November 15, 2018

Report: Ambac Was One of the KPMG Clients That Got a Second Peek Thanks to Stolen PCAOB Info

kpmg china medical

Francine McKenna did some expert sleuthing and reports at MarketWatch that Ambac Financial Group was one of the unnamed issuers in the indictment of former KPMG employees and one former PCAOB inspector. There were enough clues to piece together that “Issuer-2” was Ambac, one of the companies that were allegedly subject to a re-review by KPMG partners at the behest of Brian Sweet, the former inspector turned partner who provided an advanced copy of the firm’s issuers to be inspected by the PCAOB.

[T]he Issuer-2 re-review identified a significant error in the way the 2015 audit had been performed. According to the indictment, KPMG had failed to obtain required information from one of Issuer-2’s third-party vendors concerning that vendor’s own internal controls. As a result, the KPMG partner responsible for this audit decided to withdraw KPMG’s previously issued opinion that was included in the company’s 10-K already filed with the SEC, according to the indictment

Just as a refresher, this is what the indictment, says what happened after KPMG pulled their report:

Shortly after the decision to withdraw its opinion with respect to Issuer-2, KPMG was formally notified by the PCAOB that Issuer-2 would be inspected.

[Thomas Whittle] directed Brian Sweet to attempt to convince the PCAOB team leader responsible for the inspection of KPMG (the “Team Leader”) not to inspect Issuer-2. For reasons unrelated to this request, the audit of Issuer-2 was ultimately not inspected.

Ambac filed an amended 10K on May 11, 2016. That amended 10-K includes a revised KPMG opinion that included a material weakness; the firm’s prior report was clean. According to the story, no other KPMG client had a revised report “over failure to obtain information about a third-party vendor’s internal controls” that year.

Neither KPMG nor Ambac commented for the story, which raises the question: Did KPMG tell their clients what was going on? It seems unlikely, but for good measure, Francine is polling Twitter to see where people land on KPMG’s forthrightness:

This will probably result in a few more awkward conversations for KPMG audit brass. We’ll keep our ears open for more developments.

[MW]

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SHOCKER: Number of Fraud Cases in the Courts is High

In probably the most shocking news of the day, KPMG’s “fraud barometer” reports that the number of fraud cases in UK courts in the first six months of the year are the highest since the firm started issuing the report, 21 years ago.
Here in the states, the big sexy fraud gets all the attention but there is plenty of small fraud to go around. Plus, the bright side is, we’ve haven’t seen anything yet:

“These figures are bad, but the worst is yet to come,” Hitesh Patel, a partner at KPMG, said. “It will be a number of years before the impact of the recession fully feeds through into the fraud statistics.”

So our advice would be for any of you that are nervous about layoffs, look into getting transferred to the forensic accounting practice. You won’t be out of work any time soon.
Record total of fraud cases in court – and worse to come [FT.com]

Ernst & Young Is Here to Help (For a Small Fee)!

ernst_young.jpgWe thought that Ernst & Young was advising the New York Fed on the winding down of AIG out of the goodness of their hearts but it turns out it’s actually about the money.
E&Y could make as much as $60 million advising the New York Fed, which is 50% more than the initial agreement, according to Bloomberg. The NYF is also reimbursing E&Y for expenses, up to 10% of the professional fees. This occurs after the parties had initially said $40 million would be the cap but $60 mil is it, we swear, no more.
And because E&Y is solid like that, the firm is billing out partners and directors at discounted rates ($775/hour). I mean, ’cause, let’s face it, this thing’s a mess and E&Y is going to be working hard, working late, working weekends.
Ernst & Young’s Maximum Pay for AIG Advice Swells [Bloomberg]