, and into 2004. There were revenue recognition problems on the 2003 audit, and even the basic accounting rules weren’t followed. PCAOB said that Fazio failed to “…exercise due professional care, exercise professional skepticism, obtain sufficient competent evidential matter … and supervise assistants.”
Ultimately, Ligand had to restate three years of financials, all of which had been audited by Deloitte. For 2003 alone, revenue was adjusted downward by 52%.
Of course, Deloitte isn’t admitting or denying PCAOB’s charges, but is paying the fine and is promising to make some procedural changes. Fazio is also prohibited from being associated with any public accounting firm for the next two years.
Wed 5 December 07 · Filed under Auditing & Regulations
An article in today’s Vancouver Sun makes some interesting points about auditing firms and their OTC company clients. OTC companies aren’t very good investments for shareholders, as many have shaky businesses or are really shell companies for other planned business ventures.
Yet for auditing firms, they might seem like good clients. They need audits before they can register to be sold on the OTC Bulletin Board or pink sheets, and they’re willing to pay.
But OTC companies have become such a problem that the B.C. Securities commission is warning accountants and lawyers that if they knowingly aid and abet fraud schemes they could be in trouble.
One audit firm with lots of OTC clients is Manning Elliot. Case in point with the OTC problem is Heavy Metal Inc. Mannin Elliot audited it and gave the company permission to use the audit report when registering to become an OTC issuer. Heavy Metal is supposedly in the “exploration” business, but it is run out of the home of one David Harapiak, who has no experience in exploring and is the company’s only officer or director. The company acquired on property in July, but hasn’t done any work on it and hasn’t even had a geologist give it the thumbs-up, so it has zero value on the balance sheet.
Clearly, Heavy Metal is a questionable business and doesn’t appear to have any value. So what’s it’s real business? Or is it a shell for a planned business?
Manning Elliot has several such clients. Companies with weak financial positions, questionable business plans, owners and executives with little relevant experience.
So what is the value of these audits? Manning Elliot gives a clean audit opinion says it’s okay to use the opinion in the registration process. But outside evidence suggests that these companies are questionable at best, and a total scam at worst. Is it time to reevaluate the purpose of audits and their real value to the marketplace? Yes.
Thu 29 November 07 · Filed under Auditing & Regulations
As a general rule, communications between an auditor and client are private. The information given to an auditor can generally only be disclosed with the permission of the client, or in situations involving SEC filings.
But the protection of communications between auditors and clients isn’t anywhere near that of the attorney-client privilege. And this is causing some interesting things to happen.
Take for example, the lawsuit filed by Shaw Group against AES Coporation for almost $100 million in unpaid fees. AES was granted access to Shaw’s auditing records by the court.
This type of thing is causing angst all around. Companies are becoming concerned that auditors could be forced to turn over confidential documents that could expose the companies to lawsuits from shareholders and whistleblowers. In light of this, some companies are reluctant to turn over information to the auditors, especially regarding pending litigation and internal investigations. Yet without some of this documentation, auditors may be unwilling to give clean audit opinions.
Attorneys are advising companies that anything they give to the auditors could be subject to disclosure at a later date if a court requires documents to be turned over, like in the Shaw case.
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