Contact me at francinemck@icloud.com to schedule a presentation at your university, conference, or firm.

Coming Up

I’m done traveling until next year when I’ll attend the AAA-Audit Section meeting in Houston in January.  See you there!

March 1-2, 2020, I’ll be the Dreier Chair in Accounting Distinguished Speaker at Loyola Marymount University in Los Angeles, CA at the invitation of Professor Larry Kalbers. More details here.

March 10, 2020, I‘ll present to a combined group of Masters in Accounting Program students visiting Washington D.C. from Indiana University, Purdue University, and Ohio State University under the auspices of The Washington Campus.

March 22-24, 2020, I was asked again, for the ninth year, to be a preliminary judge for the Gerald Loeb Awards for Distinguished Business and Financial Journalism. ( I am a two-time award finalist.) UCLA, Los Angeles, CA.

March 27-28, 2020, I will be presenting “SEC Proposals to ‘Modernize’ Auditor Independence Rules: Doublespeak for Capitulating to the Big 4’s Dominance?” at the American Accounting Association Public Interest Section Midyear meeting. The paper is based on my four-part series here at The Dig.

April 1-2, 2020, Cambridge University, U.K., at the invitation of Dr Michael Willis, Judge Business School MAcc Programme Director, and Alan Jagolinzer, Professor of Financial Accounting, Director of the Cambridge Centre for Financial Reporting & Accountability at the Judge Business School.

April 20-21, 2020, I am back to talking live to MAcc students at Texas A&M University at the invitation of Professor Michael Shaub, a Clinical Professor and the Deloitte Professional Program Director in Mays Business School. This is my fourth time with them.

April 23-24, I will present twice at the 46th Annual IMA Ohio Regional Council Meonske Professional Development Conference at Kent State University. On Thursday I’ll present, “What Successful Accountants Need to Know About Professionalism and Skepticism – Lessons “Learned from Newsworthy Headlines.” On Friday I’ll be with FASB Emerging Issues Task Force (EITF) member Tony Sondhi and others on a panel to discuss earnings reports and the news media.

Previously

January 10th, 2020 Antonin Scalia Law School at George Mason University, at the invitation of Jordan Neyland, Assistant Professor of Law at the Antonin Scalia Law School at George Mason University. 6pm class to talk about accounting and financial statements concepts for law students and recent litigation against the Big 4 auditors.

October 29, 2019, Columbia University Graduate School of Journalism Knight-Bagehot Fellowship I was invited back for the second year to speak to 10 mid-career career business journalists from newsrooms around the world who spend a year at Columbia taking a full course load at the Business and Journalism Schools. Raju Narisetti, Professor, Professional Practice and Program Director asked me to present a “Tuesday Evening Seminar” where seasoned reporters/writers/editors talk in depth about their work/beat and how they do what they do well. I’ll do a Seminar for the KB Fellows on reporting on corporate fraud as a subject matter expert and former accountant/auditor.

October 21, 2019, Back for the fourth year in a row, the Baylor University Masters in Accounting program visited the MarketWatch/WSJ DC newsroom to hear from me about the latest accounting and audit stories in the news.  Hosted by Professor Gia Chevis who teaches accounting ethics.

October 17-18, 2019, I returned to The Ohio State University Fisher School of Business, for the fall MAcc Speaker Series, for a main presentation and a second presentation for undergraduates, then informal conversations with faculty and PhD students throughout the day. Hosted by Tzachi Zach.

August 27, 2019, The University of Michigan Masters in Accounting Program traveled to Washington D.C., and The Washington Campus, a non-profit, non-partisan, higher education consortium that includes some of the world’s leading business schools, has asked me to speak to them.

May 15-June 3, 2019, I taught a custom-developed Maymester course at Baylor University, in Waco, Texas, 201920, ACC 5V98 M1 – Business Journalism. Intended for graduate accounting/finance and communications/journalism students, this Maymester intensive business journalism course students learned how to ask good questions, gather evidence, and write persuasively– skills that are essential to journalism/writing careers and an accounting/audit career.

Students also learned how modern media sees its role as a financial markets watchdog and how it interacts with companies and professional services firms such as accounting, consulting and law firms.  Reporters can still break big financial stories and make an impact, like Fortune’s Bethany McLean’s did to kickstart the questioning of Enron’s financials and John Carreyrou at the Wall Street Journal did with Theranos.

Journalists also perform a public duty to deliver truth to power, and to do it objectively and responsibly, supported by evidence. They are an important part of the information environment alongside financial analysts and auditors.

Thanks to Dr. Gia Chevis, CMA, the Graduate Program Director and PricewaterhouseCoopers Fellow for Teaching Excellence who is the Clinical Associate Professor in Department of Accounting and Business Law who asked and then encouraged me to do this. Thanks also to the Accounting and Business Law Department Chair, Associate Professor Bradley Lail, who was my host in Waco.

April 15, 2019, A special lunch workshop on April 15 in Chicago for the Journalists in Residence at the Stigler Center, University of Chicago Booth School of Business. I will be talking about reporting on corporate fraud as a subject matter expert and former accountant/auditor.

April 10, 2019, San Francisco, CA, ,“Future of Financial Fraud II” conference presented by UC-Berkeley’s law school, partnering w/Pacific Square Research and some of the biggest names in fraud writing and investing including Bethany McLean, Herb Greenberg, Jim Chanos of Kynikos, Diana Henriques, John Carreyrou and Alex Gibney with a special showing of the new HBO documentary about the Theranos fraud, Linnette Lopez of Business Insider, Carson Block of Muddy Waters Research, and ME! There’s video, thanks to Valuewalk.com.

April 3, 2019, Talking to MAcc students at Texas A&M University at the invitation of Professor Michael Shaub. He teaches Accounting and Ethics.  This is my third time with them.  Via Skype.

March 13, 2019, Ohio State Fisher College of Business Masters in Accounting Program trip to Washington D.C., sponsored by Professor Zach Tzachi, includes a visit to the MarketWatch/WSJ newsroom to hear me speak from 5-7 p.m.  Staff from The Washington Campus, a non-profit, non-partisan, higher education consortium that includes some of the world’s leading business schools, will also attend.

March 24-25, 2019, I was asked again, for the eighth year, to be a preliminary judge for the Gerald Loeb Awards for Distinguished Business and Financial Journalism. ( I am a two-time award finalist.) UCLA, Los Angeles, CA.

March 26, 2019, Columbia University Graduate School of Journalism Knight-Bagehot Fellowship brings 10 mid-career career business journalists from newsrooms around the world to spend a year at Columbia taking a full course load at the Business and Journalism Schools. Raju Narisetti, Professor, Professional Practice and Program Director has asked me to present a “Tuesday Evening Seminar” where seasoned reporters/writers/editors talk in depth about their work/beat and how they do what they do well. I’ll do a Seminar for the KB Fellows on reporting on corporate fraud as a subject matter expert and former accountant/auditor.

March 5, 2019, Indiana University and Purdue University Masters in Accounting Programs trip to Washington D.C. 4:30-5:30 at the headquarters of the American Institute of CPAs, in the Willard Office building, 1455 Pennsylvania Ave., NW, under the auspices of The Washington Campus.

February 12, 2019, I was on @YahooFinance earlier this week talking Schumer/Sanders/Rubio stock buyback ban proposals using words like gutless and silly and litmus test.

My recent MarketWatch story about Senators Schumer’s and Sanders’ NY Times OpEd on restricting share buybacks is here. 

January 25, 2019, Gerald Loeb Awards Twitter Chat, Hashtag #LoebAwards, 11:00 a.m. EST.  I will be talking on Twitter with Jonathan Daillak, the Executive Director of The G and R Loeb Foundation and The Gerald Loeb Awards for UCLA Anderson about my experience as a finalist and preliminary judge for the Gerald Loeb Award for Distinguished Business Journalism. The 2019 #LoebAwards Call for Entries is now open.

January 17-19, 2019, American Accounting Association 2019 Auditing Section Midyear Meeting, Nashville, TN.  Attending as AAA member and academic.  If you are attending and want to talk about your research please write me at  fmckenna@marketwatch.com.

January 8th, 2019, Antonin Scalia Law School at George Mason University, at the invitation of Jordan Neyland, Assistant Professor of Law at the Antonin Scalia Law School at George Mason University. 12pm to 2pm class to talk about accounting and financial statements concepts for law students and recent litigation against the Big 4 auditors.

November 26, 2018,  Marquette University, fourth time speaking to graduate auditing class at the invitation of Accounting Department Chairman Michael Akers.

November 7, 2018, I returned to The Ohio State University Fisher School of Business, for the fall MAcc Speaker Series, 12-12:50pm main presentation and a second presentation for undergraduates, then informal conversations with faculty and PhD students throughout the day. Hosted by department chair and MIS professor Brian Mittendorf.

November 1, 2018, Securities Enforcement Forum 2018, Four Seasons Hotel, Washington DC. Attended as media.

October 26, 2018, California Society of CPAs Accounting and Auditing Conference, October 25-26, 2018 at the Sheraton Universal Hotel, Universal City, CA. Speaker on “Fraud Happens: Case Studies In Auditor Liability” from 1:55pm-2:45pm on Friday.

October 24, 2018, Loyola Marymount University, spoke to undergraduate and graduate students in accounting ethics classes by invitation from department chair Professor Larry Kalbers and Professor Scott Delanty.

Speaking at Loyola Marymount University, Los Angeles CA.

October 16, 2018, Back for the third year in a row, the Baylor University Masters in Accounting program visited the MarketWatch/WSJ DC newsroom to hear from me about the latest accounting and audit stories in the news.  Hosted by Professors Gia Chevis who teaches accounting ethics.

October 9, 2018, Grant’s Interest Rate Observer, 35th Anniversary Conference in New York at the Plaza Hotel.  After many years of good relations and a recent podcast performance, Jim Grant asked me to present at his conference this fall.  From Jim Grant:  “I deem it essential that someone—no, not just someone, but you—speak on the theme of willful self-delusion through accounting (have been thinking about this since your terrific podcast appearance). This would entail a short survey of the evolution from GAAP to (increasingly) non-GAAP methods followed by a discussion of, say, three specific instances of accounting abuse that directly bear on securities prices.  You would have 40 minutes, including Q&A. It would be a privilege and a pleasure to have you on the program.”  The presentation can be found here .

September 25, 2018, Via Skype to Journalism 101 – Reporting and Writing on Business and Economics at Texas A&M, at the invitation of Hannele Rubin, an Instructional Assistant Professor in the Journalism Studies Program.

September 17, 2018, In commemoration of the 10th anniversary of the Lehman Brothers bankruptcy on September 15, 2008, I was a guest on the NPR news show Here and Now to talk with host Peter O’Dowd about the tricky financial instruments used during the financial crisis and if they’re still a risk. #repo105 #cds #cdo #mbs #rtm The show airs at 2pm EST on DC’s WAMU 88.5 FM and in Chicago on WBEZ 91.5 between 1-3 CST. Here’s a link to the segment.

September 11, 2018, Moderator for the Congressional Hispanic Caucus Institute 2018 Leadership Conference in Washington DC. Topic was blockchain and the panel will include Justin Slaughter, a partner at Mercury Strategies and formerly Chief Policy Adviser and Special Counsel to Commodity Futures Trading Commissioner Sharon Y. Bowen.

May 3, 2018, Baruch College’s 17th Annual Financial Reporting Conference. New York, NY. I attended as media.

May 2, 2018,  A first ever corporate fraud and forensic accounting conference dubbed “The Future of Fraud”  Presented by UC-Berkeley’s law school, partnering w/Pacific Square Research and some of the biggest names in fraud writing and investing including Bethany McLean, Herb Greenberg, Jim Chanos and Kynikos, Kirkland & Ellis, Carson Block of Muddy Waters Research, and ME!  New York City. Here are the details.

April 11, 2018, Talking to MAcc students at Texas A&M University at the invitation of Professor Michael Shaub. He teaches Accounting and Ethics.  This is my second time with them.  Via Skype.

March 25-26, 2014, I was asked again, for the seventh year, to be a preliminary judge (this time for the Commentary entries) for the Gerald Loeb Awards for Distinguished Business and Financial Journalism. ( I am a two-time award finalist.) UCLA, Los Angeles, CA.

March 8, 2018, Columbia University Business School 3rd Annual News and Finance Conference.  I was on a journalist panel moderated by Charles Calomiris of Columbia U.  with with Shannon Bond from the FT, Sarah Kopit of Bloomberg and Chris Wiggins of the New York Times. The theme is “Fake News.” Organized by the News and Finance Initiative of Columbia Business School’s Program for Financial Studies and its faculty directors Paul Glasserman, Harry Mamaysky, and Paul Tetlock. Go here for more info.

February 8, 2018, The Ohio State University Fisher School of Business, MAcc Speaker Series, Thursday February 8, 12-12:50pm main presentation and then informal conversations with faculty and PhD students throughout the day. Hosted by department chair and MIS professor Brian Mittendorf.  The presentation can be found here.

July 1, 2016, On a panel at the Financial Times Camp Alphaville Festival of Finance, London England. I spoke about spotting corporate fraud with Carson Block of Muddy Waters Research on a panel moderated by the FT’s Dan McCrum.

May 16, 2016, Spoke for my fifth time at the 2016 Georgia Southern University Fraud and Forensic Accounting Education Conference hosted by Georgia Southern University’s Center for Forensic Studies in Accounting and Business and sponsored by Porter Keadle Moore, LLC. Westin Jekyll Island, GA.. Here’s my speech: “The Challenge of Reporting on Pharma Company Fraud: Valeant Pharmaceuticals and Martin Shkreli.”

March 20-21, 2016, I was asked again, my 6th year, to be a preliminary judge for the Gerald Loeb Awards for Distinguished Business and Financial Journalism. ( I am a two-time award finalist.) UCLA, Los Angeles, CA.

July 15, 2015, Spoke with Broc Romanek, editor of the CorporateCounsel.net, to the Shareholder Services Association Annual Meeting on “Leveraging Social Media.” Mayflower Hotel, Washington, D.C..

November 4, 2015, Attended as media. Securities Enforcement Forum 2015, Mayflower Hotel, Washington DC.

May 5-6, 2015, Attended as media. Finance and Society Conference, sponsored by The Institute For New Economic Thinking, Washington DC. Private dinner with Elizabeth Warren on May 5 and full-day invitation-only conference on May 6th including speakers Janet Yellen, Christine Lagarde, Brooksley Born and Anat Admati. For more information you can view the program here.

May 5, 2015, Attended as media. “The Auditor of the Future”, a conference sponsored by the Center for Audit Quality, the John L. Weinberg Center for Corporate Governance and the Department of Accounting and MIS, Lerner College of Business & Economics, University of Delaware. 9:30 a.m.–12:00 p.m. Gore Recital Hall, University of Delaware. To register go here.

May 2, 2015, Guest lecturer. Baruch College/CUNY, Zicklin School of Business, New York, NY, for an advanced auditing class at the invitation of Professor Doug Carmichael.

March 25, 2015, Roosevelt University, Chicago, IL. Accounting Club presentation. “The Future of Public Accounting: What Does That Mean For Students”.

March 23-24, 2015, I was asked again, my 5th year, to be a preliminary judge for the Gerald Loeb Awards for Distinguished Business and Financial Journalism. ( I am a two-time award finalist.) UCLA, Los Angeles, CA.

February 18, 2015, Stanford University and the Graduate School of Business. Visiting lecturer for undergraduate and graduate classes taught by Professor Anat Admati, author of the book Bankers’ New Clothes.

December 3-4, 2014, Illinois CPA Society’s 2014 Accounting & Auditing Conference, Wednesday, December 3, 2014 at The Crowne Plaza Hotel, Springfield, IL, and also on Thursday, December 4, 2014 at the Donald E. Stephens Convention Center, Rosemont, IL. I will present at both locations with Martin W. Terpstra, CPA, CFE, Partner, Forensic & Valuation Services, Plante & Moran PLLC, “Lessons from Litigation – CSI”. Here’s my presentation.

October 14, 2014, Securities Enforcement Forum 2014, Four Seasons Hotel, Washington DC. Attended as media.

October 12-14, 2014, NACD Board Leadership Conference: Beyond Borders, Gaylord National Resort | National Harbor, Maryland.  Attended as media.

October 11, 2014, University of Illinois-Chicago, ‘ProfessionaPalooza’ 2014 Conference, Speaking at 10 am on “Opportunities in Professional Services for Business Undergraduates – Audit, Consulting and Risk/Compliance.”  The presentation is here. 

July 10-12, 2014, Society for the Advancement of Socio-Economics Conference. Theme of this year conference is “The Institutional Foundation of Capitalism”. Our special session is entitled ‘The New Financial Architecture after Financial Crisis’. I’ll be a panelist with moderator Guler Aras, Ph.D. and Professor of Finance &  Accounting and Visiting Scholar of Finance at the McDonough School of Business and Center for Financial Markets and Policy at Georgetown University, Thomas Clarke, Professor of Management and Director of the Key University Research Centre for Corporate Governance at the University of Technology, Sydney, Shyam Sunder, James L. Frank Professor of Accounting, Economics, and Finance at the Yale School of Management; Professor in the Department of Economics; and Fellow of the Whitney Humanities Center, and Paul William, Professor, Ernst & Young Faculty Research Fellow, at NC State University. Williams is also Associate Editor for Critical Perspectives on Accounting. The conference is organized by Northwestern University and the University of Chicago and will be held in Chicago. Text of speech can be found here.

April 29, 2014, Speaking to accounting students at Benedictine University, Lisle, IL at the invitation of Martin Terpstra, M.S., C.P.A., Plante & Moran LLP partner and adjunct instructor of audit and forensic accounting.

April 24 and 25, 2014, Speaking at the 2014 Williamsburg Fraud Conference, Norfolk VA. Jointly sponsored by the Tidewater Chapter of the IIA and The Hampton Roads Chapter of the ACFE. Luncheon keynote speech is here.

April 23, 2014, Speaking at Hampton Roads Economic Club, Norfolk VA, noon meeting. My luncheon keynote speech is here.

April 7, 2014, IIA Annual Conference, Chicago Chapter, Rosemont, Illinois, Joint presentation with Martin Terpstra of Plante & Moran PLLC on “Internal Auditor Legal Liability”.

March 31 – April 2, 2014, Business Ethics Conference for Deans of Catholic Schools of Business, Co-Sponsored by The Center for Faith and Culture, the Center for Business Ethics and the Cameron School of Business, University of St. Thomas-Houston. I will be leading breakout discussions.

March 23-24, 2014, I’ve been asked again to be a preliminary judge for the Gerald Loeb Awards for Distinguished Business and Financial Journalism. ( I am a two-time award finalist.) UCLA, Los Angeles, CA.

March 11, 2014, Private briefing via webcast to law firm Cooley LLP private company practice and clients on the AgFeed fraud and my writing, in particular, on Milton Webster, Audit Committee Whistleblower.

March 3-4, 2014, NEIU European Business Conference, Chicago, IL, Speaking on “The Challenge of Creating and Sustaining A Multinational Career”. My presentation.

February 10, 2014, Stanford University Graduate School of Business, Class visit to Bus F332/Law 725 Finance and Society taught by Professor Anat Admati, author of the new book Bankers’ New Clothes. A post with my lecture notes.

December 5, 2013, Baruch College of the City University of New York, Ensuring Integrity: The 8th Annual Audit Conference, I’m on a panel with Professor Robert Coulson of Baruch College, Brian Croteau of the SEC, Greg Jonas, Director of Research and Analysis at the PCAOB, and Phil Wedemeyer a Director at Atwood Oceanics. We talked about the PCAOB’s audit quality indicators initiative. Here’s an article written about that panel in Corporate Responsibility Magazine.

November 13-14, 2013, PCAOB Standing Advisory Group meeting, attending and covering.

November 7-8, 2013, Visiting students and faculty at Michigan State University at the invitation of auditing Professor Chris Hogan.

November 5-6, 2013, Futures Industry Association Expo 2013, Chicago, IL, attending and covering.

November 1, 2013, Spoke at University of Chicago Law School for a class taught by Tom Manning on corporate governance in China.

October 17, 2013, Women In Listed Derivatives (WILD) Chicago 2nd Annual Symposium and Networking Reception, Federal Reserve Bank of Chicago, 4pm. Panelist.

October 9-11, 2013, The Professional Liability Defense Federation (PLDF) Annual Meeting, special guest luncheon speaker on the 10th, “Is Private Litigation The Only Hope For The Accounting Profession?” The Westin Hotel, Chicago.

October 5, 2013, University of Nebraska, Lincoln NE, Luncheon speaker for the annual Finance and Accounting seminar sponsored by the Department of Finance and the School of Accountancy. Speech title: “The Economic Significance of the Audit Industry and the Key Role of Integrity in the Accounting Profession.”

September 30, 2013, Live “Spreecast” hosted by Broc Romanek of TheCorporateCounsel.net on the PCAOB’s proposed changes to the auditors report.  With Joseph Hall of law firm Davis Polk & Wardell LLP.

September 25, 2013, Speaking to graduate students in the College of Communication at DePaul University, Chicago about the importance of finance and accounting proficiency for aspiring business journalists and corporate public relations professionals.  Invited by Matt Ragas, an assistant professor of Public Relations at the school.

July 22,2013, Marquette University speaking to graduate auditing class at the invitation to Accounting Department Chairman Michael Akers.

July 17-19, 2013, July 17 informal meeting with Villanova University accounting faculty. July 18 spoke to Villanova University students and interested faculty at the invitation of Professor Anthony Catanach and an informal visit at the American College, a think-tank, on July 18.

Spoke twice at the PICPA Educators Conference in Hershey, PA July 19. Keynote in the morning and lunch speaker. Morning: “The Ethics of Auditor Independence and Our Public Duty”, skepticism and professional responsibility in accounting and auditing. Lunch: “Auditor Independence, Professional Skepticism and Auditors’ Obligations When Fraud Happens: Case Studies and Examples”, building on the morning remarks with actual examples and “war stories”. Here’s a link to that combined presentation.

June 29, 2013, RT Television, The Keiser Report appearance. Talking about Anglo Irish, Ernst & Young, and my latest Forbes magazine story, “The Madoff of Munis”. Here’s a link to the video.

June 20, 2013, IIA Augusta, GA Chapter. “Internal Auditor Liability: Why You Should Pay Close Attention To The Colonial Bank and Avon Cases”.

May 16-18, 2013, Spoke for the fourth year in a row at the Seventh Annual Fraud and Forensic Accounting Education Conference hosted by Georgia Southern University’s Center for Forensic Studies in Accounting and Business and sponsored by Porter Keadle Moore, LLC. JW Marriott Buckhead in Atlanta, GA. Here’s my speech on May 16: “Professional Skepticism and Auditors’ Obligations When Fraud Happens: Case Studies and Examples“.

In Episode 449 of the FCPA Compliance Report, I spoke with Tom Fox to discuss the current status of the KPMG defendants and what their conduct means for the audit profession going forward.

I also wrote on several related subjects back in August and September for MarketWatch, ahead of recent reports on the subject in the WSJ, POGO and NYT.

On June 27, 2019, Judge Richard Seeborg in the Northern District of California denied PwC on its motion for summary judgement in the Botta case.  PwC had sought summary judgment based on its argument that the individual who made the determination to terminate Botta had no knowledge of Botta’s SEC complaint. Because PwC failed to show no reasonable finder of fact could conclude Botta’s termination was a result of his “whistleblowing,” the motion was denied.

According to the judge’s decision after Botta filed a complaint with the SEC concerning his experiences with several PwC Silicon Valley audit clients, the SEC opened an investigation and alerted PwC by letter dated April 28, 2017. The SEC informed PwC that its the investigation related to two audits conducted in 2013 and 2014.

PwC retained Walter Brown as counsel to respond to the SEC investigation. Botta’s counsel also sent a letter to PwC’s general counsel, Marie Mazour, on July 5, 2017 memorializing Botta’s complaints about on-going retaliation resulting from his internal complaints.

During the SEC investigation, Brown met with Botta for two interviews, on June 14 and July 17, 2017. According to Brown’s declaration, Botta admitted he had made false statements about an internal control described in PwC’s working papers. Botta had made similar statements about the control in his SEC complaint, which represented the “control was created the night before the filing of the 10-K,” “was not noted during the walkthrough [of the client’s controls],” and was “a documentation exercise.”

PwC Managing Partner of the Assurance Practice, Mark Simon, believed the allegations regarding Botta’s behavior showed serious misconduct if it proved to be true. According to Simon, he decided to terminate Botta’s at-will employment because (1) either the existence of the client internal control had been fabricated and constituted a false statement in PwC’s working papers, or (2) Botta lied that he had verified the existence of the control in his interviews. Simon asserts he did not know about the SEC complaint at the time he fired Botta.

The judge wrote that PwC did not contend, “nor could it,” that its employees and attorneys involved in responding to the SEC inquiry “would have lacked any basis to suspect Botta was the “whistleblower” who triggered the investigation.” One reason is that the issues the SEC raised mirrored those Botta had been escalating to HR and practice leadership internally.

So, the judge said that, “At a minimum there are at least triable issues on that point.”

PwC did contend, however, that Botta “must show a person with supervisory authority over him ‘knew or suspected, actually or constructively, that the [plaintiff] engaged in protected activity.’ PwC is thus advancing a sole-decisionmaker theory, where Botta “must make a showing that the person who actually made the decision to fire him knew” of his protected activity to satisfy this element of a prima facie case.

In contrast, Botta advanced a “cat’s paw” theory of liability.

For that to work, Botta must establish that a subordinate of Mark Simon, “set[] in motion” his firing and “influenced or was involved in the decision or decision-making process.”

The record shows that Botta was fired by PwC Managing Partner of the Assurance Practice, Mark Simon. As noted above, Simon declared he made the decision to fire Botta because either Botta “violated his professional, legal, and ethical duties and PwC policy, which prohibit the fabrication of audit evidence or documentation,” or he “lied about his conduct.” Simon also insists he “was not aware that [Botta] submitted a complaint to the SEC,” and “[t]o this day, . . . never even communicated with Mr. Botta.”

The judge wrote that Botta’s failure to submit direct evidence that contradicts Simon’s declarations just doesn’t matter.

Recall, Simon claims he made the decision to fire Botta because either Botta “violated his professional, legal, and ethical duties and PwC policy, which prohibit the fabrication of audit evidence or documentation,” or he “lied about his conduct” and that he “was not aware that [Botta] submitted a complaint to the SEC,” and “[t]o this day . . . never even communicated with Mr. Botta.”

That’s because, the judge wrote, “the relatively strong circumstantial evidence available to PwC that the SEC complaint may have been submitted by Botta weighs against concluding as a matter of law that the decision maker acted solely on other, legitimate, grounds.”

Even assuming a Botta may have been fired for good cause, Simon’s stated reasons for the firing are “intertwined with the alleged protected activity of reporting improprieties to the SEC,” the judge wrote.

I was struck by the use of the term “cat’s paw” theory of liability and had no idea what that meant.

Was the judge saying that, like a cat with dirty paws, Botta’s footprints were all over the SEC inquiry and no one could plausibly deny the possibility he had been fired in retaliation for that trouble he caused PwC?

Turns out there is an actual legal theory called “cat’s paws” theory of liability for employment discrimination and retaliation claims based on a Supreme Court decision written by Botta’s fellow Italian-American Justice Antonin Scalia in 2011.

Opinion recap: “Cat’s paw” theory upheld form the Scotus Blog:

As finally crafted by the Scalia opinion, the “cat’s law” theory of liability falls upon the employer only if these steps play out in a sequence: (1) a supervisor of the worker takes a step (writing up a negative report, for example) that is done for a biased reason, (2) that supervisor intends to get the worker fired, demoted or otherwise penalized, and (3) the supervisor’s step is found to be the “proximate” cause of the ultimate decision — even if the executive or supervisor who actually carries out the firing or other penalty is someone else, and that person was not at all biased.

From the Obermayer Rebmann Maxwell & Hippel LLP. HR Legalist blog

The Fable

“The Monkey and the Cat” is a fable (dating back to the 17^th century or perhaps earlier) about a monkey who persuades a cat to pull chestnuts from the embers of a fire, only to take the reward for himself and leave the cat nursing a burnt paw.  The fable is the source of the English idiom “cat’s paw” – essentially, one who does another’s dirty work.  The story of the clever monkey and the unsuspecting cat has also worked its way into modern employment discrimination law.

“Cat’s paw liability” describes a scenario when an employee or supervisor, motivated by discriminatory intent, influences an otherwise unbiased decision-maker to take an adverse employment action against another employee.  In the end, the employer is still held responsible.  

A 2011 Supreme Court Opinion, Staub v. Proctor Hospital, made the cat’s paw theory slightly more employee-friendly.  After Staub, the employer can no longer automatically defend a cat’s paw case by arguing that the non-biased decision-maker investigated other materials (such as the employee’s personnel file) before making the ultimate decision.  As long as the biased supervisor’s input is a factor (but not necessarily the sole factor) in the decision, the employer can still end up getting burned.

The judge also noted, in his decision to deny PwC summary judgment, that PwC had failed to “establish good cause” for the various motions it made to seal or make confidential, the documents and exhibits that were filed in connection with its motion for summary judgment.  So the sealing motions were denied.

A trial is scheduled for October.

***************************************************************************

Mauro Botta brought an action in district court in California against PricewaterhouseCoopers LLP alleging that PwC wrongfully terminated him in retaliation for a whistleblower complaint he made to the Securities and Exchange Commission about PwC’s auditing practices.

There’s been a lot written about the case, which is ongoing.

PwC Whistleblower Alleges Fraud in Audits of Silicon Valley Companies

The Project on Government Oversight, May 10, 2018, by David Hilzenrath

After more than a dozen years auditing technology companies in Silicon Valley, Mauro Botta took an extraordinary step: He decided to become a whistleblower.

He drafted an account of what he had seen and experienced as a senior manager at PwC, the accounting firm also known as PricewaterhouseCoopers. Then, in November 2016, he submitted it confidentially to a federal regulator, the Securities and Exchange Commission (SEC).

Under penalty of perjury, Botta described example after example of sloppy if not misleading bookkeeping and weak internal controls at businesses in the Valley.

Botta told the SEC that, when it came to their accounting, companies he observed generally had a “low level of competence.” (He explained to the Project On Government Oversight that he was referring to small and mid-sized companies.)

But the prime focus of Botta’s whistleblower complaint wasn’t the tech companies. It was something deeper and more far-reaching: the culture of auditing at PwC.

Botta alleged that, to keep corporate managers happy and to avoid losing their business, PwC was pulling its punches—trying not to flag too many problems with companies’ internal controls.

He said he was concerned about “the risk of collusion between auditors and management in this valley . . . with management paying us the fees and auditors picking and choosing what to call an audit issue.”

 

How PricewaterhouseCoopers Learned the Importance of Whistleblowing, the Hard Way

Posted on July 6, 2018 by Mike Bothwell

Whistleblowing can reveal tons of problems and mistakes, so it’s no wonder so many companies don’t like it.

 

Madison Marriage and her colleague at the Financial Times picked up the story, as part of her continuing coverage of the pressures the Big 4 are under in the U.K.

A dangerous dance: when auditors are too close to the client

Firms can be too focused on pleasing customers who are also a source of consulting income

Madison Marriage and Jonathan Ford

AUGUST 28, 2018

…In Mr Botta’s case, he said that PwC auditors were routinely correcting their clients’ accounts while they were being drawn up, which meant that when it came to auditing those documents, they were in effect marking their own work. His concern was that PwC partners were compromising their objectivity. He also believed that weaknesses in the internal controls at some of these companies were not flagged to shareholders by PwC when they should have been.

To outsiders, his claims may sound esoteric. But what was potentially more revealing was the feedback Mr Botta received on his performance in 2014, two years after he started raising these concerns internally.

A PwC document — seen by the Financial Times and first reported by the Project on Government Oversight — detailing the results of a peer review conducted that year shone an intriguing light on the firm’s behavioural expectations for its aspiring partners.

“Until he gets the clients pounding the table for him, I don’t think he’ll ever make partner,” one colleague said.

“Build the relationships where the client would never want to leave PwC,” said another. “If he were really responsible for bringing in the revenue and keeping clients, as partners are, he would have to adapt fast,” added a third.

 

Marriage wrote about it again to pick out one particularly colorful anecdote cited by Botta in his SEC whistleblower filing.

Whistleblower accuses PwC of failings over private jet trip

Former auditor says ‘outrageous’ incident highlights independence issues

Madison Marriage

MARCH 24, 2019

A PwC whistleblower has accused the Big Four accounting firm of serious independence failings after it allowed its auditors to fly in a private jet owned by a major audit client, US-listed chipmaker Micron. Mauro Botta, a former PwC auditor who is suing the firm in the US for wrongful dismissal, alleged that a photo of the Micron audit team standing in front of the private jet was singled out for praise during a meeting in California in 2016.

The incident is one of several alleged audit lapses involving a handful of PwC’s Silicon Valley clients that were highlighted in a document sent by Mr Botta to the US Securities and Exchange Commission as part of a whistleblowing complaint against his former employer in 2016. The document shines an intriguing light on cultural standards within PwC, and has raised further questions about whether large accounting firms are too close to the companies they audit at a time when the industry is under unprecedented scrutiny.

In the document, Mr Botta said the photo was shown to PwC’s San Jose office as an example of “best practice” as it demonstrated the auditors had a “great relationship” with Micron. Micron’s chief executive had offered to fly the PwC team to San Jose in his private jet so they did not miss an “internal firm party”, according to Mr Botta’s statement.

 

The case has also been covered in Forbes and by Brenna Nelinson for The Advocate, the magazine of the law firm Bernstein Litowitz and Berger.

It’s All About Relationships

As the Interests of Accounting Firms and their Clients Become More Interconnected, Errors and Conflicts of Interest Abound

By Brenna Nelinson

It is also important to understand that — contrary to popular belief — many auditors do not design their audits to ferret out fraud. A 2018 global study on occupational fraud found that only four percent of fraud is discovered by external audits. As a PwC audit partner famously testified under oath in 2016, “our audits are not designed to find fraud.”

Indeed, accounts from inside the “Big Four” accounting firms suggest that auditors often exploit flexibility in accounting rules to do the opposite: paint an overly rosy picture of the client’s finances. Along with such distortion of company finances can come retaliation against auditors who attempt to do the right thing.

For example, a recent Financial Times article recounts how a former PwC auditor, Mauro Botta, alleged that he experienced professional retaliation for raising internal concerns about the objectivity of the PwC partners performing audits for public companies. Botta was told that “you want these guys to like you,” and that he should prioritize generating revenue and nurturing client relationships and “build the relationships where the client would never want to leave PwC.” Ultimately, in response to client requests, Botta was removed from audits in which he raised concerns about audit accuracy.

 

Compliance into the Weeds is the only weekly podcast which takes a deep dive into a compliance related topic, literally going into the weeds to more fully explore a subject. In this episode, Matt Kelly (the coolest guy in compliance) and I take things in a different direction as we welcome Francine McKenna, reporter at MarketWatch and blogger extraordinaire at Re: The Auditors. After one full week of writing, thinking and talking about the SEC enforcement action against KPMG, we provide our initial reflections on the burgeoning scandal.

Take a listen via the link above.

Update:

The Securities and Exchange Commission settled charges with KPMG LLP on Monday June 17 for altering past audit work after receiving stolen information about inspections of the firm that would be conducted by its regulator, the Public Company Accounting Oversight Board or PCAOB.

In an even more egregious violation of public trust, the SEC’s order also finds that numerous KPMG audit professionals cheated on internal training exams by improperly sharing answers and manipulating test results. Five former KPMG officials were charged last year in the case that alleged they schemed to interfere with the PCAOB’s ability to detect audit deficiencies at KPMG. Two have pleaded guilty, two were found guilty and one is still pending trial.

The SEC’s order finds that KPMG audit professionals, including lead audit engagement partners sent exam answers related to mandatory continuing professional education, ethics and integrity, and training mandated by a prior SEC order finding audit failures to other partners, and also solicited answers from and sent answers to their subordinates to help them also attain passing scores.

It’s not clear from the order how KPMG found out about the latest scandal but the SEC’s settlement document says, “Prior to the firm’s investigation, no one reported the improper sharing of exam answers to the firm’s Ethics and Compliance Hotline.”

In addition to paying a $50 million penalty, KPMG is required to evaluate its quality controls relating to ethics and integrity, identify audit professionals that violated ethics and integrity requirements in connection with training examinations within the past three years, and comply with a cease-and-desist order. The SEC’s order requires KPMG to retain an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation.

************************************************

Many are asking me now, “What about KPMG?”

Why shouldn’t the SEC and/or the Department of Justice now sanction, or in some way criminally penalize, KPMG the firm for the PCAOB data theft “steal the exam” scandal?

After all…

To bring you up to date…

On March 11, 2019, David Middendorf, KPMG’s former national managing partner for audit quality and professional practice, was convicted by a federal court in Manhattan of four of five criminal charges, including conspiracy and wire fraud. Jeffrey Wada, a former employee of the Public Company Accounting Oversight Board, the post- Sarbanes-Oxley audit industry regulator was also convicted on three of four charges, including conspiracy and wire fraud.

Middendorf and four of his former KPMG colleagues—Thomas Whittle, Brian Sweet, David Britt, and Cynthia Holder—were were accused of using confidential PCAOB information about which KPMG clients’ audits the regulator would be inspecting.

On October 29 former KPMG partner Thomas Whittle,KPMG’s then-national partner-in-charge for inspections,  changed his plea, to guilty from not guilty on all five counts in the case of the alleged use of stolen confidential regulator information to subvert KPMG’s regulatory inspection process. Whittle, and Sweet, cooperated with prosecutors.  

The conspiracy to commit wire fraud and wire fraud charges each carry a maximum prison term of 20 years.  Middendorf and Wada were each acquitted of one count of conspiracy to defraud the United States (Count One) referring to defrauding the SEC.

KPMG also used the data to its competitive advantage to win a new audit of a Spanish bank, the Department of Justice and SEC alleged in their complaints. “KPMG won BBVA audit with stolen data about rival’s inspections,” published June 21, 2018, describes how Brian Sweet, a former PCAOB executive who joined KPMG as a partner, used his contacts at the PCAOB to obtain highly confidential data about the audits of BBVA and Banco Santander, which were audited by rival firms. A local partner in Spain used the information to prepare a successful bid for KPMG Spain to take over the BBVA audit.

One good reason you won’t see anything of substance from the SEC, in particular, is that that the regulator, and its chairman Jay Clayton, have gone out of their way to say, “Move along, nothing to see here.” (Of course, the PCAOB has no moral authority to fine or sanction KPMG in this case.)

SEC Chairman Jay Clayton also put out a statement on Monday, specifically addressing any concerns that KPMG audits may have to be withdrawn because of the alleged fraudulent manipulation of audit workpapers and post-audit additional work to cover up errors based on the illegal early warnings about inspections.

“Based on discussions with the SEC staff,” wrote Clayton, “I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports.”

In addition, the SEC also did not want me to name the clients affected by the manipulation of workpapers based on the illegal tip-offs when I did so in June. They expressed what is now clearly shortsighted faux outrage at potential market disruption and, tut-tut, undeserved notoriety for those companies. Those issuer names and more, including more KPMG personnel and the whistleblower name, have all become public during the Middendorf/Wada trial.

But the real reason nothing more substantial either civilly or criminally will happen is that nothing has changed since 2005, and nothing changed after the financial crisis period 2008-10.

It took the KPMG tax shelter scandal in 2005 to bring regulators to the uncomfortable realization there is no contingency plan. The audit firms will continue to push the envelope on legality, ethics and self-interest with impunity even with a new regulator, the PCAOB, in town. We can no longer depend on “professional” disdain for reputation risk to promote self-policing within the firms and within the accounting profession.

In fact, the moral hazard may have even gotten worse, despite new evidence of the systemic corruption of KPMG after the criminal indictment four top U.S. audit practice partners, and conviction/guilty pleas of three of them, a director, and an employee from the PCAOB, as well as termination of the top U.S. audit partner.

While the US Treasury, via the IRS, was scaring the living daylights out of KPMG over tax shelter abuses in 2005 and the Department of Justice was considering indicting the firm, KPMG was busily auditing the Department of Justice and the US Mint.  In 2007 and 2008 KPMG also audited the Department of Treasury’s Financial Management Service.

Re: The Auditors, November 28, 2006:

KPMG is negotiating with the Department of Justice about its troubles while Department of Justice is negotiating with KPMG, their auditors, regarding their audits of DOJ financial statements… in addition to the “too few to fail” doctrine at work here, there was also an attitude on the part of KPMG of, “Hey DOJ losers, who are you to call us a mismanaged, uncontrolled mess?”

At the last moment, the Department of Justice changed their mind deciding against putting KPMG effectively “out of business” over the tax shelter fraud. Who made that decision? Deputy Attorney General James Comey and Attorney General Alberto Gonzales.

Details of the deal were announced at a Gonzales news conference on Aug. 29, 2005. The resolution, Gonzales said, “reflects the reality that the conviction of an organization can affect innocent workers and others associated with the organization, and can even have an impact on the national economy.”

Now you know where Eric Holder got the idea.

In fact, there was an explicit discussion about “debarment,” the potentially devastating consequence of anything short of full support and endorsement for KPMG by every branch of the government involved in determining whether the firm would be indicted in 2005.

Discussion Relating to Suspension/Debarment

[KPMG and its Skadden Arps attorney Robert] Bennett said that KPMG would like the Department of Justice (“DOJ”) as part of the resolution to issue a statement affirming that it would continue to use the Firm as its auditor. [David N.] Kelley responded by saying that he did not think DOJ had much of a choice but to continue with its contract with KPMG. He added that, if DOI says nothing to the contrary, then KPMG’s continued role as DOJ auditor would be a signal to the marketplace.  [Joseph I.] Loonan [of KPMG LLP] said that KPMG wanted to get an agreement from General Services Administration (“GSA’ that the fact the Firm had entered into a deferred prosecution agreement would not prevent it from being deemed “presently responsible” for purposes of federal contracting.

Kelley responded that there were so many agencies that he did not think KPMG could get all of the assurances it was seeking prior to entering into an agreement. Loonan said that the key was having GSA onboard. He suggested expediting GSA’s time frame for consideration of the issue. Kelley indicated that he would ”hear it out as it unfolds.” [Judge Sven Erik Holmes, who KPMG hired to provide support in its negotiations] added, “We just want to front-run it a little bit. Kelley replied by saying that he would let us know if we could go ahead and have discussions with GSA.

I wrote:

KPMG, as auditor of the Department of Justice and the US Treasury, was concerned about debarment, a ban from working for the government. The ‘no debarment” deal was cut because, as [David] Kelley said, DOJ had no choice. KPMG was not debarred and continued unabated with all Fed government contracts. Later, after the crisis, KPMG would continue as auditor of Citigroup even after US owned almost all of the bank and could have forced a change.

This decision cemented the US government and general global regulatory posture of  “too few to fail” with regard to the largest audit firms.

KPMG also remained auditor of Citi, the combined Wells Fargo and Wachovia where it had audited both banks, and Deutsche Bank, to name just the most notorious financial crisis bailout recipients who went on to more ignominy. Certainly the same “debarment” discussion takes place anytime one of the Big 4 audit firms skates close to the line, potentially subject to strong sanctions by the SEC or PCAOB, or maybe even civil damages a federal agency can control.

The “too few to fail” premise is the primary reason penalties are tough but not nearly anything close to anything that would stop the Big 4 train.

So what else hasn’t changed? (Even former Judge Sven Holmes is still around, playing a central role in the latest crisis.)

KPMG remains auditor of the Department of Justice.  KPMG recently told the DOJ, the same DOJ that is prosecuting its partners, that it the agency has a significant deficiency related to inadequate financial statement preparation and review controls.

To facilitate its accounting of the Department’s daily activities, during fiscal year (FY) 2018 the DOJ continued the multi-year implementation of its new Unified Financial Management System (UFMS). Due to competing priorities faced by DOJ personnel in supporting the conversion of nine component organizations within the Offices, Boards, and Divisions (OBDs) reporting component to UFMS and planning for the conversion of the remaining five OBD component organizations in FYs 2019 and 2020, we noted that the emphasis placed on the Department’s financial statement preparation and review processes had not achieved the full level of rigor that is necessary to prepare timely and accurate financial statements in accordance with generally accepted accounting principles, and OMB Circular No. A-136, Financial Reporting Requirements. During our FY 2018 audit, the Department detected or we brought to the attention of the Department the following errors, for which the underlying causes were similar and pervasive.

Arguably KPMG would be forced to resign the Department of Justice audit—due to the sudden adversarial relationship with an audit client—the minute the agency filed any kind of charges against the firm, even if it did not result in a complaint, let alone an indictment.

(BTW, Deloitte did pay a hefty negotiated fine for DOJ allegations of False Claims Act violations related to Taylor Bean & Whitaker, despite no complaint filed, let alone an indictment. It’s the only regulatory action against either PwC or Deloitte or any of their partners for the TBW/Colonial Bank joint fraud. At $149.5 million it’s one of the largest audit related fines or settlements or damages awards ever against an audit firm and it got little to no media coverage.)

KPMG remains the auditor of the U. S. Treasury. In fact, KPMG recently told the Treasury that it has several significant deficiencies:

• • a significant deficiency in internal control over cash management information systems and a significant deficiency in internal control over Federal debt information systems at the Bureau of the Fiscal Service, collectively representing a significant deficiency for Treasury as a whole;
  • a significant deficiency in internal control over unpaid tax assessments and a significant deficiency in internal control over financial reporting systems at the Internal Revenue Service, collectively representing a significant deficiency for Treasury as a whole;
  • two Anti-deficiency Act violations where the Treasury Departmental Offices expended amounts that were in excess of the available fund balance in fiscal year 2015;
  • and noncompliance with requirements of FFMIA related to Federal financial management systems requirements.

KPMG replaced Deloitte as auditor of the Federal Reserve beginning in 2015.  There are no publicly available records on the change but a source told me that Deloitte’s contract was for a 5-year term for the financial statement audits for calendar years 2007 through 2011, throughout the financial crisis, with five 1-year optional extensions. The Board exercised three 1-year optional extensions, then rebid the contract in 2014 awarding it to KPMG.

KPMG is also the beleaguered longtime auditor of the Commonwealth of Puerto Rico.

Does that look like a U.S. Federal Government that is willing to live without KPMG?

Law360, New York (March 4, 2019, 9:38 PM EST) — A former KPMG partner on trial for an alleged conspiracy to steal inspection plans from the Public Company Accounting Oversight Board took the stand in his own defense Monday…

David Middendorf, 54, testified that he told his colleague Brian Sweet not to share a list of inspection targets he obtained in 2017 until he had the chance to talk to his boss. But Sweet, who took a plea deal and cooperated with the government, previously told jurors that Middendorf told him that same night the list was “too good not to use.”

According to Middendorf, he told his boss Scott Marcello about Sweet’s list on Feb. 7, 2017, the day after he learned about it.

He said others at KPMG whose views he respected were troubled by the revelation, and that he and Marcello told Sven Erik Holmes, a former federal judge and one of the vice chairs of the Big Four auditing firm, a few days later.

Middendorf said he subsequently volunteered to Mark Rubino, a KPMG lawyer investigating the matter, that he received a similar list in 2016.

“I told him … it was probably poor judgment on my part” not to have said anything at the time, Middendorf said.

If you’ve been around for a while, you may remember the last time I wrote about Judge Sven Holmes.

 Judge Sven Erik Holmes, who KPMG hired to provide support in its negotiations, admits that KPMG “obstructed”. He’d been telling client Audit Committees that the firm’s failure to produce documents was “intentional”.

Judge Holmes comments about his discussions with Audit Committees are telling. It was a form over substance strategy. According to Holmes, audit committees, rather than looking out for shareholders, were aligned with KPMG’s desire to keep the audit engagements as auditors in spite of a tax fraud charge. They were hoping there’d be no obstruction charge. A criminal indictment would force their hands and mean potential liability for directors if they didn’t immediately dump KPMG.

The timeline of who told whom what and when, this time around, is a bit more complicated than Middendorf describes.

I have reported at length on the contents of Exhibit N and Exhibit O, both of which were filed to the docket in un-redacted form in June 2018.

 “The auditor of Citi, Credit Suisse and Deutsche Bank was tipped off before regulatory inspection,” was published June 20, the great consternation of the SEC who did not want the companies’ names published. The court filing made June 8 by lawyers for two of the KPMG partner defendants identified the audit clients caught up in the scandal. They are some of the largest financial companies in the world, including Ambac Financial which was mentioned specifically in the new filing.

KPMG partners allegedly obtained regulatory inspection data about their rivals, too.

“KPMG won BBVA audit with stolen data about rival’s inspections,” was published June 21, 2018 and describes how Brian Sweet, a former PCAOB executive who joined KPMG as a partner, used his contacts at the PCAOB to obtain highly confidential data about the audits of BBVA and Banco Santander, which were audited by rival firms. A local partner in Spain used the information to prepare a successful bid for KPMG Spain to take over the BBVA audit.

Finally, “KPMG turned to Palantir to help predict which audits would be inspected,”  was published on June 26, 2018 and describes how in April 2015 KPMG signed a $250,000 contract with Palantir, contingent on a certain rate of success. The effort was led by another KPMG partner who was not named by the SEC or in the indictment and has not been charged by either.

Exhibit N, the Postal Inspector’s Report of its examination of evidence provided to the DOJ by KPMG, including phone and email records and other data collected during its internal investigation, includes a timeline of the last days of the scheme:

On or about February 3, 2017:

At approximately 12: 15 p.m., Holder called Jeffrey Wada. The call lasted 47 minutes.

At approximately 1 :03 p.m., Holder called Sweet. The call lasted 2 minute.

At approximately 1 :2 1 pm., Sweet called Holder. The call lasted 3 1 minutes.

At approximately 1 :53 p.m., Sweet called Whittle. The call lasted 8 minutes.

At approximately 2 :46 p.m., Sweet called Holder. The call lasted 1 1 minutes.

At approximately 3 :48, Sweet called a KPMG partner assigned to the Chemical

Financial engagements, one of the engagements that was to be inspected in 20 1 7.

The call lasted 8 minutes.

At approximately 3 :57 p.m., Sweet called Britt. The call lasted 27 seconds.

At approximately 5 :07 p.m., Holder called Sweet. The call lasted 23 minutes.

At approximately 7 :39 p.m., Britt called Sweet. The call lasted 26 minutes.

Thomas Whittle’s testimony in the UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA, New York, N.Y.

1. 18 Cr. 0036(JPO)

DAVID MIDDENDORF and JEFFREY

WADA,

Defendants.

On February 26, 2019

Beginning at 9:35 a.m.

Before:

HON. J. PAUL OETKEN,

From an official transcript of the testimony, this is an excerpt of direct examination of the witness for the government Thomas Whittle by Rebecca Mermelstein, Assistant United States Attorney:

RM: Let me now direct your attention to February 3rd of 2017. Did there come time that you received a phone call from Brian Sweet on that day?

Whittle: Yes.

RM: What, if anything, did he tell you?

Whittle: He told me that he had just received the final board approved list of 2017 PCAOB inspections.

RM: What was your reaction?

Whittle: I was — I was shocked.

RM: Why?

Whittle: This was information we had never gotten before. It was a complete list. It was — so it was certainly a much longer list than in the past. The audits were still in progress. And it was just shocking that he would be able to have obtained that information.

RM: Were you unhappy to receive that?

Whittle: I think I had mixed emotions. I was pleased to get it but certainly concerned about, you know, how we would be able to go about effecting changes on that scale.

RM: How did the list you received in February of 2017 compare to the preliminary list you had received in January of 2017?

Whittle: There were quite a few differences between them.

RM: How did you respond when Sweet provided you with the information?

Whittle: My response was that we should get in touch with Dave Middendorf and we should have a call to discuss the list.

RM: Did you in fact arrange a call?

Whittle: I asked Brian Sweet to arrange a call, which he did for the following Monday.

RM: When did the call take place?

RM: So February 6th of 2017?

Whittle: Correct…

Whittle: “February the 6th, approximately, you know, 8/8:30 at night. [ a conference call between Whittle, Middendorf, and Sweet) “the call where we discussed the final 2017 list….”

RM: Did anyone on the call suggest that KPMG’s receipt of confidential information should be reported to the PCAOB?

Whittle: No.

RM: Did anyone suggest that it should be reported to the SEC?

Whittle: No.

RM: Did anyone suggest that it should be reported internally at KPMG?

Whittle: No.

RM: Did anyone suggest that you shouldn’t have the information?

Whittle: No.

RM: Did anyone express hesitation in using the information?

Whittle: No.

RM: By the end of the call, was there a final plan about how to use the information?

Whittle: There was not a final plan. Mr. Middendorf said he wanted to think more about it and was — said that he was going to talk to Scott Marcello, the Vice Chair, about it…

RM: When was the next time you spoke to Mr. Middendorf?

Whittle: I believe it was that Wednesday that same week. [Feb 8]

RM: How did that come about?

Whittle: I was in my office and I could see Mr. Middendorf walking what I thought was with purpose towards my office. He came in, closed the door, sat down, and, excuse my language, but said,

“What the fuck is Brian Sweet doing? Why is he telling people thereon they’re being inspected?”

RM: What did he say about how he had come to understand that Brian Sweet told someone they were going to be inspected?

Whittle: He relayed to me that Diana Kunz, a partner in the Chicago office, had been contacted by Brian Sweet [on Feb 3] and was told she was on the final inspection list and she had become concerned about the receipt of confidential information and she discussed it with her business unit leadership, who then raised it to Laurie Mullen, who is a Regional Professional Practice Partner, who raised it up to Mr. Middendorf…

RM: What was your understanding about why Mr. Middendorf was upset to learn that Mr. Sweet had told an engagement partner that he or she would be inspected?

Whittle: That he was sharing that with others that we had confidential information about the upcoming inspections.

RM: What, if anything, did Mr. Middendorf tell you to do?

Whittle: He told me to call Mr. Sweet and tell him to stop telling engagement partners that they were on the inspection list…

RM: Were you upset to learn that Mr. Sweet was telling engagement partners they were on the list?

Whittle: Yes.

RM: Why?

Whittle: Because then we were caught. We were caught with having confidential information that wasn’t ours.

RM: Did you have the conversation with Mr. Sweet that Mr. Middendorf had told you to have?

Whittle: I did.

RM: Did there come a time when KPMG conducted an internal investigation into the possession of confidential PCAOB information?

Whittle: Yes.

On April 11, 2017, KPMG announced it has fired six employees, five partners and a director, including Scott Marcello, the head of its audit practice in the United States, who was not charged by the SEC or indicted, and Brian Sweet.

KPMG LLP, the audit, tax and advisory firm, today said that it had determined that six individuals in its Audit practice, including the head of the Audit Practice, four other partners and one employee, had violated the firm’s Code of Conduct and they are leaving the firm.

The firm learned in late February, from an internal source, that an individual who had joined KPMG from the PCAOB subsequently received confidential information from a then-employee of the PCAOB, and shared that information with other KPMG personnel. That information potentially undermined the integrity of the regulatory process.

KPMG immediately reported the situation to the PCAOB and the SEC, and retained outside counsel to investigate. The firm learned through the investigation that the six KPMG individuals either had improper advance warnings of engagements to be inspected by the PCAOB, or were aware that others had received such advance warnings and had failed to properly report the situation in a timely manner.

This issue does not impact any of the firm’s audit opinions or any client’s financial statements.

The stars aligned and Warren Buffett issued an annual shareholder letter that was forced to include an embarrassing charge for significant losses on Berkshire Hathaway’s investment in Kraft Heinz.

Buffett’s letter was a rant against GAAP, and a 180 degree turn from his typical long-term focus.

I was in New York Feb. 21-22 to give a workshop for my colleagues there about the accounting and audit issues to keep an eye on when reporting on earnings releases and S-1 IPO filings. Friday the 22 was supposed to be focused on doing an update on Valeant, now called Bausch Health.

But then news broke about a $15 billion impairment non-cash charge at Kraft Heinz.  My editor told me, “Find your angle in, Francine.”

So I wrote, “Why the $15.4 billion Kraft Heinz brand write-down was unusual”, based primarily on an excellent report from Audit Analytics on the history of Kraft Heinz accounting missteps since Heinz acquired Kraft in 2015 and the SEC’s scrutiny of its financial reporting. Kraft Heinz also surprised the markets, and not in a good way, with an unexpected announcement of an SEC investigation.

The $15.4 billion impairment by Kraft Heinz wasn’t just one of the largest in corporate history. It also was unusual in how the write-down of its Kraft natural cheese business, Oscar Mayer cold cuts business and Canada retail business was carried out.

The company also rocked investors with unexpected news of a probe by the Securities and Exchange Commission that prompted an internal investigation which resulted in a $25 million inventory accounting correction.

Audit Analytics had concluded that, “Quite unusually, the impairment was triggered by short term developments in the second part of 2018, as opposed to a routine impairment evaluation.”

(Update from Audit Analytics on March 1)
On February 28, 2019 Kraft Heinz Co [KHC] disclosed that they will be unable to file their 2018 annual report by the SEC deadline. The Company cites an ongoing internal investigation into procurement, resulting from the SEC subpoena received in October 2018. Kraft Heinz does not expect to file their annual report until the investigation has concluded.

In a current report filed on February 28, 2019, Kraft Heinz provided additional details of their impairments determined during their interim impairment test. The update was provided using 8-K Item 2.06 filing, which emphasized the significance and unusual nature of the impairment. Item 2.06 impairments are not very common and only a handful of goodwill and other intangible impairments is disclosed using an 8-K Item 2.06. (Contact Audit Analytics for the list).

Kraft Heinz had already performed its annual impairment testing in the second quarter and had already taken some charges much lower in the third quarter as a result. The write downs in the third quarter, after the annual assessment, were a warning, Audit Analytics wrote, since any softness in the underlying business could, and did, force the company to now take this even larger hit.

Berkshire Hathaway first invested significantly in H.J. Heinz Holding Corporation in 2013 and now owns 26.7 % of Kraft Heinz accounted for using the “equity” method because it’s part of the control group with the Brazilian investment firm 3G.

Berkshire, and Buffett, were poised to issue Buffett’s annual shareholder letter on Saturday morning, Feb 23, so there was enormous curiosity about how much of a charge Berkshire would take for Kraft Heinz announcement and what Buffett would say about it.

The letter not only included lengthy discussion of the Kraft Heinz situation but led off, unusually with  a lengthy criticism of GAAP and the accounting rules that prevent Buffett, in his mind, from accurately reflecting his performance in either his equity investment portfolio or his operating companies.  It’s so bad, he’s finally completely given up on “book value per share” as the metric he believes investors should track and capitulated to the short-termist share price focus.

In its fourth quarter earnings release, Berkshire took a $3 billion hit for its share of the Kraft Heinz $15 billion write-down of goodwill and intangible assets that reflects the company’s deteriorating brand value. Kraft Heinz also adjusted out its $15 billion loss in its earnings release. Berkshire Hathaway suggest investors should also adjust GAAP net income for the nearly $27.6 billion net loss on its investment portfolio for the fourth quarter.

“I was wrong in a couple of ways about Kraft Heinz,” Buffett told CNBC’s Becky Quick on Squawk Box on Monday. “We overpaid for Kraft,” he said.

On Monday Feb 26 I wrote, “Buffett criticizes others for using non-standard accounting — but he does too,” highlighting the hypocrisy of his chronic criticism of others who create non-GAAP metrics such as “adjusted EBITDA” while Berkshire Hathaway does the same thing, but choses different charges it doesn’t like to create their own narrative.

Buffett doesn’t explicitly call the number he’d rather investors focus on an “adjusted EBITDA.”

However, Berkshire Hathaway  does use certain non-GAAP financial measures regularly, adjusting every period for losses and gains on its investment portfolio, a routine GAAP expense made more significant for Berkshire Hathaway now that companies must also record the impact of unrealized gains and losses in their bottom-line number.

In his most recent letter to shareholders, Buffett claims his brand of earnings adjustment is a “far cry” from the presentations made by others. Too often, he writes, their presentations feature “adjusted EBITDA,” a measure that redefines “earnings” to exclude a variety of what Buffett says are “all-too-real” costs. In particular, Buffett rails against claims that stock-based compensation should not be counted as an expense. He also says expenses for restructurings are common in business—Berkshire’s shareholders see the impact of those activities.

Back in May of last year, I wrote about how he had set up a contra-narrative to distract from what he knew would be the ongoing volatility of his equity investment portfolio.

Buffett knew he’d have to book big investment losses, something he hates with passion only exceeded by his love for Coca Cola and Dilly Bars, so he started setting up the contra-narrative back in March. https://t.co/rwxYISd77U

— Francine McKenna (@retheauditors) May 5, 2018

Buffett has also chronically touted a type of non-GAAP metric he calls “intrinsic value.”He defines it as the “discounted value of the cash that can be taken out of a business during its remaining life.”

Buffett and his partner Charlie Munger never disclose their estimates of Berkshire Hathaway’s intrinsic value, because, they say, it’s an estimate and very subjective.“What our annual reports do supply, though,” Buffett wrote for the 2017 annual report, “are the facts that we ourselves use to calculate this value.”

That’s a lot like several of the companies we reported on at MarketWatch that started slipping numbers to journalists or providing the components of SEC prohibited non-GAAP metrics and pointing analysts and journalists to assemble them on their own, after the SEC cracked down on abuses beginning in May 2016.

See also: The company that makes Jack Daniel’s is skirting accounting rules, experts say

Read also: Valeant is providing the media with an earnings metric that the SEC told it to stop using

For more, see: SEC tells companies to be careful how they talk about free cash flow

To read: Take-Two Interactive is using a revenue metric the SEC does not allow to calculate bonuses

However Buffett and Munger do use the intrinsic value figure to determine whether the company will buy back shares. In 2018, Berkshire repurchased $1.3 billion worth of class A and B common stock. Berkshire’s common stock repurchase program was amended on July 17, 2018 to permit Buffett to repurchase its shares at prices that are below Berkshire’s intrinsic value, a value “conservatively” determined by Buffett and Munger, the annual report says.

The SEC has sent comment letters to Berkshire Hathaway about its non-GAAP reporting.  In 2017 the SEC asked Berkshire Hathaway… 

…why it had not disclosed expenses related to the amortization of certain intangible assets. Buffett rationalized the move in his letter to shareholders last year: “We present the data in this manner because Charlie and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures,” he said, referring to Charlie Munger, the vice chairman of the board.

Buffett is suggesting again this year that investors ignore the volatility of the value of the equity investment portfolio, but he had to admit its influence is expected to grow rather than diminish. Despite “hoping to move much of our excess liquidity into businesses that Berkshire Hathaway will permanently own” the immediate prospects for that, he writes in this year’s letter, are “not good.

“Prices are sky-high for businesses possessing decent long-term prospects,” he says.

There was also some interesting info about a previous acquisition, Marmon Group, which I discussed when I presented at the Grant’s Interest Rate Observer Annual Conference last October. That investment doesn’t seem to be going as well as previously hoped, either.

In 2007, for example, Berkshire Hathaway bought a 60% stake in Marmon Holdings, the industrial holding firm owned by Chicago’s Pritzker family, for $4.5 billion. Buffett now owns 99.75% of the company, all but a sliver held by a family holdout, after a series of transactions where he also criticized the impact of GAAP accounting.

“Our transaction was done just the way Jay would have liked it to be done – no consultants or studies,” Buffett said in a statement in 2007, referring to Jay Pritzker, the founder of the family’s Hyatt hotel empire and uncle of J.B. Pritzker, the current governor of Illinois and his sister Penny Pritzker, a former commerce secretary under President Barack Obama.

By 2012 Buffett was already complaining about the growing challenge of using book value and intrinsic value to measure his company’s performance when he talked about the accounting for the deal.

The Marmon deal was one of the largest acquisitions Buffett has made in recent years. Marmon had more than 125 businesses in a wide range of industries and revenues of about $7 billion at the time. It now consists of 13 diverse business sectors and more than 100 autonomous manufacturing and service businesses, according to Berkshire’s latest annual report.

“Marmon provides an example of a clear and substantial gap existing between book value and intrinsic value. Last year I told you that we had purchased additional shares in Marmon, raising our ownership to 80% (up from the 64% we acquired in 2008). I also told you that GAAP accounting required us to immediately record the 2011 purchase on our books at far less than what we paid. I’ve now had a year to think about this weird accounting rule, but I’ve yet to find an explanation that makes any sense – nor can Charlie or Marc Hamburg, our CFO, come up with one,” Buffett wrote in 2012.

But Marmon has been struggling in the last few years. Berkshire does not disclose its individual profits anymore, but does say in its latest annual report that Marmon’s pre-tax earnings decreased 5.6% in 2018 from 2017 despite a 5.5% increase in revenues to $8.2 billion. Marmon’s earnings also declined in 2017 by 3.5% from 2016, despite a revenue increase of $305 million, or 4.1% this years annual report disclosed.

That’s not what Berkshire reported in its 2017 annual report, when it said Marmon’s revenues increased by $349 million, or 7%, in 2017 versus 2016 and combined pre-tax earnings for Marmon, and International Metalworking Companies increased in 2017 compared to 2016, “due to a combination of increased sales, increased manufacturing efficiencies, the effects of business acquisitions and ongoing expense control efforts.”

Via filing:

/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 23, 2019
We have served as the Company’s auditor since 1985.

I’ve written a lot more about Berkshire Hathaway over the years at Forbes and other publications.  There’s even an e-book about the Sokol scandal!

The Gnome of Nebraska: Warren Buffett, Berkshire Hathaway, and Self-Dealing

April 4, 2011 – Warren Buffett’s Berkshire Hathaway is rarely subjected to the scrutiny almost every other public company endures. The media, with a straight face and very little of their storied balanced reporting, refers to Buffett routinely as a “sage” and an “oracle.”

McKenna Covers The Berkshire Hathaway Annual Meeting

May 3, 2011 – There are many ways journalists, investors, and Warren Buffett himself refer to the Berkshire Hathaway Annual Meeting, held in Omaha, Nebraska. These short-cuts and sobriquets add a larger-than-life aspect to what is typically, for almost any other public company, a rather perfunctory affair. Barring any significant controversy, expected or unexpected, no one that doesn’t absolutely have to show up at an annual meeting usually makes the trip.

The Berkshire Hathaway Corporate Governance Performance

Sep 2, 2011 – His latest stunt, ostensibly meant to save Bank of America while closing a savvy deal for Berkshire Hathaway, garnered laudatory headlines.

James McRitchie wrote about the above article:

McKenna’s Insights into Berkshire Hathaway

September 21, 2011 ,

Jeff Bezos has bigger problems than the Queens pull-out and criticism of Amazon’s taxes. He may want to wipe that smug look off his face.  Photo from Forbes. 

Amazon backed out of its selection of Queens, NY as a location for a new headquarters this week.  It was a big story, revolving around new Queens/Bronx Congresswoman Alexandria Ocasio-Cortez for some strange reason.

But I was not focused on that story, although I have an opinion on it that I share with Professor Luigi Zingales of The Stigler Center at the University of Chicago Booth School of Business.

Corporate subsidies are a negative-sum game. They foster crony capitalism, hurt productivity growth and inflict great harm on product market competition.

When companies compete for customers, they have to offer better products or lower prices. They are forced to innovate and improve efficiency in production. In economist lingo, product market competition is not a zero-sum game (my gains are equal to your losses), but a positive-sum game (my gains exceed your losses). By contrast, corporate competition for state subsidies is a zero-sum game. Amazon is not going to be more productive in New York than in New Jersey –it will only pay fewer taxes. If companies are successful in pitting one state against another, they will end up paying no state taxes. As a result, the economy will not be one iota more efficient, and the rest of us will end up paying more taxes to make up for the revenue shortfall. 

Competition for subsidies also fosters crony capitalism and hurts productivity growth. It fosters crony capitalism because it favors companies that are well-connected, rather than companies that are more efficient.      

I was focused on Sen. Bernie Sanders’ and Rep. Alexandria Ocasio Cortez’s campaign against Amazon for “paying $0 federal taxes.” Unfortunately this trope was picked up by all kinds of outlets and repeated verbatim with no one looking into whether or not it was actually correct.

It was not entirely correct.

Amazon riled up the left for not paying federal taxes — and it’s in a position to offset future profits, too

Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez slammed Amazon for getting a federal tax refund despite booking billions in profit the last two years.

A close look at Amazon’s finances shows the Vermont independent and Bronx Democrat will have more to get upset about, because the internet giant has billions of dollars in various credits it could apply to offset future taxes as well.

As of Dec. 31, Amazon had federal operating loss carryforwards of $627 million, foreign balances of $7.8 billion, and state balances of $919 million.

Net operating loss carryforwards are created when a company’s deductions for the year are more than its income. Companies can use a federal tax loss carryforward by deducting it from their income in another year or years.

If not utilized, a portion of the federal, foreign, and state net operating loss carryforwards will begin to expire — some as early as the end of this year — which means you can expect to see Amazon report at least enough net income in 2019 to take advantage of the foreign and state net operating loss carryforwards rather than allow them to expire unused.

 

Using $11.2 as profit number is also disingenuous. $11.2 billion is Amazon’s pre-tax net income. They made a provision for income taxes of $1.2 billion reducing their net profit number for reporting purposes to $10.0 billion and paid out $1.2 billion in cash for taxes in 2018.

— Francine McKenna (@retheauditors) February 17, 2019

 

I called this move before:

Short the hype: Amazon reports $391M profit. ~enough to soak up $443 in federal tax credits they reported in 3Q 10Q.

— Francine McKenna (@retheauditors) July 24, 2015

I wrote this in 2013.

Amazon Minimizes Profits Because CEO Jeff Bezos Hates Paying Taxes

Amazon CEO Jeff Bezos claims the company eschews profits so “free cash flow” can drive growth. Investors can’t see what cash is spent on, but do see a volatile stock price and no dividends. Bezos’ actual strategy is much more mundane: skim the cream and leave nothing for the tax man.

Technology companies often say profits aren’t the only thing. Focus on growth, especially of a company’s “free cash flow”, and earnings will eventually follow.

Recently Benedict Evans, of VC firm Andreessen Horowitz, suggested that it’s not as important whether consistently profit-poor Amazon and its CEO Jeff Bezos can “capture the future” but instead, “How long are you willing to wait?”

Evans says Amazon, the granddaddy of growth and market share over short-term profits, is brilliant for putting every last bit of earnings back into its business. Evans thinks “someone at Amazon has the job of making sure that each quarter, this nets out to as close to zero as possible, at least as far as net income goes.” And Evans doesn’t seem to see any problem with someone doing that.

I agree with Evans’ conclusion. There are few other ways to achieve consistently equal revenue and expense lines than by hands-on management of the results. CEO Jeff Bezos wants Amazon to be the biggest and best retail organization in the world. But I believe Bezos and his team massage the numbers each quarter to minimize profit for a bigger reason.

Amazon reports little or no profit because Jeff Bezos hates paying taxes, on his own income and Amazon’s.

 Amazon is audited by Ernst & Young.  Amazon is EY partner David Cyril Heselton’s only lead assignment per PCAOB Form AP and he is EY’s Global Client Service Partner and Seattle Office Assurance Leader. 

Such boldface-name investors as Mexican billionaire Carlos Slim; Betsy DeVos, now secretary of education [and married into the Amway family]; Oracle founder Larry Ellison; the Walton family of Walmart fame, who invested $150 million in Theranos; Greek shipping heir Andreas Dracopoulos; and members of South Africa’s Oppenheimer family, which controlled the diamond company De Beers Group, lost their entire investments.

These investors did not believe that an audit provided useful information when they made personal multi-million dollar investments despite most also being majority owners and chairs or CEOs of public companies that are mandated by stock exchange listings and, in the US, SEC rules to hire an external audit firm and pay for an audit according to Generally Accepted Auditing Standards that is conducted by firms registered with the PCAOB, the audit regulator.

The Theranos investors decided that an audit wasn’t worth asking for, even if the cost of this laissez-faire attitude was some “immaterial to them” fraud losses.

This week, after attending the American Accounting Association Audit Mid-Year conference in Nashville, I came back with tons of academic research I can write about at MarketWatch.

One set of researchers is keenly focused on issues related to audits and earnings releases, mostly because auditors are not required to audit earnings releases and, yet, earnings releases are so influential to investors’ activity and the market’s reaction.

From the Standing Advisory Group Meeting, June 21-22, 2004, Potential Project – Auditor’s Responsibility for Communications to Investors Containing Financial Information

Existing standards address an auditor’s responsibility for interim financial statements included in an issuer’s quarterly report filed on Form 10-Q or Form 10- QSB. Consistent with SEC requirements for timely interim reviews of financial information, the standards require the auditor to perform certain limited review procedures in connection with the quarterly statements. Neither the auditing standards nor the SEC requires the auditor to issue a written report on a review of interim financial information. However, the SEC requires that a written review report be filed with the Form 10-Q or Form 10-QSB if, in any filing, the issuer states that the interim financial information has been reviewed by an independent public accountant. (To be clear, the SEC requires that the auditor perform a timely interim review. By filing a Form 10-Q, the issuer implicitly asserts that the auditor’s required review was complete at the time of filing. However, the SEC does not require the auditor to, and most auditors do not, issue a review report at the conclusion of every review.)< However, existing auditing standards do not address an auditor's responsibility for financial information provided by an issuer in other types of investor communications, such as in a Form 8-K. In most cases, an auditor is not associated with such information; thus, having no responsibility for it is appropriate.< In other cases, however, even though an auditor is not directly associated with such information, he or she often is indirectly associated with it, particularly when an issuer makes its earnings release on a Form 8-K. Existing auditing standards do not address the auditor’s involvement in an issuer’s earnings releases. However, as a practical matter, most auditors are involved to some extent with quarterly earnings releases. This and other practice issues have led to questions about whether an auditor should have some responsibility for this type of financial information and whether he or she should be required to report on that information in some way.

I wrote about a new study from Assistant Professor Joseph Schroder and his colleagues at Indiana University, Assistant Professor Lori Shefchik Bhaskar and Professor Patrick Hopkins, in MarketWatch this week that says investors would rather have any information now even if the audit is only 80% complete:

Many of the annual earnings results companies are releasing will arrive without an auditors’ signature, and a study suggests that could be a problem.

A majority of companies announce annual earnings before auditors sign off on the numbers, but new research suggests the practice increases pressure on auditors to stick to the announced numbers rather than suggesting any final corrections or adjustments.

Approximately 70% of U.S. public companies announce annual earnings prior to the completion of an annual audit, by about 16 days on average. The practice has exploded in the past 15 years: Prior to 2004, approximately 75% of annual earnings announcements were released on or after the audit report date, but the Sarbanes-Oxley Act of 2002 added additional audit requirements related to internal control audits and audit workpaper documentation that resulted in audits taking 16 days longer to complete, on average, according to other research published in 2010.

What is the point of the audit if the market moves on unaudited information every quarter and even at year end, and auditors feel pressure not to make adjustments once companies release unaudited results, typically crowded with non-GAAP metrics that are also unaudited?

Would investors still pay for an audit if it weren’t legally mandated? Are regulators and exchanges perpetuating a government-mandated oligopolistic exclusive franchise for the Big 4 and a few additional firms that produces information investors now ignore?

Eliminating the audit mandate altogether is an idea that has been floated as the ultimate solution to the problems that plague the profession.

Turner argues that, for the system to work and investors to get the information they’ve paid for, major changes must be made. His first suggestion: provisions of the Securities Act of 1933 and the Securities Act of 1934 should be amended to remove the requirement that companies be audited. The audit firms are a “subsidized industry, like the credit rating agencies,” Turner told me, and companies are required to pay for “audits no matter the quality.” Instead, he recommends that every three to five years, investors vote on whether they want an audit. Turner says that would require auditors to “justify their existence to investors,” and this could “alter the behavior of auditors, as they would now be beholden to investors.”

Theranos was a wolf at the door, looking for pigs, that the accounting profession is, for now, ignoring.

Given that most investors seem to be just fine with buying and selling trillions of private and public company shares based on unaudited earnings information filled with unaudited non-GAAP metrics, is it only a matter of time before the wolf —complete relief from all audit-related regulatory burden and expense — blows the whole house down?

My editors asked me which stories I thought should be put in the hopper for their review and, of course, I mentioned the three topics that I’ve been following closely and that climaxed this year. They have been chronicled quite extensively for you on this blog but here are the links to the original stories on MarketWatch.

 Theranos

Symantec

Symantec’s shares dove 33.1% May 11, 2018 after the company revealed it had started an investigation, and said the probe related to “the company’s public disclosures including commentary on historical financial results, its reporting of certain non-GAAP measures including those that could impact executive compensation programs, certain forward-looking statements, stock trading plans and retaliation.”

What’s it all about? Symantec was adding back millions in “ghost revenue” — deferred revenue that accounting standards force them to write off after an acquisition — when calculating executive bonuses. Acquiring companies often assign a fair value to the deferred revenue added to their books when purchasing another company that are less than the amount reported on the acquired companies’ balance. Those write-downs are permanent, not timing differences, and are called “deferred revenue purchase accounting adjustments.” They are required by Generally Accepted Accounting Principles or GAAP.

The write-downs become “ghost revenues” for the acquiring company. Symantec and others are adding back the “ghost revenue” to GAAP revenue numbers to create adjusted revenue metrics that are reported to investors in the earnings release and via the conference call.

I originally wrote about the issue in November 2017, and mentioned other companies doing the same thing.

Companies including Symantec are using ‘ghost revenue’ to calculate bonuses

A shareholder class action lawsuit has been filed as a result of my article and the whistleblowers cliams that alleges Symantec manipulated quarterly financial results to produce big payouts for top executives. The names Symantec along with CEO Greg Clark, CFO Nick Noviello and former accounting head Mark Garfield as defendants. Previously Blue Coat’s CEO, Clark, became CEO of Symantec after it bought Blue Coat in 2016. The suit alleges that Clark and Noviello brought “Blue Coat’s unethical practices and ‘toxic culture’ with them to Symantec.”

IGC

India Globalization Capital’s chief executive boasted in February that his was the only cannabis company that was using blockchain technology — combining two of the hottest investment trends.

The CEO, Ram Mukunda, went on to say that “2018 is a very exciting year for us with a lot of milestones investors can watch for.”

Indeed, for investors, it has been quite a ride. Shares of IGC IGCC, +15.89% surged 35-fold, to $13 from 37 cents between Aug. 13 and Oct. 2, as the company promised cannabis-based treatments for conditions including Alzheimer’s, Parkinson’s, eating disorders and even epilepsy in cats and dogs.

But after MarketWatch reported last month on potential IGC warning flags, its shares plunged more than 80%.

Other details have emerged that raise questions about the company. Its chief scientific officer has been accused of falsifying data in scientific papers. Another employee, who is named as a co-inventor of a cannabis-based pain treatment in an IGC patent filing, was reprimanded and fined by the West Virginia Board of Medicine last year for failing to disclose that he pleaded guilty to felony tax fraud in 2012, according to state filings.

And while IGC says on its website that it is rigorously studying cannabis, the company has spent only $137,000 in fiscal 2018 on research and development, according to its annual report. It has spent $274,000 in the first two quarters of fiscal 2019, according to another securities filing. In comparison, the average sum for a Phase 2 clinical trial of a treatment for pain is $17 million, according to CenterPoint, which advises on clinical trials.

Trading in the shares of IGC was halted on Oct 29. The NYSE American exchange said it would delist IGC’s stock. IGC said that it “strongly disagrees” with the NYSE decision and is now seeking a listing on “an exchange that embraces our innovation.”

On October 29 former KPMG partner Thomas Whittle,KPMG’s then-national partner-in-charge for inspections,  changed his plea, to guilty from not guilty on all five counts in the case of the alleged use of stolen confidential regulator information to subvert KPMG’s regulatory inspection process. Whittle is also now cooperating with prosecutors. Here’s what the judge told Whittle, based on the transcript to his elocution ordered from the court, about the potential for any reduced sentence based on any cooperation with prosecutors.

THE COURT: Have you entered into a plea agreement with the government?

THE DEFENDANT: Yes, I have, your Honor.

THE COURT: I have a copy of a plea agreement, it appears to be signed. Did you have a chance to sign this today?

THE DEFENDANT: Yes, I did, your Honor.

THE COURT: Before you signed it did you read it and discuss it with your lawyer?

THE DEFENDANT: Yes, I did, your Honor.

THE COURT: Do you feel you understand everything that’s in that agreement?

THE DEFENDANT: I do.

THE COURT: Okay.

With respect to any assistance or cooperation I want to explain to you that it is up to the government to decide whether any cooperation or assistance has been helpful enough or productive enough for it to make a motion providing for a sentence below the guideline range of what would ordinarily be the guideline range or benchmark of a sentence when the Court considers a sentence, and even if the government does make such a motion, a 5K motion, it is up to me to decide whether to give any credit and what amount of credit is good for assistance or cooperation.

Do you understand that?

THE DEFENDANT: Yes, I do, your Honor.

Earlier in October Cynthia Holder also pleaded guilty to conspiracy to defraud the United States and to wire fraud. Brian Sweet was the first to plead guilty and cooperate with prosecutors, an action that supported many of the most colorful anecdotes in the original complaints.

That leaves David Middendorf, KPMG’s then-national managing partner for audit quality and professional practice, and David Britt, KPMG’s banking and capital markets group co-leader to defend themselves.

Middendorf, Britt and Jeffrey Wada, who never made it to KPMG from the PCAOB, are set to go to trial starting February 11.

Whittle’s guilty plea, based on the court transcript, leaves no question what he is admitting to and it implicates, in my opinion, the rest of the defendants, additional partners at KPMG and the firm itself.

THE COURT: Would you please tell me in your own words what you did that makes you believe that you are guilty of the charges in the indictment? And if would you like to read it, that’s fine, just please make sure you read it slowly and clearly so that I can hear it and that the court reporter can take it down.

THE DEFENDANT: Between approximately May 2015 and February 2017, I, along with other partners and employees at KPMG, including David Middendorf, David Britt, Brian Sweet, and Cynthia Holder, agreed to share and use confidential information from the PCAOB that we were not entitled to have.

We did so in order to try to improve the results of PCAOB inspections of KPMG audits. I knew that the results of those inspections were reported to the SEC. I also knew that the SEC used PCAOB inspection results to perform its governmental functions including overseeing and evaluating the performance of public companies and their auditors such as KPMG.

In connection with these actions, I and others used e-mail and telephones across state lines and did so on specific occasions in 2015, 2026, and 2017. Some of the conduct I described took place in Manhattan. I knew my actions were wrong at the time I took them.

Whittle faces a maximum total of 85 years in jail for the guilty plea for the five charges. He will be sentenced next September, after the trial and sentencing of any remaining defendants is completed and his cooperation is completed.

If you have been following the case against Paul Manafort brought by special prosecutor Robert Mueller case, you may have seen that he did something that I understand to be unprecedented but interesting in light of what has happened in the KPMG case. This PBS interview with former federal prosecutor Renato Mariotti says that prosecutors for special counsel Robert Mueller have accused Manafort of breaking his plea agreement and lying both to them and to the FBI “on a variety of subject matters.”

• • Judy Woodruff:

    President Trump’s former campaign chairman is in legal hot water again.

    In a court filing late Monday, prosecutors for special counsel Robert Mueller accused Paul Manafort of lying to them and to the FBI on a variety of subject matters. Manafort said in that same filing that he has provided truthful information. He was previously convicted on a number of criminal charges brought by Mueller. And, in September, he pleaded guilty to other crimes.

    In doing so, Manafort also agreed to cooperate with the special counsel’s team.

    Here now to help us digest this newest accusation is Renato Mariotti. He worked previously as a federal prosecutor focusing on white-collar crimes. He is now a defense attorney in private practice.

    Renato Mariotti, welcome back to the “NewsHour.”

    So, tell us, how unusual is this for a special counsel in a situation like this to have worked out a plea deal, but then to turn around and say, the defendant, the person we’re working with, has lied, and we think the plea deal is worthless now?

• Renato Mariotti:

  It is extremely unusual, Judy.

  In my almost decade as a former federal prosecutor, when I was in that job, I had never gone to the step of having a cooperation deal fall apart and having to go to the judge and make a statement like this.

  And I will tell you, I worked in a very large office in Chicago with well over 100 other prosecutors. And I don’t recall that ever happening during the almost decade that I was doing it. So it’s very, very unusual situation, because, typically, coordinators want to be on the government’s team. That’s why they sign the deal.

  There are huge incentives for them to be truthful, to tell the government everything that they know. That is what they are instructed by the prosecutors and by the FBI agents.

  And, on the other side, the prosecutors are trying to work with the cooperator. They want their testimony. They want their information. So, typically, there is not this sort of falling apart to this level. It’s something that is really hard to get your head around.

A legal expert close to the KPMG case told me that the three legacy KPMG partners, while not having a formal written “joint defense agreement” did have an informal “common interests” cooperative agreement that allowed them to coordinate their defense, an effort which is now being paid for by KPMG. Whittle’s guilty plea would ordinarily mean that his attorney’s courtesy conversations with the other legacy KPMG attorneys would cease.

Certainly Whittle should also avoid following Manafort’s example of lying to prosecutors now or sharing his conversations with prosecutors with his former KPMG colleagues or their lawyers or he will, at age 55, end up serving the rest of his useful life in prison.

Update April 8, 2018:

What’s happening now?

No word from SEC on sanctions against KPMG or any other professionals, including the head of the KPMG audit practice who was also fired, Scott Marcello.

The KPMG and PCAOB professionals who were criminally charged appeared in court last week. KPMG is paying the legal fees for three of them.

You may remember KPMG was sued when it dropped payment for legal fees for KPMG partners accused in the 2005 tax fraud. Indemnification is in their contract!

— Francine McKenna (@retheauditors) April 6, 2018

Some of you may recall that KPMG learned a hard lesson when it pulled support for legal fees from several of its partners during its 2005 tax fraud scandal.

The judge eventually dismissed charges against 13 defendants in the KPMG tax fraud case because their Constitutional rights had been violated by KPMG withdrawing payment for their defense. https://t.co/oUwh9DQHza

— Francine McKenna (@retheauditors) April 6, 2018

***************************

On January 22, the SEC and Department of Justice announced civil and criminal charges against five former KPMG executives —two of whom had previously been working for the PCAOB—and one more former PCAOB professional who didn’t make it to the promised land before the jig was up.

About a week after the initial story hit last April, I wrote, “KPMG Takes Its Turn With a Big 4 -Sized Scandal.”

At that time I rounded up the coverage including highlighting the initial scoop that broke the story at the Wall Street Journal.  I also wrote that it was quite odd that KPMG was so sure that the whole mess had not affected the integrity of any audits.

KPMG also says, “This issue does not impact any of the firm’s audit opinions or any client’s financial statements.”

I find that odd,  unless all of the terminated partners were leadership/national office partners, currently not assigned to lead engagements.  The two names revealed so far—Scott Marcello, the head of the United States audit practice and David Middendorf head of of the national office— do not appear to have been assigned as lead partners on any audits for 2016, based on the new PCAOB engagement partner database.

If that is the case, these non-client facing partners could still impact audit opinions or financial statements because they, perhaps, used the inspection information not directly for their own personal benefit but to warn or advise engagement teams to backdate workpapers, clean up files or otherwise cover up audit failures before the PCAOB caught them.The PCAOB says that when a firm does not provide sufficient evidence to support its audit opinion, then the opinion should not have been issued at all.

That would be an audit failure in my book.

The original WSJ article did not speculate about the civil, criminal or professional penalties that could be imposed by the SEC, PCAOB or the Department of Justice. About a week later I wrote here, “More on KPMG and the Precedents for Possible Punishment,” speculating on the possible charges and making the case for criminal charges.

I thought the KPMG case was eerily similar to another recent one. That case resulted in a trial for the perpetrator and significant fines for the firm that allowed stolen regulatory information to be used inappropriately by its employees.

If you are surprised by my mention of potential criminal penalties you should not be. This case mirrors the 2014 case where a junior Federal Reserve Bank of New York employee leaked “a regulatory gold mine,” according to a New York Times article, to a junior Goldman employee who was a former New York Fed employee himself.

What are they teaching—or not teaching— in the universities these days?

According to a NY Times report, the Fed said the confidential information stolen included reports of bank examinations and other “confidential reports prepared by banking regulators.” Goldman Sachs, the Fed said, illegally used the information in presentations to current and prospective clients “in an effort to solicit business.”

Goldman Sachs, like KPMG, not the New York Fed, or the PCAOB in this case, uncovered the leak. Goldman fired the recipient of the leaked info and an executive who supervised him who they said had “failed to properly escalate” the problem. The New York Fed fired the leaker employee and notified law enforcement agencies.

Rohit Bansal, the Goldman Sachs employee who prosecutors say instigated the theft by his friend Jason Gross, the NY Fed employee, pleaded guilty to a misdemeanor for obtaining about 35 documents on about 20 occasions from his partner in crime. Bansal escaped a jail sentence but was sentenced to two years probation, 300 hours of community service and a $5,000 fine. Gross pleaded guilty to a misdemeanor and was sentenced to a year’s probation.

Goldman paid a $50 million penalty to New York State regulators because its “management failed to effectively supervise” and paid another $36.3 million to the Federal Reserve Board, the central bank authority, because it is “illegal to use or disclose confidential supervisory information without prior approval.”

Joseph Jiampietro, the former managing director at Goldman Sachs’ investment banking division and Bansal’s supervisor, sued Goldman Sachs for failing to pay at least $350,000 in legal fees he incurred defending himself.

My colleagues at the WSJ followed up in April with a profile of “straight out of central casting,” and “the exact opposite of flashy,” Scott Marcello, the head of KPMG’s US audit practice. He was fired in April along with his deputy David Middendorf, three more partners, and a staff person, according to a statement at the time from KPMG.

KPMG said in the statement, “The firm learned through the investigation that the six KPMG individuals either had improper advance warnings of engagements to be inspected by the PCAOB, or were aware that others had received such advance warnings and had failed to properly report the situation in a timely manner.”

Six means Marcello, too. However, when the SEC and DOJ charges were made public on January 22, Marcello’s name was nowhere to be found. There was no mention of any sanctions or charges against KPMG the firm, either.

KPMG clients whose audits were reviewed and revised by KPMG partners based on use of the stolen inspection data —the DOJ said at least seven banks were affected —were not named, despite some pretty detailed descriptions of them and how the integrity of their audits and the regulatory process had allegedly been undermined.

The Wall Street Journal’s Dave Michaels asked the SEC on a press call that day about Marcello. Another reporter asked about charges against KPMG.  I asked about inherent contradiction of alleging KPMG’s audit leadership, its process and several audits were severely compromised but yet the companies and investors could still trust KPMG and their audit opinions.

But the SEC lead enforcement attorney, Steve Peikin, would only say that the SEC’s Chief Accountant had given his blessing on the audits and that the investigation was ongoing so additional individuals or entities could still be charged.

We did find out the rationale for the criminal charges from the DOJ complaint—a conspiracy—and the names of the rest of those fired from KPMG and the name of another person who had been fired from the PCAOB but had never made it to a job at KPMG in return for allegedly selling secrets.

I wrote for MarketWatch on January 23 that the, “KPMG indictment suggests many who weren’t charged knew regulator data was stolen.”

That is, the SEC and DOJ complaints implied a whole lot more folks at KPMG, “either had improper advance warnings of engagements to be inspected by the PCAOB, or were aware that others had received such advance warnings and had failed to properly report the situation,” as KPMG described the problem in its April statement.

The alleged scheme required a joint effort by the named defendants but also the complicity of others in the firm, including partners referred to in the DOJ complaint as Partner-1, Partner-2, Partner-3 and Partner-4 who were explicitly told by Sweet that their audits would be inspected before that formal announcement came from the PCAOB and used that information to fix audits ahead of those inspections, including audits at seven KPMG bank clients.

In addition to sharing the 2015 list of PCAOB inspections at KPMG with Middendorf, Whittle and Britt, Sweet also told at least one KPMG engagement partner who had not yet received notification from the PCAOB that the partner’s engagement would be subject to inspection, according to the Justice Department. He also showed a 2015 PCAOB inspection planning spreadsheet to additional KPMG partners, using it to explain why the PCAOB had selected certain audits for inspection.

On Feb. 3, 2017, at Whittle’s direction, Sweet notified several additional partners that their engagements would be inspected, the Justice Department said.

It wasn’t until early 2017 that another KPMG professional, Partner-5, reported the scheme to his superiors and then to the firm’s general counsel, who reported the misconduct to the regulators, according to the DOJ.

KPMG had been right, back in April, that no regulator would be willing to add stress to the financial system by suggesting there may be criminal or other serious charges against KPMG or would likely do anything to shake clients’ confidence or investors’ confidence in its audits just because the top tier of its audit practice were fired and now indicted for sharing confidential information that “potentially undermined the integrity of the regulatory process.”

The SEC’s Chairman Jay Clayton immediately put out a statement meant to assuage any panicked dropping of KPMG by clients or concern in the market about tainted or late audits.

Based on discussions with the SEC staff, I do not believe that today’s actions against these six individuals will adversely affect the ability of SEC registrants to continue to use audit reports issued by KPMG in filings with the Commission or for investors to rely upon those required reports. I do not expect that these actions will adversely affect the orderly flow of financial information to investors and the U.S. capital markets, including the filing of audited financial statements with the Commission.

In my story in MarketWatch, Lynn Turner, a former SEC Chief Accountant, said he’s skeptical.

Former SEC Chief Accountant Lynn Turner is not convinced KPMG’s audits should still be relied upon. “This episode raises a serious question about the culture of the KPMG firm.  Under the circumstances, how can the SEC expect investors to trust KPMG’s audits?” asked Turner.

“I’m not convinced the SEC has done enough to ascertain that these KPMG audits, especially the seven bank audits, are credible and will be credible in the future,” Turner told MarketWatch in an interview.

Based on the details about one client provided in the DOJ indictment, I identified one of the clients with 99.999999% certainty.  Why not 100% certainty?  Because neither KPMG nor the client would respond to my request to either confirm or tell me no, definitively.

Why Ambac was one of the KPMG clients that got a second look after inspection tip-off

Could that be because KPMG hasn’t told the affected clients and their audit committees why their audits were reviewed and, in some cases, revised after the allowed documentation period or even after the 10K was filed? In the Ambac case KPMG forced an amended 10K to be filed because it decided to withdraw its ICFR opinion as a result, I wrote, of the stolen second-look. I also suspect there are many more partners who used the tip-offs to clean up their audits and are still employed and still signing those audits.

Then, on Friday June 15, while reviewing the court docket for 1:18-cr-00036 USA v. Middendorf, et al, I found an unredacted document, filed publicly by two different defense attorneys, that names the KPMG clients, and responsible partners, along with the secret consulting firm that aided KPMG’s efforts that are referred to in the criminal indictment made public on January 22 of five former KPMG executives and one former regulator for allegedly taking advantage of advance notice of regulator inspections.

Read more about that here:  New Stories about the KPMG-PCAOB Scandal