Looking Out For Me, Myself, And I

By • Mar 15th, 2009 • Category: KPMG, Latest, PCAOB, Pure Content, Sarbanes-Oxley

It’s been a whirlwind weekend, after a very busy week.  I have been posting comments almost constantly.  It seems that KPMG, and now Deloitte again, are cutting more people.  You have been using this blog as a gathering place, both to get information and to disseminate new information, including lots of advice from those who have already been through an involuntary termination.

It’s very gratifying.

There is at least one person who doesn’t have to worry about having a good job, at KPMG no less.   Thomas Ray was the Chief Auditor and Director of Professional Standards for the PCAOB.

According to WebCPA:

Ray is joining KPMG as a partner in the firm’s department of professional practice in New York. 

According to the PCAOB official press release:

The principal responsibility of the Office of the Chief Auditor is to advise the PCAOB Board members on the establishment of auditing and related professional practice standards. As such, Mr. Ray was actively involved in and oversaw the development of all of the auditing standards developed, proposed and adopted by the Board.

Mr. Ray was instrumental in designing the Board’s auditing standards to implement Section 404 of the Sarbanes-Oxley Act of 2002…the development of the suite of seven proposed new standards related to the auditor’s assessment of and response to risk in an audit… [and] was actively involved in the development of the Board’s Ethics and Independence Rules…

Prior to joining the PCAOB staff, Mr. Ray was a partner with KPMG LLP in their department of professional practice in New York. Prior to joining KPMG, he was director of auditing standards at the American Institute of Certified Public Accountants. He began his public accounting career with Grant Thornton LLP. 

I got a nice personally signed letter from Tom, once upon a time.  

I will treasure it always.

I met Mr. Ray last June at the Compliance Week Annual Conference.  

At the Compliance Week Conference earlier this month, I asked Tom Ray about the push on the part of some “activist accountants” – an oxymoron if there ever was one –  to change the rules about who signs audit opinions.  Some (including me) think that the individual responsible partner should be signing the report.  This recommendation (not proposal, in carefully worded language by ACAP) was made recently by the Treasury’s Advisory Committee on the Auditing Profession. 
I mentioned to Mr. Ray that, in contrast to lawyers, it’s very difficult to get information about individual partners and their clients from the audit firms.  Unless someone is a frequent public speaker or a frequent author of whitepapers, (in other words an anointed spokesperson for the firm,) you’d be hard pressed to find an email address or proof of employment, let alone a resume or photo.
I didn’t print his answer to my question at the time.  It was something like, “There’s no f***kin chance in hell…” or an approximation. I was so dazzled by his good looks, charm, and suave delivery I couldn’t bring myself to call him out in such a perfunctory manner.
But Thomas Ray’s triumphant return to KPMG, after exile at the PCAOB doing the profession’s bidding, just about says it all on the subject of the effectiveness of the PCAOB and its willingness to enforce standards of audit quality, professional and ethical standards, and auditor independence. We like to pretend that our regulatory organizations are above it all, bound to a higher purpose, committed to serving the public, investors, and taxpayers in general.  But, as we have seen with the SEC’s Madoff muck-up and the criticism of Treasury Secretary Geithner’s financial crisis policies as being nothing more than a continuation of his Goldman Sachs colleague Paulson’s kow-towing to Wall Street ….  
Well, the apples don’t really fall, or roll, too far from their money tree.
The PCAOB actually just re-issued a proposal for an engagement quality review standard.  

The PCAOB today voted to repropose for comment an auditing standard on Engagement Quality Review (EQR). The Board first proposed a new standard on EQR on February 26, 2008.

Since then, the Board has made extensive changes to the original proposal and is now seeking comment on the revised EQR standard. 

Yeah, extensive changes I’m sure.  I sat through the meeting where the original proposal was discussed.  

The discussion was broader than what is now covered by the PCAOB’s latest proposed standard over concurring partner opinions. Even though many lament the addition of even more standards and codes where good approaches seem to exist, the PCAOB is a regulatory body and has an obligation to formalize their interim standards. This is one of them. A long standard, covering only how and when a concurring partner review is necessary, how that must be documented, and how to judge the integrity, independence, competence and objectivity of the reviewer, may seems excessive to the naive.

However, in the environment I just witnessed on Wednesday, with several different competing interests, all positioning themselves, bloviating on their position and then sitting back self-satisfied and reluctant to compromise, any precision on what will be reviewed and how can only help. I applaud the PCAOB for taking these baby steps, and pinning the son of a guns down on these issues, one by one.

The proposed standard would apply to all engagements performed in accordance with the standards of the PCAOB. In addition to requiring certain specified procedures, the proposed standard requires the engagement quality reviewer to assess whether there are areas within the engagement that pose a higher risk that the engagement team failed (1) to obtain sufficient competent evidence or (2) to reach an appropriate conclusion. In such areas, the engagement quality reviewer should evaluate whether the engagement team responded appropriately to the assessed risks, the judgments made were reasonable, and the results of the procedures performed support the engagement team’s overall conclusions.

Furthermore, the proposed standard includes a new requirement that the engagement quality reviewer must satisfy before providing concurring approval of issuance…Under the proposed standard, the reviewer must not provide concurring approval of issuance if he or she knows, or should know based upon the requirements of the standard, that the engagement team failed to obtain sufficient competent evidence, the engagement team’s overall conclusion or report is inappropriate, or the firm is not independent of its client…

Obviously this proposed standard was too hard on the audit partners and the firms.  Good thing Mr. Ray got it “extensively changed” before he went back to his firm.
I tried to find a mainstream media report of Mr. Ray’s move from the PCAOB back to KPMG.  
Zip, zero, nada.
All I could find were anticipatory and post-move announcements in CFO.com, Compliance Week, and then the article in WebCPA. All are respectable publications but hardly the Wall Street Journal, Financial Times, New York Times, or Washington Post.  
Why wasn’t there a “no revolving-door” rule included when the PCAOB was established?  Is there anything to prevent the Big 4 partners who staffed the accounting firm regulator from immediately returning to a firm they regulated, before their seat at PCAOB is even cold?  
Even the SEC has stricter rules.
Remember, Mr. Ray was at the PCAOB when KPMG escaped the guillotine in the tax shelter case.  
Mr. Ray presided over investigations of partner misconduct at Deloitte.
Mr. Ray has an ongoing super-embarrassing issue with Mr. Flanagan, the accused former Deloitte Vice Chairman who allegedly traded on inside information about twelve of his audit clients.  
Mr. Ray is on the middle of the controversy regarding auditors and their judgment and application with regard to fair value accounting. (Although no one from PCAOB or the audit firms has been called before Congress to answer for their lack of judgements or lack of competence regarding complex financial instruments.)
Imagine the “wisdom and knowledge” about KPMG and all the other firms that Thomas Ray brings back to KPMG’s Professional Standards Office ?  
Am I the only one who thinks this is another slap in the face of the taxpayers, the shareholders, the professionals?
We need a strong regulator over the accounting industry.  Instead the PCAOB is a lapdog.  
Next up, Mark Olson’s “retirement.”  Am I to expect no one will notice, be surprised, be outraged, or prohibit him from returning to EY or, even worse, to a bank?
Update: March 20, 2009
Per a conversation with th PCAOB’s Inspector General, I was pointed to the PCAOB Ethics Code, approved by the PCAOB in June 2003 and effective pursuant to SEC Release No. 34-48755, File No. PCAOB-2003-04. (November 7, 2003) 
This is all there is related to post-employment restrictions. How does this compare to general SEC post-employment restrictions, given that the SEC is the PCAOB’s governing agency?  
How much value will Mr. Ray have to KPMG if he can neither disclose any confidential information regarding KPMG or its peers nor practice before the PCOAB Board with regard to any issues he was involved with while at the PCAOB?  (That means pretty much includes everything auditing and independence or professional Standards-related since he was on board as Chief Auditor for the PCOAB from the beginning.) Did he inform the Board in a timely manner before negotiating his return to KPMG?  Did he recuse himself from any issues related to them during this period?  Was he completely cashed-out from KPMG partnership before, and during, his tenure at PCAOB except for any “retirement” benefits that are exempted from this prohibition? What mechanisms does the PCAOB have to enforce this Code? Who makes sure they do besides their own Inspector General?

EC12. Post-Employment Restrictions 

(a) Negotiating Prospective Employment 

(1) Board members and professional staff may not negotiate prospective employment with a public accounting firm or issuer, without first disclosing (pursuant to the procedures in Section EC8(b)) the identity of the prospective employer and recusing himself or herself from all Board matters directly affecting that prospective employer.  

(2) For purposes of this section, “negotiating prospective employment” means participating in an employment interview; discussing an offer of employment; or accepting an offer of employment, even if the precise terms are still to be developed.  Submitting a resume or job application to a group of employers or receiving an unsolicited inquiry of interest that is rejected, do not alone constitute “negotiating prospective employment.” 

(b) Prohibition on Practice Before the Board or Commission 

(1) Board members and professional staff shall be restricted from practice before the Board, and the Commission with respect to Board-related matters, for one year following termination of employment or Board membership. 

(2) Former Board members and professional staff shall not practice before the Board, or the Commission with respect to Board-related matters, on a particular matter in which the Board member or professional staff participated personally and substantially as a Board or staff member and which involved a specific party or specific parties at the time of such participation.  

Photo is not actually Tom Ray. Could not find one that did his preppy, good-boy looks ample justice.  It’s Hank Paulson circa 1973, courtesy of Fortune, via Dealbreaker.com

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27 Responses »

  1. The revolving door revolves once more. I await the PCAOB’s reviewing KPMG’s recent Citigroup audit Citigroup has $44 billion in deferred tax assets on its blance sheet. What a joke. In 2007 Citigroup took $49 billion in SIVs back onto its balance sheet having determined the accounting was wrong. I could go on and on about Citigroup. Citigroup is only alive because of $350 billion in federal bailout money, yet KPMG has no going concern comment in its recent opinion. What can the public expect for an $88 million fee? The PCAOB is another joke. Kill it.

  2. Francine,

    I am just amazed over the facts you have uncovered and presented and how you have put them together to reveal what is really happening to the audit profession today at the top levels of the Big 4 (and the Top 10, for that matter). This is simply another example of the “phonomenon” we have witnessed over the past 70-80 years of the “revolving door” syndrome of influential/”important” individuals in high places of government. This “phenomenon” involves the following: Government – Military Industrial Complex – Education (Ivy League and Big 10). How can this form of “conflict of interest’ ever be stopped? Does anyone have an effective answer? I, for one, do not.

    Steve Gierach

  3. Have you considered that Tom Ray’s departure might be for personal reasons. Look past PCAOB and KPMG to Tom Ray, father.

  4. @Dig Deeper
    Leaving is fine. In fact he served more than his time.
    I’m sure he’s tired.
    Going back to KPMG is not OK.
    Francine

    PS. Pulling the “devoted father” card now to explain a public career action doesn’t usually work for me, especially when someone has otherwise been so private.

  5. Thanks for the great read Francine.

    As a former KPMGer, I’m very familiar with the rhetoric of “leadership” and there is no doubt in my mind that this will be touted as a big “Welcome Back” and a “Great Re-Addition” blah blah blah. Likely, most non-partners in the firm will automatically delete the email and go back to worrying about whether or not they still have a job after Wednesday (the rumored chopping day)

  6. Another prime example of why accountants, auditors, bankers, analysts, etc can not be trusted to regulate themselves effectively. If our various regulating authorities don’t learn from this current financial debacle that our regulatory agencies need some teeth, there is absolutely no hope. Unfortunately greed continues to insure that the small investor and main street are not protected and will pay the price for their high risk maneuvers.

    “Activist accountant” what a concept! I love it! It’s right up there with “activist internal auditor” as an oxymoron……….

  7. Tom Ray’s wife passed away last fall after a battle with cancer. He has kids living at home. I don’t think in such an instance that “pulling the devoted father card” is a way that I would describe his situation. Tom is a quality guy and I wish him the best.

  8. @GRH So sorry to hear about Mr. Ray’s wife. No way I could have known that.

    However, that does not change my opinion of his return to KPMG under the circumstances.
    It should not be allowed It is ethically unacceptable in my eyes.
    Regulators should not be allowed to return to firms they regulated.
    Francine

  9. Francine,

    Isn’t someone going from the regulated firm to the regulator worse than someone going from the regulator to the regulated firm? Granted, I see your point and I see issues with both but I would argue the former is more troublesome than the latter.

  10. @Anon 10:42

    Mr. Ray is doing the complete round trip. He was a partner in KPMG’s Professional Practice Office, went to PCAOB as Chief Auditor, responsible for developing auditing standards and enforcing professional standards, ethics, and practices. He was a regulator of KPMG and the other PCAOB registered firms. He is now returning to KPMG’s Professional Practice Office.

  11. OK, I can see why you have an objection to someone going from a regulator to the firm that was regulated. But what is the alternative? You acknowledged in one of your responses above that you don’t have a problem with him leaving and that you understand he may be tired. So then where should people who have served in his position go? I think if you start ruling out entire swaths of jobs after public office for people who would take these positions you’re going to remove an incentive for getting some very bright people to take the job (and potentially create a huge disincentive).

  12. @Anon 11:38

    You must be joking, right?

    Choosing from amongst the most qualified professionals in the firms for public service is logical and acceptable. But once they serve, they can’t parlay that back into lucrative private service for those they regulated. Otherwise they’ve negated any independence or objectivity they theoretically exercised during their public sector service. They’ve betrayed the public trust.

    In fact, I’m recommending to many of the Big 4 and next tier professionals that are now out of a job to look at public sector such as the SEC, the PCAOB, the FDIC, the FED, TARP, Congressional Task Forces… The list is long because great numbers that used to be privately held now belong to the government, to the taxpayer. So, a shift of the workforce from private to public service is not only admirable and interesting, it’s also be necessary and now competitively paid. It’s the new big game in town.

    But making excuses for this egregious lapse of both regulation and ethical conduct by saying Mr. Ray needs to be with his children (like a job as a professional practices partner at KPMG as they dig their way out of culpability for Citigroup, New Century, etc will be a cake walk) or because he needs the money now after five + years of public service… Well, it”s disingenuous.

    If Mr. Ray is so poor, where is he getting the money to buy back into the KPMG partnership? Or did he never leave? Was he dropped from the rolls when he went to the PCAOB or did they forget to make a rule about that, too?

    I don’t begrudge anyone the right to make a living. Mr. Ray’s skills are specialized but not so much so that a smart guy like him shouldn’t be in demand in a lot of situations. But he’s going back to KPMG because that’s where he’s the most useful. For all the wrong reasons. KPMG is by far not the only place he can work. But it is the worst possible place for anyone to allow him to work. He’d be more honorable if he joined a law firm or a lobbying firm, if you can imagine that.

  13. Francine-thanks for covering this.

    I am convinced that many of the best people leave public accounitng – on their own accord, or as part of termination. I agree with the recommendation for people to go into SEC, PCAOB and others. It seems to be our best option – plan to monitor/detect what’s happening in the business environment rather than looking to prevention. At least we’ll have bright people in the compliance roles.

    Now, let’s implement effective compensation programs to drive behavior on the front end of businesses.

  14. Francine,

    I’m an avid reader of your blog as you know, and I find your no-holds-barred style refresing.

    However I think it’s important to take the issue you raise away from the individual, and focus on the general question about whether there is a revolving door, and if so, the complex considerations in balancing the public interest – as there can arguably be both pros and cons – again, from the perspective of the public interest – in having government employees return to their former firms or regulated industry after serving in the goverment.

    If there’s anyone who could probably do some interesting reporting on this, it’s you, with your many contacts, particularly among very senior people including former regulators and others who you believe could speak openly to you about the pros and cons of the revolving door from the public interest standpoint. An interesting place to start may be with some of the folks who served on the U.S. Treasury Advisory Commitee on the Auditing Profession (ACAP). For example, one argument made on behalf of the revolving door is to bring the enhanced knowledge gained from government service, as well as presumably an enhanced sense of respect and understanding for the regulatory process, back to the firm(s) and the clients they represent, or the private sector generally.
    Another argument for the revolving door is to bring high quality professionals into government service, and vice versa. I’m not trying to be an apologist, just a devil’s advocate to outline more of the parameters of the debate.

    One observation: on your suggestion that it would be more ‘honorable’ for a person to join a firm in a different field (e.g. law firm or lobbying firm) vs. rejoining the accounting industry directly, I believe such shape-shifting may differ more in form more than substance, and I can imagine that there is a strong pull, as with any profession, for people to rejoin an organization of which they are an alum and feel a sense of shared tradition, etc. And, the issues with which you are concerned may be present in less obvious ways if a former regulator joins, say, a consulting firm or a board of directors of a company.

    And a question: what would you think about a ‘quiet period’ between government service and rejoining a particular firm or industry? Note that this can be a nuanced issue as well, in terms of weighing pros and cons in the public interest, recusal policies on the government side, and policies as to practicing before a regulator or representing particular clients before a regulator upon returning to the private sector, etc.

    Thanks for your unique coverage of the profession; keep on keepin’ on!

  15. @Edith Orenstein

    Thanks for the comments. You always get to the heart, and meat, of the matter.

    It’s not about Tom Ray, per se. Anyone who read the piece could see I was, up until now, pretty enamored of him. But that’s neither here nor there.

    It’s not impossible to join a firm or endeavor after public service and serve the profession in a sightly different way. Some fomer SEC folks, for example,are now doing work for professional associations (you,) for media publications (Bruce Carton,) in for-profit educational and informational organizations (Broc Romanek,) and professional firms that do not audit (Scott Taub.)

    What Tom Ray is doing is akin to Henry Paulson going back to Goldman Sachs. (He hasn’t done that, has he?) Tom Ray was in a very senior policy making position at the PCAOB. Given his role in KPMG before PCAOB, his role in the PCAOB including presiding over earthshattering matters concerning KPMG, and now his intendied role in KPMG, it’s not so much just going back to the private sector as allowing the perception that he is now using his years at the PCAOB to completely benefit KPMG and himself.

    Again, I am talking primarily about perception here. But I am also now questioning the ethics and objectivity of this man for even considering this move. And I never did before.

    I’m at my parent’s this morning. I told my mom the story last night. She’s 78 years old, and although self educated and pretty sophisticated in her own way , she knows our profession only through her daughter and tangentially. I gave her the simple equation:

    Parter at KPMG judging professional ethics and accounting standards
    Then: Senior position at accounting regulator PCAOB developing accounting standards and enforcing ethics and professional standards in the firms including KPMG.
    Now: Going back to KPMG as a senior partner judging fellow partners professional ethics and standards.

    She raised her Sicilian eyebrows and stuck out her tongue.

    My smell test. This particular move stinks.

    Cooling off periods? They have them in other agencies and departments. Better than nothing. Going to another related, but not directly regulated, firm or professions as an option? Better. Something completely different like running the Red Cross, United Way, or another worthy not-for-profit that has has had governance and transparency problems in the past? Even better. Write a book, start a blog, lecture, teach in a university… He can put together a portfolio of activities that not only give him true quality time with his children, but spread his knowledge and experience amongst a broader audience, perhaps even those at the beginning of the profession. God knows we never have enough practical, hands on professors teaching our accounting students.

  16. As an avid reader of this forum in the UK, (and working from a UK top 5 firm), I thought I should point out that all audit reports for UK companies will now be signed off by the individual partner (from periods after 8 April).

  17. @John McL

    Thanks for that update. The UK beats us again to the punch. So “proper” you are…

    Francine

  18. Nice Pic. Hank was a hottie.

  19. @Anonymous 11:00

    Most men look good when they’re under 32 or so. Later, they better have brains.

  20. Wow John McL’s news is huge. I know there are some certain autographs I’d be keen to get ahold of now! :)

  21. Hello Handsome. Someone looked good in 1973. Did they even have color pictures back then? My baby pictures used to be orange…

  22. [...] I wrote a few days ago about former PCAOB Chief Auditor and Director of Professional Standards Tom Ray returning to his home firm, KPMG, after several years at the PCAOB.  I lamented the fact that Ray could roll back into his old firm [...]

  23. [...] From a speech to the AICPA Conference in December 2008 by former PCOAB Chief Auditor and Director of Professional Standards Tom Ray: [...]

  24. [...] has been living under the PCAOB inspection process for a while and can not return to his firm, Tom Ray-revolving door style. But we have to be careful that this person is not a wolf in sheep’s clothing, undermining [...]

  25. [...] wasn’t the first such instance and she won’t be the last. Instead of an honorable class of career public servants, this [...]

  26. [...] of the SEC Office of Compliance and Inspections are PwC partners. Another founding PCAOB member, Tom Ray, went back to a big job at KPMG in 2009. It’s not a stretch to say the SEC has been captured [...]

  27. [...] wasn’t the first such instance and she won’t be the [...]

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