Attestation Update – A&A for CPAs

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KPMG insider trading fiasco update – how much responsibility does a firm have for ethical failures? – 5-3-13

with 2 comments

I’ve not seen much news lately on the alleged insider trading by former KPMG partner Scott London. Two articles of interest.

These two articles have different perspectives on how much responsiblity belongs to the firm.  We need a long wrestle match with that question.

A pattern?

Writing at Pacific Coast Business Times, Professor Steven Mintz says in an Op/ed: KPMG scandal damages reputation of the accounting profession.

On one hand, Prof. Mintz is scratching his head like the rest of us who are trying to sort out the motivation. Only thing he can bring to bear is a quote from the movie Forest Gump:

“stupid is as stupid does”

Whether that is the case or not, Prof. Mintz sees a troubling pattern. One incident is difficult enough to process, three dots that seem to be connected are more troublesome.

He sees a possible pattern emerging when he considers this set of allegations, Deloitte and Touche vice chairman Thomas Flanagan sitting in jail for 21 months because of insider trading, and KPMG paying a $456M penalty & seeing three staffers in jail with sentences ranging for 6.5 to 10 years for a tax shelter scandal.

If I’m getting his point, it seems like one partner (Mr. London) with a massive ethical failure is an oddity, but three massive ethical failures (2 at KPMG, 1 at D&T) can’t be dismissed so easily.

He closes his op-ed with a discussion that ethical behavior is still the responsibility of the firm.

Good read. Check it out.

Lessons learned for the rest of us

Three litigators from the legal firm of Fried Frank have a column at Mondaq discussing some lessons learned: Implications of the London/Shaw Insider Trading Case For Public Companies And External Auditors.

The first point is the situation doesn’t call into question the policies and procedures that KPMG put into place.  I’ll take the liberty to quote one sentence of the free article:

No system of quality controls, however robust, can prevent a “rogue” partner or employee from surreptitiously tipping a third-party who is not subject to the firm’s supervision or control.

Let me rephrase: What system could prevent or detect a partner who gives a verbal tip to someone outside the firm? Our society would not tolerate the steps necessary to find out what Mr. London is alleged to have done.

Another point from the article is this fiasco should prompt all CPA firms to revisit their independence policies and training. That’s a great idea.

If you are wise, you will think about the disasters in your industry and ponder, at least for a moment, “how are we doing on that issue?”  I do that all the time when I read about litigation against accountants or see a list of common audit deficiencies.

That fiasco you read about might take only a moment to consider, might take a short conversation, or might prompt a full review. Keep your eyes and ears open for opportunities to improve your firm.

Final implication in the article is labelling as a non sequitur the idea that the alleged behavior of Mr. London means the names of audit partners should be identified. The two issues have nothing to do with each other.

That would be like saying his alleged ethical failure means we should have full adoption of IFRS in the U.S.

Oh, wait. Maybe that non sequitur would improve the arguments in favor of IFRS.

Check out the full article from Fried Frank

Read both articles and ponder how much responsibility a firm has for the ethical behavior of its staff.

Written by Jim Ulvog

May 3, 2013, 11:05 am at 11:05 am

Posted in Audits, Pondering

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2 Responses

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  1. The fried frank thing is stupid. Naming the partner wouldn’t help companies or audit firms. They already know who their audit partner is. Naming the partners helps everyone else, including other companies and investors know what other companies are vulnerable to a “rogue”. And calling a partner like Flanagan or London a rogue says more about the firm than about them. And why does know one mention Gansman from EY or McClellan and his wife when they talk about vulnerability of firms to tippers at high levels?

    fmforbes

    May 3, 2013, 11:30 am at 11:30 am

    • I don’t think naming the lead partner will do much good.

      Your suggestion, or a variation of it, might be useful. Listing all the partners on the engagement, including the one signing off on the tax provision, the concurring partner, internal engagement quality control review sign-off (if that’s done in the SEC world), and the consulting partners would give a good picture of the team at the senior level. That idea is appealing. Then you could run some intruiging correlations to the companies that seem to be pushing the limit on accounting or have several restatements.

      The deeper question, that I can’t even explain in a coherent statement, is how does someone like Flanagan or London get to a very senior level? On one hand, how can a firm possibly control the behavior of every person every moment? That’s the ‘rogue’ argument.

      On the other hand, shouldn’t people at that level have the second-nature attitude of making sure direct reports know they will get thrown out the 35th floor window if they break the law, take a bribe, sleep with a subordinate, or do anything else stupid enough to get the firm on the front page of the LA Times? That’s ‘the firm is responsibile’ argument.

      On the third hand, if it is uncertain whether someone would get fired for that kind of behavior or if the firm allows anarchy, then it is the firm’s fault.

      Here’s an interesting question – – how many partners have been summarily fired for ethical violations? Is that known inside the firms?

      I recall a conversation which I’ll describe vaguely – a senior level person at one of my clients described a situation when he/she worked at a large manufacturing company. A person was discovered having committed a serious ethical violation. Said unethical person was fired the next day and everyone in the building knew the real reason even though the for-public-consumption reason was ‘seeking other opportunities’. After that day everyone knew that sort of behavior got you thrown out the door. I doubt it happened again.

      Oh, thanks for adding two more dots to the three that the professor mentioned – five data points is troubling.

      As always, thanks for your comments.

      Update: edited to correct lousy spelling.

      Jim Ulvog

      May 3, 2013, 13:38 pm at 1:38 pm


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