Professional Services Monitor: Today

This morning on my Facebook advertising sidebar, which I actually read more often than not, an ad for the AICPA’s FeedThePig.org site appeared.

FeedThePig.org is the AICPA’s financial literacy initiative, particularly aimed at younger people.  From its about page:

I’m “spokespig” Benjamin Bankes, here to remind you to feed your piggy bank.

This website is here to help you do just that. Here, you’ll find fun tools, a quiz, tons of tips and other resources. They will all help you think through your spending and saving habits, identify ways you can start saving and commit to making changes that will reduce your debt and grow your savings.

The spokespig himself itself is creepy in the same way the Burger King King scares the living hell out of my kids while also making them want a Whopper Jr.

Who’s VS. Creepier?

I mention this because financial education and literacy is important to me.  It’s crucial importance to successful adult life is woeful neglected by our educational system.  I also think that the accounting industry is suited to take an active role in educating young people outside of the classroom.  I know that FeedThePig.org has been around for some time, and I am glad to see that they are advertising themselves in the social media market.

Mark Olsen, chair of the PCAOB since June 2006, announced his resignation effective then end of July.

Mark Olson, chairman of the Public Company Accounting Oversight Board, said he is resigning his post at the end of July, but did not elaborate on the reasons.

In a letter of resignation, Olson, 66, simply said, “The decision is entirely personal and reflects my desire at this time of life to establish new priorities.”

Olson was named PCAOB chairman on June 26, 2006, after serving on the board of governors of the Federal Reserve. The resignation will take effect after more than three years of service in the job, on July 31, 2009.

He was appointed by the SEC to run the board, which inspects accounting firms that perform audits on public companies. The PCAOB is also slated to begin inspecting accounting firms that audit non-public broker-dealers, such as the three-person accounting firm that audited Bernard Madoff’s investment management firm.

While not yet available to civilians, CFO.com has reviewed an advance copy of Cynthia Cooper’s new book, “Extraordinary Circumstances: The Journey of a Corporate Whistleblower.” The book, which is due for release on Feb. 4, 2008, is Cooper’s account of the accounting scandal that brought down WorldCom.

Cynthia Cooper, the internal auditor who unearthed the WorldCom accounting scandal, doesn’t record such a refrain in Extraordinary Circumstances, her gripping new book about her investigation. But Cooper’s bywords might well have been: “If you don’t understand it, and nobody can explain it, keep digging until you find out what it means.”
…
For her part, Cooper wasn’t following money, but information — or, rather, the lack of it. Time and again, as she worked her way through a labyrinth of misplaced accounting entries, she encountered jargon that sounded authoritative, but proved to be completely phony.
It was the kind of empty language that investors at the time had heard from Enron as well, as executives of the energy company tried to justify assetless accounting and bogus special-purpose entities.

The review notes that the strength of the book is Cooper’s first-hand accounts of her investigation, moving up WorldCom’s chain of command, including Ebber’s outsized ego and willful ignorance.

CFO.com today reports on an analysis of PCAOB inspection reports made by a pair of academics from the Hong Kong University of Science and Technology. Some key findings include:

• Negative PCAOB report do not impact a firm’s market share.
• The way PCAOB conducts its inspections makes meaningful conclusions on a firm’s overall quality difficult.
• The AICPA peer review system still has merits because of its summation of overall audit firm quality.

As a former auditor himself in the U.K. offices of KPMG, Lennox has long been reviewing the scrutiny the audit firms receive from the peers and, now, the PCAOB. He believes the current level of scrutiny is appropriate, but that the PCAOB’s current methods are not giving a full picture of each firm’s “future quality.”

While that leaves the auditors’ clients without the information they may need to feel confident in their external auditor, Lennox’s research affirms that the reports are leading to improvements in quality regardless.

A frequent opening pleasantry on conference calls is often, “How’s weather there?” When someone learns that ARGI is located in the greater Seattle area, we regularly hear an anecdote of how rainy it was was on a quick business visit several Novembers ago, or how a cousin-in-law nearly drowned by looking up into the pouring Seattle sky. With a mixture of self-loathing and self-defense of our “secret” of life in the Pacific Northwest, we usually go along with the assumption that Seattle Is The Rainiest Place On Earth.

Now, the secret is out. A study summarized at LiveScience.com, Study Reveals Top 10 Wettest U.S. Cities, shows that Seattle isn’t even in the top ten.

Mobile, Alabama, actually topped a new list of soggiest cities, with more than 5 feet of rainfall annually, according to a study conducted by San Francisco-based WeatherBill, Inc.
The Southeast dominated the most rainy list, while the Pacific Northwest never enters the list until Olympia, Washington pops up at number 24.

A new conversation-starter is order.

CFO.com reviews a Government Accountability Office audit of the SEC’s own internal controls. While the SEC improved 2005 to 2006, but new problems were found.

To be sure, by 2006 the SEC had fixed 58 of the 71 weaknesses in its internal controls that the GAO had found in its 2005 audit. Besides the 13 lingering flaws, 15 new weaknesses were found. The SEC corrected 11 of thee new problems during the course of the review and successfully passed its audit last September.

The GAO said that the SEC has been lax in implementing its own policies and procedures and has not been effective in systems testing. Specifically cited problems included applications connected to both the Internet and the SEC internal network; weak database user passwords; and poorly security at physical locations.

The UK edition of the Financial Times is reporting that PricewaterhouseCoopers’ Japanese Affiliate firm, Misuzu, will be shutdown.

PwC, the world’s biggest accounting firm, is to shut Japanese affiliate because of its involvement in the Nikko Cordial broking scandal, leaving it with a smaller presence than rivals in the world’s second largest economy.

Misuzu, one of Japan’s big four accounting firms, said yesterday it would wind down its operations because of possible penalties stemming from its work for Nikko Cordial, which faces delisting by the Tokyo Stock Exchange because of accounting fraud.

Misuzu was formerly known as ChuoAoyama and was penalized in 2006 with a two-month suspension in connection with another scandal at Kanebo. In July 2006, PwC opened a new Japanese firm, PwC Aarata, to give its ChuoAoyama clients a new firm. Today’s announcement does not affect PwC Aarata.

Some major PwC clients, such as Sony Corp. and Millea Holdings, have changed from Misuzu/ChuoAoyama to PwC Aarata. However, the Financial Times article reports that only 70 of the estimated 750 Misuzu clients have switched to Aarata.

Yesterday, KPMG made the front page of the Wall Street Journal.  And the story was positive.  At least, the story showed the positive steps KPMG took to handle a very negative situation.
"Narrow Escape: How a Chastened KPMG Got By Tax-Shelter Crisis" tells how the firm and its then-new chairman Tim Flynn got the firm through the crisis to reach an agreement with the government, avoiding criminal indictment of the firm.

Timothy Flynn, a top executive at KPMG LLP, was driving to a nephew’s graduation in May 2005 when he got a phone call from the chairman: The firm faced imminent criminal indictment over tax shelters it used to sell.

Then a different sort of shock. One week later, the chairman, Eugene O’Kelly, learned he had a brain tumor that left him just months to live. Mr. Flynn, a down-to-earth accountant who once led KPMG’s human-resources department, was suddenly thrust into its top job, where he faced an urgent task: to somehow persuade the government not to indict. He knew that criminal charges against the firm would probably kill it, as they did Arthur Andersen after the Enron scandal.

Clearly, KPMG’s problems here are not yet over. However, the article shows that both sides—the government and KPMG—learned a lesson from Andersen. Regulators, prosecutors and lawmakers now seem all-too-aware that losing another large, international audit firm would be disastrous for US and global capital markets. More interesting, however, is what the Big Four seemed to have learned from the tortuous, public death of one of their peers.

As the Enron frenzy grew in late 2001, Andersen largely let other dictate the story. Whatever Andersen knew about the seriousness of the matter internally, it publicly sat back. By the time Andersen tried to exercise some control of the story in the media, it was too late. Despite “public” being literally the professional middle name of CPAs, facing public attention and managing public relations has not been a strong competency of the profession. Thus, we bore witness to a case study in failure of crisis PR.

In a crisis situation, often the worst course of action is inaction. Tim Flynn acted. As the WSJ puts it, “Mr. Flynn took a gamble.” Until June 2005, KPMG had denied anything criminal in its “tax advice,” according to the WSJ. With a criminal indictment eminent, Flynn met with the Justice Department and admitted wrongdoing. “Two months later, the government gave KPMG a deferred-prosecution deal, holding off indicting if KPMG paid a $456 million penalty and met other conditions.”

This crisis for KPMG had many actors and constituents, with the Justice Department being only one. Flynn’s decision to admit that the tax advice was actually tax shelter was not universally supported within the firm. He had to assure the firm’s partners that the decision was in the best interest of the firm. According to the article, Flynn personally contacted hundreds of partners individually and then held a special meeting off partners, accepting hard questions and giving candid answers.

To retain clients, Flynn and KPMG partner Sven Holmes, a former federal judge, visited more than 100 audit clients, again taking tough questions but giving strong answers.

Mr. Flynn met with [General Electric] directors. According to a person who attended, his message amounted to: “There’s some stuff here, it’s really ugly, it happened, and here’s what we’re going to try to do with this situation.”
GE stuck with KPMG. A spokesman for GE says it is “pleased that KPMG and its leadership have aggressively addressed the compliance issues raised in the government’s tax case.”

Finally, KPMG dealt with the media and the public. Soon after meeting with the Justice Department, KPMG issued a statement in which the firm took full responsibility for “unlawful conduct by former KPMG partners.”

The article is well-written illustration of 360-degree leadership. Flynn took action, in very difficult circumstances, and followed through.

The PCAOB released a public report today, “Observations on Auditors’ Implementation of PCAOB Standards Relating to Auditors’ Responsibilities with Respect to Fraud,” that focuses on common issues the board found over the course of its firm inspections. The report does not name any specific firms nor proposes changes to any PCAOB standard.

In the board’s press release on the report, Mark Olson, board chairman, said, “This report is a constructive way to remind all auditors of what the Board’s standards require of them in these areas. Careful attention to these requirements is important to best position auditors to detect material misstatements caused by fraud.”

Among the issues cited by the board is an overall checklist approach by auditors. Instead designing testing based on the particular situation, the board finds that auditors often check-off items in standard audit programs. PCAOB inspectors also found instances failed to expand audit procedures when addressing identified fraud risk factors, an approach the board calls “mechanical” in the report.

A PDF copy of the report can be obtained from the PCAOB website.

Ames Research Group this week released the latest Big Four Quarterly Competitive Summary, covering competitive auditor change activity between the fourth quarter of 2005 and third quarter of 2006. 
 This report covered nearly 440 events involving Big Four firms.  ARGI research covers both public and privately-held companies.
Ernst & Young continues to perform well in winning new work and doing so efficiently.  E&Y won the most new clients during the 12 months covered, and the firm won almost 50% of the engagements on which it proposed. 
Deloitte’s engagement success rate, or “batting average” fell slightly.  However, Deloitte continues to narrow its net loss in clients over a 12-month period.  Since 2003, the Big Four have collectively lost clients, but Deloitte has moved back towards a net gain quicker than the other firms.
KPMG dropped slightly in its invitation and engagement rates, but also improved slightly on its net client loss.
PricewaterhouseCoopers trails the rest of the Big Four by a significant margin in both invitations and successful engagements, and continues to have a large net loss in market share.