re: The Auditors » Deloitte

It’s A Race To The Finish – But There Are No Winners

Francine — Mon, 11 May 2009 14:29:27 +0000

Not so long ago, Dennis Howlett and I went public with a bet:

Which Big 4 audit firm is the next to fail?

This may seem like a dead pool – a quite depressing and morbid fascination with something that will add pain and misfortune to so many. I have been accused of being so totally negative that I strain credibility. After all, isn’t there anything good to say about any of the firms?

Isn’t some audit failure natural? Isn’t some error and omission in the audit process the result of a rational cost/benefit formula at work – one that determines how much more testing, sampling, investigation, questioning, and verification work should be done to reduce risk of material misstatement to an “acceptable” level?

Isn’t everyone cutting staff in this recession? Why can’t the audit firms run a business like any other capitalist and make a profit? Why are auditors any more responsible for the public interest than lawyers?

Aren’t plaintiffs’ lawyers too aggressive and going after audit firms only because they have “deep pockets” ? Aren’t auditors responsible only for certifying based on what management tells them? Can anyone hold them responsible if they were “duped” by bad guys?

The litany of crybaby defenses goes on and on.

Frankly, it’s getting a little tedious.

Let’s face facts. Dennis may be right. It may be EY that’s next.

Even before the conviction this week of four current and former partners of Ernst & Young for criminal tax fraud involving tax shelters, EY had a bundle of other trouble. They were the auditors of Lehman Brothers and are being sued for their role in that failure. They have Madoff exposure. They are also co-auditors for Societe Generale and auditor for UBS – two problem children, for sure. There is speculation about EY in other quarters, and although I don’t agree with their reasoning, the conclusion is the same.

Dennis believes that I’m betting on PwC as next to fail. I don’t honestly remember committing to that, but I’m willing to go with it for the sake of argument. This is in spite of the fact that the other Big 4 have plenty to worry about and the next tier firms are in no way ready for prime time. Wishful thinking that BDO can somehow win their appeal in the Banco Espiritu Santo case, that Grant Thornton won’t get hurt by Refco, or that McGladrey is innocent in the Sentinel case is trumped by the fact all have additional exposure to Madoff.

KPMG, of course, has New Century, Anglo Irish Bank, Citi, Siemens, and others.

Deloitte, well, too many to count. And the Parmalat case is a potential model changer. And a very embarrassing insider trading scandal. Then there’s the loser consulting gigs and a declining demand for consulting, all of which makes for never ending cuts and a not so rosy outlook.

And yet, for my money, PwC is still the closest to the precipice, if only now because of Satyam.

Think about it. It’s their third strike (at least that we know of) internationally after Japan and Moscow. Two of their Indian partners, for God’s sake, are still in jail – thrown to the prosecutorial sharks by the Indian Central Bureau of Investigations. The Chairman (soon to be retired ) of Pricewaterhouse International Limited, Sam DiPiazza, has pulled out all stops in investigating what occurred in India, sending US and other professionals to “assist” colleagues in India with comprehensive audit quality reviews, and personally meeting with Indian government officials and others worldwide to try to repair the “lost trust.”

And then there’s PwC’s Madoff exposure.

And the lawsuit for wage and hour violations in California that they’ve already lost on the facts but are vigorously appealing. They completely flubbed the administrative responsibility test in this case and will lose the licensing argument. Why? Because the fear mongering they’re trying to stir up through proxies (there have been friend of the court briefs filed by business organizations sympathetic to PwC) are just that. Empty threats. The law firms have nothing to be afraid of if audit firms are required to pay overtime to not-yet-licensed associates. The law firms exposure is minimal. After all, you pass the bar and are a licensed attorney in most states by late fall of the year you graduate. Most law firms don’t tolerate a delay or a failure to pass the bar the first try, especially for top graduates. Contrast this to the audit firms. You can work for five to seven years, eighty hours a week during busy season, before making Manager level, the typical cutoff for future promotions without a CPA.

And there are still questions lingering over their role in Northern Rock. And their forays into gambling audit have not been so successful all the while they’re advising the US to open up online gambling in order to reap the tax revenues.

The rumbling has also started in the comments on this blog over PwC’s stealth “reductions in force” and their broken promises over start dates and starting salaries to graduates. It’s fully expected that additional staff cuts will come soon and be of such a volume that it will be hard to hide behind the “didn’t fit with our performance culture” excuse.

Finally, there’s the strategically disastrous purchase of BearingPoint’s Commercial Services practice. Sources tell me due diligence has been non-existent, it’s solely an ego-trip for current leadership, and there’s a shell game going on in public statements regarding their interest in full blown systems integration services. The probability that integration of the operations, financials, staff and infrastructure will be smooth and trouble-free is in the low single digits.

Yep. Of the Big 4, my bet is with PwC US to fail in the next twenty-four months.

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Hedge Funds And Their Auditors – It’s Good To Be Aggressive

Francine — Tue, 11 Nov 2008 20:59:00 +0000

Every once and a while someone asks me,

“fm, how do you keep up with all the news, the stories? How do you know all this stuff?”

Well…Although I have been accused of conceit, presumption, being “too smart,” being too quick to draw conclusions, painting a whole firm black on very little basis, precociousness, general egotistical behavior and, the latest, “sexism, ” I will only concede authoring a blog that publishes often controversial opinions in my own name does require nerve.

And not much of much else. I read a lot. I talk a lot. I listen, but that takes more effort. I watch news shows and other TV and movies to stay in touch with real life. (LOL) I read a lot. I read more. I like to take people to lunch and coffee and pick their brains, push their buttons, get them to drop their masks. Occasionally we have dinner, complete with wine and heavy food. In those instances, I lull them into a mood of complacency and surrender and, before you know it, they tell me secrets.

And every once and a while I read or hear something that causes even me to step back and say to Rosie Rott, “Huh? What the hell is this, sweety?”

The following press release, from Institutional Investor’s Alpha Magazine Awards event, came in as a Google Alert for Deloitte.

It was one of those, “Huh?” moments.

In Accounting, Rothstein Kass & Co. is the clear favorite among both small and large hedge fund firms. Part of the reason is the firm’s aggressive move to help clients interpret Financial Accounting Standards Board Statement No. 157, or FAS No. 157, the new accounting rule that sets more stringent standards for valuing assets.

BDO Seidman drops one place this year to No.2.

Deloitte Touche Tohmatsu, No. 3 is the highest ranked of the Big Four firms.

1. Who is Rothstein Kass and does the PCAOB know they exist?

2. “…aggressive move to help clients interpret Financial Accounting Standards Board Statement No. 157…” - Aggressive, asset valuation, and accounting in the same press release paragraph on October 24, 2008? Yikes!

3. BDO, the firm with Damocles’ sword hanging over its head, is the #2 firm for client service to small and large hedge funds?

4. And Deloitte is the #3 firm and #1 amongst the Big 4? Doesn’t any Big 4 firm, given their audit coverage of other financial services firms present a lot of conflicts?

Hedge funds are, of course, in the news, under much scrutiny, and potentially subject to increased regulation. There’s concern that large failures in this sector will prevent any economic recovery in the near future and will drag global markets into a doom and gloom scenario that will take forever to recover from.

Even the largest and best firms, such as local Chicago firm Citadel Investments, are fighting off constant rumors of their demise, despite unprecedented prior success.

For the second time in as many weeks, Citadel Investment Group (Note from fm: Not confirmed, but I believe they use PwC) has been forced to deny rumors that it is in serious trouble.

The hedge fund giant, whose flagship fund is down almost 40% this year, denied a Wall Street Journal report that banks were demanding increased collateral as its losses mounted. Gerald Beeson, the firm’s chief operating officer, said Friday that it was meeting its daily collateral requirements with Goldman Sachs, Deutsche Bank, Merrill Lynch and others without being forced to sell its assets to cover the margin calls.

“We will continue to have sufficient capacity to meet our funding needs over the course of the short and medium term,” he said.

And hedge fund results, that is, poor hedge fund results, are throwing many funds a curve ball and stressing their cash positions, forcing frantic asset sales according to some reports.

Hedge funds lost an average 5.52 percent in October, marking their fifth consecutive monthly drop as managers faced sharp stock market swings and angry clients who demanded their money back, new data shows.

The average hedge fund has now lost 15.30 percent in the first 10 months of 2008, putting it in line to post its worst year ever,

Hedge fund managers are sometimes vilified as “shorts. ” Some commentators have turned the words “activist investor” into dirty ones, based on the most active CEOs’ outspoken, blunt assessments of specific company and general economic conditions.

“…Forget about a government bailout—General Motors Corp. would be better off going bankrupt,” according to William Ackman.

During a discussion about the automaker on Charlie Rose Tuesday, Ackman said a “prepackaged bankruptcy” was the best move to get its struggling business back on track.

“The word ‘bankruptcy’ is scary for people, but it is simply a system,” Ackman, head of Pershing Square Capital Management (Note from fm: Uses EY as auditor), said…

In the hedge fund business, you win some and you lose some, as David Einhorn of Greenlight Capital (Note from fm: Uses BDO as auditor) will tell you. It’s just important to win more than you lose over time, as long as it’s not too long a time.

As John Maynard Keynes , the original market interventionist said:

“In the long run, we’re all dead.”

In case you think I’m injecting unsubstantiated, alarming conjecture into this discussion of the potential connection between choice of accountant/auditor and aggressive asset valuations, I will suggest that my idea is not original nor really so outlandish.

The potential for “valuation shopping” and in my mind by necessity “auditor rationalization and blessing shopping” has been mentioned before, in the Financial Times, the Wall Street Journal and academic studies. Surprise, surprise, they say, hedge funds may be “aggressive” and seek out the most favorable valuations for their assets in order to boost performance statistics.

Via Yves Smith and naked capitalism:

“It is very easy for hedge funds to shop around to find valuations (FM note: And accountants that bless them?) that suit them best and then book their assets at that,” says one banker who advises hedge funds. “Going back to the bank that sold you a CDO and asking for a price is rarely likely to produce an accurate picture.”

Back to the Journal. The story goes on to note, quel surprise, that the hedge fund engage in this sort of behavior to boost performance.

However, caviling aside, there is some new information in the piece, namely, that funds that hold a fair number of positions in illiquid securities appear to seek out favorable valuations to turn months with negative returns into positive results:

Investors should take heed because this massaging can help make the difference between a winning or losing month, the research found…..

So far, investors, auditors and regulators have focused on the way banks and brokers value these securities. But the new research suggests hedge funds may be an even bigger area of concern.

Forgive me for interrupting. The reason regulators haven’t focused on hedge funds is they have no jurisdiction over them…

So, my first step was to go to the PCAOB and look for registration and inspection reports for Rothstein Kass. If Rothstein Kass is the auditor of choice for hedge funds and, in their words, has, “stepped up and differentiated themselves,” we need to know more about them. Focusing on award-winning client service related to FAS 157, in particular, carries enormous implications. FAS 157 requires hedge funds to divide assets according to liquidity and to document how they estimate the value of assets. The rule also makes it easier for investors to press for more detail than some have traditionally received.

“We’ve recognized — and have for months — that we need to proactively communicate with our clients about [FAS 157],” Howard Altman, co–managing principal in charge of financial services says. “We’re doing that literally every day, to make sure their questions are being answered.”

Rothstein Kass has a long history, a great website, and a very responsive public relations professional. It seems they have developed a niche as the “go-to” firm for hedge funds and private equity firms and have probably attracted top accounting professionals in that field as a result. Nothing worse than working in a Big 4 firm, having specialized financial services knowledge but seeing most of your potential clients “independenced” out because of conflicts beyond your control. Or having most of your colleagues not appreciate you because they address more run-of-the mill manufacturing and consumer products company issues and have no idea, most of the time, what you’re talking about.

Rothstein Kass is registered with the PCAOB as of October 31, 2008. When I first checked on October 24th, the PCAOB showed a registration for 2007, also.

Section 102 of the Sarbanes-Oxley Act of 2002 prohibits accounting firms that are not registered with the PCOAB from preparing or issuing audit reports on U.S. public companies and from participating in such audits. With registration comes inspections. It would be helpful to know if Rothstein Kass has been inspected by the PCAOB and if their audit quality, especially with regard to issues related to their hedge fund clients such as FAS 157 valuations, has passed muster with the PCAOB.

Unfortunately, although the Rothstein Kass spokesperson claims that they were inspected by the PCAOB in 2006, there is no inspection report available yet on the PCAOB site. The PCAOB would not confirm that an inspection had ever been performed on Rothstein Kass, since they do not make any information about inspections public until the report is final. Rothstein Kass would not confirm whether their PCAOB inspection report was still in draft, whether it was being reviewed by the firm, or was still in the hands of the PCAOB.

Rothstein Kass did make a Peer Review report that was completed in January of this year available to me. Unfortunately, the Peer Review Report, completed under the auspices of the AICPA’s Center For Public Company Audit Firms Peer Review Program has little value for this discussion. The program allows member firms to choose their own review firm and/or a peer review can be performed by a firm in the the reviewee’s network of firms.

1) The report does not cover accounting and auditing practice applicable for SEC issuers since that is the responsibility of the PCAOB.

2) The report was completed by Richard A. Stalvey, an accountant who is a partner with the firm Fowler, Holley, Rambo, and Stalvey PC , a member firm of AGN International, a network of separate and independent accounting and consulting firms. Fowler, Holley, Rambo, and Stalvey PC is also registered with the PCAOB.

3) Rothstein Kass is also a member of the AGN International Network.

As such, I do not consider this Peer Review to be truly independent or helpful given its limited scope in ascertaining whether Rothstein Kass consistently demonstrates the accounting and auditing practice quality required for being the #1 choice of hedge firms, large and small, public and private.

In addition to BDO Seidman’s issues with regard to their appeal of a judgment in the case of Banco Espiritu Santo which threatens their demise, their most recent PCAOB inspection report had several exceptions noted related to asset valuation and asset impairment decisions. BDO, like Rothsten Kass, is clearly very service oriented to their hedge fund clients and full of folks who’ve gravitated there because they want to work on these specialized topics. Their expertise and influence gets diluted and brushed off in the Big 4. But I think the risks of BDO going under make it a risky choice for hedge funds that are already operating in the risk stratosphere.

Deloitte seems to think they are actually hedge funds’ # 1 choice, based on a read of their press release for the Alpha Awards. I guess, in their mind, the only competition that matters is the rest of the Big 4.

Deloitte today announced it was selected as the top accounting firm in the Alpha Magazine 2008 Alpha AwardsTM by the Hedge Fund 100, Alpha’s most exclusive ranking of the world’s largest single-manager hedge funds. Hedge Fund 100 voters have consistently rated Deloitte as the pre-eminent accounting firm for four consecutive years.

They also tout their expertise in valuation and their consulting practice as a distinct advantage for their clients, even though auditors are not supposed to consult on the valuation and accounting policy decisions of their clients nor supplement accounting expertise that their clients are short of. They are only allowed to audit their client’s assertions.

Deloitte Touche Tohmatsu, No. 3, is the highest ranked of the Big Four firms (Deloitte, KPMG, Ernst & Young and Pricewaterhouse Coopers). New York–based Cary Stier, head of Deloitte’s U.S. asset management services, says FAS No. 157 places a greater onus on hedge funds to produce accurate valuations, a circumstance that puts Deloitte at an advantage over competitors because the firm hasn’t spun off its specialized consulting business, as have some other big firms, Stier believes. “We’ve got a deep capital markets group,” he says. “It also means we have a very extensive financial advisory services group, and they have deep expertise around valuation.”

In Deloitte’s most recent PCAOB inspection report, errors in judgement and lapses in quality around valuations also appear a several times, including multiple instances of incorrect accounting treatment for interest rate swaps.

So why would any firm choose Rothstein Kass, BDO, or Deloitte, for example, as their top choice? Well, I think we already know.

They are very aggressive in “client service.”

Here’s another perspective in the words of an attorney who works with hedge funds as an advocate:

“…specialized accounting boutiques have exploited the opportunity to service hedge funds. The Big 4 have significant depth in all that they do (at some level) and they certainly have experience in analyzing complex securities. HOWEVER, their clients are going to be more institutional and less the hedge funds — again because of scale, cost, nimbleness, potential independence conflicts, etc. Hedge funds want aggressive — in everything.”

And from a famous hedge fund executive:

“Historically funds did not use Big-4 because they did not get service and cost twice as much – easier going to a lower-tier audit firm that cared more about you. Because of this, a whole slew of firms became “experts” on auditing funds – BDO, RK and GGK amongst others. This was way before the days of FAS157…”

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Deloitte – Tolerant And Forgiving of Bad Accountants

Francine — Mon, 10 Nov 2008 13:11:00 +0000

It’s been an interesting few days. I’ve finally stopped receiving poison pen letters from PwC apologists because of my doubts about their bandwith and qualifications for the TARP work. All last week I pondered the implications of the Deloitte insider trading scandal before events overtook me and I finally had to post something more than Tweets on the issue.

Now the Deloitte apologists are vilifying me.

And it seems that everyone learned a new word last week:

Salacious: Arousing or appealing to sexual desire or imagination…

I can’t remember when the word was first used, but to have my posts about audit, about PwC and Deloitte, called “salacious” is an interesting compliment. I’ll take what I can get.

But I digress.

As my choice of a titillating (pleasantly stimulating or exciting) title today suggests, I have more to tell you about Deloitte, their tone at the top and why the culture of the firm as a whole deserves a closer, more critical, look.

In addition to the possibility there was tolerance at the top for what Mr. Flanagan is accused of doing, there are two other cases I’ll ask you to consider.

From a post I made in July 2008:

A senior Deloitte accountant who audited Adelphia Communications Corp.’s fraudulent financial statements in 2000 has been reinstated by the Securities and Exchange Commission after being banned from auditing public company statements for two years.

William Caswell, who headed a team of 20 accountants and tax professionals and reported to Deloitte’s engagement partner during Adelphia’s audit in 2000, assisted the SEC investigation into shortcomings surrounding Deloitte’s 2000 audit and “has shown good cause for reinstatement,” a June 25 commission order said…

Deloitte spokeswoman Deb Harrington declined comment. In a response to a request to speak with Mr. Caswell, Ms. Harrington said he declined comment. Mr. Caswell, as part of his 2005 settlement with the SEC, neither admitted nor denied wrongdoing.

William Caswell, suspended by the SEC for the Adelphia audit, where Deloitte paid $50 million to the SEC to settle charges against the firm, was still working for Deloitte when the SEC reinstated him?

And the second case is more recent. From an article in Compliance Week on November 3, 2008.

The PCAOB slapped Deloitte & Touche Audit Partner Christopher Anderson with a one-year suspension from public company audit work, a $25,000 fine, and a one-year restriction on his audit abilities when his suspension expires for his role in the audit of 2003 financial statements for Navistar Financial Corp. The disciplinary order does not make any findings against the audit firm…

Deloitte representative Deborah Harrington said Anderson remains with Deloitte “with responsibilities consistent with the settlement.” The disciplinary action suspends him “from being associated with a registered public accounting firm,” which specifically is Deloitte & Touche LLP, the firm that is registered with the PCAOB.

Looks like Mr. Flanagan may have resigned too soon. I’m sure given the exposure the firm also has on the insider trading scandal, if he had played his cards right, they would have kept him around in a “desk job. ” Maybe he could have collected a paycheck wherever Mr. Caswell and Mr. Anderson are working, perhaps the Engagement Risk and Quality Office, so he could be around to help Deloitte defend itself.

The Rat Pack, watercolor

What The Auditors Saw – An Update on Société Générale

Francine — Tue, 14 Oct 2008 15:53:00 +0000

Prentice: It’s a fascinating theory, sir, and cleverly put together. Does it tie in with known facts?
Rance: That need not cause us undue anxiety. Civilizations have been founded and maintained on theories which refused to obey fact.

“What The Butler Saw”
Joe Orton, 1969

Kerviel’s lawyers question Société Générale accountants

PARIS: Jérôme Kerviel, blamed by Société Générale for the record trading loss it took this year, met Monday with accountants from Ernst & Young and Deloitte Touche Tohmatsu to ask about alerts they may have sent to the bank.

The meeting focused on how much auditors had known and told the bank about its exposure to what became €50 billion, or $68 billion, in unauthorized futures positions that cost Société Générale €4.9 billion to unravel in January.

The bank’s assertions that it had not known know about Kerviel’s activities are “a smoke screen,” Bernard Benaiem, a lawyer for Kerviel, said before entering the interview in the offices of judges leading the investigation. “E-mail exchanges from their auditors kept them aware that the trades didn’t exist.”

The lawyers for Kerviel also planned to ask about the findings of the French banking commission in the case. The commission fined Société Générale €4 million in July for failing to comply with rules on internal controls. The report, which was not made public, was recently shared with Kerviel’s legal team.

The auditors’ evidence is “of no concern” to the criminal case against Kerviel, a Société Générale lawyer, Jean Veil, said during a break in the proceedings Monday. The bank’s legal team also represented the auditors at the meeting.

Well, it’s about time Ernst and Young and Deloitte, dual auditors under French law for Société Générale, made an appearance. Does anyone else find it very odd that it seems the bank’s lawyers also represented the auditors in these depositions related to the criminal proceeding against Kerviel? Are the auditors’ interests aligned with each other? Are the auditors’ interests aligned with management of the bank? And are the interests of the bank’s executives aligned with interests of shareholders? What will happen when the auditors must part ways with their client to save their own skin? Or when management of the bank decides to blame auditors for not telling them enough, with enough vigor, often enough, and soon enough.

Maybe this is how the French do things, all clubby-like.

Société Générale just yesterday requested an investigation into rumours that it would experience heavy additional losses from structured products. On the contrary, according to the bank, they’ve had a great third quarter. It may be French pride or more of the same obfuscation. But I would be très sceptique of anything these guys say given the current environment, especially since it seems they have their auditors, as well as PwC , in their pockets.

That’s a Big 3/4 trifecta!

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Latest Updates: My Clients Are Failing, My Clients Are Failing

Francine — Tue, 07 Oct 2008 12:02:00 +0000

Update:
Chicago’s John “Dr. J.” Najarian co-founder of OptionMONSTER on the need for transparency when the assets bought by the US government are eventually sold.

On YouTube.

Part 2 from Jon Najarian is here.

I have been updating this information throughout the weekend as other banks failed and other deals have been done.

A summary of “the mother of all bailouts” from The Corporate Counsel.net.

I have also been on Twitter, passing information along to those that follow me there and remarking on developments as they happen.

Stay tuned for updates to this post and more on the financial crisis.

***************************************************************

Originally posted September 26, 2008

The Big 4 are no Chicken Little. They’re not even the boy who cried wolf.

If only we had received the benefit of warning, however early, potentially exaggerated, and conservatively based. If only the Big 4 had told us, in the form of significant deficiencies, material weaknesses, going concern opinions, or some other way of signaling, that some of the banks were technically insolvent or potentially illiquid under certain scenarios.

And what if the FAS 5 required statements on contingencies had been used to signal something other that the probability of a legal catastrophe or a natural disaster? What if they had been, instead, made useful in pointing to less than doomsday market breakdown contingencies and that company’s readiness to weather them? Unfortunately, they’ve decided to shelve those proposals for fuller disclosure for now. And we get more and more and more opaque…

My esteemed friend Richard Murphy in the UK states the obvious. Who has not yet been called to account for this mess? The Big 4.

So let’s look at an update of where things stand , at least from a competitive position and as the shifting sands may have a potential impact on the staff and partners of the Big 4.

My expert assessment: Feds better watch how much toxic risk JPM and B of A have taken on in addition to what they already have. Both are audited by PwC and we know what I think of those guys….

And Citi (KPMG) has been suspiciously silent during all of this. What’s going on over there???? Update: Citi is in the running to take over Wachovia. Update (2) Looks like Wells Fargo is getting Wachovia instead and Citibank is suing. Yeah, thats a good use of capital.

Red

AIG – Taken over by the Feds. Why is PwC still the auditor when they are paying off their clients, the shareholders, for misleading them? Why isn’t this an independence violation?

Bear Stearns – Purchased by JP Morgan who uses PwC (Formerly Deloitte)

Merrill Lynch – Was Deloitte, bought by Bank of America (PwC)

Lehman Brothers – (EY) Bankrupt. Pieces being picked up by Barclays and Nomura. Dick Fuld gives less than satisfying performance in front of Congress on 10/6.

Washington Mutual – Deloitte

Northern Rock – Nationalized (PwC)

New Century - (KPMG)

Countrywide (KPMG) – Bought by Bank of America (PwC) B of A to $8.4 billion to settle claims that Countrywide defrauded mortgage customers.

Wachovia (KPMG) – This article does not paint a pretty picture. Update: Potential takeover by Citi (KPMG) or maybe Santander or Wells Fargo. Looks like Wells Fargo.

Fortis – (PwC and KPMG) Update Looks like they are now on the way out, perhaps as soon as the weekend of the 9/27-28. Update (2) Looks like BNP Paribas will pick up most of Fortis.

Bradford and Bingley UK - Nationalized over the 9/27-28 weekend.

Royal Bank of Scotland (Deloitte) moves from Green to Red on news of a run and potential bailout.

LLoyds (PwC)

Yellow

Fannie Mae -Suing Former auditors KPMG, now with Deloitte and recently put under US government conservatorship.

Freddie Mac – PwC and recently put under US government conservatorship. (For a nice timeline and commentary on Fannie/Freddie issues and takeover check out this report from Currency Trading.net)

Morgan Stanley – (Deloitte) – Morgan Stanley has agreed to sell a 21 per cent equity stake to MUFG, Japan’s largest bank, for a cool $9bn.

Goldman Sachs – Recently accepted capital infusion from Warren Buffet (PwC)

HSBC – (KPMG) Largest European bank by market value is also teetering. Cut 1100 jobs on 9/26

Societe Generale (Deloitte and EY)

Credit Suisse – (KPMG)

UBS - EY

Wells Fargo – (KPMG)

Green (for now)

JP Morgan – (PwC) Has picked up Bear Stearns and now Washington Mutual, both formerly audited by Deloitte

Nomura – (EY)

Barclays - (PwC) Buying US portion of Lehman

Bank of America – (PwC) – Bought Countrywide (KPMG) and Merrill Lynch (Deloitte)

BNP Paribas (Deloitte, PwC, and Mazers) Looks like BNP will pick up Fortis.

Credit Agricole (PwC and EY)

Santander – (Deloitte)

Wells Fargo – (KPMG) – Wells Fargo moves to Green now that they theoretically have the strength to buy Wachovia. However, Maria Bartiromo asked some tough questions of their CEO on Friday and I was not convinced.

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Deloitte – The Worst May Be Yet To Come

Francine — Tue, 30 Sep 2008 15:31:00 +0000

I’m reprinting, verbatim, a comment made this morning on the August 29th post, Update: Deloitte Statement on Layoffs. Many people have asked me about the rules for public notice prior to a layoff. I believe that notice requirements depend on the size of the cuts and their geographical concentration. Organizations like the Big 4 have an advantage given the dispersion of their workforces across multiple locations. The rules are oriented towards “layoffs” in a particular plant or factory, per the typical definition of a “layoff”. But it seems others have now done the research and perhaps spoken to counsel. These are not layoffs, but reductions in force, cuts, terminations, firings.

Ain’t no going back…

Text below comes from a comment posted anonymously on September 30th to my post of August 29th. I have added nothing nor have I edited it. For the original comment go to the August 29th post.

US CEO Barry Salzberg sent out an e-mail on September 22 informing all US employees that there will be a “headcount realignment” due to the current economic crisis and that “some people will be leaving us.” (even though they have already performed a substantial “headcount realignment”)

I think everyone on this blog knows that Barry didn’t send this e-mail out of the kindness of his heart to give his people a “heads up” about the “headcount” issue.

In my mind, this e-mail was sent out to comply with WARN Act requirements, which mandate that if you plan to layoff more than 30% of your employees, 60 day notice must be given. So, yes, more layoffs are going down. Since they are complying with WARN, this layoff could be much larger – possibly massive. In my mind, the next round of layoffs will be like looking at casualty levels in World War I compared to WWII. Image-conscious Deloitte wouldn’t have made such an announcement unless they planned to cut many, many more people and stay in compliance with WARN.

Merck sent out a similar letter last year, and lo and behold, 60 days later, a massacre occurred – massive layoffs were conducted.

Keep in mind that the latest cuts were not performance based – they were based on salaries and accumulated severance. Who knows what the criteria will be next time (late November – just in time for Thanksgiving!), but I trust the criteria will be similar.

So, if you get an e-mail that says “FYO9 Planning” – run the other way and don’t look back! Some useless person from HR will give you the bad news to justify their existence.

Update: Deloitte Statement on Layoffs

Francine — Fri, 29 Aug 2008 05:01:00 +0000

As I mentioned in my Twitters on Thursday, I had the opportunity to speak with Deloitte’s National Director of Public Relations, Deborah Harrington, on the phone earlier.

Deborah, who mentioned she had been responsible for public relations for FASB before coming to Deloitte, has communicated with me via email about the blog before. She represents the only one of the Big 4 who has acknowledged this blog and the fact that some folks are reading it. Her willingness to talk on the phone today is a sign of transparency and willingness to engage that is good to see and is also demonstrated by Deloitte’s efforts to engage in Social Media.

At least they’re trying.

Ms. Harrington responded to my email asking about the authenticity of the story below that appeared on the Dow Jones Factiva site. She asked me to call and we spent about twenty minutes on the phone. She thought that the reporter had asked her for a statement because of my blog post on Monday.

She sent me a more succinct statement that she said was more accurate than the story below. In particular, we talked about the fact that the reporter wanted to compare these staff reductions to prior years. But the problem is that this kind of openness and transparency is new. There are no publicly available prior year numbers to compare this to.

As I have said before, in particular with regard to the layoffs at PwC in February that have continued since, the Big 4 do not like to talk about cuts. They have a habit of reducing staff surgically, in a thousand little cuts, across practices, geographies, offices, so that each person thinks they are unique. Those cut are often made to feel inferior and a failure, as most often the cuts are characterized as performance related and a result of forced ranking techniques. I also see the survivor rationalization too – when survivors dis’ those cut by saying they just “couldn’t make it in the Big 4″ or they were “dead wood.” Helps cut down on ongoing morale problems when the remaining staff feel more secure, safe, because they think they are superior.

Ms. Harrington made it clear on the phone, and in her statement, that the vast majority of cuts were based on the negative economic reality the firm is facing. What’s frustrating to professionals, both those cut and those left behind, is why the firms are not better at planning and forecasting.

Ms. Harrington’s official statement is as follows:

In a move to align its workforce to better reflect business and client needs, Deloitte LLP is taking a number of steps to reduce costs, including adjustments to its workforce levels in the United States. The cost-containment program is taking place across all support functions and client service units.

Part of the plan is to align our headcount according to current and projected revenues. Like our competitors, we are affected by a number of economic events, including the overall slowdown in the U.S. and global economies.

It’s refreshing when one of the Big 4 admits that they are as vulnerable as their clients to both an economic downturn and other forces outside their control. It may not make those who have been let go feel better right now (and they are commenting), but it should help them when looking for a new job. What is disappointing is when the firms don’t manage what is within their control – recruiting, commitments to new hires, commitments to H1B visa holders,and commitments to tenured employees and those whose performance has been rewarded in the past but are now in the wrong place at the wrong time.

Ms. Harrington said that some employees were offered other positions, including opportunities to relocate. She also said that Deloitte has not rescinded any offers to students and has no plans to do so. They are still recruiting. She also listened to my comments about the difficulties that H1B visa holders have when they are suddenly let go and said she would make management aware of my concerns. I get a lot of mail about Big 4 firms cutting H1Bs first and most severely. They have a legal responsibility to these employees that goes beyond what they do for others. Are they upholding their obligations and making employees aware of their rights?

By all reports, Deloitte has severance programs in place and is doing the best they can for employees under the circumstances. But it’s the circumstances, and why they could not be better anticipated and managed, that we have an issue with, Ms. Harrington.

Please let your firm know they are expected to be smarter than that.

************************************************************************************

This news story is currently only available via Factiva, the Dow Jones news service for corporate subscribers. It is not showing up on WSJ or anywhere else that I can find.

27 August 2008
8:27 PM GMT
Dow Jones News Service
English
(c) 2008 Dow Jones & Company, Inc.

(Updates spokesperson’s comments in fourth paragraph and adds comments from recruiter starting in the sixth paragraph.)

DOW JONES NEWSWIRES

Global accounting firm Deloitte & Touche LLP this week began layoffs that will reduce the 45,000-strong U.S. staff by “slightly less than 2%,” a company spokesperson said Wednesday. Layoffs will occur across all departments and offices of the firm.

“Part of the plan is to rightsize our headcount according to current and projected revenues,” spokesperson Deborah Harrington said in an e-mailed statement. “Like our competitors, we are affected by a number of economic events, including the overall slowdown in the U.S. and global economies.”

Harrington said Deloitte, like many other financial services firms, reduces its workforce annually to “meet the needs of our clients,” but did not say how this year’s cut compares to typical downsizings. While some of the reductions are based on performance reviews, Harrington said much of it is part of a cost-cutting measure.

Harrington said the firm is hiring in other departments and said the U.S. staff at the company has increased by “several thousand” over the last few years.

“Its hard to draw any broad conclusions from what Deloitte is saying, as it relates to the rest of the industry,” said Jon Zion, president of eastern US operations for financial-services recruiter Robert Half International.

With unemployment in accounting services around 2% – compared with the 5% national unemployment figure – the broader economic slowdown has not weighed as heavily on accounting industry jobs as it has elsewhere, Zion said.

“Up until this point, we are not seeing any pattern of workforce reductions” across the industry, either in the private and public sectors, Zion said.
-By Kejal Vyas, Dow Jones Newswires; 201-938-5460, kejal.vyas@dowjones.com [ 08-27-08 1627ET ]

And The IRS Has What Leverage Over The Firms?

Francine — Mon, 07 Jul 2008 11:31:00 +0000

I laughed out loud when a Google Alert pointed me to the FT article excerpted below.

I find this solicitation by the US Internal Revenue Service quite ironic given that four of the six firms mentioned have had serious, and I mean serious, issues with the IRS related to their aiding and abetting the development of illegal tax shelters and a fifth is under an IRS audit related to the sale of its consulting practice, as well as having been sanctioned for their abusive tax shelters in the past.

Or is it? Is there something else going on here?

Did the Justice Department call the IRS and tell them,

“Yeah, those turkeys’ geese are cooked. Go wild. They’ll bend over backward, sideways and every other way imaginable to help you out. Just remind them of the ongoing investigations we have and consent decrees some are still under and the monitors still in place to make sure they don’t mess up.

Too few to fail? Let those SEC and Treasury wimps worry about that. You’re the IRS. We’re the Justice League, I mean the Justice Department. We don’t give a flying tomato about the audit industry. They’re just a bunch of cigar chomping, suburban white picket fence, non-passport holding, non-lawyer guys.”

From the Financial Times on July 4th:

IRS to seek accountants’ help on evasion

The US Internal Revenue Service is to solicit the help of the world’s top accounting firms in its widening effort to clamp down on offshore tax evasion.

The IRS is planning to speak on Tuesday to six accounting firms about how they could help find foreign banks that fail appropriately to identify US customers holding investments or income in offshore accounts, according to people briefed on the plan.

A conference call has been scheduled between the agency and Deloitte, Ernst & Young, KPMG, PwC, Grant Thornton, and BDO Seidman, they say…

In Any Other “Profession…”

Francine — Tue, 01 Jul 2008 09:53:00 +0000

In any other kind of firm, in any other profession, what these guys did would be cause for termination.

Why are they still working for Deloitte?

Do you want them on your audit? At the Compliance Week Conference earlier this month, I asked Tom Ray about the push on the part of some “activist accountants” – an oxymoron if there ever was one – to change the rules about who signs audit opinions. Some (including me) think that the individual responsible partner should be signing the report. This recommendation (not proposal, in carefully worded language by ACAP) was made recently by the Treasury’s Advisory Committee on the Auditing Profession.

I mentioned to Mr. Ray that, in contrast to lawyers, it’s very difficult to get information about individual partners and their clients from the audit firms. Unless someone is a frequent public speaker or a frequent author of whitepapers, (in other words an anointed spokesperson for the firm,) you’d be hard pressed to find an email address or proof of employment, let alone a resume or photo.

I write a lot about the lawyers involved on both sides of the audit litigation cases. When I read about a case, I usually see the name of the lawyer for the defendant and the name of the plaintiff’s attorney named in the article. It’s rare that an audit firm will make a comment to the press about one of their clients, let alone allow the partner for that client to be quoted. Even when an individual partner has been charged by the SEC, they are not named in media reports. If you want to find out who the partner in charge of the AIG or Bear Stearns audit is, or about an individual partner’s experience or credentials, you can’t Google most with much success or do a search for their name on the firm’s website and see any significant results.

Contrast that to Mike Attanasio, attorney for Dan Stulac in the Peregrine case. After seeing him quoted in the press about his client, I looked up his name on his firm’s website, saw his photo, his resume, his list of articles published and all the cases he’s won. I also found his contact info including email and office phone. And, when contacted, Mike responded within 4 hours.

That’s a guy worth paying big bucks for.

Accountability is not the auditors’ strong suit.

Here’s the article from Financial Week.
Deloitte accountant, banned from public company audits for two years after Adelphia debacle, is reinstated by SEC

Caswell engaged in improper professional conduct by failing to ensure adequate disclosure of Adelphia’s liabilities and related-party transactions, a September 2005 SEC order said. It said he could apply for reinstatement in two years, which he did.

In one instance, Caswell and others proposed that Adelphia disclose $1.6 billion of debt borrowed by the company and related parties. He followed up by inserting this disclosure in at least six drafts of Adelphia’s 2000 annual report. But Caswell dropped his efforts in the face of resistance from Adelphia executives and the Deloitte audit partner, the 2005 order said.

SEC spokesman John Nester said he knew of no federal data to show how common or uncommon it is for a disbarred accountant to be reinstated by the commission.

Deloitte, one of the Big Four U.S. accounting firms, agreed in 2005 to pay a $50 million penalty to the SEC without admitting or denying misconduct. After several appeals, Caswell’s supervisor, Gregory Dearlove, was barred in January 2008 from auditing public company statements. He can apply for reinstatement in four years.

Mr. Caswell had examined Adelphia’s finances for six years prior to Deloitte’s 2000 audit of the firm. Mr. Dearlove, who had little or no experience in auditing cable-TV companies, had been briefed on the company’s statements but hadn’t supervised an Adelphia audit, the January SEC order said.

Adelphia filed for bankruptcy protection in 2002 and agreed to pay $715 million to a victims’ restitution fund. Adelphia founder John Rigas and his son Timothy were convicted of criminal charges and sentenced to prison. Adelphia vice president of finance James Brown and its accounting director, Tim Werth, both pleaded guilty to criminal charges.

Deloitte and Litigation – Ya Win Some, Ya Lose Some

Francine — Fri, 20 Jun 2008 15:45:00 +0000

Deloitte is in the news for some significant litigation issues.

First the winner.

This ruling, I think, will have a big impact on the auditor subprime cases to come. Many of these cases, when it comes to the auditors liability, will be based on whether auditors should have been more diligent, thorough, and hard on banks and mortgage companies with regard to their valuation models and estimates for loan losses and reserves.

Were any of the banks or mortgage companies already insolvent or in a “deepening insolvency” and the mistakes, negligence or outright “aiding and abetting” on the part of the auditors to prop them up by holding off on “going concern” or other negative opinions only prolonged the eventual misery to investors’ detriment?

Deloitte Is Protected in “Insolvency” Ruling
A Pennsylvania judge says that a firm that improperly keeps a company out of bankruptcy may not be liable, unless it is negligent in other ways, too.

A recent Pennsylvania Court ruling favoring Deloitte & Touche seems to restrict a company’s ability to win a case against an accountantcy for actions that lead to the company’s “deepening insolvency,” unless the accountant is negligent in other ways as well.

The issue arose in a lawsuit that Reliance Insurance Co. filed in the state’s Commonwealth Court against Deloitte & Touche, over allegations that the accountancy improperly certified that the insurer’s loss reserves in 1999 was reasonable. That caused Reliance to take underwriting losses on payments that it could not really make, to avoid the wrath of regulators, and to go deeper into debt when it should have declared bankruptcy, according to The Legal Intelligencer newspaper.

Now the losers.

Looks like the Parmalat folks are still not letting Deloitte off the hook. Deloitte keeps settling and paying, but obviously, since they have not proven their “innocence” in a court, the shareholders, bondholders and others seeking damages will still keep going after the firms considered, “deep pockets.” And what’s to dissuade them when the firms are still willing to reach into those pockets and pay rather than go to trial?

Former auditor Deloitte has reached a settlement in an ongoing court case in Milan to reimburse some 16 million euros to former holders of Parmalat bonds. The agreement however has to be approved by the court in a hearing that will be held on September 19, Italian daily Il Sole added.

The report said that so far 88 percent of the bond-holders, mostly members of the Sanpaolo Committee, accepted the settlement and will receive some 14 million euros, while another two million euros will be paid to bond-holders belonging to other associations. Deloitte has already paid an additional 8.9 million euros on the bank accounts of 11,179 investors who have filed a civil claim.

Parmalat Suits Target Deloitte, Grant
Looking to milk more from the Italian dairy’s accounting scandal, investors also eye Citi and Bank of America, as well as the two auditors

In another round of lawsuits stemming from the Parmalat accounting scandal, individual investors claiming losses from the Italian dairy giant’s 2003 collapse plan to sue Deloitte & Touche and Grant Thornton, along with Citigroup and Bank of America. The plaintiffs will probably demand more than $77 million in damages in litigation filed in Milan, according to a Reuters report quoting Vincenzo Somma, head of legal and economic studies at Altroconsumo, an independent consumer protection association. A majority of the more than 6,000 retail investors are Italian, but they will be joined in the suit by a number of European institutional investors based outside Italy, according to Somma.