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I asked CPA and blogger Jim Ulvog to write a guest post on the Olympus scandal because he was the only one to explain it to me from an accounting perspective. An investigative report prepared by auditor Ernst & Young Shin Nihon – yes, the one that missed the fraud – is a scathing indictment of the company and others potentially complicit in the multi-year subterfuge.
I wrote this post about a month ago for Forbes.com and my column, “Accounting Watchdog” on a very important legal decision related to a real estate company, Centro, in Australia. Centro’s auditors were PwC.
It’s the potential for sudden conflagrations in developing countries that keeps the global audit firms – PwC in this case – up at night. The legal quagmires in developed countries are messy, too. PwC may want to put the Satyam scandal behind them but, unfortunately, I fear there’s still much more pain for the firm to come.
My Forbes column today is about the Chinese reverse merger market and recent reports of potential frauds – plural. I waited for the inevitable case that implicated a Big 4 audit firm. When it came I got two for the price of one and a bonus – a great new research paper from the PCAOB on the Chinese reverse merger phenomenon.
Let’s consider for one moment that the US firms are not the center of the universe for the global audit franchise. Although US revenues are significant, profits and growth are not necessarily stellar compared to the potential in other geographies. So the firms will plow foreign fields instead.
In December of 2009, India’s Central Bureau of Investigation (CBI) arrested Mahindra Satyam’s internal audit head V S Prabhakar Gupta for his alleged involvement in the Satyam fraud.
The UK accounting firms’ response to the “pressure” on the industry post-crisis is sharp, quick, and on message. But the “pressure” itself feels like a sinister strategy orchestrated by the audit firms to force legislators to grant their wishes under the mistaken assumption they’re “regulating” the industry.
Let me break it down for you.
It’s time for the PCAOB Board to think about how they might respond when the audit firms are not going to be so pleased as punch. There’s much for them to address. I’ll be talking about some of those changes and improvements in future posts. But, the most important role of the PCAOB is the inspections process. Let’s take a look at how well that’s going.
The Economic Affairs Committee of the House of Lords questioned representatives of the four largest audit firms on the issue of “going concern” opinions during the financial crisis. In particular, why were there none for the banks that failed, were bailed out, or were nationalized? The auditors admitted that they did not issue “going concern” opinions because they were told by government officials, confidentially, that the banks would be bailed out.
Politicians are again trotting out the same old ideas and suggestions for audit industry reform. Does the UK also pop in new politicians every four years as we do here in the United States such that we get a fresh crop of potato heads every term, fresh from the field, with nary a clue about the history, legacy, machinations and pervasive influence of the largest global accounting firms?
 Francine McKenna (@retheauditors) has more than twenty-five years of experience in consulting and professional services including tenure at two Big 4 firms, both in the US and abroad. Look for my column, "Accounting Watchdog" at Forbes.com and "Accountable" at American Banker. For more information, click "About" at the bottom of this page. Your firm can sponsor this specialized news site. For more information contact Francine McKenna, fmckenna@mckennapartners.com |
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