• BDO Shouldn’t Have Blown This Audit

    By | September 9, 2015

    This SEC Accounting and Auditing Enforcement Order against BDO will be the best thing you read today. That is, if you enjoy reading about audit firms issuing an unqualified opinion when they absolutely had no business issuing an unqualified opinion. That is the case with the story of BDO's 2009 audit of General Employment Enterprises, Inc. (aka "GEE" which is perfect in a "GEE WILLIKERS, they really screwed this up" kind of way). Settle in, this is a doozy.

    Back in 2009, BDO was auditing GEE's books and something was kinda funny with the company's cash:

    During BDO’s 2009 audit of GEE’s financial statements for its fiscal year ended September 30, 2009, BDO learned that $2.3 million (comprising approximately half of GEE’s assets and substantially all of its cash) was unaccounted for when GEE’s chief financial officer (the “GEE CFO”) advised BDO, in November 2009, that (a) GEE’s purported 90-day non-renewable certificate of deposit (“CD”) at a New York bank had not been repaid by the bank after the stated maturity date in mid-October, (b) GEE was missing documentation supporting the CD, and (c) a bank employee had told GEE’s CFO that the bank had no record of a CD.

    Missing cash! That's fun. It's this sort of scenario that will catch an auditor's attention, who then, in turn, will get the attention of more senior auditors, who then get the attention of even more senior auditors, who then take an action that, to use relevant parlance, appears reasonable: 

    BDO’s engagement and concurring partners consulted with senior BDO partners, including the assigned BDO regional technical director, BDO’s national director of accounting, and BDO’s national SEC practice director. The consultation resulted in BDO issuing a five-page letter, dated December 21, 2009, in which BDO advised GEE of its belief that BDO had not been provided sufficient audit evidence to formally conclude on the matter and demanded that GEE’s audit committee commission a full investigation of the matter by an independent firm.

    Now, if you believe auditors are protectors of the realm vis-à-vis financial reporting, this is where the showdown occurs and auditors' stewardship of GAAP conquers all. Of course if you believe this, you are kind of naive and silly in a way that grown men who wear caps to a sit-down restaurant are silly. Here's what really happened next:

    BDO received conflicting information from various sources as to the existence of the CD and never received rational explanations as to why the $2.3 million went missing and why an equivalent amount was later received under suspect circumstances. Only days later, however, after GEE’s chief executive officer resigned, BDO agreed to withdraw its demand for an independent investigation and issued an audit report containing an unqualified opinion on GEE’s financial statements. Those financial statements, included in GEE’s Form 10-K filed on January 8, 2010, represented that GEE had a $2.3 million cash equivalent in the form of CD as of September 30, 2009, and had entered into an assignment agreement to sell the CD for full face value to an unrelated party.

    How do you go from from "conflicting information from various sources as to the existence of the CD" to an audit report containing an unqualified opinion? It's pretty hilarious and interesting, actually.

    Among the BDO partners closest to this mess were Sean Henaghan (engagement partner), John Rainis (concurring partner), Leland Graul (national director of accounting and risk management partner), James Gerace (regional technical director) and Wendy Hambleton (national SEC practice director). And when you read the Background section of the order — which I strongly recommend — it is the Kafkaesque nightmare that you would imagine it would be. It was so bad that Sean Henaghan sent an email that contained the following:

    [G]iven the highly unusual nature of this issue and the significant amount of time it is taking to recover the funds, it is critical that we understand both the nature of the administrative error as well as the underlying cause of this error…. As I have never encountered such an issue with a bank or CD and any reasonable person (including the PCAOB or SEC) would certainly question such an issue, I need to be in a position to fully explain exactly what occurred… 

    He goes on to list the items BDO needed to "gain comfort" over the availability of the $2.3 million. Later, when BDO finally demanded the independent investigation, Leland Graul and Wendy Hambleton had this back and forth:

    Hambleton replied to Graul’s email, asking whether they “should go into detail of the issues in the letter.” Graul responded to Hambleton: “Short of saying we think there is fraud, the point is we have been looking for support for months and don’t have anything satisfactory to support a final opinion. If we give a list of questions, we’ll get answers to those questions and still not know what is really going on. An independent investigation is the only way to get to the bottom of this. The list doesn’t look like it would get us there.”

    They suspected it! They suspected fraud! In fact, you get the sense that they knew there was fraud! This goes on and on; I'm really not doing it justice, but in order to move things along and give you an idea of how ridiculous this got: in this time, GEE appointed a new CEO (mentioned above) and BDO got a "senior NY Partner" the "Midwest Leader" and their General Counsel involved. I have to add this, too, because it's my favorite part:

    Henaghan sent Rainis, Graul, Gerace, Hambleton, the NY Partner, the BDO Midwest Leader, and BDO’s general counsel an email on December 24, 2009, asking for their availability for a call [Ed. note: When? On Christmas Day?!] and stating he was drafting a memo summarizing current facts. Graul responded: “Unless there is something new that hasn’t been discussed in the last few calls, what’s the purpose?” The NY Partner replied: “The purpose is to try to salvage an account where they made [] changes in the management because of the alleged wrongdoing.” Graul responded: “Did they change the guy that can’t support the $2 million that supposedly was put into company? What about the two audit committee members that stalled the investigation and the lawyer that wouldn’t let us participate in a board meeting to preserve privilege. There’s something funny going on here.” The NY Partner replied that he had no disagreement with Graul on the last point.

    Again, everyone knows this is fraud. They're not even dancing around it. And yet, what ultimately gave them comfort was an 8-K that discussed the CD that didn't exist and all the fishy circumstances around it. Here's a portion of that 8-K:

    In July 2009, the Registrant purchased a $2.3 million certificate of deposit (“CD”) at a New York bank. When the CD matured in October 2009, the bank did not timely credit the proceeds of the CD to the Registrant’s account. Although the Registrant has made a formal inquiry of the bank, to date the Company has not received an adequate explanation for the bank’s non-performance relating to the CD. In December 2009, the Registrant was reimbursed in full through a nonrecourse assignment of the CD for face value to an unrelated party, who has other business interests with the bank. The purchaser of the CD is neither an employee nor a director of the Registrant. 

    Once that was all settled, the 10-K was finally issued in early January 2010. All was good for about 2 months and then BDO got some unfortunate news:

    BDO learned of a criminal complaint against the New York bank president. The criminal complaint alleged, in connection with a wide-ranging conspiracy involving, among others, GEE’s then-chief executive officer and GEE’s then-majority shareholder and chairman of the board, that (i) GEE’s purported $2.3 million CD never existed, (ii) the bank president signed a false confirmation to BDO, (iii) GEE’s $2.3 million was used to attempt to conceal a loan default connected to the broader conspiracy, and (iv) the entities that transferred the $2.3 million back to GEE were related to the bank president’s co-conspirators, including GEE’s then-majority shareholder and chairman of the board.

    You might be able to argue that the BDO partners simply didn't have the confidence to call a fraud a fraud to "salvage an account," but the circumstances around GEE are so sketchy that it defies comprehension how BDO would issue an unqualified opinion.

    The firm settled the order for $2.1 million and agreed to a slew of "undertakings" including a thorough review of its quality control policies. All over a phony certificate of deposit. Yeesh.

    [SEC Order]

    • keepin_it_real

      Was the account really worth saving? The audit fees for a company that small has to be like $100k a year.

      • buthurt

        It’s money on the table. There’s no way those greedy partners will just leave it there.

        Also, fees were probly lowballed at like 50K

        • D’Angelo

          The 2012 proxy statement says BDO billed GEE audit fees of 90k and and audit related fees of 42k in 2010.

          • buthurt

            I stand corrected. Definitely operating below expectations this year…

        • Scharfinator

          You have to imagine they would have had some extenuating fees once they passed it as non qualifying.

      • The Horniest Partner

        They had to cash in the CD to pay the audit fees, right?

    • The Horniest Partner

      Would it have been cheaper for BDO to give the company the $2.3 million so there’s actual cash to audit and save the fine plus all the partner time noodling over this mysterious CD?

      • CharityB

        Yeah, but investing capital in a client may cause independence

        issues. As I’m typing this I realize that they probably don’t care about independence and are just kicking themselves for not thinking of your idea themselves…

        • The Horniest Partner

          consider it a gift, not an investment. BDO just needed a bag man to deliver the cabbage.

      • N.E.R.D.

        ..

      • GAAPGirl

        Audit Evidence = wire transfer from BDO. Cross reference. Sign off. Done.

    • N.E.R.D.

      Hey this was a cool article. Nice job.

      • Scharfinator

        Yeah I agree! We complain way too much and then don’t recognize these diamonds in the rough.

    • Embezzler

      Lol, newbs cant even audit cash.

    • MWCPA

      I enjoyed reading this. Multiple “oh, shit” moments. The back and forth on Christmas Eve is a real treat. Great find Caleb!

      I love Graul’s response. That man is taking none of this bullshit. Until he apparently did and they all signed off.

    • Artie Andersen 69

      BDO blows

      • P. Niss

        Yeah they do!

    • Big4Veteran

      This is the difference between Big 4 and the 2nd Tier. A Big 4 would never sweep fraud under the table for such low audit fees.

      • CharityB

        I’m honestly more shocked by the simplicity of the fraud. Usually when you hear about accounting fraud you think of something like Enron where you’re dealing with VIEs and estimates that are based heavily on management’s judgment.

        For this, it sounds like they just made up an investment to make their balance sheet look better. It wasn’t even a complicated investment like a derivative — it was a C.D., the kind of thing that your boring accountant relative might give a 12 year old for his birthday.

        They just put down a big number and dared BDO to call them out. If this had worked, next year they would have had “Trade accounts receivable Infinity Bazillion” and had the CFO pretend to be that customer by walking out of the room and returning with a fake mustache and a thick French accent.

      • The Horniest Partner

        Sweep under rug for $even figure audit fees tho?

        • keepin_it_real

          Of course. If you’re going to sign off on fraud, at least make it worth your while. A $even or even 8 figure account is worth saving.

      • liEYr

        Sheesh. Local firms are better than this. Even pathetic local firms.

        • D’Angelo

          I wouldn’t be so sure. My ex-firm issued some audit reports that the partner admitted would fail a peer review.

          • Jack

            Failing peer review doesn’t mean the financial statements are wrong. It means you didn’t comply with audit standards. Financials could be perfect.

            • Oh lord…this argument again.

            • Big4Veteran

              I’ve concluded that people who use this argument not only lack a conceptual understanding of auditing, but also struggle to grasp basic aspects of reason and common sense. You can’t have an intelligent conversation with these people on this subject.

              Based on the frequency I hear this argument, I’m left to conclude that this is something that gets regularly talked about within the big firms and has become doctrine over time (i.e. part of drinking the Kool-Aid).

              Furthermore, it makes me angry whenever I hear an accountant (possibly even a CPA) make this fucking stupid argument. I’ve invested a lot of time and money into my profession, and dumb fucks like this make our whole profession look like a bunch of amateur shitheads. How can you be a fucking auditor if you don’t even know what the basic purpose of auditing is?

            • “Based on the frequency I hear this argument, I’m left to conclude that this is something that gets regularly talked about within the big firms and has become doctrine over time (i.e. part of drinking the Kool-Aid).”

              I truly think it is. At least for me, my thoughts on our procedures became more and more critical as I came closer to leaving public accounting.

            • Big4Veteran

              I wouldn’t say this is something that comes from the top of the firm though. Partners are too smart to believe this shit, much less say it publicly. I think the argument originates among the dumb fuck audit staff on engagement teams (manager and below) and becomes the type of thing they commiserate about at happy hour or late at night a week before the filing deadline. Or when they’re getting an ass reaming about how shitty the firm did in its recent PCAOB inspections.

            • liEYr

              The “ass reaming” will continue until morale improves. We know morale will not improve. Thus, ass reaming to infinity and beyond!

            • Quixote’s BFF

              Right on Bro – Public Accounting sucks donkey dick

            • Big4Veteran

              “Failing peer review doesn’t mean the financial statements are wrong. It means you didn’t comply with audit standards. Financials could be perfect.”

              Every single statement here is factually true. But if you are an auditor, your job is to comply with the audit standards. If you didn’t comply with the audit standards, you failed to do your job. The purpose of a peer review is not to determine if the financials are perfect or not. The purpose is to determine if the auditors did their fucking job.

            • FormerBig4

              I don’t disagree, but the problem is that “didn’t comply with professional standards” is extremely subjective. For example, I think everyone would agree that the failure to have a fraud brainstorm in an audit would be a “didn’t comply with professional standards”. But a failure to adequately test a management estimate has a lot of grey in it. The auditor may have done enough work, in his opinion, to be comfortable that a material misstatement didn’t exist. Someone else might believe more work needs to be done while someone else might believe less work needs to be done.

              An auditor may have made a professional judgment that a reviewer disagrees with. Is that a “failure to comply with professional standards” and “not doing their fucking job” or is it smart people disagreeing on how far you have to take something? I remember one comment in a PCAOB report a few years ago that acknowledged that the “omitted procedure” couldn’t result in a material misstatement. One auditor may take the position that if there is no risk of material misstatement you are done. Obviously others disagree.

          • The Horniest Partner

            As long as it was not a “must select” type or a high hour engagement, very good chance nobody ever sees the shotty work

          • buthurt

            Lots of jobs would fail peer reviews. I know all of mine will.

    • hastalasagna

      Somehow I managed to never audit cash while in public accounting. I get the feeling that none of these partners have, either.

      • buthurt

        When you are having issues with the cash account, it’s an indication that other accounts are gonna be really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really, really fucked up

        • BDO Boob

          Cash is hard to count

          • buthurt

            Tell that to the SEC.

    • liEYr

      This is one of the most pathetic examples I have seen. Truly ridiculous. I suggest all of the partners should be permanently prohibited from auditing public entities. A sharp intern could have figured this out and slapped it down in a pin position. BDO. Big (and getting Bigger) Dumb ass Operation.

      • Auditor

        Those who know BDO … Know that BDO can’t audit cash!

        • liEYr

          These guys couldn’t find their ass in a field at high noon…..

          • BDO Boob

            I like asses and boobies but I’m mediocre at finding them.

      • BDO Boob

        Sharp interns don’t want to work at BDO. No sharp tools in the BDO shed, we’re all dull.

    • Auditor

      Well done, BDO …. Well done!! Keep up the great work!! Those who know BDO … Know BDO has a soft spot for fees. This is a proud day for BDO, Wendy, Lee, Jim, Sean, John, and Wayne Berson. This is incredible press for BDO and your brand!! You can’t buy this kind of press for a little over $2 million. With the incredible talent at BDO, you might have future opportunities to grab the spotlight. I’m looking forward to seeing you on CNBC and other media promoting your success!! Keep up your exceptional client service, and your incredible instinct for knowing fraudulent activity/auditor response, your ability to gather all necessary audit evidence, and your unquestioned due professional care. You might consider a new advertisement campaign around this kind of success!

    • TurtlyEnough

      “(ii) the bank president signed a false confirmation to BDO,”

      Well, they did have a confirm… Collusion is a bitch.

      Per LinkedIn it looks like the engagement partner didn’t get canned by BDO? I would think that should be included in the required “slew of undertakings”…

      • Caleb Newquist

        The scamps over at r/accounting made the same point. I personally don’t think any of the partners involved — save the NY Partner — could reasonably conclude that there wasn’t something sinister going on. They should’ve disclaimed, at the very least.

      • SteveR

        He just hasn’t been canned yet. When an investigation like this is underway, the firm won’t fire anyone, especially a partner, until it is resolved – even in situations where the investigation takes several years. The reason being, if the investigation is on-going, and the firm cans the partner, it would be viewed as admission of a wrong-doing. The firm will pull the partner from working on any engagements and essentially turn him into an administrative assistant – for instance, they may have put him in charge of AR collections and scheduling.

        • keepin_it_real

          There’s also less of an incentive for him to burn the house down and take everyone with him since he’s still being paid. Once the investigation is done and over with and penalties doled out, the firm can get rid of him. They cut him loose now and he airs all the dirty laundry.

    • Chipman69

      Even a firm as DYNAMIC as GT knows how to audit cash!!!! Everything else is a gray area, but cash is GT’S CHOSEN MARKET to penetrate using their INSTINCT FOR GROWTH and WHOLE SELVES!!!!

      • buthurt

        I sure hope this is how you document your workpapers.

    • McValue Meal Audit

      Great story, I can’t believe they issued a clean opinion.

    • Randy

      At least new partner Ryan M out of Georgia will be on quality control

    • CajunAuditorTeyonce

      Did Caleb use the expression ‘protectors of the realm?’ Was that a Game of Thrones reference? I approve.

    • Jasmine

      We need dramatic readings of these audit screw ups.