An article written by Michael Rapoport "Regulators, Accounting Firms Bicker Over Audit Rule" discusses the recent debate among regulators and accounting firms as to where the name of the lead auditor should be reported.While regulators argue that the name be present on a company's annual report (10-K), accounting firms doing the auditing feel that the name should be reported on a Form 2 which is an accounting firm's own annual report.
Regulators want the auditor in charge to be recognized on the 10-K because it will be easier for investors to find and increases the accountability for auditors. Investor advocates say that putting it in the company's annual report is the simplest and more prominent place to disclose the partner's name. Arthur Levitt, who is the former Securities and Exchange Commission Charmain, agrees that the name should be disclosed in the 10-K saying, "If it's good enough to go in a document, it's certainly good enough to go in the 10-K."
On the other hand, accounting firms are pushing for the location of disclosure to be in the Form 2. They say that putting the name in the 10-K would expose their auditors to more lawsuits. Executive director of the Center for Audit Quality, Cindy Fornelli, believes that Form 2 is the right choice. She supports the efforts to make the disclosure more accessible and timely for investors.
I believe that lead auditors should be disclosed in a company's 10-K. I feel that reporting the names on a Form 2 says to investors that the auditors have something to hide. That they aren't willing to take full credit for their work. In addition, a Form 2 isn't available to investors in a timely manner. Accounting firms don't file their Form 2 until June covering the year ending the previous March.
Auditors should be held fully accountable for their work. Reporting the lead "engagement partner" name is one of the most sure ways of doing so.
Tuesday, November 4, 2014
Tuesday, October 7, 2014
How'd They Miss That?
As part of the Big Four accounting firms, KPMG holds a high standard when it comes to their auditing. They are expected to provide exceptional work to all clients across the global. So how did they miss the impending collapse of the Espirito Santo Financial Group?
According to a Wall Street Journal article entitled KPMG Faces Criticism for Espirito Santo Audit Work, KPMG was also the auditor for three offshore investment vehicles that illegally traded Espirito Santo debt from Banco Espirito Santo. These offshore companies were registered in the tax haven of Jersey and were all audited by Andrew Quinn, an executive director in the KPMG Jersey offices.
Some may say that because KPMG is such a large company there may have just been a lack of communication between the Jersey office and the Lisbon, Portugal office. However, if you had discovered fraud that would make a huge impact, such as dissolving a company, wouldn't you make sure it was communicated? Also, Espirito Santo Financial Group provides a huge clientele for KPMG (over 400 clients ranging over 60 different entities) why wouldn't KPMG want the company to survive?
I believe it is the Jersey office that should be held accountable. The Jersey office directly audits the three offshore vehicles that were conducting a fraudulent scheme. Any executive director would catch the name of such a large client and see a red flag.
So I suppose the big question here is why? Why not report the fraud going on right under your nose? Why not prevent the collapse of a major Portuguese financial group and bank? The only real answer is that getting paid and maintaining clients sometimes gets in the way of doing the right thing. That is the ever present problem with auditing. People don't do what is ethically correct enough in this field.
According to a Wall Street Journal article entitled KPMG Faces Criticism for Espirito Santo Audit Work, KPMG was also the auditor for three offshore investment vehicles that illegally traded Espirito Santo debt from Banco Espirito Santo. These offshore companies were registered in the tax haven of Jersey and were all audited by Andrew Quinn, an executive director in the KPMG Jersey offices.
Some may say that because KPMG is such a large company there may have just been a lack of communication between the Jersey office and the Lisbon, Portugal office. However, if you had discovered fraud that would make a huge impact, such as dissolving a company, wouldn't you make sure it was communicated? Also, Espirito Santo Financial Group provides a huge clientele for KPMG (over 400 clients ranging over 60 different entities) why wouldn't KPMG want the company to survive?
I believe it is the Jersey office that should be held accountable. The Jersey office directly audits the three offshore vehicles that were conducting a fraudulent scheme. Any executive director would catch the name of such a large client and see a red flag.
So I suppose the big question here is why? Why not report the fraud going on right under your nose? Why not prevent the collapse of a major Portuguese financial group and bank? The only real answer is that getting paid and maintaining clients sometimes gets in the way of doing the right thing. That is the ever present problem with auditing. People don't do what is ethically correct enough in this field.
Tuesday, September 16, 2014
Rotating Auditors: Is Europe onto something?
In an article entitled, More U.K. Companies Put Auditor Contracts Up for Bids, many large companies on the London Stock Exchange are looking for new auditors. This is in compliance with the new European Union rules. These rules are requiring regular auditor rotations every ten years.
Some may argue this is not a good strategy. In order to perform a good audit, the auditor must be knowledgeable about the company. And because companies are so large, its takes time to learn about them. People will argue that after spending years with a company, auditors have invaluable knowledge and information and it shouldn't be thrown away.
However, I think this is a good move on Europe's part. Auditors that have been with a company for ten years (or less) have less of a connection or attachment to the company. They are less likely to be eager to please. In addition, auditors that spend too long with a company get too comfortable.
If auditors are getting too comfortable, they overlook details. If auditors think they already know the company and its books, they might miss what's right under their nose. It's almost like giving the "ok" for the company to commit fraud. And isn't the biggest reason for auditing to uncover fraud?
While Europe has enacted these rules, the U.S. has not. I believe that eventually the U.S. should adopt the same rules. Even though there are cons, there are pros that outweigh them. I believe that stopping corrupt business practices is worth this change in rules.
Some may argue this is not a good strategy. In order to perform a good audit, the auditor must be knowledgeable about the company. And because companies are so large, its takes time to learn about them. People will argue that after spending years with a company, auditors have invaluable knowledge and information and it shouldn't be thrown away.
However, I think this is a good move on Europe's part. Auditors that have been with a company for ten years (or less) have less of a connection or attachment to the company. They are less likely to be eager to please. In addition, auditors that spend too long with a company get too comfortable.
If auditors are getting too comfortable, they overlook details. If auditors think they already know the company and its books, they might miss what's right under their nose. It's almost like giving the "ok" for the company to commit fraud. And isn't the biggest reason for auditing to uncover fraud?
While Europe has enacted these rules, the U.S. has not. I believe that eventually the U.S. should adopt the same rules. Even though there are cons, there are pros that outweigh them. I believe that stopping corrupt business practices is worth this change in rules.
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