• Auditors Know How To Backdate More Than Options

    By • Dec 19th, 2007 • Category: Pure Content

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    Did auditors aid and abet options backdating by blessing schemes under the guise of “Everyone does it…”? At least one person thinks so. But we may never know, because the firms keep settling instead of going to trial and clearing their names.

    It may be hard to believe that an auditor, an accountant, a professional would advise a client to backdate documents, to disregard strict interpretation of laws and regulations. And, then again, maybe not.

    Ex-BDO Seidman Auditors Disciplined by PCAOB
    The Public Company Accounting Oversight Board has disciplined two former auditors at BDO Seidman for failing to review the audit work of a junior member of the firm and then trying to cover up by backdating documents.

    The PCAOB found that Stephen J. Nardi, a partner in BDO’s Philadelphia office, assigned audit manager Ann Marie Fitzpatrick to oversee an audit of client Hemispherx Biopharma’s financial statements for fiscal year 2004. However, after she completed the audit-planning phase, Nardi directed her to stop working on the Hemispherx audit engagement and concentrate on a larger client.

    After she stopped working on Hemispherx, though, she did not supervise or review the work performed by more junior members of the audit team, according to the PCAOB. The fieldwork was completed without the supervision of an audit manager and was never subject to a detailed review as required by BDO policy, said the PCAOB. Nardi authorized the issuance of BDO’s audit report on Hemispherx’s financial statements on March 16, 2005, and the report was included with the Form 10K filed that day with the Securities and Exchange Commission.

    However, later that year Nardi learned that BDO partners would be performing quality control inspections of his local office and that the Hemispherx audit would be one of the engagements selected for inspection. He asked a subordinate to check the Hemispherx workpapers. The subordinate noted the absence of initials and signatures indicating that a detailed review had been performed.(Bloggers Note: There was probably time billed to the client for the partner and manager review but an absence of any time charged in the firm’s internal time reporting system. Regulators: you should be looking for this common discrepancy.) .

    When Fitzpatrick returned from vacation the following week, Nardi directed her to initial and sign the workpapers and backdate them to dates preceding the issuance of the March audit report, even though she had not done a detailed review…

    “This matter, which took place in 2005, involved two former professionals of the firm,” said BDO in a statement. “Upon uncovering the conduct, BDO Seidman immediately launched an extensive internal investigation, conducted by outside counsel, and appropriate corrective measures were taken by the firm.”

    PCAOB – In my experience, this kind of behavior is rampant in the firms. There’s always a scramble when either inside QA, peer review or PCAOB comes to town. Why do you think they constantly have to improve their Quality Assurance processes, policies and procedures? When are they going to be ready for prime time and when are you going to go after the big guys in the same way you’ve slammed these poor BDO folks on this?

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    22 Responses »

    1. I’m with you on this Francine. This kind of “late cleanup” is not unknown in the Big Four.

    2. I have worked at major accounting firms, they all clean up workpapers. Does that mean that the audits were substandard? No.
      Did anyone read in the first paragraph of the PCAOB findings what Mr. Nardi’s responsibilities were? Assurance partner, scheduling partner, quasi human resource partner. When did the poor guy have time to service his clients? What firm lets one person take on all of these responsibilities. PCAOB should have went higher on the food chain on this one.

    3. How much higher can they go? OMP or Regional partners seem to be immune from prosecution in this case as they never had anything to do with the client. I don’t think the PCAOB, or any governing body for that matter, would ever even think about going after a CEO.

      Seems to me that the buck stops with the Client Service Partner.

    4. MAYBE THEY SHOULD.

    5. Re: the above post:

      How? How can they go after an individual not specifically working on the engagement? Isn’t that one of the perks of an LLP?

    6. I believe that the reason why firms do “late cleanup” is because some are very understaffed. Administrative clean up falls through the cracks when you have deadlines and are trying to service the client. My opinion is that the firms should, on a regional and national level ensure that each of their offices are properly staffed so a situation like this does not happen

    7. I’m happy to work in an office where those kinds of lapses are both unthinkable and looked upon with what you could fairly call scorn.

      It’s a point of pride to get things done right.

      Although the anon commenters’ similar attitudes are understandable, what they don’t seem to have noted is the fact that a poor quality review is a huge ugly stain on the record of anyone hoping to progress in a quality firm. And that, really, is the true punishment that the regulators/inspectors can mete out.

    8. I don’t get it? I seem to recall that GAAS insists that each engagement be “properly staffed and supervised” yes I’m sure I read that someplace. So if the engagement partner is also the head cook and bottle washer for BDO, and the manager was specifically told NOT to work on the engagement, sounds like BDO should get sanctioned, not the folks that were obviously buried in more work they they could possible handle.

    9. What Nardi and Fitzgerald did is called ‘false sign-off’. It occurs because the way firms are run. How do you get a pay raise and promotion? Field personnel have a goal conflict. On one side it’s come in under budget and keep the client happy. The other side is do all the work. So as long as firms have conflicting policies false sign off will occur. But the real question is why did the QC review team alert the Philly office which client files they would be examining. That’s no different than auditors telling client which warehouses they’re going to observe in the inventory count. If firms want to minimize false sign off, QC should NOT tell what files they’re going to review. Just show up and review. If the work is done, why should the office folks care. Only if they didn’t complete the audit before releasing the report do office staff need to know to files to be reviewed. Disclosing the files to be reviewed is a MAJOR QC weakness.

    10. While BDO certainly isn't the only firm cleaning up files, in this instance substandard procedures were clearly employed and intentionally covered-up. BDO is quickly gaining a reputation for these and similar types of foul ups. Apparently, the firm does not understand the importance of assigning the correct dates to documents…whether the documents be workpapers or stock options.

      BDO clients, employees, and potential clients & employees beware, this firm is quickly becoming known for poorly trained, inept auditors. Not only that, their employee turnover rate is outrageous even by public accounting standards. They also seem to obtain more and more clients by submitting low bids and then performing substandard audits, often overlooking serious accounting errors. It is not unreasonable to anticipate that BDO Seidman will be the audit firm responsible for failing to uncover the next big accounting scandal.

      Auditor quality has been shown to have a significant impact on share price of publicly traded clients. Boards, Audit Committees, and chief executives owe it to their shareholders to select auditors who will protect their assets. Let BDO audit the closely held organizations it is (somewhat) qualified to handle.

    11. […] many more of these situations, in backdating cases for example, would come to light if only more went to trial rather than being settled? Maybe we need Judge Rakoff to put a stop to audit firm settlements that obscure the truth about […]

    12. Dear all,

      I have a question regarding the PCAOB investigation. My previous accounting firm had PCAOB inspection one year. Apparently my partner and managers were trying to clean up the workpapers and had me signed off on few documents and backdated (although I had no clear recollection of what I did or what they were doing few years ago, they were pushing me around on different tasks in a short period of time), PCAOB started investigation on this company and had me on witness stand. Am I in trouble? Will I lose my job or go to jail?

      Thanks,

    13. Dear Francine,

      Will pcaob put a staff into jail or penalize him for signing off and backdating other auditors workpaper for pcaob inspection few years ago even though he was told by management at that time. He is no longer with the firm and not a CPA.

      Thank you very much,

      An accountant

    14. @accountant

      This is not an offense that lands you in jail. But depending on the circumstances you could be in trouble professionally. if you are not a CPA there is not much they can do but if you want to be a CPA and they find you responsible too, that may be a problem in the future. I suggest you get a lawyer if you do not already have one.

    15. Dear Francine,

      I truly appreciate your prompt reply. From your reply, it might affect me if I want to be a CPA, would it affect other designations, such as CIA , CFE, CISA….? Would it affect my current job?

      Thank you,

      An accountant.

    16. Francine,

      I appreciate your prompt reply. If I have no plan to be a CPA, but some other auditing designations I might pursue in the future, would it affect those designations? Would it affect my current audit job? Would PCAOB penalize me by prohibiting me from working on any other audit works giving the facts it happened few years ago and I was not that mature/experienced/brave enough to say no to my managers?

      Thank you,

      An accountant.

    17. @Accountant

      It”s hard to say. it depends on whether PCAOB decides you should have known better and done something differently. Any bad judgement by the regulator will have a negative effect on your future. Do your best to defend yourself. Get help if you can.

      Francine

    18. Thank you Francine. I hope someone with similar experience could tell me no to worry, I am stress out.

    19. @ Francine,

      What if the staff also held a position as a regulator currently, what would happen to his current career? Does he deserve a second chance?

    20. @Anonymous

      Not for me to say without all the facts. I talk to students and new professionals about making sure you have trusted mentors, family, friends you can use as sounding boards and as support if you have to do right thing and then take consequences. I do not believe in the excuse “I was young and dumb.” Certainly not for someone who aspires to be a professional, a CPA.

    21. I agree with you @ Francine

    22. Another overreaching headline — “Auditors Know How To Backdate More Than Options”. You paint with too broad a paintbrush. I agree that the BDO Philadelphia office incident is egregious and discipline for Nardi is in order. The headline also implies widespread backdating and participation by auditors in the backdating of options which is untrue.

      Your conclusion are patently untrue when applied to the generic term “Auditors”. It impugns the integrity of the other BDO partners not involved in this hopefully isolated incident as well as the other Big 4 partners and professional staff.