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Should a PwC partner blame the junior staff?

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If something goes wrong on an audit, whose fault is it? Is it the partner’s fault or the junior member of staff’s fault?

Over in Australia, the Sydney Morning Herald newspaper has provided some interesting commentary on a legal case that is currently taking place concerning an audit undertaken by PricewaterhouseCoopers (PwC).

The background to the case is that shareholders in a company called Centro are claiming that PwC misled and deceived them by failing to properly disclose that the Centro group had billions of dollars of short-term debt that needed to be refinanced in 2006 – 2007.

The lead PwC partner on the audit, a gentleman by the name of Stephen Cougle, is facing a bit of a grilling in court at the moment.

Under cross-examination yesterday in the Australian Federal Court, Mr Cougle denied trying to “bury” one of the errors by putting it in the small print notes at the back of the accounts.

According to reports, he said “when one of his PwC colleagues told him in late August that a $1.1 billion bridging loan had been wrongly classified as a long-term debt in the unaudited, preliminary accounts, he suggested Centro might need to disclose it publicly. When Centro declined this idea, he decided one option was to point to the discrepancy in a note to the final accounts”

According to Mr Cougle though he did not try to “bury it”.

Whether or not it was satisfactorily disclosed will be a decision for the court and that decision is not expected until the end of May

However, one thing for sure is that a number of the junior PwC staff members who were on the audit are probably not currently the best of friends with Mr Cougle.

Despite being the lead partner on the audit, he has already “declined to accept any responsibility for the accounting debacle” and has “blamed junior staff.”

Now blaming junior staff for an error in the accounts that you signed off on is in itself an interesting point to debate. After all, there is a well-known saying that you “can delegate work but you can’t delegate responsibility”.

The outcome of this case will be very interesting for auditors around the world. Not least for guidance on who is the best person to blame if there is an error on your audit…

The Big 4 don’t appear to be happy about this…

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We blogged earlier this year about Michel Barnier, the EU internal market commissioner announcing plans to issue new laws which would dramatically impact the “Big 4” (namely Deloitte, Ernst & Young, KPMG and PwC.)

Well, these changes have now got a bit closer as the draft law has just been released.

In an attempt to reduce conflict of interest and to introduce more competition into the industry the main proposal of the draft law includes the requirement for the Big 4 firms to separate their auditing and consulting divisions in the EU.

This is a pretty big issue as in simple terms if the law becomes final it could prevent the Big 4 “audit firms” from providing any non audit related services such as consulting, providing tax advice or running training courses.

This could see a major restructuring of the audit profession.

Other provisions in the draft law include banks being banned from insisting that a company uses a Big 4 firm if they are to be lent money by the bank (at the moment a number of banks make it a requirement for a company to be audited by a Big 4 firm before they will release significant loans.)

There is also a proposed requirement for audit firms to be rotated every 6 to 12 years.

Perhaps unsurprisingly the Big 4 are reported to be against any changes to the current rules (after all as the saying goes, “how many turkeys would vote for Christmas?”).

I’m pretty sure though that the “mid tier group” of auditing firms that are below the Big 4 in terms of size such as BDO, Grant Thornton and Mazars would maybe take a different view to the Big 4 and be in favour of Mr Barnier’s views as this could open up a number of opportunities for them.

Before everyone that works at a Big 4 company starts rushing to rearrange the office furniture though it’s worth noting that the law at the moment is only draft and the EU states and the European Parliament have to provide the final sign off before the law becomes a reality.

How would you feel if you were called a liar on Oracle’s website?

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Meet two companies – Oracle and Autonomy.

A lot of you will probably have heard of Oracle but probably less of you have heard of Autonomy.

Oracle is a business software and hardware systems company whilst Autonomy develops search software.

Oracle’s Chief Executive is Larry Ellison and Autonomy’s Chief executive is Mike Lynch.

Interestingly enough Oracle’s CEO has recently accused Mr Lynch of lying or in his words of telling “whoppers”.

So, what’s the story behind all of this?

The story began a couple of weeks ago when Oracle’s Elison said that he thought Hewlett Packard had overpaid when they had paid £7bn to buy Autonomy and that Mike Lynch from Autonomy had earlier this year offered to sell Autonomy to Oracle but Oracle had turned it down as they felt it was too much.

Autonomy’s Lynch then said that any discussion of him talking to Oracle about them purchasing Autonomy was “inaccurate”.

Now the previous sentence is quite important as seeing that Autonomy was quoted on the London Stock Exchange, if there was any kind of sales process taking place then Autonomy were required to notify the Stock Exchange about it.

No such notification took place.

After Mr Lynch said that any talk of him discussing a potential sale to Oracle was inaccurate, Oracle responded in quite a dramatic way.

They posted a statement on their website (with the nice webpage address of Oracle.com/PleaseBuyAutonomy) and they didn’t hold back.

Amongst other things, they released PowerPoint slides of the meeting that Mr Lynch attended and the Oracle statement is entitled “Another Whopper from Autonomy CEO Mike Lynch”.

The statement then goes onto say amongst other things:

“Autonomy CEO Mike Lynch continues to insist that Autonomy was never ‘shopped’ to Oracle.  But now at least he remembers and admits to meeting with Oracle President Mark Hurd and Doug Kehring, Oracle’s head of M&A, this past April.  But CEO Lynch insists that it was a purely technical meeting, limited to a ‘lively discussion of database technologies.’  Interesting, but not true.  The slides Lynch showed Oracle’s Mark Hurd and Doug Kehring were all about Autonomy’s financial results, Autonomy’s stock price history, Autonomy’s Price/Earnings history and Autonomy’s stock market valuation.  Ably assisting Mike Lynch’s attempt to sell Autonomy to Oracle was Silicon Valley’s most famous shopper/seller of companies, the legendary investment banker Frank Quattrone.  After the sales pitch was over, Oracle refused to make an offer because Autonomy’s current market value of $6 billion was way too high.

We have put Mike Lynch’s PowerPoint slide sales-pitch up on the Oracle website – Oracle.com/PleaseBuyAutonomy – with the hope Mike Lynch will recognize his slides, his memory will be restored, and he will recall what he and Frank Quattrone discussed during their visit to Oracle last April. Yesterday, the Autonomy CEO did not remember having any meeting with Oracle.  Today, he remembers the April meeting and inaccurately describes how it came about and what was discussed.

The Statement continued but the key message appears to be that the two individuals are probably not the best of friends and somehow I don’t think the two CEOs will be sending each other Christmas cards this year.

Who earns the most out of a PwC or Deloitte partner and who’s suing Deloitte for $7.6bn?

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The Financial Times or FT as it is generally known, is a great newspaper.

First printed way back in 1888 by James Sheridan and Horatio Bottomley, the FT specialises in business and financial news.

You can find a lot of information in the FT.

Information ranging from share prices to the latest business activities can all be found within the paper’s famous light salmon coloured covers.

They have also recently highlighted some interesting figures about the average partner remuneration in the UK firms of PwC and Deloitte.

In the year to 30 June 2011 the average profit share for each PwC partner in the UK was a healthy £763,000.

In the previous year to 30 June 2010, Ian Powell, the Chairman of PwC, received £3.6 million. The latest figures show that he managed to increase this amount to £3.7 million in the year ended 30 June 2011.

But what about PwC’s fellow Big 4 partners from Deloitte?

Even though the Deloitte figures are not entirely comparable with PwC’s due to differences in the treatment of past pension obligations, the results are interesting and it’s not all good news for Deloitte partners in the UK.

This year saw their average profit share fall by 13%. They now have to scrape by with £758,000 per year compared to the £873,000 that they had the year before.

Whilst figures are available for the UK Deloitte partners they are not currently available for the Deloitte partners from over in the US.

My guess though is that the US Deloitte partner’s profit shares may well be reduced this year though as money may be held back for potential legal fees after it was announced today that Deloitte in the US are being sued for the princely sum of $7.6 billion.

They are accused of failing to detect fraud during their audits of a US mortgage firm which went out of business during the US housing crash.

A Deloitte spokesman was quoted in the press as saying the court claims were “utterly without merit”.

Tesco – “Every Little Helps”. Especially someone else’s shares…

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Share incentive schemes are a good way to motivate and reward senior executive employees.

As far as I’m aware though there are very few supermarket checkout operators that find themselves eligible for £100,000 worth of company shares as part of their remuneration package.

Mr Jeffrey Adams who worked on the checkout at Tesco’s Burton-on-Trent store in the UK though thought otherwise.

Back in 2002 he received some 44,000 shares in Tesco’s from the company that runs Tesco’s executive remuneration share plan.

These were meant for Mr Adams but alas not the Mr Jeffrey Adams that worked at the checkout in Burton-on-Trent but instead, Mr Jeff Adams who is the Chief Operating Officer of Tesco’s Fresh and Easy business in America.

Now what did Mr Adams (the checkout operator) do when he received the shares?

Did he do he honest thing and report it to his employees straight away?

No he didn’t.

Instead he sold the shares and made a profit of £100,000.

His ill-gotten gain remained secret for 7 years until Mr Adams (the Chief Operating Officer) tried to cash them in and found that the shares were nowhere to be found.

Mr Adams (the checkout operator) didn’t really appreciate the paper trail that exists when shares are sold and when he was arrested he claimed that they were left to him by his grandfather.

Mr Adams (the checkout operator) no longer works for Tesco and was last week jailed.

The judge said “You have to serve a prison sentence for £100,000 of dishonesty. You have shown no remorse and gave no plea of guilty.”

If you found this item interesting you may also like:

Which is worse. A $3 billion fraud or taking $100 and giving it back the next day?

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Taylor Bean & Whitaker were one of the largest privately held mortgage lenders in the US.

Paul Allen was their CEO and involved in all the key areas of the business. Unfortunately for a lot of people Mr Allen also became involved in the fraud which led to the Taylor Bean business being closed down with 2,000 people losing their jobs.

The fraud also contributed to the collapse of Colonial Bank in the States after they purchased hundreds of millions of dollars of Taylor Bean mortgages.

Two major European banks also suffered as BNP Paribas and Deutsche Bank lost nearly $2 billion as a result of buying various corporate paper from Taylor Bean which was not suitably backed up by collateral.

A $3 billion fraud with thousands of people losing their jobs. Clearly a serious crime.

The end result was that Mr Allen was jailed for just over 3 years.

Meanwhile at the other end of the spectrum in terms of crime against financial institutions and the financial amount involved, a teller at Capital One bank in the States was approached by Roy Brown who put a hand under his jacket, claimed it was a gun and demanded money.

The teller handed Mr Brown 3 piles of money but he only took one $100 bill.

Mr Brown then had a change of heart and the next day handed himself into police and told them that his mother didn’t raise him that way.

He was homeless and told police that he needed the $100 to attend a detox centre.

Despite Mr Brown’s dramatic change of heart he was subsequently sentenced to 15 years in prison for the robbery.

So in summary, $3 billion and 3 years vs. $100 and 15 years…

If you found this item interesting you may also like:

Would you steal £30m from ING Bank?

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How much would you try to steal from your employer if you work for ING bank and you’re an accountant?

Hopefully most of you would not try to steal anything from your employer but if you were a lady by the name of Rajina Rita Subramaniam who worked for ING in Sydney, Australia for 20 years then the temptation was just too much.

So what did she steal?

A few pens? Maybe some yellow post-it stickers?

Nope, not even close.

According to press reports in Australia Rajina is about to plead guilty to defrauding ING of an astonishing AUS $45 million (approx. £30 million).

The sharp eyed amongst you will probably guess that she didn’t take if from the petty cash til.

She allegedly siphoned off millions of dollars from the company into a number of private accounts.

Rather than hold on to the stolen money for a rainy day she spent the money on a variety of items including beachside apartments and diamond jewellery (oh, and rather bizarrely some Michael Jackson memorabilia).

Even ignoring the items such as luxury properties she had outside her office, Police allege that she had over 600 pieces of jewellery as well as 200 perfume and make-up items in her office at the ING building where she worked.

Whilst Ms Subramaniam was temporarily one of the wealthiest people in Australia I don’t think she was one of the brightest. Surely it must have been obvious that when a normal bank employee started having the lifestyle of a Saudi Prince there would be certain suspicions raised.

After all, how many of her colleagues also had luxury properties looking over Bondi Beach and wore a Bulgari diamond necklace worth nearly £1 million.

According to prosecutors, the thefts came to light when staff at Bulgari saw that the accountant was paying for luxury items via direct transfers from ING accounts.

It’s not clear from the reports whether Ms Subramaniam wore a Michael Jackson diamond studded single glove to meetings in the office.

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Is it acceptable for a client to hold your audit files hostage?

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It seems that Deloitte has had a spot of bother in dealing with one of its Chinese clients.

When they initially won the audit for Longtop they were no doubt very pleased.

Longtop Financial Technologies Ltd., to give it its full name, is a Hong Kong-based maker of financial software. In 2007 it raised $210 million in a US IPO underwritten by Goldman Sachs and Deutsche Bank.

Things haven’t been going too well recently though. Their share price has plunged by 56% since last November reducing the company’s market value by more than $1 billion.

They have also just lost their auditors as Deloitte has just resigned.

Auditor resignations aren’t that unusual but in Deloitte’s resignation letter that was submitted to the U.S. Securities and Exchange Commission there are a few items which to put them in non technical language, sound “extremely dodgy”.

The full resignation letter submitted to the SEC can be found here but some extracts of the letter showing the highlights (or lowlights) of some items that Deloitte identified at Longtop are as follows (note that the bold emphasis on certain words was made by us):

[Start of extract from  resignation letter]

As part of the process for auditing the Company’s financial statements for the year ended 31 March 2011, we determined that, in regard to bank confirmations, it was appropriate to perform follow up visits to certain banks. These audit steps were recently performed and identified a number of very serious defects including: statements by bank staff that their bank had no record of certain transactions; confirmation replies previously received were said to be false; significant differences in deposit balances reported by the bank staff compared with the amounts identified in previously received confirmations (and in the books and records of the Group); and significant bank borrowings reported by bank staff not identified in previously received confirmations (and not recorded in the books and records of the Group).

In the light of this, a formal second round of bank confirmation was initiated on 17 May. Within hours however, as a result of intervention by the Company’s officials including the Chief Operating Officer, the confirmation process was stopped amid serious and troubling new developments including: calls to banks by the Company asserting that Deloitte was not their auditor; seizure by the Company’s staff of second round bank confirmation documentation on bank premises; threats to stop our staff leaving the Company premises unless they allowed the Company to retain our audit files then on the premises; and then seizure by the Company of certain of our working papers.

In that connection, we must insist that you promptly return our documents.

[End of extract of resignation letter]

I have to say that my initial observations are that Deloitte did the right thing in resigning!

Longtop however have released a press release in connection with the resignation and included the statement that they have “initiated a search for a new auditor.”

Somehow I’m not convinced that the other top auditing companies will be rushing out to win Longtop as a client.

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It took 26 years to find out that he’s not an expert…

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One of my friends is a TV producer and he’s recently been working on a documentary that just amazed me and I thought you may enjoy hearing of.

In 2007, Gene Morrison was convicted of a number of serious offences, including perjury.  The reason for this is that he had successfully posed as an expert forensic scientist for some time, having taken some money from people and having even appeared repeatedly as an expert witness in court.

When I say “some time”, I could be more precise: I mean 26 years.

When I say “some money”, I mean over a quarter of a million pounds.

He was one of the favoured expert witnesses used in the Manchester area by the UK’s Crown Prosecution Service.  Why?  Apparently he had a good reputation.  How reliable is reputation as a way to assess somebody’s competence?  Read on…

As my friend was telling me this story, my mind turned to audit standards. In particular, my mind turned to ISA 620 Using the Work of an Auditor’s Expert.

In criminal investigations where forensic evidence is important, it’s clearly necessary to obtain expert testimony.  The same applies with specialist areas of accounting that require non-accounting knowledge.  Either the auditor can prove the necessary skills themselves, or can commission an expert.

The problem here is that where evidence comes from somebody who is less expert than they claim to be, evidence that appears to be reliable is actually then worthless. Good quality forensic evidence is destroyed by being handled by a charlatan.

Doctor Gene Morrison MSc PhD (or to give him his full list of titles, Gene Morrison) had run his own company, with the grandiose title of Criminal and Forensic Investigations Bureau (CFIB) on the basis that he obtained the work, then secretly contracted it out to unwitting genuine experts.

He collected the cash, claimed the work as his own and kept almost all of the cash. His knowledge of forensic science appeared to come exclusively from the complete box set of the CSI: Crime Scene Investigation TV shows.

Astoundingly, it appears that in the 700 or so investigations where he provided expert evidence, not one lawyer meaningfully verified his credentials.  His statement that he was an expert appeared to be enough to be considered sufficient.  He appeared as a witness in court many times, somehow bluffing his way through cross examination.

The criminal trial against him was thorough, and the jury found him guilty of 20 of the 21 charges against him.

An auditor following ISA 620 could almost certainly not have been hoodwinked even once by Mr Morrison’s scam.  ISA 620 requires an auditor to verify the existence and quality of any qualifications an expert claims to hold.  Critically, it also requires that the auditor know enough about the subject material to discuss the matter with the expert and reach a concurring opinion with them.  This would surely be impossible with somebody who didn’t know a thing about the subject matter under discussion

He was eventually caught out when privately commissioned by some desperate and grieving parents who wished to know more of the circumstances of the sudden death of their son.  Their dissatisfaction with the bewildering contents of his report caused them to conduct some cursory investigation of their own; shortly followed by a phone call to the police.

Mr Morrison was sent to prison for five years.

One of my friends is a TV producer and he’s recently been working on a documentary that just amazed me and I thought you may enjoy hearing of.

In 2007, Gene Morrison was convicted of a number of serious offences, including perjury. The reason for this is that he had successfully posed as an expert forensic scientist for some time, having taken some money from people and having even appeared repeatedly as an expert witness in court.

When I say “some time”, I could be more precise: I mean 26 years. When I say “some money”, I mean over a quarter of a million pounds. He was one of the favoured expert witnesses used in the Manchester area by the UK’s Crown Prosecution Service. Why? Apparently he had a good reputation. How reliable is reputation as a way to assess somebody’s competence? Read on…

As my friend was telling me this story, my mind turned to audit standards. In particular, my mind turned to ISA 620 Using the Work of an Auditor’s Expert.

In criminal investigations where forensic evidence is important, it’s clearly necessary to obtain expert testimony. The same applies with specialist areas of accounting that require non-accounting knowledge. Either the auditor can prove the necessary skills themselves, or can commission an expert.

The problem here is that where evidence comes from somebody who is less expert than they claim to be, evidence that appears to be reliable is actually then worthless. Good quality forensic evidence is destroyed by being handled by a charlatan.

Doctor Gene Morrison MSc PhD (or to give him his full list of titles, Gene Morrison) had run his own company, with the grandiose title of Criminal and Forensic Investigations Bureau (CFIB) on the basis that he obtained the work, then secretly contracted it out to unwitting genuine experts.

He collected the cash, claimed the work as his own and kept almost all of the cash. His knowledge of forensic science appeared to come exclusively from the complete box set of the CSI: Crime Scene Investigation TV shows.

Astoundingly, it appears that in the 700 or so investigations where he provided expert evidence, not one lawyer meaningfully verified his credentials. His statement that he was an expert appeared to be enough to be considered sufficient. He appeared as a witness in court many times, somehow bluffing his way through cross examination.

The criminal trial against him was thorough, and the jury found him guilty of 20 of the 21 charges against him.

An auditor following ISA 620 could almost certainly not have been hoodwinked even once by Mr Morrison’s scam. ISA 620 requires an auditor to verify the existence and quality of any qualifications an expert claims to hold. Critically, it also requires that the auditor know enough about the subject material to discuss the matter with the expert and reach a concurring opinion with them. This would surely be impossible with somebody who didn’t know a thing about the subject matter under discussion

He was eventually caught out when privately commissioned by some desperate and grieving parents who wished to know more of the circumstances of the sudden death of their son. Their dissatisfaction with the bewildering contents of his report caused them to conduct some cursory investigation of their own; shortly followed by a phone call to the police.

Mr Morrison was sent to prison for five years.

What’s in a name? Ask Julian Assange.

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Trademarking your name and logo is normally the preserve of businesses but WikiLeaks founder Julian Assange has just submitted an application to trademark his name.

The 39 year old computer hacker who is currently fighting extradition to Sweden over allegations of rape and sexual assault, has recently applied for the trademark on his name through London-based law firm Finers Stephens Innocent.

If the application is successful , he will own the trademark to his name for the purposes of “Public speaking services, news reporter services,  journalism, publication of texts other than publicity texts, education services and entertainment services.”

He is not the only well known individual that has trademarked their name. Sarah Palin, the US politician, has applied for similar trademark protection for both her and her daughter Bristol Palin.

Now if any of you happen to be called Julian Assange but are not the Mr Assange that founded WikiLeaks,  then don’t worry, you won’t have to change your name. The trademark will only prevent others from advertising and selling the same kind of materials using the Julian Assange name.