It’s difficult for me to imagine a new generation of systemically important financial services company CEOs without strong risk management experience. Independent board members with risk management experience will also be in demand. The current generation of CROs is gaining the experience to lead as CEOs and board members in today’s challenging market and regulatory environment.

Stewart Goldman, a senior client partner at executive search firm Korn/Ferry International, tells me there’s a ‘’scarcity” of candidates with the ”ideal skill set” to be chief risk officers, so institutions are considering people with a broader range of backgrounds to fill the post.

A Chief Risk Officer who does a good job mitigating risk while optimizing opportunities can now have significant stature and sway. But, conversely, that new prominence gives shareholders, regulators, and the media an easy target for ridicule after a corporate stumble or failure.

I’ve written quite a bit about some additional cases of Chief Risk Officers getting the heave-ho when something goes wrong. These additional examples – all outside of the US – didn’t make it to the American Banker column. It was a case of space as well as an “American” banker focus. But, I wonder out loud if there’s something different going on in Europe – something that forces accountability – or if the executives given the shove-off in Europe were just easy scapegoats.

Société Générale had its own “rogue trader” scandal in January 2008. Société Générale  lost $7 billion in spite of service from dual auditors under French law, Ernst and Young and Deloitte, and myriad policies, procedures, organizations and systems they, theoretically, had in place to manage risk.

However, words alone do not insure sufficient risk management. In 2009 Benoît Ottenwaelter replaced Group Chief Risk Officer Didier Hauguel. Hauguel had served as Group CRO and a member of the Executive Committee and Group Management Committee of Société Générale since 2000.

Paul Moore, HBOS’ former head of regulatory risk and a former KPMG partner told the Treasury Committee of the UK’s Parliament that Sir James Crosby, HBOS former chief executive, fired him after he warned the HBOS board in 2004 about its potentially dangerous “sales culture”. KPMG, external auditors for HBOS, ended up front and center in the 2004 controversy because the audit firm “independently” investigated Moore’s firing at the request of the Board after Moore blew the whistle. KPMG got the job in spite of its long and very lucrative relationship with HBOS management including significant fees for work done for the bank’s bid for Abbey National that same year.

The role of chief risk officer at Anglo Irish Bank, a tough job, has not been filled on a permanent basis since May of 2009. AIB was nationalized by the Irish Government in January 2009. In December AIB lost its second acting chief risk officer in less than a year when Stephen Bell, a PricewaterhouseCoopers Director, announced he was leaving to become Chief Risk Officer at Ulster Bank. AIB had hired PwC to help run the bank. Bell took over from Mary Phibbs, an associate at restructuring firm Alvarez and Marsal, who had been on the job since the previous October.

One interesting additional US example can be found at Countrywide, now ignominiously owned by Bank of America. I wrote about it in January of 2008.

At the end of 2004, Sherry Whitley, then the Executive Vice President of the Enterprise Risk Assessment Group for Countrywide, wrote this article for the Institute of Internal Auditors FSA Times Publication.

Countrywide’s strategic-planning process includes a companywide focus on managing risks.

In the wake of headline-grabbing corporate financial scandals, management and boards of directors of public companies are under intense pressure to increase their involvement in the strategic and operational activities of the companies they oversee. Executives at Countrywide Financial Corporation, a diversified financial services provider, reviewed various ways to provide a more focused, comprehensive approach to help their leadership teams identify and better manage business risk across the organization.Approaching risk with the goal of increasing shareholder value, in mid-2002 Countrywide incorporated comprehensive enterprise risk-management techniques into its leadership strategy, focusing board participation on a more global, disciplined decision-making process than has historically been used in the past.

In 2007, the Institute of Internal Auditors and their Research Foundation, lauded Countrywide’s Risk management initiative.

Countrywide Financial Corporation, the subject of our first case study, has the most comprehensive ERM program we have seen. Readers who want to know how a state-of-the art ERM program operates will see it illustrated through Countrywide’s example.

A writer for Internal Auditor magazine, an IIA publication, wrote in April of 2007 about this model initiative.

The largest independent originator and servicer of mortgage loans in the United States, Countrywide has the most comprehensive ERM program of the organizations in the study. Under the leadership of Senior Managing Director Walter Smiechewicz, Countrywide is currently building Sarbanes-Oxley functionality into an internally developed enterprise risk assessment software application…Countrywide’s Enterprise Risk Assessment division has 45 professionals with risk assessment responsibilities. They are supplemented by 112 internal auditors within the Enterprise Risk Assessment division and the risk management specialists in another division who manage credit and market risk for Countrywide…Enterprise risk assessment at Countrywide has both a bottom-up and top-down governance structure. It has led to a major restructuring of committees from the board level down through operating units. This restructuring has improved the flow of risk information throughout the organization…Countrywide’s program is truly “best practice…”

Things didn’t get any better when Bank of America tried to close the deal on Countrywide. In March of 2008, I reported that Bank of America was staring down a very dark tunnel on Countrywide exposure:

Just who is doing the due diligence for Bank of America on the acquisition?

Countrywide’s Mortgage Woes Deepen
Countrywide Financial Corp.’s mortgage portfolio continues to deteriorate rapidly as defaults increase and home prices fall, a securities filing shows…But if losses on the loans exceed certain levels, Countrywide isn’t reimbursed immediately and may never be reimbursed unless income from the loans outstanding is sufficient to meet obligations to investors in the securities.

Countrywide said the likelihood of such a situation was “deemed remote” until late 2007. It blamed a “sudden deterioration” in the housing market. As a result, it recorded a $704 million loss to cover the estimated costs of its obligations on the lines of credit…A Countrywide computer model used to gauge risks on these securities didn’t take into account the possible effects of exceeding the loss levels that cut off reimbursements, according to a Dec. 28, 2006 internal report reviewed by The Wall Street Journal.

I can’t find any mention of Sherry Whitley, former Executive Vice President of the Enterprise Risk Assessment Group for Countrywide, working at Bank of America or anywhere. Walter Smiechewicz, who implemented Countrywide’s ERM program, moved to Audit Analytics in 2008 and is now Chief Risk Officer at First Niagara Bank in California.

Back home after dropping off my friend at the airport.  As those of you who have been following me on Twitter know, I’ve spent the last few days visiting with an old friend from my JP Morgan Latin America days. Kenny recently came out of almost five years of semi-reclusive Buddhist retreat. We hadn’t seen each other during that time, but had been in touch each time he was home in Brooklyn for the holidays or between sessions at the retreat in Northern California.

We worked together in Latin America, primarily Brazil, during the Year 2000 project period. I was JPM’s PMO Director for the project in Latin America. He was implementing a new order entry and trade management/compliance system for their equity options and derivatives business. As calm and serene as he has learned to be when faced with crowds, traffic, schedule changes and chatty friends like me, he is also still human. And he is still my old friend with enormous knowledge of how and why controls and regulations are intended to safeguard investors in financial services industry.

Last Monday in Forbes, I gave readers a link to some very interesting facts uncovered by Bob English, an independent trader and blogger who has been following the MF Global story on his blog, Economic Policy Journal. His findings raise serious questions about the Securities and Exchange Commission’s regulation of MF Global and all broker/dealers.

A summary of that post and some additional developments after press time is here.

It seems the SEC, maybe by design, maybe by careless default, is keeping the truth from the public about what went wrong at MF Global.

PwC’s report to the SEC of internal control discrepancies at the broker-dealer for 2010 – and there is one according to the filing index – is private. None of the auditor’s reports specific to MF Global’s broker/dealer are available to the public on Edgar for 2011.

“…it appears the SEC has provided a little-known, yet easy way for broker dealers to keep a substantial portion of their annual filings non-public, without having to file a confidentiality request. Several smaller brokers we contacted were not aware of this.

If the internal controls report of MF Global Inc. made it into its 2010 public filing, yet the financial notes did not, was it simply a case of improper separation of the public and private bound filings on the part of the filer? If so, why is the SEC not enforcing substantive error checking, inasmuch as we have found this phenomenon to be quite common for broker filings?

Or, is the SEC selectively determining itself which portions will be public and private, and committing errors (intentional or not) in the process? Recalling the deleted filings of JPM, Goldman, BoA and others, is it possible that what was supposed to be confidential was inadvertently made public, and upon petition from the filer (or its auditor), the entire public filing was simply deleted?”

My column at Forbes also noted that it’s not just the SEC who’s holding back information about MF Global from the public:

The CFTC, who seems to be using leaks to the press to deflect attention from its own role and responsibility for keeping an eye on customers’ money, is doing it, too. There is no data regarding status of segregated customer assets for MF Global on the monthly required regulatory report for FCMs posted by the CFTC for September, 2011.

I asked the CFTC:

“Did MF Global submit their data as an FCM for September on time within your required timeframe? If the CFTC received the data on time, why did the CFTC decide not to publish MF Global’s numbers as of September 30th? The full report was posted to the website on November 10, after the October 31 bankruptcy, but the data is “as of” September 30 when the firm was still in business.”

The CFTC spokesperson would not go on record with his response. Based on our conversation and the policies published on the CFTC ebsite of handling this report, I’ve determined that the September 30, 2011 financial statement filings for all FCMs, FCM/BDs, and RFEDs were originally due October 26th. The CFTC gives itself 12 business days after the due date to publish. It appears that organizations were given additional time due to the Veteran’s Day holiday. The Commission states that it “generally” publishes data for active FCMs only.  MF Global Inc. declared bankruptcy October 31, 2011. At the time the September data was posted, MF Global Inc. was no longer an active FCM and, therefore, the firm and its data was deleted for the report.

The first private lawsuit naming PwC, the MF Global auditor, as well as several MF Global executives and JP Morgan, was filed last week by some Montana farmers. Here’s a copy of the original complaint.

Are the holding company trustee Louis Freeh and the broker dealer SIPA trustee James Giddens ever going to investigate JP Morgan and auditor PwC? As I wrote here on January 10, the trustees have already given themselves an easy legal out:

Unfortunately for those who will be looking for third-parties like the auditor PwC and the banker JP Morgan to make up the difference in the missing funds, these disclosed conflicts set up an easy out for the Trustees to decline to investigate claims against the parties they have a deep and fruitful business relationship with.  It happened before in a case that is too close for anyone involved here to claim ignorance of:  Refco.

Let’s look at the conflicts that the trustees have just with PwC:

• PwC is the external auditor for MF Global.
• PwC is the external auditor for Man Financial, the firm from which MF Global was spun off.
• PwC designed the internal controls for Refco, the firm Man Financial bought after Refco’s fraud drove it to bankruptcy and the firm that became MF Global after its IPO.
• PwC was not pursued as a third-party aider and abettor of the Refco fraud because the judge decided that a prexisting conflict between PwC and the trustee’s firm precluded the trustee from personally pursuing PwC. The judge decided not to select another non-conflicted trustee to pursue PwC.
• PwC is the auditor of JP Morgan, MF Global’s primary banker and largest creditor.
• PwC is the auditor and a client of the SIPA trustee’s law firm Hughes Hubbard.
• José R. Hernandez, the Chief Executive Officer of Freeh Group Europe, the consulting firm founded by MF Global Holding company trustee Louis Freeh, is a former European-based partner of PricewaterhouseCoopers (PwC).
• PwC is auditor to Goldman Sachs, Corzine, Abelow, and Ferber’s former firm and a firm that bought a significant amount of assets from MF Global in its last days when MF was desperate for liquidity.
• MF Global CFO Henri Steenkamp came to Man Financial, predecessor firm to MF Global, from PwC.

Don’t say I didn’t warn you when Judge Glenn allows Freeh and/or Giddens to say later, regarding pursuing claims against PwC, “Move along. Nothing to see here.” PwC is worth more to them alive than severely wounded.

In other news, I penned a somewhat provocative prediction for American Banker on January 3 regarding Jamie Dimon, CEO of JP Morgan.

Jamie Dimon will have the misfortune, I believe, of catching a significant amount of fallout from the MF Global mess. As MF Global’s primary banker, JPMorgan Chase has been consistently accused in the media and by the attorney representing a customer coalition of taking advantage of the firm’s vulnerable financial state. Bloomberg News reported that the MF Global trustee said “certain” actions of JP Morgan Chase “are likely to be the subject of investigation.”

What JP Morgan Chase may have allowed – the use of customer funds to meet MF Global’s corporate obligations – is something JP Morgan was recently severely sanctioned for in the U.K. The bank’s London unit was fined a record 33.3 million pounds by the FSA, Britain’s financial regulator, for commingling client funds in its futures operation.

Some commenters were not crazy about the tone of the column. Or the title. You be the judge. “Jamie Dimon Will Have His Comeuppance in 2012″ is at Forbes.

I’ve added this video at the request of commenter “Johnny Dangereaux”.

Bob English, an independent trader and contributing editor to the blog, Economic Policy Journal, wrote earlier Monday about some filings funny business over at the SEC.

On January 3, 2012, a copy of the missing audit reappeared under a different index number (the original, as of the time of writing, remains here). While it seems the replacement simply corrects what is an obviously wrong stamped receipt date on the face page of the original, there are a few curious annotations that we will explore. More importantly, after researching the SEC’s public database for scanned paper filings, which includes private offering Form D’s, exchange filings, firm advertising literature, and other filing types (including broker dealer audits themselves), we are left with more questions than answers.

It seems that sloppy scanning and filing standards combined with preferential treatment for certain large brokers has substantially reduced the value of this part of the SEC’s public filing system…a look into all of 2011’s scanned paper filings reveals that only 45% of the sequentially indexed PDF files that were scanned from hard copies by the SEC remain public (7,949 out of 17,718). [The SEC has kindly left the source code to its PDF scrubbing program here, also archived here on Scribd.]

Journalists throw in terms like tobashi to sound knowledgeable. There’s talk about the potential complicity of other parties without understanding or seeking to understand the theory and practice underlying the fraud.

How are we to prevent future frauds if we focus only on the sensational?

Japan is ripe for fraud. PwC seems to be the only Big Four auditor – well, they are not that big in Japan any more – not implicated by the fraud. PwC was hired by the Olympus ex-CEO Woodford to support his side of the story after he blew the whistle on the fraud after being fired.

PwC, who seem to be getting a lot of investigation whitewash jobs lately, was almost kicked out of Japan a few years ago for their own involvement in a major fraud. Some of the firm’s partners went to jail along with the executives.

The old Pwc Japan (Misuzu, formerly ChuoAoyama Pricewaterhouse) calls it quits. The new PwC Japan still going, although in a small way. Even they were not excited to take on any of their former colleagues accounts, for fear of the ghosts hidden behind the walls.

Misuzu operations formally halt in Japan
The 2,400 remaining employees to go to KPMG, Deloitte and Ernst & Young

“Operations of the Japanese firm, Misuzu Audit Corp, formally terminated yesterday after a 39-year-history which included several major accounting scandals involving its own employees.

Deloitte has its own scandal in Japan with Daio Paper.

And, like PwC experienced in Russia with the Yukos scandal, Olympus’ most recent and former auditors, Ernst & Young and KPMG, now have to worry about what might be found after a raid of their client’s offices by government officials.

Japanese prosecutors raided offices of Olympus Corp. (7733) inTokyo, more than a month after the camera maker admitted to a $1.7 billion accounting fraud that hid investment losses over more than a decade.

Officials from the Tokyo District Public Prosecutors Office and police entered Olympus offices in Tokyo today, the company confirmed in a statement. Footage from public broadcaster NHK showed investigators entering the building of three companies Olympus used in its scheme.

Olympus last week restated more than five years of earnings to avoid being automatically delisted from the Tokyo Stock Exchange after admitting to the 13-year cover-up.

I will keep following the story, along with Jim Ulvog, and bring you updates as they emerge.

James L. Ulvog, CPA, is a sole practitioner located in the Los Angeles area providing audits and reviews to the nonprofit community.  In 2011 he started providing peer reviews of CPA firms.  He has over 25 years experience in public accounting.

Ulvog blogs on nonprofit issues at Nonprofit Update and on issues of interest to CPAs at Attestation Update.  He also discusses the radical change taking place all around us at Outrun Change. His company website is Ulvog CPA. www.ulvogcpa.com

How Do You Hide a $1.7 Billion Loss?

Summary of the Olympus Scandal in Journal Entry Format

Olympus’ investigative committee’s report on the fraud at Olympus was released December 6. The description of the fraud, causes, and recommendations in the report are a scathing indictment of the company.

This post is a thumbnail description of the fraud based on my reading of the investigative committee’s report.  The summary report is available here.

My goal is to provide more accounting detail than shows up in the general news reports.

The report’s conclusion on page 30 compares management to a cancer:

Olympus had originally been a sound company, with diligent employees and high technical strength. Not all part (sic) of the company was involved in this misconduct. Olympus should remove its malignant tumor and literally renew itself.

Ouch. That’s gotta’ hurt.

Here are just a few of the news articles discussing the company’s report:

• The Wall Street Journal, Panel Calls Olympus ‘Rotten’ at Core. (article behind paywall),
• Bloomberg, Olympus faces Tokyo delisting after management hid $1.7 billion of losses.,
• New York Times, The Culture Was Corrupt at Olympus, Panel Finds.

What is the amount of the fraud and time frame?

According to the report, the company had incurred substantial losses on financial investments by 1990. The report indicates that through 1998 very large losses were incurred, but the investments were never written down.

The whole project got started as 2000 approached and new accounting rules would require writing down the investments from book value to market  value.

In 1998 through 2000, approximately ¥96B (~$US1.2B by my calculation) of unrealized investment losses were moved off the books. In 2003 approximately ¥118B (~$US1.5B) of unrealized losses were moved off the books. The scheme blew up this year. Losses are reported at ¥137B (~$US1.7B).

There was ¥214B/ $2.7B moved off the books according to the report, which represents the book value of the investments that were underwater.  The current loss being reported is $1.7B.  If I get the picture right, the difference between those amounts represents the market value of the investments that were moved out, plus some smaller losses incurred while the investments were held in subsidiaries.

For perspective, the March 31, 2011 audited financial statements report total assets are $US13.3B, equity is $US2.08B, net sales are $US10.59B, net income is $US92M.

The WSJ article says the losses were apparently off the books by March 31, 2010, so those amounts are after $1.7B had all been written off.

Sure seems to me that $1.7B of hidden losses is rather material.  I doubt anyone will be advancing the immateriality argument.  Compared to March 31, 2011 amounts (which is after write-off, I believe), the loss is equal to 13% of total assets, 81% of net worth, 16% of total revenue, and 18 times net income. Some amount of the loss was hidden off the books from 2010 back to at least 1998.

Also, since those losses were primarily hidden in goodwill according to the report , that loss constitutes 78% of goodwill, after the write-off.

I think several audit firms are going to be on the receiving end of some tough questions.

Arthur Andersen was the external auditor through 3-31-02. Then KPMG AZSA LLC was the auditor through 3-31-09.  The 2010 and 2011 fiscal years were audited by Ernst & Young ShinNihon LLC.

Just to complicate the picture, the report lists staff persons as assistant commissioners, which includes lots of attorneys plus 18 staff from Deloitte Tohmatsu FAS Co., Ltd. and 17 staff from Deloitte Touche Tohmatsu LLC.

On the other hand, the report also mentions the fraud was hidden quite well. Three banks were also involved by hiding information from the auditors. The summary report says all three of them agreed not to tell auditors the information that would normally be provided on an audit confirmation.

How do you hide a $1.7B loss?

Now I’d like to discuss the debits and credits.

Since reading the first reports, I’ve been wondering how you can hide investments that are underwater by $1.7B.

Here is a one paragraph summary from page 5 of the report:

The lost disposition scheme is featured in that Olympus sold the assets that incurred loss to the funds etc. set up by Olympus itself, and later provided the finance needed to settle the loss under the cover of the company acquisitions. More specifically, Olympus circulated money either by flowing money into the funds etc. by acquiring the entrepreneurial ventures owned by the funds at the substantially higher price than the real values, or by paying a substantially high fees to the third party who acted as the intermediate in the acquisition, resulting in recognition of large amount of goodwill, and subsequently amortized goodwill recognized impairment loss, which created substantial loss.

(Grammar issues are in the original, which is understandable because this is the English translation from the Japanese report.)

Here’s my understanding in one sentence:

Olympus indirectly loaned money to an off-the-books subsidiary and then sold the investments that had the huge losses to the subsidiary at historical cost, eventually paying a huge premium to buy some other small companies and writing off the underwater investments as if they were goodwill impairments.

Journal entries

I’m going to walk through what I think the summary journal entries would be. Think of the old t-account analysis you learned in school. This will be in accounting shorthand, so only accountants will likely appreciate it.

If you want the long version, the last two pages of the report have diagrams showing the flows of money. Be forewarned that there are 17 different entities on each graph with lots of arrows, so it’s a bit complicated.

So, here goes the simple version. Let’s look at the Olympus entries in highly condensed form. I’ll condense the story into 8 journal entries.

• DR Certificate of deposit that was in turn loaned to unconsol sub
• CR Cash
• Transfer cash to new, unconsolidated sub

This is a summary of a complex move – it involved making a CD deposit at several banks, who were asked to loan the money back to an apparently unrelated entity, with the CD as collateral, so the sub can buy investments from Olympus.

According to the investigative committee’s report and the New York Times article, three banks were involved through the course of the whole project:  Commerzbank, LGT, and Société Générale  The committee’s report and NYT article both indicate that all three banks  agreed to Olympus’ request to not tell the auditors  about the CDs being collateral for a loan.

• DR Cash
• CR Financial assets that are seriously underwater (probably not the actual general ledger account they used)
• Proceeds from selling underwater investments to new, unconsolidated sub

Eventually the CDs would have to be rolled over and brought back. In addition, the unrealized losses would have to be written down eventually, so the second phase was launched.

Olympus bought some tiny companies. They paid humongously more than they were worth and paid big dollars for consultants for their service as finders and intermediaries.

The effect of these transactions was to transfer money into the newest consolidated subsidiary, which used the money to buy the bad investments from the older, unconsolidated subsidiary. The unconsolidated sub then repaid the note payable to the bank and Olympus pulled back their CD.

The investment in the consolidated subsidiary shows huge goodwill, which could then be either written off over time or written down completely when it was determined to be impaired.

Here’s my understanding of the journal entries on Olympus’ books for phase 2:

• DR Investments in startup subsidiary
• DR Goodwill – tons of it, since the subs have minimal FMV that can be identified, so there must be lots of goodwill
• CR Cash
• Make several investments in new subs – note these have minor revenue and assets

• DR Cash
• CR Certificate of deposit (that had in turn been loaned to unconsol sub)
• This is for the cash coming back from the unconsol sub repaying their loan, which was used to transfer out the underwater investments

Here’s the entries on the newly formed consolidated subsidiary:

• DR Cash
• CR Common stock
• Cash investment from Olympus used to buy 3 little companies

• DR Financial assets that are seriously underwater (bought from unconsol sub)
• CR Cash
• Buy underwater investments from unconsol sub at book value

Here’s the entries on the older, unconsolidated subsidiary:

• DR Cash (from consolidated sub)
• CR Financial assets that are seriously underwater
• Proceeds from selling underwater investments to newly formed consol sub

• DR Note payable to intermediary bank
• CR Cash
• Repay loan to European and Asian banks

Therefore the net effect is the bad investments were moved into a new subsidiary, converted into goodwill, then written off as a goodwill impairment. You can guess what the press releases could then say: That investment in new technology or start-up or cutting edge idea or other-excuse-given-for-unsuccessful-subsidiary just didn’t work out and those accounting rules required the goodwill to be written off.

And thus the tanked investments would be off the books with the unrecognized loss written off as goodwill amortization or impairment.

Hiding losses was legal and normal

Apparently, moving underwater investments off the books was so common in Japan that it had a nickname, tobashi. The investigative committee’s report uses the phrase but does not explain it.  The Wall Street Journal article reports that senior leaders:

…devised a plan to transfer the bad assets off Olympus’s books to firms that weren’t officially connected with the company and so wouldn’t appear in Olympus’s accounts, the report said. The intention was to unwind those transactions gradually, allowing Olympus to take the losses secretly, over time. This type of operation had been employed by so many Japanese companies in the 1990s that it was widely known in Japanese as tobashi, meaning, to send something flying away.

KPMG did tumble to one of the tobashi schemes carried out through one of the three different routes that had been set up. I’m not sure if this is the only scheme through that particular bank or just one of several.  The WSJ article continues:

Not everything was going smoothly. The report said that in 1999, Olympus’s then-auditor, KPMG AZSA LLC, came across information that indicated the company was engaged in tobashi, which recently had become illegal in Japan. Messrs. Mori and Yamada initially denied KPMG’s assertion, but the auditor pushed them that same year to admit to the presence of one fund and unwind it, booking a loss of ¥16.8 billion. The executives assured KPMG that was the only such deal, the report said.

Looks like there was quite a nasty fight over that write-down.  Notice that tobashi was finally made illegal sometime before the 1999 audit. That means it was an acceptable approach previously.

A few thoughts here on the auditors’ actions:

How do you perform an audit for a global investor audience in a local economy where intentionally hiding losses is legal? How do you function in a business environment where that is acceptable and normative?

On the other hand, notice how one audit team, from KPMG in 1999, did find one part of the scheme.  Management lied bv denying it even existed. After agreeing to write it off, Olympus senior management lied again and said it was the only one.

On the other hand, the scheme expanded, without detection, for another 6 years or so and was in place, without detection, until the last component was unwound at the end of fiscal year 2010.

I’ve run out of hands, so back to the story.

When did the scheme finally get unwound?

The last part of the bad investments was finally written off in March 2010, according to the WSJ article. That month, by the way, would have been the last month of the fiscal year when Ernst & Young took over the audit from KPMG :

Messrs. Mori and Yamada decided to unwind and write off the whole thing, using three small Japanese companies: …. Olympus bought the trio in 2008 for the highly inflated price of ¥73.2 billion and wrote the bulk of that amount off the next year, an arrangement that allowed it to repay the loans it had borrowed from LGT and close down the European route in 2008, the report said.

Note: LGT is one of the three banks used to hide the money flow.

That left only the funds in the Singapore route still operating, the report said. Olympus internal documents said Messrs. Mori and Yamada wrote off those losses using $687 million in fees attached to Olympus’s acquisition of U.K. medical-technology firm Gyrus Group PLC as cover. The last bit of that deal was completed in March 2010. Those fees were paid to the company run by Mr. Sagawa, one of the brokers who first proposed the loss-covering operation to Olympus 12 years earlier.

Note: There were three different ‘routes’ set up to get the bad investments off the books.

When did this mess get started?

A bit more detail on the front end of this mess. The WSJ article points out the fiasco started back in about 1985 with management pushing aggressive investments that didn’t work out too well.

Exchange rates started generating losses on those investments in the late 80s. Thus the fraud was running from about 1985 through 2010, when it was all written off. The fraud blew up in October of this year.

That is why you will see comments that this fraud was running for 20 years. That is also why the WSJ article leads with:

The secret held for a quarter-century, quietly passed among senior executives.

Causes of the fraud

The report was harsh in identifying the causes, starting at page 23. Just a few causes that were mentioned:

• Collusion and intentional fraud by management
• Very poor corporate culture which punished dissent
• No document trail (this is something to remember in the long discussion of auditors’ work that we will have later)
• Poor corporate governance
• Poor follow-up by the CPA – this obviously requires lots more follow-up by the committee and others.
• Outside collaborators (this could eventually include three banks and a host of attorneys, intermediaries, finders, and consultants)

The New York Times article comments about cooperation from the outside banks who did not give full answers to the audit confirmations:

The report says that Olympus had persuaded several banks, including Société Générale of France, to submit incomplete financial statements to auditors, apparently in an effort to conceal financial maneuvers that the report says involved at least $1.7 billion and were meant to hide failed investments during the 1990s. There is no indication the banks knew of Olympus’s cover-up, the report said.

According to the report, Olympus told the banks that they did not need to respond to KPMG queries about collateral, which was used to finance loans to investment funds involved in the loss cover-up.

Keep that bit of trivia in mind as we read the soon-to-arrive avalanche of articles saying it was all the auditors’ fault.

Recommendations

The recommended changes are extensive and harsh. Here are a few of the committee’s recommendations, starting on page 27:

• Replace management who did nothing about the issues identified by the auditor in 2009 and 2010. Replace the board members who addressed those issues in a mere 15 minutes.
• Remind the current auditor, who missed things in their first audit in 2010, of “…the importance of its duties…” Ouch. Think that will be a painful meeting with the board?
• Don’t hire the president’s buddies or business partners.
• Change the attitude and mindset of management. Also, make sure management, directors, and auditors know they have a responsibility to society in carrying out their duties. Ouch. Slam in the last sentence – new members of management should have “…moral value and sense of compliance”.

Ouch again.

• Change corporate culture to one that is focused on compliance with policy, not just following orders.
• Reform many of the systems of the company. Corporate culture overhaul, HR system reform, periodic rotation of duties, and lack of whistleblower system all need to be addressed.

Like I said, a rather harsh report.

One final idea. Think about the sheer size of the fraud.

Picture a company that can absorb $1.7B of losses and keep going as if nothing happened. Then they have enough cash ($2.7B) to fund some round-about loans to buy the assets and return the cash to Olympus.  That leaves $2.7B sitting on the books as an unusable CD.

After that, they have enough cash sitting around to float $2.7B again, but this time it’s sent to the consolidated sub, which passes the money to the unconsolidated sub, on to the various banks, and then back to Olympus.

Imaging having enough spare cash after absorbing the loss, enough cooperation from enough people, and sufficient skill to discretely push $2.7B in a meandering trip through the world’s banking system, twice.

Finally, in what will generate lots of discussion, picture that the whole thing was hidden well enough that dozens of audit teams from three different audit firms over 25 years stumbled onto only one part of the fraud in only one year, and that was toward the beginning.

I think we will be talking about this a lot. I hope my comments in this post move the discussion forward.

Many thanks to Francine for the opportunity to be a guest blogger!

Main page photo is cropped image of  Daedalus Print “Mt Olympus” by Cecil Kim.

I first met Professor Tim Louwers, my host, at the American Accounting Association (AAA) Public Interest Meeting in Chicago last March. He is President of the Fraud and Investigative Accounting (FIA) Section of the AAA. (I’ll be speaking on a panel this March 30 at the midyear meeting of the AAA FIA, also to be held in Chicago.)

Professor Louwers and Professor Sandy Cereola took me out for dinner to the wonderful Joshua Wilton House.  If you are ever in the Shenandoah Valley near Harrisonburg I high recommend it.

Professor Paul Copley, the Department Head for School of Accounting as well as several other faculty were kind enough to share their research and their feedback on my writing with me. James Madison University School of Accounting offers a Bachelor of Business Administration (B.B.A.) degree and a Master of Science (M.S.) degree in accounting.  Most students choose to receive both degrees and thereby satisfy the 150 semester hours of education required in most states to be eligible to sit for the CPA exam.  It seems that this is a significant trend – obtaining a Masters in Accounting to meet 150 hour requirements rather than lengthening the undergraduate degree.

According to the 2011 National Association of State Boards of Accountancy report, the 2010 edition of Candidate Performance on the Uniform CPA Examination ranked JMU as the No. 1 school with the top overall pass rate for first-time candidates with an advanced degree. The report covers testing information collected for the 2010 calendar year and details examination candidate performance from nearly 2,000 colleges and universities. To see how JMU compares to other schools, visit http://bit.ly/tGIwrA.

I spoke to both students and faculty about the advantages and disadvantages of this strategy for students and schools, especially in light of the overtime lawsuits against the Big Four audit firms.

Here’s the text of my speech to the Beta Alpha Psi initiates.  If you would like me to speak at your school, please contact me at fmckenna@mckennapartners.com

Good evening.

Thank you so much to Professor Louwers, Professor Cereola and James Madison University for asking me to speak. It’s enormously rewarding to me to be here amongst accounting students and accounting educators.

I’ve worked a lot of different places over the years and I’m no different than you in finding the world we live in a constant professional challenge.

I think you will face more than one ethical dilemma during the first year of your career at a large public accounting firm, corporation, or in a government office. In public accounting firms, which are my primary focus, the land mines are everywhere.

You may have to decide whether to check a box for a test or review that wasn’t done. You may be asked to create or backdate a workpaper, add evidence of reviews and signoffs, insert documents after the fact, or change conclusions or recreate analyses in preparation for a quality review or PCAOB inspection.

Rule of thumb:  If a partner or manager uses the word “backdate” it’s pretty certain he or she wants you to do something you may be famous for later – and not in the good way.  If you hear the word “backdate”, run as fast as you can in the other direction to your firm’s Ethics Hotline.

You may be pressured to falsify the timesheet to stay under budget for your part of the engagement. That’s called “eating hours” or sticking to the budget.

You may see something and want to say something.

Will you? Should you?  Can you?

Some of will make the difficult decisions to speak up. Some will go along to get along. Keeping your head down and your mouth shut is self-interest and career survival. The pressure to succeed, to make those in your life proud, to maintain physical, financial and job security can chip away, day after day, at your self-esteem as professionals and your ethical resolve.

So, what are the standards accounting professionals must acknowledge and adhere to?

First, let’s differentiate between an “accounting professional” and the accounting or audit industry where many professionals practice.

Those of you who are CPAs and teach can attest that I’m talking about two different things. Accounting professionals work in industry, government, politics, journalism, academia, and other vocations in addition to public accounting firms – the accounting industry.

What does it mean to be an “accounting professional”?

The AICPA Section 50 Principles of Professional Conduct starts out:

• By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.
• The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.
• A distinguishing mark of a profession is acceptance of its responsibility to the public.

There’s more but that’s the gist of it.  If you work in client service, if you are a CPA, your first obligation as a professional is to your client – not your firm, your partners, or even your family.

If your client is doing something illegal, then your obligation shifts to society and to law enforcement. That may seem harsh, but it’s the code that’s supposed to insure that lawyers and accountants, for example don’t cut corners out of their own self-interest and to the detriment of their client’s interests.

Martin Luther King Jr. said “Morality cannot be legislated, but behavior can be regulated. Judicial decrees may not change the heart, but they can restrain the heartless.”

Regulate bad behavior. Restrain the heartless.

The audit model is intended to provide a critical public service meant to protect shareholders (the purpose of the audit report). It’s done via a profit making private partnership that can encourage “behavior that must be regulated”. In the United States, that’s the job the PCAOB was charged to do after Sarbanes-Oxley.

Many of you will go to to work for public accounting firms. In the United States, certified public accountants are the only authorized non-governmental type of external auditors who may perform audits of financial statements and provide reports of those audits for public review, submission to the SEC, and to comply with exchange listing standards.

In the United States, the firms and their state-certified, licensed professionals are also required to be independent of the entities being audited.

Public accounting is an industry that employs many accounting professionals, as well as lawyers and other professionals. Each group has its own set of standards and a code of ethics. As a regulated industry, all employees of public accounting firms have an obligation to behave within laws and standards governing that industry that are intended to protect investors and serve the public’s interest.

Look at the four largest global public accounting firms. They officially operate as a loose confederation of separate private partnerships for legal reasons and to insure secrecy, but their size and complexity makes them look more like corporations to the outsider.  They manage by consensus, but in reality a limited number of partners lead the firm and make decisions on behalf of thousands of “partners” who are more like highly paid executives.

The top four firms – Deloitte, Ernst & Young, PwC, and KPMG – generate more than $100 billion in total revenues globally and employ more than 600 thousand people. As auditors and advisors, they work inside the banks, brokerage firms, auto manufacturers, mortgage brokers, and homebuilders.

Here’s an example:

KPMG audits Citigroup, Wells Fargo – who now owns client Wachovia – GE, and GM.  They used to audit two big mortgage originators before they blew up – Countrywide and New Century. They also used to audit Fannie Mae and Moody’s before they were fired and sued. They also audit the US Treasury.

PricewaterhouseCoopers audits JP Morgan Chase, Bank of America, Goldman Sachs, AIG, the Federal Home Loan Banks, and Freddie Mac. PwC is also responsible for Satyam, Northern Rock in the UK, Glitnir in Iceland, and Russia’s Yukos.

Deloitte, who is now Fannie Mae’s auditor, was also auditor of four other housing related companies that had issues: Taylor Bean & Whitaker, Beazer, Novastar, and American Home. (The bank that TBW bankrupted, Colonial Bank was audited by PwC.) Deloitte audited three no-longer-independent large firms sunk by bad mortgages: Merrill Lynch, Bear Stearns, and Royal Bank of Scotland. Deloitte used to audit Washington Mutual before it was taken over forcibly by JP Morgan. They also audit the Federal Reserve Bank and Buffett’s Berkshire Hathaway.

Ernst & Young, everyone knows, audited Lehman Brothers. They also audit Groupon, Facebook, Google, and Zynga. Don’t forget alleged fraud Sino Forest in Canada. And also UBS and Societe Generale, home of the “rogue” traders, and Anglo Irish in Ireland. EY also audits News Corp of the phone-tapping scandal, and S&P, the ratings agency.

The revenue model of professional services firms is based on hourly rates and that means people. More people equals more billable hours assuming there’s demand, but more fixed expense. If demand goes down or the market contracts as it did when some firms lost clients through failures and acquisitions like Deloitte, they start laying off. And they have less people work more hours. They’re on salary, after all, not hourly. And they replace higher paid professionals with lower paid professionals. They even cut partners.

That’s called the leverage model.

One legal case that demonstrates the leverage model in action is the class action in California, Campbell v Pricewaterhouse, a lawsuit about overtime.

Several overtime lawsuits are pending against some of the major accounting firms doing business in California. These suits were filed by non-CPAs, non-licensed associates (entry level college graduates), who believe they were misclassified under California law as exempt professionals and are due overtime and other benefits due to non-exempt employees.

A few states like California, Wisconsin, and Massachusetts  – and Canada where similar suits were settled with very little notice here – have wage and hour laws that are perceived as more employee-friendly.

I have mixed feelings about these lawsuits. In twenty-five years of working as an accountant, consultant and internal auditor, I have never been paid time and a half. When you choose to work in a profession, you don’t expect it.

Many college graduates, these days, don’t see the point in working eighty hours a week during the busy tax or audit season for a fixed salary. When they calculate their hourly rate, even given the fairly generous salaries, signing bonuses, and benefits the best and brightest get as new Audit Associates, many question the total cost of the sacrifices they’re making.

All they see are strained relationships with family and friends, excessive stressful travel, late nights spent performing mind-numbing “monkey work” on laptops, non-stop scanning and photocopying, fewer partners and opportunities for promotion, and very little use of the ambition and brains they thought they were hired for.

Although the state and federal wage and hour laws governing eligibility for overtime pay are complicated, the public policy issues they present for audit firms are not.

The largest public accounting firms want entry-level accounting graduates to feel like professionals, by virtue of their university degree, the potential to take the Certified Public Accounting (CPA) exam, and their eligibility to be licensed eventually. But when it comes to eligibility for overtime – or rather exemption from overtime – it’s not who you think you are or where you came from but what you actually do that matters most.

The education of accounting majors consists, in the worst case scenario, of being “taught the exam” and, in the best case, of four to five years of head-down, hard-core study and rote memorization of facts with rarely any time for other outside reading, enrichment, travel, or world view development.

If some of these lawsuits are successful, universities that provide their states’ CPA hour requirements without the necessity of a graduate degree may doom their graduates to status as “para-accountants” until licensing.

There’s an economic argument at play here: In this environment more work produced for less pay is both tolerated by labor and a business model that rewards firms with higher profitability.

The goal of today’s Big 4 private partnerships is, primarily to increase partner earnings (total cash compensation, unit values, revenue per partner, etc) and preserve the future of the partnership so partner pension, profit sharing, and other funds upon which retired and retiring partners depend will remain intact (and funded). Everything else – employees, clients, and more often these days integrity – is secondary.

There’s also a practical regulatory issue at stake when the firm uses the leverage model to the extreme: Can the regulators allow audit firms – who play a role as critical regulatory cogs in the financial system wheel – to delegate more judgment and decision making over financial reporting and disclosure to the lowest level of staff because they are the per-hour cheapest?

Individual assimilation and success in a Big 4 public accounting firm starts with selection based on university credentials, referrals from professors, family background, and business ties, as well as having political beliefs and economic philosophies that are aligned with firm values. This process now starts in some universities in freshman year, with some students having two or three internships before they graduate.

For some students it starts even earlier.  One or both parents work for the audit firms and the career is one that has always been considered a safe choice.  That’s especially true if the apple doesn’t fall far from the tree in talents and personality.

Auditors often marry other auditors or accountants because in school or in their early career they have no time to date anyone else!

We’re often furiously trying to join something, enroll others or keep people out. The more exclusive a country club, society or nightclub the more desperate we are to gain entry…

Or avoid being kicked out.

Professional services and, in particular audit and consulting in the Big 4, are not for everyone. Audit is, in my mind, a vocation. So in addition to the client service aspects, which require you to do things on their timeline, based on their needs, given their requirements and your commitments, you are also serving a broader set of interests, shareholders and the capital markets system.

Big job, but somebody does it and it takes, at times, long hours, unpredictable schedules, and long hours. Did I mention long hours? I won’t get into the issue of “face time” and bad budgets, and squeezing more work on less people so you can hoard chargeablity…

For another day. But in general, the nature of professional services is that it has peaks and valleys of activity.

The difference between now and when I first started working for KPMG Consulting in the early 90‘s is that there’s no predictable payoff. When I worked for KPMG Consulting/BearingPoint from roughly 1993-2001 (not necessarily PwC 2005-2006) I felt that if I put the time in, did well, and asked for extra – went the extra mile – I would be rewarded.

I put my name in the hat for not one but two tours of duty in Latin America. I was rewarded as the first female Managing Director in Latin America. I had much more people responsibility and P&L authority than most any other partner/MD in the US except the national leaders.

Nowadays, however, it’s more of a crapshoot. I get email and comments every week from those who did everything right, 150%, only to realize it’s not what you do or what you know, but who you know at the right time, and that sometimes there’s a “what have you done for me lately” mentality that can be demoralizing.

In spite of the fact the firms are doing well in the consulting and tax practices and different practices and some firms are doing better than others, in general, the audit practices are not bringing in the dollars they used to.  That’s due to no more Sarbanes-Oxley windfall and a number of things that put the ball back in the client’s court. At this point, the client controls the relationship and the fee structure, with many clients requiring competitive tenders and fee cuts or more work for the same fee every year.

Does that mean that the experience at a public accounting firm is all bad?  On the contrary.  There’s the training, the chance to work with big companies and very smart people in the firms and at clients and, eventually, the alumni network. But your experience, and what you get out of it, is very dependent on the firm and the people you choose to work with.

I was fortunate to have great mentors, coaches, people who took their job and my career seriously when I was at KPMG and BearingPoint.  At PwC, not so much.  But even at PwC I met very smart people like Richard Chambers who is now CEO of the Institute of Internal Auditors. He and others are still friends and contacts and very supportive of what I have been doing since.  Good people are everywhere.

How do you choose which firm to work for, assuming you have a choice?

Look them in the eye.  Are these people you trust, you can learn from, that you respect?  Do any of them look like the guy or gal or would hit on your boyfriend or girlfriend when you weren’t looking?  People don’t change.  That type in college is that type at work – the one who will tell the manager you screwed up or forgot to staple the stack of documents with two parallel staples in the left hand corner or used the blue pen instead of the green one just so their friend can get the billable hours or hang out on the client site with them instead of you.

Cliques and cabals form in the close knit working environment of the late night team room, when you’re all supposed to be sharing the workload, while eating pizza or Chinese food and swapping life stories.

The firms are managed locally and the strength of the client list, partner personalities, and culture of an individual office is more important to your professional development and future choices in the first five years than any secondment program or diversity program or even which firm it is. They all have great people and they all could go bust with the next big lawsuit for a fraud you didn’t see coming.

Internal operations of the public accounting firms, especially the largest ones, are conducted in a secretive manner. Financial results and common business metrics are minimally disclosed to the outside and on a “need to know” basis even internally. Once initiated into firm culture, survival requires adoption of an informal oath of allegiance that makes it shameful to betray even one’s deadliest enemy, your competitors, to legal and regulatory authorities. It’s a Big 4 type of omertà, the extreme form of loyalty and solidarity in the face of authority usually attributed to the Mafia.

Examples of an extreme sense of loyalty to even those who’ve disgraced the profession can be found when partners that have been sanctioned by the SEC, forbidden to audit public companies, are later reinstated. Deloitte, for example, kept the partners responsible for Delphi and Navistar on their payroll during their SEC suspension and they survived the sanction to audit more public companies.

Many accounting professionals who work for the audit firms write me to ask about their “true client.” They have either never been taught this concept or had it beaten out of them by the reality of which behavior is rewarded at their firms.

The client for audited financial statements is the shareholder, not the company management. The Audit Committee of the Board of Directors hires and is supposed to manage the external auditor. The Audit Committee represents that shareholder client but has a legal duty to the corporation not the shareholder. Other stakeholders include bondholders, lenders, employees, vendors/customers who depend on the continued viability of the company, and regulators (whose role is to protect investors and overall capitalist system.)

When professionals forget or suppress acknowledgement of their true client, an auditor loses the ability to properly structure decisions with moral and ethical implications, let alone those with serious legal and regulatory ones.  In the face of potential legal implications of a decision, they seek to avoid personal liability.  In the face of a moral or ethical dilemma, they look at costs/benefits of looking out for their own financial self-interest, at an individual and at a firm level rather than shareholders’ and society’s interests.

When was the last time you heard about a whistleblower from one of the Big 4 firms?

It’s not easy for an individual external auditor to step up and do the right thing. The model of providing audits, a critical public service meant to protect shareholders via a profit making private partnership, often encourages “behavior that must be regulated.”

I believe auditors demonstrated a profound lack of professional skepticism and professionalism during the crisis. They ignored the possible motives and motivations of their audit subjects.

Rather that assuming executives, and possibly the Board of Directors, are self-centered and human, they accorded them the highest form of deference. In the interest of maintaining financial and social relationships, in my opinion the auditors did not sufficiently challenge and expose the survival instincts and financial incentives of corporate executives and board members. That may be because the firms, paid by management, have their own financial incentives to stay quiet.

Whistleblowers and those that push unpopular ideas or try to report on wrongdoing often lose their jobs, are vilified by the former employers and sometimes their former colleagues, are often disbelieved and laughed at, attributed with bad attributes and intentions such as revenge, anger, payback, whining, mercenary goals, bitterness, spite, Don Quixote-like tilting at windmills, unreasonable idealism, and impractical expectations.

Whistleblowers are often very right, but often end up being right all alone.

Sometimes, when raising concerns or questions about lack of segregation of duties, improper expense reports, lack of proper authorizations for stock options or shady compensation decisions, an external or internal auditor hears the following:

“He’s a man of integrity.  He lives this company. He is a pillar of the community.  He donates to charity.  He is an elder statesman of the industry. He has unquestionable, unassailable ethics and cares about this company.”

Speaking up can be a career-limiting move, threatening your own livelihood in addition to the success of your office, your practice, and your firm.

But auditors, who are inevitably almost always CPAs, have a higher responsibility. Making the type-two error of being right in your suspicions of illegal activity and potentially enormous harm or loss and not acting on them is completely unacceptable.

Don’t let anyone ever tell you again, after Madoff and the rest of the cases of hubris we have seen during this ignominious year, that any man or woman is above suspicion.

Professors: Please teach your students the principle of professional skepticism.

Students:  Never stop questioning authority.

The PCAOB, under the leadership of new Chairman Jim Doty, is raising many of these issues and speaking frankly and consistently about them.

We can wait for regulation to change. But we can also act every day to promote positive change in the profession.  Your attitude, your actions, and your focus on independence and integrity can force change, too.

These disclosures were a result of pressure brought to bear by Congresswoman Maxine Waters and several other congressional members who sent a letter to the OCC and the Fed on October 28. This letter expressed the legislators’ displeasure with the way the OCC and the Federal Reserve Bank had so far run the “independent” foreclosure review process that is intended to overhaul mortgage-servicing processes and controls and to compensate borrowers harmed financially by wrongdoing or negligence.

Congresswoman Waters cited my October 6 column for American Banker in this letter to the OCC and Fed when demanding that the regulators manage conflicts of interest in the foreclosure review process as well as make a full disclosure of vendors and their engagement letters with the banks.

On December 6, I wrote again in American Banker after I reviewed the engagement letters that were posted by the OCC. I had several concerns. Congresswoman Waters did, too.

“[The OCC] issued a report on the actions of a dozen national bank and federal savings association mortgage servicers aimed at complying with the consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices. (The two remaining consent order recipients — GMAC/Ally and SunTrust — have not yet finalized their terms with vendors and as a result their overseers, Fed Chairman Bernanke and the Federal Reserve Bank, have not yet responded to the request for full disclosure, according to the Water’s office.)

Waters was less than impressed with what she saw and so am I.  She told me, “My letters specifically asked for information on conflicts of interest between the banks and the consultants — which is precisely what the OCC redacted in the information they released last week. A cursory look into the banks and their consultants indicates that in some cases, there are substantial pre-existing relationships between the firms.”

Redacted is an understatement.

Here’s what was redacted, according to OCC spokesman Bryan Hubbard:

Limited proprietary and personal information has been redacted from the engagement letters including, but not limited to:

• Names,titles and biographies of individuals;
• Proprietary systems information;
• References to specific bank policy;
• Fees and costs associated with the engagement;
• Specific descriptions of past work performed by the independent consultants.

So what’s left? It’s interesting enough, as a start, to look at which consultants and law firms were selected by which servicers. It’s also interesting to look at the scope of services to be performed and the time and volume estimates for project activities where they were not redacted.

From my December 6 American Banker column:

The disclosure of the consultant engagement letters for each servicer has already had a huge impact. The Financial Times reports that the New York Attorney General “launched an investigation into possibly unlawful foreclosureson the mortgages of active-duty members of the US military.” The foreclosure review engagement letters posted by the OCC included estimates prepared by the banks and their consultants suggesting, according to the Financial Times, that 10 leading lenders may have seized the homes of about 5,000 service members in violation of the Servicemembers Civil Relief Act, which restricts foreclosures on the homes of active duty members of the U.S. armed forces.

There’s also the issue of attorney-client privilege:

Some of the engagement letters invoke attorney-client privilege and attorney work product privilege over the whole process and confidential treatment of engagement letter itself. It appears all the servicers used their general counsel’s office to engage the consultants and outside counsel and some name their general counsel as project lead. Some servicers engaged additional outside legal counsel for the review directly rather than through the primary consultant.

OCC spokesperson Hubbard says, “although some of the engagement letters make claims of attorney-client privilege, these claims are by statute inapplicable to the OCC and FRB, which have complete access to all documents produced by the independent consultants and servicers as part of the independent foreclosure reviews required by the Consent Orders.

I certainly hope so.

I was the first to report on December 6 the irony of Deloitte having been selected by, of all banks, JP Morgan Chase. The high likelihood of a conflict between the bank and the audit firm, and possibly the individual Deloitte partners assigned to the JP Morgan Chase review, should have been obvious to anyone at the OCC. I said on December 6 that it would be great if we could see the names of the partners and staff assigned to the engagements and check their credentials and prior client work for conflicts.

It would be enlightening, for example, to see whether any of the Deloitte partners proposed as consultants as part of the foreclosure solution at JP Morgan/EMC, were previously part of the mortgage origination/securitization problems as auditors at Bear Stearns or Washington Mutual.

Bear and Washington Mutual, both former Deloitte audit clients, are now part of JP Morgan Chase, and Deloitte is defending lawsuits over alleged audit failures at those firms.

Lo and behold, partner Ann Kenyon of Deloitte, who testified at a December 13th Senate hearing on the issue, said under oath that she is the engagement partner on the JP Morgan Chase foreclosure review. An internet search revealed a conference biography that suggests that amongst Kenyon’s representative clients was Washington Mutual, now owned by JP Morgan Chase and a significant part of the review. This would be a clear conflict with her role as engagement partner for the review.

Ms. Kenyon [who leads Deloitte's Securitization Advisory practice] works with issuers, comprised of both attest and non-attest clients, who have encountered difficulties in accounting for and reporting on their securitizations.

At the 126:20 mark of the archived webcast of the Senate hearing Kenyon describes the organizational structure, level of experience and source of professionals for the Deloitte JP Morgan Chase review team. (She says it’s all Deloitte staff.) She also says that a large team of Deloitte partners who are subject matter experts report to her and are leading each team.

Someone should check their conflicts, too.

Two of the other three Big Four audit firms were selected for multiple review assignments. KPMG, auditor of Citigroup, New Century, Countrywide, Wells Fargo, and Wachovia, is conspicuously but thankfully absent from the list of consultants.

Examples of firms involved in multiple reviews include Ernst & Young (involved in three reviews as both a primary consultant and subcontractor), PricewaterhouseCoopers (involved in two reviews as a primary consultant), and Promontory Financial Group (involved in three reviews as primary consultant). Law firm Gibson Dunn is legal counsel for three reviews (retained by the consultant in two cases and by the bank directly in one).

For example, one firm could be charging different rates to different banks for what is supposed to be a consistent review across servicers. That not only indicates banks can leverage their influence with vendors to get the review they want (and the monetary exposure estimate) at the price they want to pay, but that we may not get consistent results for borrowers that were harmed by multiple servicers.

Some of the concerns I mentioned in my December 6 column were pursued by Senators at the December 13 Senate Committee on Banking, Housing, and Urban Affairs hearing: Helping Homeowners Harmed by Foreclosures: Ensuring Accountability and Transparency in Foreclosure Reviews.

Some additional interesting interchanges during the hearing:

At the 45:30 mark of the archived webcast, Senator Reed asks the OCC’s Julie Williams why the OCC and Fed could not select and contract with the consultants directly. Williams says that would have been difficult because it would have necessitated the regulators to use a “procurement process” that included consistent “standards” for selection.

That sounds to me like a Request for Proposal process and a vendor selection process that is in place  - for many of these same vendors already – as a result of the finical crisis. Instead the OCC and Federal Reserve bank abdicated the vendor selection process to the services and, therefore, will reap the numerous potential conflicts they have sown.

At the 49:00 mark, Senator Reed asks a critical question, perhaps thinking about the Deloitte/Bear Stearns-EMC/Washington Mutual issue with regard to a JP Morgan Chase review. If a consultant runs across a set of transactions that the firm or those consultants had direct involvement in is the consultant obligated to report that conflict to the regulator?  Williams says that they would expect to hear about such a conflict.

Reed presses to ask if there is an “obligation” versus an “expectation”.  Williams sounds evasive in her answer, implying that this specific obligation is not explicit in the engagement letters.  I sure didn’t see it.

My December 6 column, in particular the parts regarding the Deloitte conflict and the attorney-client privilege issue were mentioned in the written and oral testimony by Alys Cohen, Staff Attorney  at the National Consumer Law Center.

With regard to the attorney-client privilege potential issue, the OCC and the Federal Reserve Bank should make sure all legal counsel that is intended to be part of the foreclosure review team should be retained by the consultant not the bank.  Otherwise, I see an assertion of attorney-client privilege by the outside legal counsel for the reviews as inevitable.

Some additional areas where strong monitoring by Congress and the OCC/Fed might be helpful going forward include:

• Checking consistency of level of effort estimates across project plans for each consultant’s proposal. Estimated hours for each task may vary based on the size and complexity of servicer, difficulty of obtaining information, and level of cooperation in resolving issues. But consultants will bill on a “time and materials” basis and variations in length of time estimated, for example, for each initial loan review and the quality assurance process could make millions of dollars of difference in fees given the tens of thousands of documents to be reviewed.

• The complaints process, managed as a coordinated approach for all servicers by Rust Consulting, needs to be synchronized with each servicer’s plan for their reviews. Although the OCC strongly influenced the design and implementation of the “coordinated” process, Rust Consulting signed a contract each servicer, risking the possibility of some servicers skimping on the effort or being unprepared based on their lack of progress in other dependent activities.

Many might think that with the demise of Arthur Andersen, the regulators and the public have gotten rid of the baddest apples in the bunch. Much has been written about whether Enron was an anomaly or whether there was something more institutionally perverse that had to be stopped. Andersen alumni felt vindicated and cheated when the Supreme Court overturned the conviction of the firm. Why then did it have to fail?

Well, there was more to the story and, of course, it did not end with the end of Andersen as a firm. There were many other times Andersen was called on the carpet by the SEC or sued by shareholders for bad audits.

In April of 2001, Arizona state officials and securities regulators jointly filed a lawsuit against Arthur Andersen LLP, alleging that the auditor willingly participated with a religious foundation in an investment fraud. The state sued the accounting firm over what it contended was Arthur Andersen’s involvement in an alleged cover-up of a securities fraud by the Baptist Foundation of Arizona.

“Any time senior management conspires to defraud investors, this kind of complicated fraud will be very difficult to detect,” the paper quoted Ed Novak, an outside attorney for Arthur Andersen at that time. (That’s a quote you’ll keep hearing from the remaining firms even today…)

In May 2001, Andersen also paid $110 million to Sunbeam shareholders to settle lawsuits stemming from its inflated earnings statements. Both Sunbeam and Waste Management restated their earnings after admitting fraud in their financial statements.

In April of 2002, AA announced that it was backing out of a $217 million settlement with victims of the Baptist Foundation of Arizona’s 1999 collapse. However, as the trial started a new agreement was reached to settle the case, when Andersen Worldwide, the company’s global organization, agreed to provide enough additional capital to enable the insurer to pay the $217 million originally agreed to.

In June of 2001, AA agreed to pay $7 million to settle the Waste Managment case. The Securities and Exchange Commission said that Arthur Andersen LLP’s audits of Waste Management Inc.’s financial statements were false and misleading. It was the largest civil penalty ever assessed against a Big Five accounting firm at that time.

In April 2005, Arthur Andersen LLP, the final defendant in the WorldCom securities class action, agreed to settle. Andersen will pay at least $65 million in cash and those funds have already been transferred to an escrow account. In addition, the class will receive 20 percent of any distribution to any of Andersen’s 1,700 partners from any funds remaining when all other claims are settled.

But the remaining Big 4 audit firms also have their share of outstanding and settled suits for improper audits and other claims. And in all cases, the remaining firms either bought, merged, or absorbed Arthur Andersen partners, staff and their clients all over the world. Where it seemed that former Andersen clients may have gotten new auditors and a fresh look, there may have been only more of the same, just operating under a new name.

The US Chamber of Commerce has warned recently that the auditing profession is “on the edge of disaster” if regulators, business and auditors do not tackle the enormous litigation liabilities faced by the “big four” firms.

This warning reflects concern over the possibility that one of them – PwC, Deloitte, KPMG or Ernst & Young – could collapse if multi-million dollar lawsuits brought for alleged negligence bring a firm’s partnership to its knees. Claims against auditors began to increase in number and size in the 1990s, particularly in the US.

The PCAOB, the audit industry regulator, shamed global audit firm Deloitte recently when they exposed the private portion of the inspection report of the firm’s 2006 audits. It was the first time that had happened to one the Big Four audit firms, the largest firms that audit the vast majority of publicly listed firms in and out of the U.S..

I’m sure Deloitte, and the rest of the Big Four, thought the PCAOB would never have the nerve.

re: The Auditors has seen a confidential, internal Deloitte training document, prepared this past summer, that reveals the firm expects the worst when the inspection reports for their 2009, 2010, and 2011 audits are published by the PCAOB. The 2009 report should be out by the end of this year. The training document also shows how difficult it is for Deloitte leadership to steer the largest global firm away from the “audit failure” iceberg.

It seems audit competence and capacity to audit complex topics are in short supply at all the firms, based on PCAOB inspection results for audits conducted during the financial crisis period and the reports for 2010 audits at PwC and KPMG released recently. Deloitte has been particularly hard pressed to maintain audit quality since the firm lost several engagements that would have helped to grow specialized knowledge and retain experts. Big clients like Merrill Lynch, Bear Stearns, and Washington Mutual helped pay the bills for subject matter experts and quality control but those revenues were lost to financial crisis failures and forced combinations with better capitalized, non-audit client banks.

I think the PCAOB decided to publicly criticize Deloitte for two reasons.

• The firm has been piling on the negatives via a $1,000,000 fine/disciplinary sanction as a firm for a previous issue, two high level insider trading scandals (Flanagan and McClellan), the failures and frauds of Deloitte China clients CCME, Longtop and now Focus Media, and the specific failures of major clients during the crisis (Bear Stearns, Merrill Lynch, WaMu, Taylor Bean & Whitaker, American Home, and Royal Bank of Scotland, to name a few).
• Deloitte was resistant to the inspections, resistant to the criticisms, and unwilling to make changes based on the PCAOB’s requests. If you can’t fix something that’s one thing. If you won’t and thumb your nose at the regulator, you are getting close to Arthur Andersen-like behavior.

We know how that story ended.

If they did nothing, the PCAOB risked having a new major failure of a Deloitte client expose their lack of push on the firm to even respond, let alone improve.

I wrote in American Banker about the special risks to financial services firms when the regulated, like Deloitte, resists the regulator:

The PCAOB’s decision to make the Deloitte 2006 quality control criticisms public, and the fact that the Securities and Exchange Commission allowed it to do so, tell me Deloitte is still fighting the regulators. The deadlines for Deloitte to fix or sufficiently respond to criticisms in the 2007 and 2008 inspection reports have passed. We could soon see previously nonpublic information from those reports, too.

The risk for banks in a situation like this is that an auditor that brazenly irritates its regulator may draw unwanted attention to its clients from their regulators. For example, PCAOB spokeswoman Colleen Brennan reminds me that the SEC knows the names of every company whose audit deficiencies are mentioned in a PCAOB auditor inspection report.

These risks apply to all of Deloitte’s clients and to all public companies if the rest of the firms – KPMG, PwC, and Ernst & Young – are also playing chicken with the regulator.

A little more than a month after releasing the Deloitte private report, the PCAOB released the inspection reports for audits performed by PwC and KPMG in 2009. The Financial Times’ Kara Scannell summarizes the findings:

The Public Company Accounting Oversight Board’s findings from an annual inspection revealed that years after the financial crisis both auditing firms were not adequately challenging companies’ valuations of certain assets when the market for them dried up…

The board reviewed 71 audits completed by PwC in 2010 and 52 audits done by KPMG in 2010.

The Wall Street Journal’s Michael Rapoport tells us how bad the results really were:

The government’s auditing regulator found deficiencies in 28 audits conducted by PricewaterhouseCoopers LLP and 12 audits by KPMG LLP in its annual inspections of the Big Four accounting firms.

The Public Company Accounting Oversight Board said many of the deficiencies it found in its 2010 inspection reports of the two firms, released Monday, were significant enough that it appeared the firms didn’t obtain sufficient evidence to support their audit opinions.

The regulator hasn’t yet issued its yearly reports on its inspections of the other Big Four firms, Ernst & Young LLP and Deloitte LLP.

KPMG’s response to the PCAOB was not quite as belligerent as Deloitte’s persistent irritation at having their “professional judgment second-guessed”. But, it was not exactly conciliatory.

Floyd Norris of the New York Times:

Normally these letters say something like what KPMG wrote:

“We conducted a thorough evaluation of the matters identified in the draft report and addressed the engagement-specific findings in a manner consistent with PCAOB auditing standards and KPMG policies and procedures.”

You may note that said nothing about whether the firm accepted the board’s conclusions or not. That is better than what Deloitte did a few years ago, when it essentially said the board did not know what it was talking about.

PwC, on the other hand, met the regulator more than half way according to Norris:

PwC’s letter addressed that issue, saying that while there were cases where it differed with the board’s conclusions, “they generally related to the significance of the finding in relation to the audit taken as a whole, and not to the substance of the finding.”

“Accordingly,” wrote the PWC officials, “the overall PCAOB inspection results, as well as the results of our internal inspections, were important considerations in formulating our quality improvement plan,” which it then describes.

PwC’s spokesperson sent me this additional statement:

“PwC is built on our reputation for delivering quality. We also recognize that the role we play in the capital markets requires consistent, high-quality audit performance. We therefore are focused on the increase in the number of deficiencies in our audit performance reported in the 2010 PCAOB inspection over prior years. We are working to strengthen and sharpen the firm’s audit quality, including making investments designed to improve our performance over both the short- and long-term.”

Did the quality of the auditing really deteriorate for KPMG and PwC or is the PCAOB getting tougher, and maybe better, at what they do?

We’ll have to see what the upcoming Ernst & Young and Deloitte reports show. Ernst & Young has been criticized for the Groupon multiple S-1 issue, as well as questions about accounting at future IPOs Zynga and Facebook. Now we have Olympus, too. And, of course, the jury is still out on the firm’s role in Repo 105 and Lehman Brothers.

And what about the Deloitte improvement plan for prior years? Has Deloitte accepted the PCAOB’s criticisms and moved on or are they still fighting the regulator? Is Deloitte working hard to get ahead of their 2009, 2010, and 2011 results and avoid the embarrassment or worse – sanctions – if the PCAOB has to publish another private report?

The confidential internal training report, intended to brief Subject Matter Resources (SMR), is called, “FY 2012 Engagement Quality Activities”.

The Audit Quality Activity Plan for FY2012 has been socialized with:

1. –  The OAQ Steering Committee
2. –  The Audit Quality Council
3. –  The RMPs
4. –  The NPPDs
5. –  The RILs
6. –  Leaders in the PPN
7. –  Extended Leadership Team
8. –  CFO / CEO

Yeah, that’s a lot of acronyms. And I’m not sure anymore – maybe I’ve been out of the firms too long or maybe I was never in them enough – what “socializing” a quality plan means. Suffice to say, the document, one hundred and eight-one very dense PowerPoint pages, has tons of information for the SMRs to absorb and pass on to engagement teams like now.

But, by this summer, it was too late to make a difference in the inspection reports for the 2009 and 2010 audits.

2009

• Response submitted on May 4

2010

• Total of 98 comments (56 engagements inspected)
• Expect about 25 engagements to appear in Part I
• Draft report has not yet been issued

2011

• 33 engagements selected to date
• Focus areas
  – Continue to include: fair value and impairment determinations; internal controls – Also focusing more on revenue recognition
• 16 completed
  – 5 with no written comments
• Total of 24 comments on 11 completed inspections

If Deloitte sent their response to the PCAOB for the 2009 audits on May 4th, why are we still waiting for the final report? Given the PCAOB’s decision to release Part 2 of the inspection report for Deloitte’s 2006 audits last month, I believe Deloitte was still treating PCAOB comments as an affront to partners’ professional judgments.

What are the root causes for so many negative PCAOB comments, according to Deloitte?

When evaluating “what didn’t work” for the various engagement activities, the consistent refrains outlined in the training document are “started too late”, “not enough time”, and “greater discipline and consistency needed”.

But there’s a bigger problem when it comes to audit failures around complex topics like goodwill, deferred tax asset impairment, fair value determination of thinly traded securities, and management estimates of loan loss reserves. There’s a huge intellectual divide between the audit teams and the subject matter specialist teams.

Professionals who are experts in tax or valuation of complex derivatives, for example, are not experts in auditing standards. The auditors, and the education they receive in universities and in the firms, focuses on the technical aspects of accounting – they know GAAP chapter and verse but not GAAS. That’s how we ended up with a defense of Repo 105 from Ernst & Young that the treatment meets the GAAP requirements with no appreciation for the more subtle GAAS disclosure expectations. Until recently, the firms didn’t think the PCAOB would push them to meet such high standards for auditing as long as the accounting was, subject to “professional judgment”, right enough.

But that’s how the auditors missed, or justified looking the other way, as so many banks failed or had to be bailed out during the crisis. This attitude is evident when you read in the training document how many of Deloitte’s policies and methodologies have to be revised to now absolutely require certain tests and additional steps. The steps weren’t performed unless the firm considered them explicitly required. Unfortunately, there’s still a difference of opinion between Deloitte and the PCAOB about what the PCAOB auditing standards explicitly require.

Here’s one example from the Deloitte training document:

Auditing Standard No. 12 – Identifying and Assessing Risks of Material Misstatement

Understanding the company and its environment

Change to our Methodology: We shall consider reading public information about the company (e.g., analyst reports), observing or reading transcripts of earnings calls, obtaining an understanding of compensation arrangements with senior management, and obtaining information about trading activity in the company’s securities. (AS 12.11)

Key Takeaway: This is a more specific requirement for audits performed in accordance with the standards of the PCAOB. Previously, while we may have been considering these items in our audits, their consideration was not explicitly required by our policies or by professional standards.

How does Deloitte intend to meet this higher standard in a quick and dirty, cost effective way?

Run a report using “OneSource” that includes a company summary, corporate overview, strategic initiatives, strengths & weaknesses, competitors report, significant developments), News, Articles and Financial Statements.

Zippity doo da.  You now know everything you need to know about the company.

It doesn’t help that the audit firms business model accepts high turnover of staff during the first 5 years. It’s a model that auditors got away with when issues were not as complex as they are now, especially within financial services firms.

For example, how can a senior, someone with 2-4 years experience, test a complex structured derivative for potential fraud (i.e. think of the Abacus deal) which is, in reality, an embedded derivative with multiple tranches and economic and risk characteristics that may not be aligned with the host, sitting off balance sheet, after having been passed thru an SPV sponsored by a “too big to fail” bank?

The manager, senior manager, and partner typically have no idea what the subject matter expert, a member of Deloitte’s Financial Instrument Valuation Risk Analytic team, is talking about when he says the client’s models and assumptions are insufficient, outdated, or flawed. The audit team probably doesn’t even know what a synthetic CDO is.

The most egregious recent example of a subject matter being ignored  - it happened in Enron, too – is the case of KPMG’s expert on mortgage securitizations and repurchase risk being told, “We’re done here” when he warned at New Century Financial that the client’s models had obsolete assumptions. That ugly episode only came to light because of the New Century bankruptcy and a robust bankruptcy examiner’s report.

In the recently disclosed Part 2 of the 2006 Deloitte inspection report, the PCAOB told the firm that partners were ignoring experts, too.

The inspection team identified six engagements where there were deficiencies in the procedures relating to the use of the work of specialists. These deficiencies included five engagements where there was no evidence in the audit documentation, and no persuasive other evidence, that the Firm had tested certain data or assumptions that the issuer had provided to the specialist (beyond, in one instance, inquiry of management).

In the sixth engagement, as part of their tests of the issuer’s annual goodwill impairment test, the Firm’s internal valuation specialists performed various sensitivity analyses to resolve concerns the specialists had raised regarding the issuer’s method for evaluating goodwill. For some of the issuer’s reporting units, the sensitivity analyses indicated the fair value of the unit might be considerably lower, or considerably higher, than the unit’s carrying value. The Firm failed to perform further, more precise sensitivity analyses, or other procedures, to determine whether the goodwill associated with these units was impaired.

Deloitte did not use its specialized SEC reporting and GAAP/IFRS consultation group well either.

The inspection team identified complex fact patterns in significant accounting and auditing areas, which were associated with deficiencies noted in seven engagements,35/ including five engagements36/ discussed in Part I.A, where the engagement teams did not consult with the Firm’s National Accounting Research or Quality Assurance departments. In addition, * * * * engagement teams consulted in three instances at below “Level A,” and neither the engagement team nor the National Accounting Research personnel raised the issue to a higher level as allowed by the policies.

Is Deloitte truly committed to a sea change in tone as well as technique? Seems to me the firm puts an enormous burden on the “soldiers” on the front lines and not enough on the “generals”, the partners who sign the opinions.

I’m not convinced they’re committed. Based on this document, and insider reports, I believe the the firm is still resistant. The firm’s big hope is probably that the spotlight moves away from Deloitte when something happens at another firm. Perhaps it will be a new development in the New York Attorney General’s case against Ernst & Young for Lehman.

But I do think the PCAOB is getting bolder and won’t be letting up on the audit firms.  The recent inspection reports on PwC and KPMG 2009 audits are proof of this.

On October 28, Congresswoman Maxine Waters and several other congressional members sent a letter to the OCC regarding the “independent” foreclosure review process intended to overhaul their mortgage-servicing processes and controls and to compensate borrowers harmed financially by wrongdoing or negligence.

Congress insisted on more disclosures and assurances of independence and monitoring of conflicts of interests during the “independent” foreclosure review process.

Congresswoman Waters cited my October 6 column for American Banker in their letter when demanding that the OCC manage conflicts of interest in the foreclosure review process as well as make a full disclosure of vendors and their engagement letters with the banks.

On November 22, 2011, the Office of the Comptroller of the Currency (OCC) issued a report on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

“The report, “Interim Status Report: Foreclosure-Related Consent Orders,” summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations…

In addition to the interim report, the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC’s consent orders. The letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews…”

I’ve been following the subprime crisis that morphed into a credit crisis and eventually the full-blown financial crisis since almost the start of this site in late 2006.

The first blog post on this site to use the word “subprime” was about New Century Financial, a KPMG client, mortgage originator, and one of the first failures of the coming crisis.

In August of 2007, I wrote about the irony of Senator Charles Schumer, one of the accounting industry’s favorite pet politicians, calling on the auditors to gut check the sincerity of the mortgage servicing industry about loan modifications.

Senator Charles Schumer has a lot of nerve. He also has a strong belief that the US public is naive and gullible. At best, it’s comical that Senator Schumer is demanding action on the sub prime crisis from the accounting firms. After all, they pay him to protect their interests, not the other way around. Where did he get the idea that they’re part of the solution? I wouldn’t be surprised to find out that Deborah Harrington wrote the press release.

Sen. Schumer urges Big 4 on mortgage accounting

“U.S. Senator Charles Schumer has asked the big accounting firms what steps they are taking to inform investors holding securitized mortgage assets that they can modify home loans and refinance them, according to a letter obtained by Reuters on Friday.“One of the most promising solutions to the anticipated foreclosure crisis is the voluntary modification by lenders of existing unsustainable subprime loans,” the New York Democrat said in a letter to the heads of Deloitte and Touche USA, KPMG, Ernst & Young and PricewaterhouseCoopers.