Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Lots more information on the case settled by PwC

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Image courtesy of Adobe Stock.

Image courtesy of Adobe Stock.

I stumbled across the website of the law firm that handled the lawsuit against PwC over their audit of Colonial Bank. The case has been settled for an undisclosed amount.

The firm has a section of their website that covers litigation news and settlements. The website is here, the news section is here.

Rare glimpse inside major audit

To put this into context, this is the biggest case against a CPA firm to actually get into court in a very long time. If I’m understanding the case correctly (a massive assumption!) after briefly browsing the articles, there were 12 days of testimony spread over either 3 or 4 weeks of in-court proceedings.

Phrased another way, this case provides lots of sworn testimony on the details of a major audit disaster. It is rare for outsiders to see the inner workings of an audit that did not go well.

For future reference, a bank failure which cost the FDIC insurance fund somewhere around $5B is reasonably categorized as a fiasco or disaster. The audits covering four years of that bank during which a massive fraud was running inside of said bank, resulting in the current suit for $5.5B, with said suit ending in a confidential settlement, and another billion dollar suit against the auditor scheduled for trial, can reasonably be referred to as either an audit disaster or a fiasco.

I’ve only browsed a few of the articles on the case. What is obvious based on a few minutes of reading is that there is far more going on in the case than I realized (imagine that – I have much so much to learn!). As just a few examples, consider the following tidbits from the trial.

Some indicators of audit quality concerns

In one article, the lead audit partner conceded that multiple transactions originated by TB&W, sold to Colonial Bank, held by the bank as custodian, and sold to a specific third-party, did not exist. Dollar amount of the series of transactions is not mentioned in the article.

The key point for me as an auditor is the series of transactions did not exist. I concede I’m making inferences from a one paragraph comment, but will infer anyway: it is not that the dollar volume of loans was overstated, or their quality was overstated, or the allowance for loan loss was understated, or the gain on sale is wrong, or the documents were faked by the originator TB&W. The article says the transactions “did not exist.” That suggests the underlying loan files, and the end purchaser, and the gross amount of sale, and the gain on sale, and the servicing rights, and any deferred asset for future servicing rights, simply don’t exist.

Think occurrence assertion along with accuracy/valuation assertion. For any assets on the balance sheet, think existence assertion.

Another article states a billion dollars of mortgage transactions were tested by an intern. The plaintiff’s auditing expert categorized this as a violation of the first general standard (adequate technical training and proficiency) and the first field work standard (planning and supervision). Another article, which discusses this further, needs another read later.

Another article suggests several paths to explore regarding audit quality. The audit partner conceded the firm did not substantively test the existence of a material amount of assets. The plaintiff attorney claims there was $4 billion of unsubstantiated assets. The partner does not know whether that is the correct number or not, but acknowledges there was a material amount of assets that “were not real.”

Think existence assertion. Think asset with a balance that is material at the financial statement level. Think zero substantive testing.

Thought process for the auditors:  consider these few paragraphs set out the concept (to which the audit partner seems to agree) that there was no substantive testing of the existence assertion of assets which are measured in multiples of billions of dollars.

Thought process for peer reviewers: develop a list of items you would want to look at in the audit documentation.

So that auditors can make their own materiality assessments, my understanding is the asserted amount of assets with no substantive testing is $4B in relation to total bank assets of approximately $25B at the time of failure.

When I have some time, I will dive into this and other coverage to see what can be learned from looking at the testimony with an auditor’s perspective. There is much more to learn and much more to say.

Written by Jim Ulvog

September 1, 2016, 8:39 am at 8:39 am

Posted in Audits, Pondering

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