Auditing » Tax Research UK

Staggering admissions by the Big 4

Accounting, Auditing, Big 4 20 Responses »

Nov 232010

The Big 4 are giving evidence to the House of Lords right now on auditing.

I missed the start but the admissions are amazing.

First Deloitte at least signed off bank audit reports saying they were going concerns in 2008 because they assumed the government would bail the banks out. They didn’t say so. But that was the reason for their unqualified opinions. I think their Lordships were surprised.

Second, PWC said Northern Rock had a clever business model everyone knew about.

Third, they have confirmed that IFRS did not allow a loss to be recognised as a provision – only when it had occurred. So as Tim Bush has said time and again – IFRS allowed profits to be recognised when not realised but did not allow losses to be recognised until realised – so building in massive overstatement of profits – and they all signed off on this basis.

Oh, and KPMG have said that they might have assumed a bail out because the government wanted them to do so and not mention it.

The arrogance, lack of flair, incompetence and sheer smugness is staggering.

If you wanted to know why the system is broken watch these four make fools of themselves.

Conflicts of interest? Surely not

Auditing, Deloittes, PWC 2 Responses »

Nov 192010

As the Guardian notes:

The government is spending millions of pounds employing firms that audit its accounts to also carry out vast swaths of its work, in an arrangement that risks creating conflicts of interest.

The "big four" auditors that dominate the commercial world – KPMG, Deloitte, Ernst and Young and PwC – received nearly £70m from the public purse in the first five months after the election. The vast majority of payments were for management consultancy and large project work, but two of the auditors were also commissioned to simultaneously carry out internal audits for Whitehall departments.

Conflicts of interest? Surely not? Not when there’s a chance to share in the loot from the government gravy train for the already well off. When that’s on offer such a thing’s not possible. Surely?

If the Big 4 are bad…..

Auditing 3 Responses »

Sep 282010

Accountancy Age reports:

In a scathing report the audit watchdog has said that significant improvement is required in the audits conducted by small firms. Some firms have even been blocked from taking on listed clients because of the poor quality audits.

The conclusions will come as a bitter blow to smaller firms hoping to compete with the dominance of the big firms and the expansion of audit competition.

A report from the Audit Inspection Unit of the Financial Reporting Council says today that a "high proportion" of audits need to improve especially in gathering evidence to support material balances reported in financial statements.

In stinging criticism the reports also says that where smaller firms are involved in the audit of multi national groups significant improvements are required in "most cases".

Apologies for extensive quote, but this is damning.

Can the accounting profession have any credibility if it can’t do one of its most basic tasks correctly?

Big 4 – inadequate by any standard

Accounting, Auditing, Big 4, Ethics 1 Response »

Sep 172010

As AccountingWEB notes:

The Financial Reporting Council has criticised the Big Four for lack of ‚Äòprofessional scepticism’ and failure to meet ethical standards in its latest audit inspection report.

Despite the quality of firms’ policies and procedures, the number of audits assessed by the Audit Inspection Unit (AIU) – which forms part of the Financial Reporting Council – as requiring ‚Äòsignificant improvements’ remains too high, said the report.

The key findings of the inspections were:

The firms have policies and procedures in place to support audit quality that are generally appropriate to their size and the nature of their client base.

Despite the quality of the firms’ policies and procedures, the number of audits assessed by the AIU as requiring significant improvement remains too high.

The findings suggest that the firms are not always applying:

Their procedures consistently on all aspects of individual audits;

Sufficient professional scepticism in relation to key audit judgments.

Firms need to embrace more fully the principles underlying the Ethical Standards and, in particular, accept that non-audit services should not be provided to audit clients where appropriate safeguards do not exist.

When these firms can do their own jobs properly; when these firms understand ethics; when these firms can use sufficient professional scepticism (shall we cal it competence?); when these firms can show they can do much, much more than write a procedures manual then they might have something to say that the rest of us might listen to.

But right now these firms seem unable to live up to their own standards, let alone those expected of them by the rest of us.

It’s a sorry tale.

Repeated in secrecy jurisdictions around the world – where the one uniting feature is the presence of these firms.

Farewell to the Audit Commission

Auditing, ConDems 7 Responses »

Aug 142010

The vulgarity, stupidity and vague whiff of inappropriateness surrounding ConDem cuts rows by the day. Yesterday the Audit Commission was scrapped in an announcement made by Communities and Local Government Secretary Eric Pickles.

The Commission was an independent watchdog charged with auditing and supporting local councils to ensure that they deliver effective, value for money services. The audit functions of the Commission will be moved to the private sector. Its research activities will simply cease.

So, rich pickings for the Big 4 firms who spent so much supporting the Tory because before the general election there then. How good of Dave to send such a nice “thank you”.

And how inappropriate to now task auditors paid well over £500,000 each on average with responsibility for checking local value for money. As if they’d know anything about it.

But it gets worse. In a statement, Eric Pickles said,

“I want to see the commission’s auditing function become independent of Government, competing for future audit business from the public and private sector. These proposed changes go hand in hand with plans to create an army of armchair auditors – local people able to hold local bodies to account for the way their tax pounds are spent and what that money is delivering.”

Is the man stupid?

Auditors failed when signing off bank accounts

Auditing, Big 4 1 Response »

Jun 302010

The Guardian reports:

The role of accountants in the banking crisis was thrust into the open yesterday when the Financial Services Authority said that the profession had not been sceptical enough about the financial firms it audited in the run up to the banking crisis.

The City regulator, setting out a case to have the powers to publicly censure and fine auditors, also noted that some firms appeared to be "systemically aggressive" in some of their accounting policies.

Paul Sharma, FSA director of prudential policy, said: "Our experience has indicated that, at times, auditors have focused too much on gathering and accepting evidence to support firms’ assertions, rather than exercising sufficient professional scepticism in their approach. This falls far short of what the FSA – and society at large – expects from auditors."

The FSA said its work since the banking crisis had led it to question whether auditors had been "sufficiently sceptical" when challenging the models used by management to measure their bad debts and said it was "concerned that the dispersion in valuations – both within and between firms – for similar items is higher than might be expected".

It said there had been an "inadequate level of challenge to firms’ management" from auditors about some of the crucial assumptions they make in deciding whether to take a provision for a loan that is not being repaid.

The regulator is particularly scathing about the way auditors tackled client assets – where, since Lehman’s collapse, firms must show they keep client’s money safe – saying it had found "material weakness" in some reports filed by auditors.

What can I add? Except the likes of Prem Sikka, Dennis Howlett, Francine McKenna and I can all say “we told you so”.

And “when will they listen?”

UK probes E&Y on Lehman audit

Auditing, Big 4 2 Responses »

Jun 162010

As the FT notes:

A British investigation has been launched into whether Ernst & Young properly audited Lehman Brothers’ accounts in the months preceding the US investment bank’s collapse in September 2008, reports the FT. The Accountancy and Actuarial Disciplinary Board has launched a probe into E&Y’s accounting treatment of controversial transactions known as “Repo 105s” and “Repo 108s”, which Lehman regularly used in its quarter-end balance sheets.

It’s inevitable the Big 4 will become 3 one day.

And that at that point the whole edifice of auditing – with its current ludicrous state of claimed independence – will collapse with it.

The odds must be on E & Y being the one to create the tipping point now. How many more audit fiascos can it be involved in?

Ernst & Young fined £500,000 but was this justice?

Auditing Comments Off

Jun 062010

Ernst & Young fined £500,000 over Equitable Life | Money | The Guardian .

Everyone knew that Ernst & Young had to be culpable with regard to the failure of Equitable Life. So it was not surprise to note that:

The former auditors of Equitable Life have been fined and reprimanded for their role in the insurer’s near collapse, a decade after the event.

Ernst & Young has been fined £500,000 plus £2.4m costs and both the firm and former partner Kevin McNamara have been reprimanded by the joint disciplinary tribunal (JDT), which polices the accountancy profession.

Much more important though is this:

It comes after E&Y appealed against a much more severe judgment issued two years ago. In December 2008 it obtained an injunction which prevented a report produced by the JDT from being disclosed to anyone, including other regulators. That injunction prevented evidence about Bannon and Stewart from being passed to their professional bodies for investigation, until it was lifted six months later.

Can justice really have been done behind threats of super-injunctions?

What meaning has regualtion got when evidence cannot be disclosed?

And what relevance has regaultion got when it takes ten years or so to deliver a verdict?

It’s time we swept away the notion of self regulation for good in auditing and accountancy.

As Ruth Sunderland said today:

E&Y may have got off lightly over Equitable, but its troubles are not over: it is also under the spotlight for its audit of Lehman Brothers, after a highly critical report by former US attorney Anton Valukas. The audit profession has so far escaped sustained scrutiny in the aftermath of the credit crunch. It’s about time that changed.

If, as can reasonably be argued, the current financial crisis was caused by a lack of transparency and accountability then there’s no doubt auditors were at the core of that failure. I’d actually suggest they helped create it.

And for that they are culpable.

A manifesto for accountants

Accounting, Auditing 7 Responses »

Apr 252010

Accountancy Age has said:

[We are] putting together a manifesto from the profession and we want your ideas. Send your manifesto proposals, it doesn’t matter which specialism you work in or whether you’re from practice or the business world. We want ideas that would have a direct impact on the working lives of accountants, wherever they are.

Once we have a list we’ll ask Accountancy Age readers to vote on their top ten issues which we can then present to the new government as a manifesto from the profession. We’ll also publish the result online.

These are my ideas, quickly assembled, under appropriate headings.

Auditing

1. A ban on auditors providing any other services to their clients

2. Mandatory audit rotation after five years

3. Auditors to be liable to individual shareholders and other users of accounts

Accountants

1. The term “accountant” to be regulated and restricted in use

2. All accountants to be required to subscribe to a Code of Conduct requiring that they comply with the spirit as well as the letter of all law and that they always make full disclosure of all transactions to which they are party in any way to all relevant authorities as required by law, at risk of significant penalty if breached

Company law

1. Companies to have a duty to stakeholders equal to that of shareholders

2. Abbreviated accounts to be abolished

3. Striking off fee from Companies House increased to £10,000 to prevent fraud and abuse

4. All small companies transformed into LLPs unless having a capital of at least £50,000, with income tax payable on account at basic rate, this to save small company admin and tax complications.

5. Prevent an accountant assisting the application for striking off of a company without it having first filed all accounts due with the Registrar of Companies and secondly it having filed all tax returns due and thirdly paid all its tax

6. Require that all accounts disclose the full ultimate beneficial ownership of an entity as recorded for anti-money laundering purposes, indicating the means of control if this is not direct

7. Adopt country-by-country reporting

Tax

1. Introduce a General Anti-Avoidance Principle

2. Deny tax reliefs of more than £5,000 a year to any person earning more than £100,000 a year to prevent wasteful tax planning

3. Require that an accountant registered with a UK based institute disclose all contacts they have with offshore entities, including requirement that they disclose beneficial ownership of all such entities as recorded for anti-money laundering purposes to HMRC each year

Trusts

1. Require that all trusts be recorded on a public register or that they be unenforceable in law, such record to include the trust deed, the name and address of the settlor, the name and address of any enforcer and the names and addresses of the trustees

2. Require all trusts file accounts on public record unless they have income of less than £25,000 a year and assets of less than £100,000 and file on public record:

a. A copy of the trust deed and any letters of wishes

b. The name and address of the settlor

c. The name and address of any enforcer

d. A description of the trust property

e. The names and addresses of the trustees

f. A list of all beneficiaries of the trust in each year sufficient to identify them with certainty

g. A statement that trust income was less than £25,000 in the year

h. Confirmation that trust assets are less than £100,000

i. This statement to be certified by an accountant or lawyer who is liable for its accuracy.

3. Trust accounts must include full details of all distributions in each year sufficient to accurately identify the persons in question.

4. Any trust with a UK resident settlor, enforcer, trustee or beneficiary to be subject to these regulations.