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.

MF Global’s fall puts spotlight on CME Group, The Financial Times, November 2, 2011

The case of the missing customer funds at MF Global is putting a spotlight on the failed broker’s de facto supervisor, CME Group.

CME, the largest US futures exchange operator, is also the designated self-regulatory organisation for more than 50 futures brokers, including MF Global. As such, CME had direct responsibility for making sure MF Global’s books were square…

CME’s dual role puts it in a delicate position. MF Global, according to its website, was the top broker by volume at CME’s metals and energy exchanges in New York and in the top three at its Chicago exchanges. CME’s main source of revenue is clearing and transaction fees.

Brokers themselves have questioned letting exchan-ges be overseers. “Given their strong market knowledge and proximity to the trading markets, they provide the best forum for addressing many of the futures markets’ oversight functions,” the Futures Industry Association said in a 2004 letter to the CFTC. “However . . . we are concerned about potential conflicts of interest.”

There is an inherent conflict at every publicly-listed equities, futures, and commodity exchange. When the NYSE went public in early 2006 through a reverse merger with publicly-held Archipelago, there was some discussion of the conflict in roles that public ownership of the exchange presented.

The clearing firm is the first line of defense for a brokerage firm against unauthorized trading or exposures outside of risk limits. What’s comical is that the Department of Justice, via its letter to the Treasury regarding “vertical clearing house models” wants the US to implement a model for clearing firms like Europe’s, or the one that did not have enough weight or skin in the game to stop Kerviel and SocGen from racking up such big losses. The DOJ is saying that the Chicago Mercantile Exchange’s clearing operation and its relationships and tight straight-through processing model are a problem even though that model was able to put the brakes on the problem at MF Global in less than twelve hours.

I think the Department of Justice is wrong.

I have disclosed in various forms, but probably not often enough, that I give the CME Group the benefit of the doubt because I grew up in Chicago, the home of CME Group and the Chicago Board of Trade. I live here. The futures markets are in our blood. That being said, I will write the story as I see it. (I do not personally own any CME Group stock.)

I will call a spade a spade.

From the perspective of the individual trader and smaller brokerage firm member, the CME has not been the same since it went public. Higher fees, constantly changing margin requirements, and apparent favoritism towards large institutions grate on individual traders and bread-and-butter brokers. It’s a big public company now that focuses primarily on outside shareholders, not its “members”. And like any other public company, decisions may be made at times based on the self-interest of those who run it.

Any CME member who cleared MF Global is as angry as anyone else at the CME Group for the disruption, the confusion, and the lack of stewardship that allowed the failure of MF Global to occur. But the CME Group is owned, in large part, by its clearing firms and members who hold a large percentage of the open interest. Each clearing firm owns at least 6000 shares, multiplied by 80 clearing firm members of CME Group. That’s a lot of interested parties.

The recent announcement by CME Group of a $300 million backstop for the MF Global Trustee is something.

Though CME Clearing does not guarantee FCM-held assets, CME Group is willing to provide a $250 million financial guarantee to the Trustee to give the Trustee greater latitude to make an interim distribution of cash to customers now, given the monumental task he faces to sort through considerable data and claims in order to complete the MF Global liquidation and make distributions to creditors.  Additionally, CME Trust will provide $50 million to CME Group market participants in the event there is a shortfall at the conclusion of the Trustee’s distribution process…

This unprecedented guarantee offered by CME Group would be used by the Trustee in the event that a final accounting determines that the Trustee distributed more property than was permitted by the Bankruptcy Code and CFTC regulations.  In addition, if there is a shortfall at the conclusion of the distribution and the $50 million Trust has not been exhausted, the remainder of those funds will be used to restore the other CME Group customer accounts that suffered a shortfall in customer-segregated funds held at MF Global.  The Trust was designed to be used in cases such as this if customers lose money due to the failure of a clearing member.

But it may not be as great as it seems. An industry veteran explained it to me:

Is it really $300 million? It’s $50 million with a potential backstop of an additional $250 million. They may be trying to imply that they are coming up with half of the customer segregated funds shortfall. But what they are really guaranteeing is to make sure everyone is pari passu as an inducement to the trustee to free up money he is currently holding.  I’m not sure that the public (i.e., especially but not limited to MF customers) understands the distinction.

But until someone tells me otherwise – or I see otherwise – I am going with the fact that CME Group was in on the 24th of October and found the segregated funds they are responsible for to be accounted for. But there are ten clearing houses that were used by MF Global.  The CME is the largest, but not the only one, and their audit did not cover all the segregated funds. I’m going to dig into what and how their review was done. I’m going to make sure that we can say that everything that went wrong at MF Global probably went wrong after they left.

It’s especially important because the CFTC recently published the FCM information as of September 30 and MF Global’s numbers were conspicuously absent.  Is their excuse that the books are a mess? For MF Global’s auditor, PwC, that’s a terrible thing to say. It may just be a move by regulators to buy more time. Or it may be true.  Then what is PwC doing signing off on the 10Q as of September 30th or the annual report as recently as May?

What’s more troubling to me than any CME potential conflict as both a public company and a self-regulating organization (SRO) is the fact that former Refco executives who were fined for the Refco fraud were working in key positions at MF Global. They also hold, or have held, key positions in the Futures Industry Association, the CFTC, and a brokerage firm that will now benefit from MF Global’s demise.

When the U.S. Attorney for the Southern District of New York, Preet Bharara,announced the Refco enforcement actions in May of 2010 he spoke earnestly:  “More than just prosecuting criminals who engage in fraud, this Office strives to return as much as possible to their victims.  Justice has been rightly served for the victims of the Refco fraud.”

By that time, what was left of Refco post-fraud and post-bankruptcy had joined with Man Financial to become MF Global via a new IPO.

Bennett, Grant, Maggio, and Trosten faced criminal charges and all four are serving, or will serve, jail terms. Other Refco insiders, including Stephen Grady, Dennis Klejna, and Joseph Murphy, were not criminally charged but signed consent orders, or settlements, with the Department of Justice. Grady, Klenja, and Murphy paid $1 million, $1.25 million, and $5 million respectively – and then went back to work for the firm that became MF Global.

Not only did those three executives get to come back, they took on roles that gave them a bird’s-eye view of MF Global’s implosion – and, perhaps, of the transactions that were made, legitimately or not, in an ultimately futile attempt to keep the firm alive as it sought a buyer in the last days.

Dennis Klejna was the head of compliance at Refco when it exploded. Refco had recruited him from the CFTC, the regulator now in charge of investigating the MF Global collapse, where he was Chief of Enforcement. Klejna is now MF Global’s head of compliance and senior vice president for legal matters. Operating under bankruptcy protection must be keeping him especially busy these days.

Stephen Grady moved from Refco to Man Financial after Refco’s bankruptcy and is CEO of MF Global Chicago.

Joseph Murphy joined R.J. O’Brien in November of 2008 after six years at Refco, where he served as President of Refco Futures. R.J. O’Brien is one of the brokerage firms that received some MF Global customer accounts from regulators after the bankruptcy.

I bet these guys, or other legacy Refco accounting and since professionals still working in MF Global, can give investigators some clues on what happened to the missing $600 million.

And let’s not forget PricewaterhouseCoopers, MF Global’s auditors.

When it comes to hands-on access to private information, the auditor has more than any other regulator mentioned. And they are supposed to be experts in that client’s business and in the accounting and auditing standards for that industry. PwC also audits JP Morgan, Bank of America Merrill Lynch, and Goldman Sachs. They are all large players in the futures brokerage industry and mixed up in the MF Global mess.

Last year JP Morgan Chase’s futures and options desk neglected to segregate billions of dollars of client money, largely belonging to hedge funds. PwC, the auditor of JPMorgan Chase, and the bank – which is also MF Global’s main banker – admitted to U.K. regulators that for at least seven years, about $23 billion dollars of clients’ assets had not been properly segregated. JPMorgan Chase was fined 33.3 million pounds and PwC is subject to sanctions.

The auditor is part of the regulatory structure for public companies. They serve that role for the benefit of shareholders and the markets and earn oligopolistic profits as a result of the lack of competition and the government’s mandate that all listed companies have an audit.

The audit does not happen only once a year. The auditor also provides “negative assurance” on the 10Qs. MF Global’s most recent quarter end was September 30. Unfortunately, they will not be filing that 10Q on time. PwC also authorized inclusion of the audited financial statements from the year end, March 31, 2011, in MF Global’s August bond issue prospectus. MF Global was not only complex but a relatively new client. They got a lot of service and constant attention. They have been public only since mid-2007 but PwC also audits MF Global’s predecessor firm, Man Group.

The auditor has complete access, at any time, including to financial systems and reports. They are responsible for issuing an independent opinion on internal controls over financial reporting and for issuing additional reports to the regulators – which they are dependent on – regarding controls over segregated assets per the Commodity Exchange Act.

So… When you think about frequency, access, independence, and the fact they get paid well for their services by the shareholders the auditor is in line as the first-responder.

Back in 2008, when the wheat trader took MF Global for $141 million, the firm was brand spankin’ new with a lot of old pros and even older systems running it.  I said this then about PwC:

MF Global is a spin-off from Man Group plc. MF Global IPO’d in July 2007 and inherited PricewaterhouseCoopers as their auditor, also.

MF Global has not been independent and publicly listed for very long, has not issued an audited annual report yet, and does not yet have an obligation to comply with Sarbanes-Oxley. They have issued quarterly financial reports to the SEC, carved out of the Man Group plc reports, but that are unaudited so far. Their CEO and CFO, however have made Sec. 302 certifications to the SEC regarding the firm’s internal controls.

From MF Global’s July 2007 prospectus:

We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls by the end of fiscal 2009 and we cannot predict the outcome of that effort. As a U.S.-listed public company, we will be required to comply with Section 404 of the Sarbanes-Oxley Act by March 31, 2009. Section 404 will require that we evaluate our internal control over financial reporting to enable management to report on, and our independent auditors to audit, the effectiveness of those controls. While we have begun the lengthy process of evaluating our internal controls, we are in the early phases of our review and will not complete our review until well after this offering is completed.

Can’t wait to see how that works out…

I think we know now.

Here’s another good summary of the players and their games.  (It’s all good except the last shot at speculators.  The words “trader”, “speculator”, “hedge” and “derivative” are not pejoratives.)

Here in Chicago, everyone is mad and no one knows who has the answers.

MF Global’s auditor is PricewaterhouseCoopers, who inherited the client when Man Financial, also a client, spun off the brokerage firm in 2007.

Almost everyone wondering where the missing MF Global customer assets have gone thinks they will show up eventually.

I believe the assets are long gone.

Unlike the shell game, there is no bean under the MF Global dixie cup. The mixed bag of marketable securities taken from customer segregated accounts, used most likely to meet margin calls and satisfy “important” customers closing accounts during the last days, will, in my opinion, never be seen again.

Too much time has passed for anyone to still reasonably expect that the “discrepancy” is just a timing difference or a misallocation between accounts, according to several sources who prefer to remain anonymous because of the sensitivity of the situation. All of the statements made on the record by those in a position to know point to assets taken out of the firm and now gone for good.

CFTC in bankruptcy filing October 31 according to The Financial Times: The CFTC, in a court filing, revealed MF Global’s general counsel Laurie Ferber emailed the regulator at 7.18pm Monday – hours after the bankruptcy filing – to say that it had “discovered a significant shortfall in its segregated funds account”.

Joint statement of CFTC and SEC on November 1: “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”

The CME Group on November 2: “CME completed its on-site review last week. [Reportedly Monday.] At that time, the results of our review indicated that MF Global was in compliance with its segregation requirements.  It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday, October 31, 2011.”

Read the rest at Forbes.com, MF Global Assets Have Left The Building: How, When, Where.

Other stories of mine about this issue include:

At Forbes:

October 31, 2011 MF Global : 99 Problems And Auditor PwC Warned About None

At American Banker:

Auditor PwC Should Have Been on Top of MF Global
November 4, 2011 If MF Global commingled client funds, it would be PwC’s fault as much as Jon Corzine’s.

Are Cozy Ties Muzzling S&P on MF Global Downgrade?
October 28, 2011 Jon Corzine’s old ways got his firm into trouble. Now he’s hoping old ties will bail it out.

Main page image, “Elvis has left the building” by Simon Crubellier.

Thank goodness for the plaintiffs’ bar and class action lawsuits.

And state attorneys general.

Without them, there’d be very little justice yet – or compensation – for any of the mortgage-related fraud perpetrated during the recent real estate bubble.

Chad Johnson, a partner in the litigation practice at Bernstein Litowitz Berger & Grossmann LLP, posted in the Harvard Law School Corporate Governance and Financial Regulation Forum (on behalf of colleague Ross Shikowitz who wrote the article) that private litigants, in spite of some significant impediments, are picking up the slack for the SEC and Department of Justice.

Now, more than ever, private lawsuits are needed to supplement the existing regulatory structure, both to ensure that shareholders are adequately compensated for their losses and to send a strong message that fraudulent conduct will not be tolerated. Indeed, institutional investors continue to vigorously prosecute suits against the companies and executives at the heart of the mortgage crisis, well after the SEC and DOJ have shuttered their civil and criminal investigations.

While it remains to be seen whether government regulators will eventually force Wall Street executives to answer for their improprieties, it is clear that sophisticated public pension funds will continue to play an essential role in obtaining compensation for injured investors and deterring future wrongdoing by corporate executives.

Even when institutional investors like pension funds try to work within the system, using their significant, long-term shareholder standing to exert influence on corporate boards, they have been turned back. The banks and financial institutions won’t own up to their mistakes and their executives to their culpability willingly.

Eliot Spitzer explains the phenomenon in his recent broadside, “Government’s Place In The Market,” published by Boston Review Books and MIT Press.

“Only government can ensure integrity, transparency, and fair dealing…even though private companies compete, only government can ensure that there is competition. Everyone wants to be a monopolist.”

In January, my column, Accounting Watchdog, described the potential impact on bank stocks of a letter sent to Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo by New York City Comptroller John Liu. This letter, sent on behalf of a coalition of seven major public pension systems, called on the banks’ Audit Committees to launch independent examinations of their loan modification, foreclosure, and securitization policies and procedures.

Liu had proposed these reviews, initially on behalf of the New York City pension plans, back in November. The banks were cold to these proposals, as well as the one in January by the larger coalition. The pension funds called for immediate action.

Time passed with no willingness by the banks’ boards, in particular their Audit Committees, to conduct independent reviews in the normal course of business. So, the coalition submitted shareholder proposals for the banks’ annual meetings. Throughout this period, the boards of the four banks were generally unresponsive to the coalition’s requests to discuss and meet on the proposals. Audit Committee members would not meet with them at all.

It’s a sign of the banks’ unwillingness to own up to the problems we know so much more about now that the only way for these institutional, long-term investors to be heard was to submit an advisory-only  shareholder proposal viewed as antagonistic by the banks’ boards.

“The banks and financial institutions won’t own up to their mistakes and their executives to their culpability willingly.” Chad Johnson

I said at the time that the letter didn’t go far enough. The reviews should also have demanded an accounting of the reserves for loan losses and for litigation. These numbers have been slow to come and, when they did, hard to decipher.

Gretchen Morgenson in the New York Times on January 8: While it is unfortunate that the Bank of America deal won’t recoup much for taxpayers, the resolution could have one important benefit. It might just open the door to a much-needed reckoning of the liabilities created by questionable mortgage practices at the nation’s largest banks. These institutions have not yet made a full and realistic accounting of their liabilities.

I agree.

On September 30, 2010, before the SEC issued its letter to bank CFOs reminding them to follow the standards and book adequate reserves, I wrote that Bank of America had admitted it had “repurchased, during 2009, $13.1 billion of loans from first lien securitization trusts as a result of modifications, loan delinquencies or optional clean-up calls.”

I couldn’t easily see what the actual reserves were for estimated future liabilities and how they came up with a number given the total loans sold by type and the current claims by various parties. I said it’s time for someone, perhaps the SEC, to demand more detailed disclosure about reserves for repurchase risk.

When I challenged the SEC to push harder on the reserves issue they stepped up. But disclosures are still not complete.

Here’s an excerpt from the New York City Comptroller’s shareholder proposal that did appear in the Bank of America proxy document dated March 30, 2011:

…Resolved, shareholders request that the Board have its Audit Committee conduct an independent review of the Company’s internal controls related to loan modifications, foreclosures and securitizations, and report to shareholders, at reasonable cost and omitting proprietary information, its findings and recommendations by September 30, 2011.

The report should evaluate (a) the Company’s compliance with (i) applicable laws and regulations and (ii) its own policies and procedures; (b) whether management has allocated a sufficient number of trained staff; and (c) policies and procedures to address potential financial incentives to foreclose when other options may be more consistent with the Company’s long-term interests.

Board’s Response to Proposal 7

The Board recommends a vote AGAINST Proposal 7 for the following reasons:

• our company has already taken significant steps to ensure that appropriate internal controls are in place, including additional controls and processes we have implemented following a comprehensive self-assessment of our foreclosure processes, as well as an environment of heightened regulatory scrutiny by state and federal authorities, including certain bank supervisory authorities ;

• we actively manage the loan modification and foreclosure processes to ensure that we have strong internal controls over our mortgage service operations;

• we have been a leader in providing foreclosure alternatives, assisting homeowners and constituent groups to resolve home loan issues through loan modifications or other solutions where possible; and

• our company has already provided extensive public disclosure regarding the requested information, which makes the report sought by the proposal unnecessary.

In each case where the Comptroller’s shareholder proposal made it to an April Annual Meeting agenda, management recommended a “no” vote for the proposal.

The proposals all failed to gain a majority vote.

At Bank of America, the shareholder proposal gained a strong 40% “yes” vote. At Citigroup, the “yes” vote was just shy of 30% and at Wells Fargo a little less than 23%. At JP Morgan Chase the coalition’s proposal did not make the Annual Meeting Agenda because a similar proposal, according to the JPM Chase Board, was in line ahead of theirs.

Michael Garland, Executive Director for Corporate Governance for the New York City Comptroller, told me that his office will continue to press for the independent reviews. These reviews, the Comptroller insists, should not be performed by the banks’ auditors since, “we do not consider the existing audit firm to be independent since they previously signed off on the internal controls.”

New York City Comptroller John Liu: “ Our pension funds are long-term investors. We’re going to be around a lot longer than any of the management or the board members of these banks. As shareholders we will continue to insist bank boards clean house until we see independent audits of their mortgage and foreclosure practices.”

Other interested parties have been pressing since the spring of 2011 for reviews of, and changes and improvements to, the banks’ policies, procedures, and processes around loan modifications, foreclosures, and securitizations. There have also been several calls for more transparency, and honesty, in the banks’ allocations of reserves for loan losses and litigation.

On May 12, FDIC Chairman Sheila Bair testified before the Committee on Banking, Housing, and Urban Affairs of U.S. Senate:

Serious weaknesses identified with mortgage servicing and foreclosure documentation have introduced further uncertainty into an already fragile market.The FDIC is especially concerned about a number of related problems with servicing and foreclosure documentation. “Robo-signing” is the use of highly-automated processes by some large servicers to generate affidavits in the foreclosure process without the affiant having thoroughly reviewed facts contained in the affidavit or having the affiant’s signature witnessed in accordance with state laws.

The other problem involves some servicers’ inability to establish their legal standing to foreclose, since under current industry practices, they may not be in possession of the necessary documentation required under State law. These are not really separate issues; they are simply the most visible of a host of related problems that we continue to see, and that have been discussed in testimony to this Committee over the past several years…

Our examiners participated with other regulators in horizontal reviews of these servicers, as well as two companies that facilitate the loan securitization process. In these reviews, federal regulators cited “pervasive” misconduct in foreclosures and significant weaknesses in mortgage servicing processes. Unfortunately, the horizontal review only looked at processing issues. Since the focus was so narrow, we do not yet really know the full extent of the problem.

In April 2011, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Bank (Fed), and the Office of Thrift Supervision (OTS)  - the IndyMac regulator – ordered fourteen large mortgage servicers to overhaul their mortgage-servicing processes and controls, and to compensate borrowers harmed financially by wrongdoing or negligence.

An article in Thomson Reuters’ News and Insight on May 19 describes the problems some were having with the setup of this Consent Order, specifically the way the “independent” reviews required by the Order were expected to be performed.

U.S. regulators are pinning their hopes on independent consultants picked by large U.S. banks to uncover the true depth of foreclosure misconduct seen at lenders. Regulators are close to signing off on these consultants, which are expected to include Promontory Financial Group, Treliant Risk Advisors and PricewaterhouseCoopers…

The key thing is that the independent consultant needs to recognize that the client is the regulators… and not the bank,” said Joe Evers, a large bank deputy comptroller at the OCC. “They need to be taking direction from us and they need to be meeting our expectations.”…

One issue is who would do the review if not the consulting firms. Regulators say they don’t have the manpower, and so they are looking for firms with the required expertise. Senator Reed suggested the regulators at least hire the firms directly rather than approve the banks’ choices. Evers said regulators decided not to take this approach because it would have raised government contracting issues that could have slowed when the reviews begin. He said the agency also has had success using third party reviews in past enforcement actions.

The problem with this approach and the inherent conflicts of interest should be obvious to all but the most naïve observers.

It’s a joke for any government agency, especially one says they’re in the enforcement versus the supervision business, to defend an approach that allows the entity found guilty of wrongdoing to select the consulting firm that tells them how bad they were and how much they have to pay for the bad behavior.

It’s not like the agencies – Treasury, the General Accounting Office, the Federal Reserve, the SEC, and others like them – don’t have procurement teams that contract with professional services firms on a direct basis all the time. One only has to look at the assistance that all the Big four audit firms  - and lawyers and other consultants – provide to the Federal Reserve Bank, The SEC and the Treasury on the TARP program and related initiatives as a result of the crisis. The process, controls, and the rationale for direct contracting is already in place.

And let me assure OCC spokesperson Evers that audit firms like PwC will not look at the regulators as their clients instead of the banks unless someone makes them. They know where their bread is buttered and where their next meal is coming from.

The SEC and the PCAOB, the audit industry regulator, have said so.

The reforms from early this decade notwithstanding, I believe more can and should be done to emphasize the importance of independence and the auditor’s duty to shareholders and the public. It is integral to the foundation of the reason for requiring an audit in the first instance…I’m not suggesting that the role of an auditor should be that of an adversary; but it also cannot be, either in fact or in appearance, that of an advocate for the management of the company it audits. In a world where the mantra “the client is always right” can be typed in to Google and return over 8 million results in .30 seconds, I would suggest it is time to give serious consideration to changing the perceived “client” in audit relationships.

Auditors are, after all, paid by the clients they are charged with policing. As in other professions, auditors want to advance in their chosen profession which often means keeping the client happy and growing their business.

Auditor independence requirements serve as counterweights to those forces. One example of those counterweights may be found in the SEC rule that says an accountant will not be considered to have the necessary independence from its audit client if an audit partner earns or receives compensation based on selling non-audit services to the audit client. The purpose of this rule is to keep auditors singularly focused on the quality of their audits and not on nurturing a relationship that will make management more receptive to cross-selling efforts.

Despite those requirements, PCAOB inspection reviews of partner evaluation and compensation processes find examples of seemingly unrestrained enthusiasm — in partners’ self-evaluations, in their supervisors’ evaluations of their performance, and in agreed performance goals — for selling services to audit clients…We don’t see these problems in all the files we look at, but we have seen them in sufficient number to raise troubling questions, not the least of which are whether these audit partners are unaware of, or simply unconcerned about, the independence rule that should make such considerations irrelevant to their compensation, and why a firm would allow such unawareness or unconcern to continue unabated.

So let’s look at the proposed consulting firms. Promontory Financial Group, Treliant Risk Advisors and PricewaterhouseCoopers are professional services firms that serve the large banks directly on other consulting assignments.

The banks that must be reviewed are their existing or target clients.

PricewaterhouseCoopers (PwC) is the auditor of two of the banks that must be reviewed – Bank of America and JP Morgan Chase. That’s an independence conflict that can’t be overcome. PwC can not be involved in the reviews at these banks. Recently, retired PricewaterhouseCoopers’ Chairman Sam DiPiazza joined Citigroup as a Vice Chairman in the Institutional Clients Group and a member of the bank’s strategic advisory board. There’s another conflict for PricewaterhouseCoopers.

Where PwC is not serving a bank as auditor - namely Citigroup and Wells Fargo - they are already serving as a consultant. These three consulting firms want consulting business from these banks, now and in the future. If PwC is allowed to participate in reviews at Bank of America and JP Morgan Chase, PwC’s will seek to protect their audit relationships and avoid highlighting their own or their clients’ serious errors.

PwC will also seek to protect their fellow Big Four audit firm – KPMG – which audits Citigroup and Wells Fargo, owner of Wachovia one of the large mortgage originators. Although each audit firm has their own level of tolerance for client’s bad behavior and for accepting clients’ “judgments and estimates” there’s a least common denominator bottom line that keeps all the firms in line at all their large financial services clients.

As we saw during the crisis, any one of the Big Four auditors could at any time, by virtue of failure, acquisition, or merger, become the auditor of any of their fellow firm’s clients. No firm wants to inherit a client that’s too far out on the edge. As a result the largest firms are all as good – and as bad  – as each other in enforcing the standards in the most controversial areas.

In addition, given the firms’ self-insured status using a captive offshore vehicle that all the largest firms participate in, litigation against one audit firm as a result of finding mortgage fraud at their client hurts them all – in the pocketbook as well as reputationally.

The plans for independent reviews required by the banks’ Consent Order with the OCC, OTS, and the Fed are due July 13. Additional self-assessments were orderd for all banks, not just those under the consent decree.  Those are due September 30. According to HousingWire’s Jon Prior, the reports of the reviews will not be made public. Would it be possible keep the reports secret if the regulators had contracted for the reviews directly?

I think not.

On June 13, the Huffington Post’s Shahien Nasiripour disclosed that New York State Attorney General Eric Schneiderman had turned up the heat on Bank of America and other banks, servicers, and trustees of the mortgages that were securitized.

New York Attorney General Eric Schneiderman has targeted Bank of America, the biggest U.S. bank by assets, in a new probe that questions the validity of potentially thousands of mortgage securities and their associated foreclosures, two people familiar with the matter said.The investigation, which began quietly in recent weeks, is part of a larger inquiry that is scrutinizing whether mortgage companies and Wall Street firms took the necessary steps under New York state law when creating mortgage-backed securities.

There was a movement by all the state attorneys general to force a global settlement on the banks to remedy the wrongs of the crisis, in particular with regard to bad documentation and unjust foreclosures. That effort has repeatedly been hit by defections and roadblocks.

From William Greider in The Nation on June 28:

As facts about the banks’ ugly behavior gathered headlines, the fifty state attorneys general came together to demand reforms. The effort was chaired by Democrat Tom Miller of Iowa and actively coached by Washington officials from the Justice Department and HUD. The Obama administration is eager to get a settlement, fearing that state-by-state litigation will injure the banks and maybe derail the foreclosure process.

The AGs first suggested a settlement of $20–25 billion—even though the true public loss would probably be much greater—plus a commitment from the banks to clean up their procedures. In exchange, the AGs would agree to release the banks from potential liabilities that states might pursue. The banks’ counteroffer was a trivial $5 billion, which suggests that they are not taking the AGs too seriously.

[New York Attorney General Eric] Schneiderman agreed to participate with other AGs, but warned from the start that New York would refuse to give up its right to hold banks liable—to sue and collect damages or impose court-ordered reforms. Other strong states, including California and Massachusetts, evidently agree. That alone would presumably doom the deal-making, since any settlement that does not include New York and California would probably not be worth much to the bankers.

In January, Bank of America settled with Fannie Mae and Freddie Mac over repurchases but there are several other suits outstanding with the Federal Home Loan Banks and private investors. Bank of America recently caved in to another group of investors. On June 29, the Financial Times FT Alphaville blog reported that a settlement had been reached between Bank of America and some bondholders.

…several news outlets (the Wall Street Journal had it first, and here’s the FT) reported last night on the expected $8.5bn settlement reached between the bank and the aggrieved parties, and earlier this morning BofA confirmed the details in a statement.

The key driver of the expected loss is the representations and warranties provision of $14.0 billion, including $8.5 billion for the settlement agreement on legacy Countrywide mortgage repurchase and servicing claims, and an additional $5.5 billion increase in the company’s representations and warranties liability for non-GSE exposures and, to a lesser extent, GSE exposures.

The company also expects to record $6.4 billion in other mortgage-related charges in the second quarter of 2011…

Audit firms PricewaterhouseCoopers and KPMG, as well as the other two members of the Big Four, are all around this crisis – in the banks, the ratings agencies, and in the regulators. And there’s a pervasive revolving door between the regulators and the banks and institutions they regulate, as well as between the regulators, the regulated, and the auditors and attorneys that serve us as watchdogs and guardians of the public interest.

But the Taylor, Bean & Whittaker convictions prove that mortgage fraudsters can be prosecuted.

The best way to get truly independent assessments of how much is wrong with the processes and the paperwork and how much compensation should be paid is for regulators to step up and take direct responsibility for the problem.

Independent individuals and firms, people who are not beholden to the large banks and financial institutions, do exist. Many next tier and regional or boutique firms have the expertise and are not in the day-to-day business of auditing or taking on large projects with these institutions.

It’s time for the regulators to build a more permanent task force of public servants rather than private profiteers to tackle these issues. The problems are really big, they’re going to get worse before they get better, and they’re going to be around for a long time.

The main page image comes from this site and this essay on the challenges to the criminal justice system, penned in 1997.

Post Script: This was a great movie about plaintiffs’ lawyers.

Post Post Script:  When I told readers in January to sell or short the banks – in particular Bank of America – the bank’s closing price was $14.667.  On Friday July 1, Bank of America closed at $11.09.

It’s a complicated case and it’s not over yet.

It’s also another case, like Satyam, that I’ve followed for a while – almost as long as I’ve been writing this blog.

Here’s an excerpt from the first article I wrote about it in October of 2007.  The case started in 2006.

With echoes of pending actions against E&Y and KPMG in Canada, PwC has now been served in the first Big 4 suit to make it to the class certification stage, according to the firm representing the plaintiffs, Kershaw, Cutter & Ratinoff…According to CFO.com, “…under California law, only certified public accountants can properly be classified as exempt from receiving overtime.”

“For years, the Big 4 accounting firms have ignored Federal and State laws mandating the payment of overtime to unlicensed accountants,” said Bill Kershaw, the KCR attorney representing the plaintiffs. “This is in stark contrast to smaller accounting firms, many of whom comply with California’s overtime law and pay overtime to their unlicensed associates as non-exempt employees.”

In June of 2008, I wrote about it again:

Take a look at this response to one of the most important points of fact in the complaint and tell me what you think is wrong with this picture..

“Answering paragraph 4 of the Complaint, PwC admits Plaintiffs are individuals and residents of the State of California. PwC further admits that Plaintiffs were employed by PwC as “associates”in PwC’s Assurance Line of Service. PwC is without knowledge or information sufficient to form a belief as to the truth of the allegations concerning Plaintiffs credentials or degrees, licensing status by a state or federal agency, test status or “Certified Public Accountant” or “CPA” designation from the State of California, and on that basis denies such allegations. PwC admits Plaintiffs bring this action as a proposed class action on behalf of themselves and certain current and former California employees of PwC. Except as so admitted, PwC denies each and every allegation ofthis paragraph in the complaint. “

Hey Jude Curtis, PwC Chief Ethics, Risk and Compliance Officer:  Shouldn’t you guys know who is licensed in each state, each and every state where your professionals work and travel, and whether a particular person has proper credentials and degrees to be an auditor?

Lawsuits are tedious. They take forever. Judges often reverse each other. It’s almost never over when you think because there’s almost always an opportunity for an appeal. Those who think an injustice has been done often only give up when they run out of money or die.

The latest twist in this case was a reversal by the Ninth Circuit Court of Appeals of a lower court decision that handed a partial summary judgement to the plaintiffs – more than 2000 PwC attest associates in California who claim they are owed overtime under California law.

Yesterday, the Ninth Circuit Court of Appeals decided that the lower court had erred in granting partial summary judgment because it misconstrued the statute. The lower court erred by finding that all of the enumerated professions, including accountants, were precluded as a matter of law from presenting evidence that their employees could meet the professional and administrative exemption requirements.

From yesterday’s decision:

PwC has viable defenses under the professional exemption and the administrative exemption. Neither exemption is categorically inapplicable to unlicensed accountants as a matter of law, and PwC has established material fact questions on whether Plaintiffs fall under either exemption. The exemption defenses must be resolved at trial.

The case is now headed to trial unless something happens before that. There’s one thing about litigation that everyone agrees on. Anything can, and sometimes does, happen.

Read the rest in Forbes.

“If only it were all so simple! If only there were evil people somewhere insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart?”
— Aleksandr I. Solzhenitsyn (The Gulag Archipelago: 1918-1956)

There’s quite a bit of bad news coming out of Russia about PricewaterhouseCoopers and their client Yukos.  Former Yukos chief Mikhail Khodorkovsky and his business partner Platon Lebedev stand co-accused in a new trial brought by prosecutors intent on preventing their scheduled release from prison in 2011.  Khodorkovsky and Lebedev have decided to target PwC in their defense.

From the official Khodorkovsky And Lebedev Communication Center:

(Yes! Still wealthy by any measure jailed Russian oligarchs can afford dedicated global PR efforts!)

“…as reported in major features published in today’s Wall Street Journal and The Financial Times following separate investigations conducted by both newspapers, PwC appears to have succumbed to a woefully illegal war of intimidation waged against them by Russian authorities who sought to cast doubt on the reliability of the Yukos audits. PwC was subject to police raids, partners were threatened with imprisonment for their work on Yukos, and legal proceedings unrelated to Yukos were lodged by prosecutors against the firm. These problems all disappeared after PwC withdrew its Yukos reporting. A persistent threat echoed by authorities as PwC adamantly defended its Yukos reporting – that the firm’s Russian license could be revoked – has not been raised again since PwC backed down, and Yukos-related investigations into PwC appear to have ceased. The allegedly “new” information received by PwC was not only supplied by the prosecution, but also never independently verified before PwC withdrew their audits.”

The Wall Street Journal makes a double vodka, straight-up, no chaser assessment of PwC’s problem:

PWC’s entanglement in the legal travails of Mr. Khodorkovsky highlights the ethical and legal dilemmas that can face auditors in emerging markets where corporate governance and judicial systems are weak, industry observers say.

Yes, indeed.

Just ask PwC about its India firm post-Satyam… Or about their Japanese firm and the problems they had after some of their partners were indicted for fraud along with their client, Kanebo.

The Financial Times wants to talk about truth, as if that’s still the currency global audit firms like PwC actually trade in.

Regardless of where the truth lies, what is emerging is a situation where global audit firms operating in Russia may all be vulnerable to the double jeopardy of auditing the books of notoriously opaque companies, while being regulated by a government able to launch arbitrary attacks. This lose-lose situation could call into question the value of audits that have been hotly sought as a western seal of approval ever since Russian companies began to access international financial markets.

Correspondence between PwC and Yukos, as well as PwC’s own internal memorandums and audit drafts, raises questions over what the audit firm knew and did not know about certain transactions stemming from the late 1990s…

This story has been out there for a while.  I started writing about it in March of 2007.  That’s more than three years ago! Reports have been open and consistent in saying PwC was pressured.

Moscow raids PwC over Yukos back tax
“Russian investigators raided the Moscow office of PwC on Friday, stepping up pressure on the “big four” audit firm ahead of a crucial court case over allegations that it signed off on false accounts by Yukos, the bankrupt oil company.

About 20 law enforcement officials from the prosecutors’ office and interior ministry combed PwC’s offices for documents relating to Yukos, and questioned senior managers including Mike Kubena, head of PwC in Moscow, the company said. Interior ministry officials also announced they were launching a criminal probe into alleged tax avoidance by PwC in Russia.

The search came as PwC prepared for a court hearing on Monday in a lawsuit filed by Russia’s Federal Tax Service alleging PwC concealed tax evasion by Yukos in 2002-04. PwC denies all the accusations. The pressure against the audit group is seen as a key element in the state campaign against Yukos …Much is at stake for PwC. If found in violation of accounting procedures, it could lose its Russian licence and valuable clients including big state-controlled companies such as Gazprom, the natural gas giant, Sberbank, the savings bank, Russia’s central bank, and Unified Energy System, the electricity monopoly.”

Political contributions, the audit firms’ stock in trade, kept the dogs at bay for a little while.

MOSCOW, April 4, 2007 (RIA Novosti) – “The United States expects Russia to treat U.S. companies doing business in the country fairly, including embattled auditor PricewaterhouseCoopers (PwC), the U.S. Commerce Secretary said Wednesday.

PwC, a respected international auditing firm, has been accused by Moscow city tax officials of helping the bankrupt Yukos oil company evade taxes, and it may as a result lose its operating license in Russia. Carlos Gutierrez, who arrived in Moscow Monday to discuss Russia’s bid to join the World Trade Organization (WTO) and bilateral investment, said after a meeting with Russia’s economics minister, German Gref, that Washington expects any investigation into alleged violations of Russian tax legislation by PwC to be even-handed.

By June of 2007, PwC had caved to the pressure from the Kremlin.

Looks like PwC is claiming the “we were duped” defense. (Do any of my attorney readers know which firm that defends the Big 4 came up with this brilliant strategy – make your client, who makes their money by selling knowledge and expertise, look dumb?)

Must have been the price they had to pay to placate the Russians and pay back their Congressional and Administration godfathers.

PwC withdraws Yukos audits

“PwC has withdrawn its entire set of audit reports over 10 years for the bankrupt Yukos oil group, in a move that marks a significant climbdown by the global audit firm following months of Russian government pressure.

PwC said on Sunday it was withdrawing all its audit reports of Yukos from the years ending 1995 to 2004 becauseRussian prosecutors had unearthed new information that led it to believe statements provided by Yukos management in the past “may not have been accurate”. The sudden about-turn comes after a government pressure campaign that included police raids in March on PwC’s Moscow office and an ongoing criminal investigation into alleged underpayment of taxes by PwC…

“I don’t think anyone is going to believe this is anything other than bowing to pressure from the Kremlin,” said Tim Osborne, managing director of GML, the main shareholder of Yukos. “I’m astonished to see such a complete lack of backbone in an organisation like that.”…

PwC said in its decision to pull the audits was “influenced by the fact that some former shareholders and management of Yukos are continuing to encourage others to rely on PwC’s audit reports”.

It could not say what specific piece of new information had forced it to withdraw the audits for the entire 10-year period. Only Yukos’s liquidator could disclose that information, it said.”

I guess the threat of further legal action changed their mind. PwC is now defending its withdrawal of ten years of audits by willingly discussing all their reasons.  Unfortunately, it sounds to me, even given the dubious nature of those making the accusations, that PwC’s reasoning is full of hot air.

Tim Wall commenting 9/9/10 in The Moscow News: Whatever good things international accountancy firms are doing in Russia – and I’m sure there are a few – blowing the whistle on massive corruption isn’t really one of them.

Whether accountancy firms are looking at the books of multinational firms or Russian companies, it would seem inevitable that their tasks would involve defending the interests of those companies and their shareholders. Their less public aims would probably involve dealing with often-corrupt tax officials.

It would also seem logical that these accountancy firms would stop short of asking any awkward questions that might lead to them losing lucrative contracts with the firms they’re auditing.

In other words, they would appear to be operating a “Don’t ask, don’t tell” policy…..So perhaps we should not be that shocked when PwC says its audits probably didn’t accurately reflect Yukos’ finances. It’s just a shame it took them so long to admit it.

I wrote several more pieces about PwC’s Russian angst during 2007 and 2008.

Sitting Ducks June 28, 2007

It saddens me but I must report…I was not surprised to see PwC run away whimpering like a girl in Moscow. My Google Alerts have been beeping all week with commentary regarding their latest about-face. But that coverage has been almost all from media outside the US. It’s as if the US media believe that no one knows or cares about what the firms do outside the US. Do they think that their readers can’t spell Yukos or Russia (or Chuo Aoyama).

Maybe so… This week’s issue of the Economist has a quote by Mark Cheffers of Audit Analytics, who I met in Washington DC at the Compliance Week Conference.

“…PWC’s volte-face seems unlikely to hurt it elsewhere in the world because of its federated structure: Mr Kubena says that the decision to withdraw the audits was the Russian firm’s and entirely appropriate given the new information. Any controversy is likely to be discounted by outside observers as an unfortunate fact of Russian life, particularly where Yukos is concerned. “I doubt events in Russia would have any effect on perceptions of PWC in America,” says Mark Cheffers, boss of Audit Analytics, a research firm. Instead, the likeliest victim of the saga is that normal, functioning economy of which Mr Kubena used to speak.”

Reversal of Fortune for PwC in Russia, July 21, 2007 (Things were looking up for PwC)

Never Say Nyet: PwC and Moscow Update October 4, 2007 (Don’t get comfortable just yet.)

Moscow Tax Guys Swing Their Hammer At PwC October 14, 2007 (What do they want from us?  We’ve already withdrawn the audits.  Uncle!)

PwC Moscow Still Breathing Barely June 24, 2008 (Finally a bit of a reprieve…)

And then things went quiet, at least on the Russian front.  We know now that PwC’s problems were not yet solved.  It was not yet “business as usual” in Moscow – if business there was ever anything one could ever call “usual”.  However, we’d never know “Da” or “Nyet”  in the US. The average US businessperson, regulator, and legislator has no world view of the accounting industry because the US media has very little interest or aptitude for the accounting industry, in general. Until there’s a major lawsuit, there’s very little coverage of the business of the firms and, even then, the interest is short-lived and that coverage typically limited in depth and breadth.

In December 2008, the theater of war for PwC shifted to India as a result of the Satyam scandal.

For the global audit firms, and PwC in this case, it’s the potential for and the reality of sudden conflagrations in developing countries that keeps them up at night.  The legal quagmires in developed countries are painful, too.  The audit firms’ global networks are loose confederations of independent legal entities tied together only by their greed and the dependence of the less powerful member firms on the more powerful ones through the legal construct called the international coordinating firm.  When the lawyers finally get it straight that the member firms are not agents of the international firm but instead the international firm is a sham vehicle used to impose the will of the powerful firms on the less powerful firms, they will have found the key to breaking the industry’s back.

Just look at the hands of “PwC International” (read, PwC US and UK) all over the decision by the partner in Russia to withdraw the audits. From The Wall Street Journal:

At a sixth interrogation on June 4, 2007, prosecutors asked Mr. Miller about PWC’s plans to withdraw its audit opinions for Yukos’s financial statements. Mr. Miller answered that there were active discussions of the issue going on at higher levels of PWC.

In response to a query for this article, a PWC official said the decision to withdraw the audit opinions was made by Mr. Miller and others in PWC’s Russia office.

Prosecutors then walked Mr. Miller through the issues that would later be cited in PWC’s letter withdrawing the audits.

Ten days after the June 4 meeting, the top prosecutor on the case wrote to PWC asking if the audits of Yukos’s financial statements could be relied on. Mr. Miller promptly replied with a letter withdrawing the audit opinions for ten years.

The loss of a major network member firm from regulatory or legal actions  - Japan, Russia, Germany, the UK, India, Ireland  - would mean the end of these networks as we know it.  But will local regulatory and political forces allow it?  That’s why these proceedings take so damn long and that’s why we see history repeating itself, over and over, audit failure after audit failure.  It’s moral hazard at its highest level.

The opposite occurred with Arthur Andersen.  The loss of the US Andersen firm meant all the other AA firms around the world were on their own. They were free to make new alliances in order to to serve their local clients and to participate in the work needed to service multinationals doing business in their country. No more paying tithes to the US.  Today, it’s not the US firms that are most seriously threatened with extinction – although there are significant threats such as to EY with regard to Lehman. The larger threat is to one or several of the large member firms outside of the US as a result of  scandals such as Satyam and Yukos.

Main page image from a review of the movie Reds starring Warren Beatty and Diane Keaton. The review was published as Remembering a Red From Reds By Jeff Kisseloff on March 5, 2009 in The nation. The image and review come to us via The Rag Blog.

I’ve just received word: There was a PwC Advisory partners emergency conference call tonight announcing upcoming involuntary staff reductions.

(This time the source is impeccable.)

New US Advisory Leader, Dana McIlwain laid out the bad news:  The time has come to cut. Average utilization is hovering at 69%. Cash collections are millions short.  Campus recruiting for Advisory has been stopped cold. Business sucks and then there’s the 800+ BearingPoint folks to absorb.

On November 11th the rank and file partners, fortified after training and coaching by HR via a webcast in the next few days, will chop 300+ professionals from PwC Advisory, at all levels, all geographies, all practices. Most have already seen the writing on the wall via forced ranking.  You are already on a “list” and I’m not talking a fun Twitter one.  You may be fighting it, thinking you can survive if you just find a project to take you, somewhere. You may even have been encouraged to go looking, just to be told, “Sorry, wrong number.”

Because that’s the way it works at PwC.  After putting themselves on a pedestal, telling the press and their peers at other firms they were better than everyone else, they’ve finally acknowledged that they have no idea how to fix the systemic problems in the practice, don’t know who will fix them, and don’t know when they will get fixed.  No amount of prancing around like pompous peacocks will change the fact no one is buying their act right now.

It can’t help that their Health Care Advisory practice was royally punked by Report-Gate. I never got an answer back from the PwC PR folks as to who, specifically, had the bright idea to whore themselves out for a few bucks to the insurance industry’s anti-reform lobby. This is the big time now and PwC was toast before the graphics department was done printing out those shiny booklets for the next conference.

It seems that none of the BearingPoint transfers-in will be cut.  That would be an admission of fault for a colossal, strategic mistake of going long systems integration consulting during one of the biggest corporate cost cutting periods in my more than twenty-five years of professional life.

And it looks like no partners will be part of the RIF parade, for now.  At least at PwC, they’re reducing those numbers by attrition instead – disgusted, demoralized, and defeated by massive cuts in compensation and shifting of accounts and responsibilities. All in the name of preserving the remaining spoils for the few at the top of the pyramid.  Just walk away with tails between your legs, fellas, and be glad you had the supreme privilege of working for Price, Waterhouse, Coopers, or Lybrand during your 15-25 year career. Oh, and don’t tell anyone. It would embarrass both of us and no one would be better for it.  There’s lots of CFO jobs around.  You may have to move your family to North Dakota…

Don’t think this is the last of the cuts at PwC. Once the rich “sons of a gun” at the top – more on that later in the week, including actual compensation figures – get a taste of blood, it’s easier and easier to justify anything to save their own skins.

They’ve done it before.  They have the playbook.

Let’s see how the PR guys spin this one…

Inside Photo Credit

Main Photo Credit

Back in February, I reminded you of the good things about the Sarbanes-Oxley Act.

“When the Sarbanes-Oxley Act was passed in the summer of 2002, largely as a rushed reaction to Enron, it did get a few key things right.  Notwithstanding the long debate we’ve had about cost/benefit or why it didn’t prevent the subprime crisis or large frauds such as Satyam and Madoff, both of which are derivative discussions for later, there were a few important changes that still make a difference.”

Section 201-209 had a significant impact on the audit firms because it prohibited auditors from providing certain other services to their audit clients.  This change was the result of a long simmering debate about auditor independence but made possible, finally, by the ‘cornered-the-market” behavior of Arthur Andersen as auditor, internal auditor, and chief consultant for Enron.

From the Wall Street Journal in February of 2002:

“…The push to outsource oversight of Enron’s internal-audit function came out of discussions from Enron’s audit committee in the early 1990s, according to depositions. Robert K. Jaedicke, the audit committee’s longtime chairman and former dean of Stanford University’s Graduate School of Business, favored the idea of an “integrated audit,” Mr. Hooten said in his deposition.

Mr. Jaedicke’s attorney, W. Neil Eggleston, said in an interview that Mr. Jaedicke agreed that outsourcing oversight of Enron’s internal-audit function, where Andersen auditors reviewed checks and balances, was a good idea because Andersen’s expertise would provide more “real-time analysis” of whether Enron’s controls were effective.

Andersen had a clear leg up in winning the business. Since 1986, Andersen had been auditor of Enron and its predecessor company. Jack Tompkins, who had headed Andersen’s Houston office for years, was Enron’s chief information and accounting officer during the early 1990s when the contract was being pursued.

The Enron outsourcing business was a big prize. Andersen’s original proposal included a five-year guaranteed contract, $18 million in net fees for Andersen and “value-billing opportunities” of as many as 44,400 guaranteed consulting hours, as well as potential savings for Enron of $12 million over five years, according to a deposition by Michael L. Bennett, Andersen’s world-wide head of assurance and business advisory.

Once it won the contract, rather than physically separate internal and external auditors working at Enron to prevent conflicts of interest, Andersen encouraged a “culturization” of the work teams, bringing the auditors together on the same floor at Enron, Mr. Bennett said in the deposition.”

The US-based academics mentioned in my February post used the same arguments as were made to sell Andersen as an internal audit outsourcing vendor to Enron. They suggested that rolling back the prohibition on auditors also acting as internal auditors of their clients might be better for us:

1) More efficient and effective teams given the external auditors’ extensive knowledge of their clients. The study actually contends, “the knowledge of a company that an external auditor gains from internal auditing lowered the chances of publishing misleading or fraudulent financial results.”

2) Cost savings to client (via leverage over auditor re: fees) from combining the teams and gaining “synergies” from having same firm do both.

3) Promotion of a “consultative” approach that would benefit both client and vendor. In fact, I reported in February that the audit firms were rolling their internal audit practices back into the external audit/assurance practices. No more pretending to be true “strategic” consulting/advisory teams.  This is certainly more efficient and cost effective for the firms, especially if they can use the same staff for both external and internal audit engagements.

If you thought the discussion was pure rhetoric, you were mistaken. KPMG (and PwC who also proposed on Rentokil but lost) has now rationalized, rhetoricized, and revisited the best practice based restrictions for their new client Rentokil. Rentokil is not listed on a US exchange and, therefore, not subject to the Sarbanes-Oxley restrictions.  The UK, where Rentokil is listed, has a gentleman’s agreement with regard to auditor independence for non-audit services.

From a paper by Eleanor Dart of the Cardiff (UK) Business School:

“In 2004, the Auditing Practices Board issued ‘Ethical Standards for Auditors’ (updated in 2008). These standards are less permissive than previous guidelines and must be followed by all members of professional accounting bodies who engage in auditing activities. The standards include a 10% limit on audit firm income from any one listed company client, audit engagement partner rotation every 5 years and key audit personnel rotation every 7 years and compulsory withdrawal from the audit should any non-audit services supplied not be viewed as consistent with the objectives of the audit itself.

However, despite these developments, fundamental questions over auditors’ ability to live up to the service ideal of professional integrity still remain and there is much controversy over what can be done to ‘minimise the possibility of an Enron or WorldCom situation occurring’ (Reeves, 2002:4). Whilst it appears that ‘no single solution is a panacea’ (Reeves, 2002:4) for UK auditor independence concerns, interested parties have yet to agree upon important issues such as whether non-audit service provision should be prohibited or whether a system of mandatory audit firm rotation should be introduced. It is clear that further consideration may be needed to prevent future losses of confidence in auditor independence.”

The arguments for combining the external audit and internal audit activities under one provider repeat, not surprisingly, a familiar refrain. But they conveniently and completely ignore the lessons of the past.  What’s different today is that journalists, corporate governance experts, and plaintiffs attorneys have longer memories:

From The Financial Times’ Jennifer Hughes:

Rentokil Initial has struck a cheaper, streamlined form of audit deal with KPMG that could be adopted by other companies but has raised eyebrows in the corporate governance world.  Rentokil has shaved £1m, or almost a third, off its annual payments to its external and internal auditors, it disclosed in its interim statement on Friday…

KPMG said there was no conflict in its deal with Rentokil and that it was conscious of the rule.

“Conceptually, doing internal audit isn’t a conflict in itself, only if you get involved in the wider aspects such as management – which we are not,” said Oliver Tant, head of audit for KPMG UK.

“Companies are aware today of the importance of good assurance yet at the same time, they’ve got to look at costs. There are ways you can do it more efficiently and effectively.”

KPMG’s pitch was helped by the history the audit team had in working previously with Alan Brown, Rentokil’s chief executive, when he was finance director at ICI.  It was Mr Brown who initiated the discussions that led to the new arrangement.

Given the pressures on costs and the longstanding ties some finance, audit, and accounting executives have with the accounting firms, it is not surprising that the weakening of the independence commitment may come from the companies themselves.  What’s the downside for them?  The potential for scrutiny by corporate governance experts and journalists?  You can’t argue with a recession.  And in the event of an accounting scandal or restatement, plaintiff’s lawyers will have an uphill battle to penetrate the impenetrable auditor liability shields and caps.

I would hate to think, as Dennis Howlett has suggested, that this could become another lame excuse for repealing SOx/general deregulation of audit firms under the threat  of companies decamping to more hospitable climates?

What’s lost in all of this discussion of efficiency and cost cutting?

Independence protects shareholder’s interests.

Fortunately, at least one important voice, the Institute of Internal Auditors (IIA) President and CEO Richard Chambers, has issued a strong statement “in response to recent suggestions that it may be time to revisit existing prohibitions on provision of internal audit services by the same firm responsible for the external audit in the U.S., as well as a recent high-profile instance of the practice in Europe.”

“Internal audit services should not be provided by the same accounting firm that audits the organization’s financial statements, as it would impair the independence of the external auditor. We have expressed this numerous times over the past two decades and we feel it’s important to re-emphasize this at a time in which the practice is potentially being reconsidered,” said IIA President and CEO Richard Chambers, CIA, CGAP, CCSA. “The SEC prohibits this practice by public companies listed in the U.S., but The IIA believes that even if allowed by law or statute, this practice – at a minimum – creates a perceived impairment of independence and erodes public trust.”

I could not have said it better myself.

In addition, KPMG and Rentokil must realize that KPMG’s internal audit practice and Rentokil’s internal audit function will no longer be able to say they comply with IIA standards.  May not seem like a big thing to you but, to internal auditors, it’s the heart and soul of being a “professional.”

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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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Mr. Grant said during a webcast sponsored by SecuritiesDocket.com on February 24th, that a loss at trial by Deloitte in his Parmalat case may be the one that finally drives change, however reluctantly.  He hopes it’s good change via improved quality and accountability for what happens in any firm in the “network.”

I’m less sanguine. Who knows? If a case against PricewaterhouseCoopers global firm for Satyam rolls in soon too, the risk of losing at trial in two Big 4 cases – and Satyam will go to trial – will weigh heavily, like a giant dumbbell dropped on their heads, heavy enough to force the breakup of the global firms as we know them.

What I am talking about here is a case that has been lightly publicized, except in its own world and in the local California legal environment.

That case is Campbell v. PricewaterhouseCoopers.

I’ve mentioned it before.

And I’ve mentioned the similar suits that were settled in Canada with very little fanfare in the US.  As a result of the upheaval being visited on the professionals in all the firms right now by the thousands of cuts and terminations taking place right now, I’m getting all kinds of reports and updates about what’s going on all over the country.

One professional, on deck to join PwC after graduation this May in California, reports:

PwC informed us of a conference call scheduled for Thursday. So far this is what I have heard:

• New Hire salary reduced to $49k, my offer was for $52k.  I have heard that PwC recently lost a class action lawsuit in California about overtime and I am now thinking that lowering the salary now, while the reason given is the economy, may be a way of combating what seems to be the inevitable of paying associates overtime.
• Annual review rankings changed from a scale of 1-5 to 1-3 with lower performers being let go.
• No raises for people moving into their second or third year at the same position, only for those being promoted

So far no info about start dates being pushed back

On March 25, 2008, the law firm of Kershaw, Cutter & Ratinoff, LLP obtained class certification in a lawsuit brought on behalf of unlicensed associates who were employed by PricewaterhouseCoopers (“PwC”) in California from October 2002 through July 2008.

The actual definition of the class certified by the court is: All persons employed by PricewaterhouseCoopers in California who, at any time during the period October 27, 2002 to the present, (a) worked as associates in the Attest Division of PwC’s Assurance Line of Service, (b) were not licensed as certified public accountants by the State of California for some or all of the period they worked in this position; and (c) were classified as exempt employees while working in this position (“Class” or “Class Members”).

Both the plaintiffs and PricewaterhouseCoopers (PwC) recently filed competing Motions for Summary Judgment. The plaintiffs’ motion sought a court determination that all PwC attest associates were improperly classified as exempt and PwC’s motion sought a decision that all Attest Associates were in fact exempt and not eligible for overtime. If PwC had been successful, the Class would have received nothing. On March 11, 2009 the court granted plaintiffs’ motion for summary adjudication on the issue of exemption.  Class members are not exempt under the 2001 wage order. The court conversely denied in part PwC’s cross-motion, as it pertains to the exemption issue. However, the court granted in part PwC’s cross-motion for summary adjudication on the issues of waiting time penalties and punitive damages.

But the court noted that the determination regarding exemption is one involving a controlling question of law, that there is substantial ground for difference of opinion, and that an immediate appeal from the order will materially advance the ultimate termination of the litigation. Therefore, Judge Karlton certified the matter for interlocutory appeal pursuant to 28 U.S.C. § 1292.

What all this legalese means is that the plaintiffs and their law firm are winning so far. But if the Ninth Circuit Court of Appeals accepts the appeal it could take as long as a year to get a ruling either affirming or reversing the lower court decision. It is clear, however, that PwC is feeling the impact of this most recent decision.  Which is why PwC may be preparing themselves by modifying new hire and Associate compensation packages to include an overtime component if required.  But you’ll never hear that from PwC.

According to Bill Kershaw, the lawyer for the plaintiffs, PwC is currently declining to negotiate, and has signaled their intent to pursue all remedies available to the firm on appeal.  I suspect they are very nervous about being the ones who kill the golden goose laying the golden eggs – uncompensated overtime in the US for the whole industry.

Granted, if this particular case is successful for the plaintiffs, it will cover only a specific limited set of professionals (Associates in the Attest practice in PwC in California.) But the pattern and precedent that will be set, both legal and moral, will definitely have a ripple effect throughout the firms – all the firms, everywhere in the US.

You might recall that the Big 4 accounting firms have already caved, without going to trial, in Canada.  As I said to Mr. Kershaw, what happened in Canada stayed in Canada and was barely noticed here, had no effect on the firms’ policies in the US.  This is for two reasons, in my opinion.  The first is the popular notion amongst many conservatively-minded business people in the US that Canada is a socialist country. What happens there in the employment law arena is an anomaly.

The second is that the audit firms will never give up their sacred super-leveraged model without being dragged kicking and screaming to do so. And PwC is, probably based on my experience with them, deathly afraid and embarrassed to be the one that will make them all have to do it.

The summary judgement decision is a great read, if you are curious at all about how the firms say and do what they need to do to avoid admitting liability, that they’re plain defenseless and wrong.  I reminded Mr. Kershaw of the bonehead move PwC made earlier in the case of allowing their lawyers to say they did not know who was licensed.

Take a look at this response to one of the most important points of fact in the complaint and tell me what you think is wrong with this picture…

“Answering paragraph 4 of the Complaint, PwC admits Plaintiffs are individuals and residents of the State of California. PwC further admits that Plaintiffs were employed by PwC as “associates”in PwC’s Assurance Line of Service. PwC is without knowledge or information sufficient to form a belief as to the truth of the allegations concerning Plaintiffs credentials or degrees, licensing status by a state or federal agency, test status or “Certified Public Accountant” or “CPA” designation from the State of California, and on that basis denies such allegations. PwC admits Plaintiffs bring this action as a proposed class action on behalf of themselves and certain current and former California employees of PwC. Except as so admitted, PwC denies each and every allegation ofthis paragraph in the complaint. “

Hey Jude Curtis, PwC Chief Ethics, Risk and Compliance Officer: Shouldn’t you guys know who is licensed in each state, each and every state where your professionals work and travel, and whether a particular person has proper credentials and degrees to be an auditor?

The March 11, 2009 decision also has a really funny, PwC-kind-of-quirky part.  You have to have been there to appreciate the richness of this argument especially as it relates to a limited class of staff consisting of only Associates, the lowest level of staff other than interns.  I take that back. Maybe PwC is not so unique amongst the firms in making most moves lately, both internally and for clients, for an ulterior, liability-paranoid, partner-self-interested reason.  However, while I was at PwC, I told a lot of folks that the practice described below was a crock of shit, an abdication of responsibility on the part of the PwC partners for running their own practice. It’s not some kind of enlightened form of participatory, inclusive management.  I was branded a troublemaker, even by some staff, and a “consultant” who just didn’t get it.

Defendant identifies a limited range of purportedly administrative work class members perform on behalf of PwC.  This includes supervising junior associates, participating without authority in hiring and recruiting, participating in internal committees, such as the “great place to work” committee, evaluating the performance of people class members supervise, and proposing draft engagement budgets…PwC’s argument is that these tasks, coupled with performance of other exempt work, warrant exemption.  This argument fails because the court has held that class members are not engaged in any other form of exempt work. Class members are therefore not exempt under the administrative exemption.  Accordingly, class members are not exempt, and plaintiffs’ motion for summary judgment is granted.

PwC was claiming, amongst other things, that the Associates’ participation in the internal committees is an example of how they participate in the management of the firm.  If it was not so ludicrous as to make me laugh out loud and nearly spit my latte at the screen of my black MacBook, it would be pathetic.

Counsel for PricewaterhouseCoopers in this class action law suit: Orrick, Herrington and Sutcliffe, a Global Law Firm.

Great.  Maybe they can use them in the Satyam suit against PwC global that’s on its way.

Internal photo courtesy of IMDB.com.

Main page photo courtesy of this site, on behalf of this cause.