December 9, 2018

Failure

Failed CPA exam

Let’s Figure Out How This Person Bombed the CPA Exam More Spectacularly Than Any CPA Exam Bomb in History

Ed. note: an earlier version of this article contained the name of a review course the poster claimed to have used. As this information has not been verified and is not relevant to the issue at hand, it has been removed. Spotted this on Reddit this morning, and like /r/accounting I’m wondering how this is […]

3 Epic Fails of Backup and Recovery

Auditors — especially seasoned IT auditors — are familiar with the scene of sitting with a nervous backup and recovery analyst once a year for a walkthrough. If you haven’t had the pleasure of experiencing it, here’s the drill: It begins with rapport-building (read: uncomfortable) small talk mixed with a few questions about the overview […]

#CPAexamFail Doesn’t Do This Justice

Nor does it seem real which either means: 1) It's totally real and if so, let's pray for this person; 2) It's totally not real. But hey, someone shared it with us on Twitter, so okay! Worst #CPAexam score ever? What do you think happened here @going_concern #yikes pic.twitter.com/c2oSSzfhIc — benson (@benson304) June 21, 2016 […]

Common Traps CPA Exam Candidates Fall Into and How to Avoid Them

Now that scores are out, this may be relevant to your interests.

Failed CPA exam

So You Failed the CPA Exam, Now What?

With the end of the year fast approaching and only two months left to knock this puppy out before January, getting a failing score this late in the game probably has you writing overly dramatic tweets about throwing yourself off a bridge (not funny) or giving up and becoming a dairy farmer. STOP. It’s really […]

(UPDATE) Canadian Officials Not Impressed with Ernst & Young’s Audits of Sino-Forest

Up until this point, Ernst & Young has seemed perfectly content to see how this Sino-Forest situation (some have called it a "Ponzi scheme") would play out, standing quietly by their audit opinions without so much as a peep*. Canadian regulators, possibly impatient with the radio silence, have decided that they'll open things up, as the Ontario Securities […]

Let’s Discuss: Auditors and The Responsibility to Detect Fraud

When I finally got around to writing about the HP/Autonomy finger pointing party yesterday, the topic of fraud detection by auditors came up as it often does in these scenarios. More specifically, the statement that "audits are NOT designed to detect fraud."   A friend of Going Concern emailed me later in the day with […]

KPMG’s PCAOB Inspection Report Shows Firm’s Audit Quality Was Consistently Meh with Last Year

Late yesterday the PCAOB released the first Big 4 firm inspection report with none other than KPMG (in full on page 2). Compliance Week reported that the House of Klynveld more or less stayed consistent with last year's findings, which basically amounts to everyone shrugging with indifference:  In its first published report from the 2011 […]

PCAOB’s Latest Report Finds That Auditors of Broker-Dealers Suck, Too

PCAOB Auditor Wrecking Ball Tour 2012 rolls on with the an interim report on the auditors of broker-dealers. And this time there's 100% deficiency!  From the Executive Summary of the Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers:  This report presents observations from inspections of portions of […]

This Farewell Email from a Former Ernst & Young Senior Manager Is an Epic Failure

The farewell email is one of few art forms in the corporate world. There are good ones. There are bad ones. There are the ones that when you read them, you recognize its genius instantly. They are similar to street art in the sense that they have very short shelf lives; you will probably see […]

New Jersey Hasn’t Forgiven Ernst & Young for the Whole Lehman Brothers Thing

I mean, you know how it is, when you lose $192 million. It’s a tough thing to forget. The Journal reports that the Garden State has renewed its lawsuit against E&Y saying “Those review reports were false, as E&Y knew or should have known that Lehman’s quarterly financial statements were not prepared in accordance with [GAAP].” When reached for comment, E&Y spokesman Charlie Perkins’s voice was barely audible on a nearly worn out tape recording, “Lehman’s demise was caused by the global financial crisis that impacted the entire financial sector, not by accounting or financial reporting issues.” Wouldn’t it be nice if Chuck had Nick DeSanto sing the statement? With a rock accompaniment? At least it would liven up this story again. [WSJ]

Deloitte Resents the Notion That They Should Have Known That Taylor, Bean & Whitaker Was a Massive Fraud

As we mentioned briefly, Deloitte has been sued for $7.6 billion by the bankruptcy trustee of Taylor, Bean & Whitaker and Ocala Funding, LLC. If you’ve never heard of Taylor, Bean & Whitaker then check out Jr. Deputy Accountant who’s been all over it since the Feds starting kicking down the doors. Long story short – TBW was a giant fraud perpetrated by its management, Colonial Bank owned a lot of TBW’s mortgages, Colonial failed, Bank of America bought up a bunch of the mortgages, Fannie Mae says they’re owed money, CHRIST, it’s a mess.

Anyhoo, Steven Thomas, who is known for suing the pants of Big 4 firms (and BDO!), is the lead attorney for the plaintiffs and it sounds like the age-old story of auditors BEING COMPLETE IDIOTS:

“Deloitte missed this fraud because it simply accepted management’s conflicting, incomplete and often last-minute explanations of highly-questionable transactions, even though those explanations made no sense and were flatly contradicted by documents in Deloitte’s possession,” one of the lawsuits says.

Of course Deloitte isn’t amused by this, as Deloitte spokesman Jonathan Gandal’s statement attests:

Gandal said the blame for the fraud and losses should rest squarely on Taylor Bean, Ocala Funding and Farkas. “The bizarre notion that his engines of theft are entitled to complain of injury from their own crimes and to sue the outside auditors they lied to defies common sense, not to mention the law,” Gandal said on behalf of Deloitte.

If this statement strikes you as a little confusing, then you’re not alone. First off, when Mr. Gandal is referring to the “the law” he’s probably referring to this. In less legalese, basically what Deloitte is saying is that Lee Farkas and his merry band of crooks are the ones responsible for this shitshow not the Green Dot and therefore, this whole thing is ludicrous. I mean, come on guys, what could a firm that just reported nearly $29 billion in revenue could possibly have done differently? Crooks are just far too smart far auditors. Just ask one.

CFTC Didn’t Think Too Much of McGladrey’s Audit of One World Capital Group

They were so unimpressed with it, in fact, that they are fining the firm $900,000 and partner David Shane $100,000 to settle up.


Mickey G’s issued an unqualified audit opinion for One World Capital Group’s 2006 financial statements and also stated that the company’s internal controls were just fine and dandy. Neither of these things turned out to be true. And when you read the CFTC’s press release, you really have to wonder if anyone was really auditing this company:

[T]he order finds that One World’s 2006 financial statements were materially misstated in various ways including: (1) the 2006 Statement of Financial Condition states that liabilities payable to all customers were over $6.9 million, when in fact information available in One World’s records showed that it may have owed at least $15 million just to forex customers alone, for whom One World served as the counterparty; and (2) the 2006 financial statements materially misstated the nature of One World’s business by failing to reflect that One World served as the counter party to its forex customers for over 90 percent of its business, according to the order.

In addition, McGladrey failed to report material inadequacies in One World’s accounting system and internal accounting controls, including the lack of a customer ledger, and an accounting system that did not properly identify the number of forex customers or the amount of customer liabilities, according to the order. These material inadequacies reasonably could, and did, lead to material misstatements in One World’s 2006 financial statements, the order finds.

No punch and cake for anyone after this fiasco.

[via CFTC]

Can a CPA Exam Candidate Who Failed REG With a 71 Prepare for a Retake in Three Weeks?

Today’s CPA exam question from the mailbag has to do with a familiar topic to many of you: failure.

Hi Adrienne,

I slaved for an HOA audit firm and our busy season just officially ended. I found out last week that the very last day I can schedule to sit for REG is on 5/27 so that give me approximately 3 weeks to cram for the materials. I sat for that section in January and failed at 71. I am planning to spend 4 hours studying during the week and 8 hours to cram on Saturday and Sunday so I can study at most 36 hours per week. Should I go try for 5/27 or postpone the exam until July when I am more prepared?

Also, I am using both Becker & Gleim to review. In the past, I watched the Becker lectures, completed MCs and simluations on both Becker & Gleim and using Becker book to review. Due to not having enough time, should I just work on MCs and simluations and forgo re-watch the lectures?

Your advice is greatly appreciated.

Our candidate has also sent in her score report, included below:

We should point out here that our candidate admitted in a follow-up e-mail after very little badgering that she had, in fact, done poorly on the simulations as she suspected, telling us “I went into Regulation knowing that I was weak on simulations and as you can see on my score report, not making an effort reviewing and re-doing the simulations led to my failure.”  And yes, it’s pretty clear to us that’s exactly what happened here.

With only three weeks to study before the new test date, it wouldn’t make sense to spend much time reviewing lectures or even entire chapters as a 71 shows an excellent command of the information and her score report confirms that suspicion. Unfortunately, the days of “kind of blowing the simulation part of the exam” are over with the advent of CBT-e, meaning you’re obviously going to have to do better in that area if you want to pass.

The good news is you get it, overall, except maybe for that federal tax process area. Check the CSOs (page 25 of the PDF) for more detailed info on what is tested in that area (naturally it has a lot to do with federal taxation) and practice problems in those areas. If you feel particularly lost in any one area, go ahead and read the chapter or watch a lecture over again but since time is of the essence, try not to use the lectures at all. Don’t get too focused on your one weak area, though, since you presumably haven’t studied any of this stuff for months. You’ll need a good once over (that means all your MCQ at a minimum) before exam day, so try to set aside at least three hours a day, more if you can fit it in. If you have more than three hours a day to study, try not to study for more than three hours at a time, break it up to some in the morning and some in the evening if you can.

As for the simulations, practice working through simulation problems while timing yourself. Set your cell phone alarm or an old school kitchen timer to work out 10 – 15 minutes per problem and start blasting through them on whatever software you still have access to in hour-long intervals. Work towards finishing each simulation in no more than 10 minutes as that will allow you time on exam day to review your sims once you have finished.

Good luck!

Chart of the Day (From Yesterday): Audit Failure Edition

As if the combination of March Madness and St. Patrick weren’t enough, this slide from yesterday’s Investor Advisory Group meeting should drive many to drink.


After yesterday’s findings on the usefulness (or lack thereof) of the auditor’s report, we bring you “The Watchdog that Didn’t Bark … Again.” It’s not as caught up on surveys and whatnot, as it is just pointing out some of the well, failures by auditors during the financial crisis.

The presentation was prepared by The Working Group on Lessons Learned from the Financial Crisis of the IAG and includes past comments from critics like Francine McKenna and Jonathan Weil on the expectations gap between auditors and basically everyone else. But don’t worry, it also presents the audit profession’s defense of itself including past statements from the Center for Audit Quality and PwC’s Richard Sexton the head of audit it the UK, who said this:

Now, one could come to the conclusion that Mr Sexton works for his clients first and not investors but you might not agree with that.

Now before all the Big 4 auditors get in a huff, the presentation has some criticisms of the PCAOB as well, specifically on the report the Board issued in September 2010:

If you can manage to stop drinking your breakfast for two, check out the full presentation below and discuss.

The Watchdog That Didnt Bark

How Will the Senate Screw Up the 1099 Repeal Bill This Time?

The upper chamber is making yet another run at repealing the 1099 requirement that was part of the healthcare overhaul despite miserable failures in the past.


The Hill reports that the new bill has 52 co-sponsors which lead you to believe that this time, repeal will be a cinch:

Senators reintroduced bills that would eliminate the 1099 requirement for businesses to report annual purchases of at least $600 from each vendor. Most Democrats, including the Obama administration, support repealing the provision, but lawmakers have clashed over how to offset the $19 billion in lost revenue.

A bill introduced Tuesday by Sens. Mike Johanns (R-Neb.) and Joe Manchin (D-W. Va.) authorizes the Office of Management and Budget to identify unobligated federal funds to cover the cost of repeal.

“It’s a bad policy; it hurts businesses and it should be repealed, enough said,” Johanns said in a conference call with reporters.

The measure has 52 co-sponsors including 12 Democrats: Sens. Mark Begich (Alaska), Michael Bennet (Colo.), Maria Cantwell (Wash.), Kay Hagan (N.C.), Amy Klobuchar (Minn.), Manchin, Ben Nelson (Neb.), Mark Pryor (Ark.), Debbie Stabenow (Mich.), Jon Tester (Mont.), Mark Udall (Colo.), Mark Warner (Va.).

With such an overwhelming show of bipartisan support the only issue now is who will get the credit for saving small business as we know it?

Both parties have seized on the 1099 requirement to score political points. Republicans are posing repeal of 1099 as part of their promise to chip away at the reform law, while Democrats are touting it as a sign of their willingness to improve the current law.

Just for the sake of spiteful mischief, we’re hoping this goes nowhere (any and all theories on how they manage to do that are encouraged). Stay tuned!

Senators introduce bipartisan 1099 repeal bill [On the Money/The Hill]

Accountants Aren’t Saving Any Personal Finance Savvy for Themselves

This is the risk to providing excellent client service to anyone and everyone; you forget to keep any of that wisdom for yourself.

A support group says it has received a record number of calls from accountants in personal debt over the past few months.

The Chartered Accountants’ Benevolent Association (CABA) for UK chartered accountants says that it has seen a sharp rise in calls from accountants with debt problems over the past few months.

CABA said that it has received its highest ever number of calls from accountants asking for help in dealing with personal debt – and expects the problem to worsen over the next few months.

Kath Haines, chief executive of CABA, said: “The number of calls that we are receiving about debt is probably at a record high and we believe that this will grow quite substantially during early 2011.

Accountants racking up record level of personal debt [Accountancy Age]

The Bell Effect: City of Riverside Won’t Renew With Mayer Hoffman McCann

If you’re a small city in California, you probably won’t be looking to Mayer Hoffman McCann to do your audits. If you’re already with them, it’s time to go auditor shopping.


Following the debacle that was Mayer Hoffman McCann’s completely blown city of Bell audits, the city of Riverside has joined the angry mob and will not be looking to renew with MHM any time soon. Riverside’s CFO Paul Sundeen said “given that the firm’s five year contract with the city is at its end and the controversy at the city of Bell, we will not include them [when seeking proposals for an auditor]”. Sorry, MHM, don’t wait by the mailbox for that invitation because you aren’t invited to the party.

Now that’s not nearly as harsh as getting fired by the client but sends a clear message to MHM (and any other questionably-equipped-to-do-their-job auditors out there) that ineptitude will not fly with the client. Unless, of course, there’s a conspiracy at work to defraud TPTB, in which case ineptitude is totally welcome if not encouraged.

Once again, it comes down to scope. No audit firm should be expected to look at every receipt and every statement but in the case of the Bell audit, auditors obviously missed some very large accounts either on purpose or because the firm sent a bunch of fresh-faced neophytes down there (this rarely happens) to actually perform the audit (Note to MHM: $8.89 million is significant unless you’re auditing the King of Saudi or the Federal Reserve). What happened to the accountability SOX promised us?

Said Riverside city controller Jason Al-Imam, “They want to do the right amount of work because they don’t want to lose their license, but they can’t audit everything. Sometimes something might go wrong and that just might be an area that they didn’t look at.”

Scraping by isn’t doing it anymore for the profession, so Riverside is more than welcome to go track down some new auditors but who wants to bet the kids doing their next audit will be just as fresh-faced and clueless as the last bunch MHM sent to fetch the client’s bank recs and invoices?

City of Riverside to drop Bell’s financial auditor [The Riverside Press-Enterprise]

Doing It Wrong Twitter Case Study: The Runaway Tweeter

Continuing our series on those in the industry who attempt to use Twitter but fail miserably in one way or another, today’s case study has to do with a tweeter all too frequent among the accounting set: the abandoned account.

You’ve probably come across more than one of these if you’ve attempted to look up certain state societies of CPAs or organizations that appear in Twitter search results but, sadly, feature no picture and maybe one or two tweets from two years ago. It’s obvious, upon checking out the empty bio and single tweet that these accounts belong to tweeters who really wanted to get into the whole Twitter thing but either gave up or got confused and let that drive them away.


I won’t name any names (but one starts with Idaho and ends with Society of CPAs) but one has to wonder what would inspire a media department to go through the trouble of getting their account validated and deciding on that first tweet only to be spooked by the lack of interest or the pure unadulterated excitement of tweeting. What is it? And why bother opening an account in the first place?

We’ve given you guys this lovely piece of advice before (see our interview with New Jersey Society of CPAs’ Don Meyer) but it’s important to remember that you won’t become Ashton Kutcher with 1,000,000 followers overnight and possibly never if you’re tweeting mostly about accounting and all related awesomeness. The niche is small and interest is limited to the couple thousand folks out there who are actively using social media to connect with other like-minded accounting enthusiasts and sources of accounting information. Reactions can be slow to come, if at all, and if you’re trying to break into social media you shouldn’t let the oftentimes frigid audience keep you from trudging ever-onward to meet your social media goals.

You may never get a reaction. You may not get many followers. You may not feel like your message is getting through. But keep doing it and please, don’t end up one of these phantom accounts abandoned in the Twitter junkyard with all the dirty Britney videos and busted dot coms.

Memo to the Wealthy: Death Is Looking Like a Good Option

“I have no confidence that this Congress will address the estate tax.”

~ Joe Kristan has a morbid outlook.

Michel Barnier: The Big 4 Audit Model Is a Failure

Okay, those weren’t the EU financial services commissioner’s exact words but you get the sincere impression that he’s had it up to his silver coif with how things are going.

“The crisis highlighted failings in the audit sector,” Barnier said today. “These need to be explored and we need to see what improvements can be made. I believe it is important to approach this discussion in a frank and open manner. No subject should be taboo.”

Right! No subject is off limits. So what will be discussed? Well, for starters this Big 4 thing has to stop. The Telegraph reports, “If one of the Big Four – PricewaterHouseCoopers, KPMG, Deloitte and Ernst & Young – were to collapse the Paper suggests it could create systemic risk for the financial markets.”

Secondly, the notion of independence and “putting shareholders” first is a sham. ‘Berg reports:

Restrictions on auditor choice may reduce “distortion within the system” caused by auditing firms acting in the interests of their clients rather than shareholders when compiling reports on a companies’ financial health, the commission said in a report outlining possible measures.

[…]

The commission said it’s also considering rules that would force companies to change their auditing firms after a fixed period of time.

Forcing companies to rotate their auditors would “enhance the independence of auditors” and “operate as a catalyst to introduce more dynamism and capacity into the audit market,” the commission said.

Lastly, can a Frenchman get some choice up in this mofo?

The top four accounting firms have a market share of about 90 percent in the majority of EU member states, according to the commission’s report.

“The market appears to be too concentrated in certain segments and deny clients sufficient choice when deciding on their auditors,” the commission said.

Barnier isn’t asking for a full-blown cafeteria but for crissakes, the choices right now are chicken, chicken, and….chicken. Sure, they might have slightly different recipes (e.g. KPMG a little spicy/sweet, PwC is in a cream sauce) but it’s all chicken. And Barnier HATES chicken.

Companies May Lose Right to Pick Auditing Firms Under European Union Plans [Bloomberg]
EU markets chief Barnier plans radical overhaul of audit industry [Telegraph]

Here’s Some Stuff You Didn’t Buy at PwC’s Lehman Brothers Auction in London

Gosh, team. It’s been over two years since Lehman bit the big one and now all that’s left is bits and pieces (Barclays, pink sheets, Dick Fuld’s stonewalling testimony) and charges from the SEC that could eventually see the light of day (unless the sun burns out first). Oh! And Ernst & Young. They’re in the mix too, although some people we talk to have their doubts about any repercussions.

Anyhoo, there was a big auction at Christie’s in London today directed by the newly-branded PwC. After everyone got done ribbing the P. Dubs partner in attendance about the Atari design, the bidding started. Here’s a little taste of what’s been sold so far, courtesy of the Times:

• Corporate Sign from Canary Wharf building – £42,050. Bidding started at £5,000

Gary Hume’s Madonna – £120,000 (most expensive item so far)


• A collection of five maps from circa 1720 – £1,875

• An 1870 collection of the works of one Bill Shakespeare

• Two etchings by Lucian Freud

• Photographs by Sebastião Salgado

• A 43.5-inch painted pine model of a 62-gun ship

Overall, the auction has topped £600,000, according to Accountancy Age but is still rising. You can probably still get a bid in if you hurry.

Lehman Memories Sold Off Piece by Piece at Auction [NYT]

I’m Not Impressed With FASB’s New Twitter Account

When @FAFNorwalk launched on August 4, 2010, it was supposed to be an awesome attempt at connecting government accounting to the 439 people interested in it (don’t trip, FAFN, y’all will get your massive following).

The day after signing up, they mustered up the courage to send out their first tweet:

Welcome to FAF/FASB/GASB! Stay Tuned For Updates.


First of all, we’re not sure if FAF, FASB and GASB know this but Twitter accounts are free so you are totally allowed to get your own. As far as I know, you are even allowed to get several as long as you can come up with an email address for it so there’s no need to share, although that can get messy. What if one of you is trying to tweet about the latest comment period (Disclosures of Certain Loss Contingencies – I’m sure that will garner quite a bit of interesting commentary) while the other wants to talk about new lease rules?

Secondly, is this the best they can do? I’d really like to see some more thoughtful commentary from Norwalk that truly opens the conversation. They can think of this as a comment letter in 140 characters.

Thirdly, what’s up with the one and only person FAFNorwalk is following? We don’t know who the hell @Badwissen is but maybe they are just really into FASBs and @FAFN could totally vibe that when they started their little Twitter co-op.

Lastly, let’s try to work a little better on the turnaround, eh @FAFN? Compliance Week already had an entire story up about new lease rules by the time @FAFN got around to tweeting about it… fine, @FAFN tweeted it around 2 and the CW story went up after 5 but still, with @FAFN’s access to insider information, I want to see @FAFN tweets about lease rules a full two hours (or a day!) before anyone, come on.

If you are looking for a truly dull Twitter follow with zero interaction, @FAFNorwalk is totally for you. Personally I like my accounting feeds with slightly more bite, even if that means a simple @ every now and then.

How’s that for a fucking comment letter?

Earlier:
Wonky Accounting Insight in 140 Characters or Less: The FASB Is Now on Twitter

There Are More Than a Few Texans Who Aren’t Impressed with Ernst & Young’s Auditing Abilities

And this has nothing to do with Lehman Brothers.

Attorneys from Houston’s Ahmad, Zavitsanos & Anaipakos are representing a group of investors in a lawsuit filed against hedge fund auditors Ernst & Young after the group lost more than $17 million following the collapse of a Plano, Texas-based hedge fund that promised low-risk investments.

The lawsuit focuses on two funds sold by Plano’s Parkcentral Global and was filed on behalf of Houston financial consultant Gus H. Comiskey and four Tucson, Ariz.-based entities, including the Thomas R. Brown Family Private Foundation. The now-defunct Parkcentral Global was operated by affiliates of billionaire and former presidential candidate H. Ross Perot before closing its doors after losing a total of more than $2.6 billion.

“Our clients were told that an investment in Parkcentral was designed to preserve capital. Instead, they lost every penny in record time. E&Y was supposed to be auditing Parkcentral, but the audited financial statements never once warned Parkcentral’s investors of their impending doom,” says attorney Demetrios Anaipakos, who will try the case with Amir H. Alavi.


Did you hear that E&Y? RECORD TIME! But why the Ross Perot mention, Ahmad, Zavitsanos & Anaipakos? Got something against eccentric Texas billionaires that like explaining complex things with charts? Sadly, the BPR does not elaborate.

The lawsuit includes claims that New York-based Ernst & Young falsely represented that the company fairly audited Parkcentral Global and the auditor failed in its “watchdog” [Ed. note: These quotation marks appear to be unnecessary. Also, the “watchdog” thing, sucks as metaphor.] role to warn relying investors of the risk of fraud and noncompliance by management. The suit accuses Ernst & Young of fraud, negligent misrepresentation, securities fraud and conspiracy.

This month, Brown Investment Management, L.P., one of the plaintiffs in this suit against Ernst & Young, won a Delaware Supreme Court ruling that requires Parkcentral Global to disclose its former investors. Those investors could be added to the new Houston lawsuit.

The investments of the Brown foundation, Brown Investment Management and the two other family-related ventures totaled $16 million and were lost within 90 days despite a “worst case loss” estimate of 5 percent. Mr. Comiskey, like his fellow investors, lost 100 percent of his investment when Parkcentral Global went under.

Mr. Anaipakos and Mr. Alavi have handled disputes against hedge funds and private equity firms for more than a decade. This lawsuit is separate from a class action filed in the U.S. District Court for the Northern District of Texas against Parkcentral Global.

Marin County Scrapping SAP System That Deloitte ‘Neophytes’ Slapped Together

Earlier in the summer, we told you about Marin County California, who was pretty displeased with Deloitte throwing a bunch of ‘neophytes’ at their ERP implementation project or in the County’s words ‘a trial-and-error training ground.’

As a result of Deloitte’s amateur hour, the SAP system – that Deloitte claims was just fine and dandy where they left it – is now being thrown to the scrap heap by the county because fixing it will cost more than replacing the whole system. And God knows Arnie won’t be helping them out with the bill, so they have to save on costs where they can.

The system is the subject of a lawsuit Marin County filed against system integrator Deloitte Consulting earlier this year. Deloitte used the project as “a trial-and-error training ground” for inexperienced employees, and the result was a “costly computer system far worse than the legacy systems it was intended to replace,” according to the county’s complaint.

Deloitte has filed motions against Marin County’s “completely unfounded allegations,” as well as a complaint seeking unpaid fees, a spokesman said via e-mail. The system “was working properly and could perform all the tasks consistently with the standards set forth in the written contract,” according to a Deloitte court filing.

Marin County tells a different story. The SAP implementation dates to 2006, but today only 50 percent of the functionality is in place and working properly, according to a county report.

The county hasn’t decided on who they’re going with for the new system but if you’ve got a one-person shop with no experience and present your RFP using overhead transparencies, you’ll still have an edge on Deloitte.

County will rip and replace ailing SAP system [Reuters]

While They Were at It, The PCAOB Thought They Might Chime in on Auditors’ Babysitting Skills

As we mentioned late yesterday, the PCAOB has been working hard these days. Late nights, weekends, ordering in and whathaveyou. Adrienne told you about the new eight auditing standards that you’re all expected to have memorized by Labor Day, and we wrapped up with Dan Goelzer snagging QOTD for the Board’s move towards open enforcement proceedings. This move will, presumably, be used in order to shame the pants off of those of you that dare to break the rules.

But the Board had one more thing to serve up yesterday and that was to put it out there that they don’t think too highly of the job auditors are doing supervising the worker bees:

“Through its inspections and investigations, the PCAOB has observed that supervision processes within firms are frequently not as robust as they should be, and that supervisory responsibilities are often not as clearly assigned as they should be,” said PCAOB Acting Chairman Daniel L. Goelzer. “Today’s Release seeks to highlight the Board’s views on the scope for using the authority provided in the Act to address those problems.”

For an industry that depends so heavily on a hierarchal structure, this does not bode well. There are several possible scenarios that led the PCAOB to jump in with their thoughts, including but not limited to:

1. Dozens of audit engagements of publicly traded companies have aloof partners that pop in once or twice a week, observe a handful of staff people feverishly ticking and tying, only to assume everything appears a-okay.

2. The PCAOB has incredible “luck” picking the biggest shitshow engagements.

3. The PCAOB is just blowing the shortage of experienced SAs out of the water.

4. Inspectors don’t buy the “we got this” story from the A1 and A2 running an accelerated filer engagement.

If you’re on one of these free-for-all audits, for crying out loud, get in touch. We want details.

PCAOB Issues Release on Failure to Supervise [PCAOB]

PCAOB Report States That There Was a Fair Amount of Failing Going on at Ernst & Young

The PCAOB has issued its annual report on Ernst & Young having given the firm the third degree at its national office and 30 of its 80 U.S. offices. It inspected 58 audits performed by the firm but exactly who is, of course, a big secret (unless you tell us).

There were five “Issuers” that were listed in the report and some form of the word “fail” was used 25 times (that includes the footnotes).

[Issuer A] The Firm failed to adequately test the issuer’s loan loss reserves related to certain loans held for investment. Specifically, the Firm failed to reconcile certain values used in the issuer’s models with industry data, failed to test the recovery rates used in the issuerfailed to test the qualitative components of the reserves.

Damn those loan loss reserves!

[Issuer C] The Firm failed to perform sufficient procedures to test the issuer’s allowance for loan losses (“ALL”). The issuer determined the general portion of its ALL estimate, which represented a significant portion of the ALL, using certain factors such as loan grades. Data for this calculation were obtained from information technology systems that reside at a third-party service organization. The Firm relied on these systems, but it failed to test the information-technology general controls (“ITGCs”) over certain of these systems, and it failed to test certain of the application controls over these systems. Further, the Firm’s testing of the controls over the assignment and monitoring of loan grades was insufficient, as the Firm failed to assess the competence of the individuals performing the control on which it relied.

This loan thing appears to be a trend…

[Issuer D] The Firm failed to sufficiently test the costing of work-in-process and finished goods inventory. Specifically, the Firm’s tests of controls over the costing of such inventory were limited to verifying that management reviewed and approved the cost allocation factors, without evaluating the review process that provided the basis for management’s approval.

Hopefully that doesn’t blow back on an A1.

Anyway, you get the picture. The whole report is below for your reading pleasure. E&Y’s got its $0.02 in, however it was short and was mostly concerned about the firm’s right to keep its response to Part II (the non-public part)…non-public:

We are enclosing our response letter to the Public Company Accounting Oversight Board regarding Part I of the draft Report on 2009 Inspection of Ernst & Young LLP (the “Report”). We also are enclosing our initial response to Part II of the draft Report.

We note that Section 104(g)(2) of the Sarbanes-Oxley Act requires that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.” Based on this statutory provision, we understand that our comments on Part ii will be kept non-public as long as Part ii of the Report itself is non-public.

In addition, we are requesting confidential treatment of this transmittal letter.

So this doesn’t mean much other than E&Y would prefer that no one know how it managed to tell the PCAOB to fuck right off as nicely as it could.

If you had the pleasure of being on one of these 58 engagements, we’d love to hear about your experience.

2010 Ernst Young LLP US

What’s the Next Move in This PCAOB Situation?

Jonathan Weil over at Bloomberg has a new column up today and he is less enthusiastic about the Supreme Court decision in FEF v. PCAOB than say, everyone else.

JW is mostly wondering why we should keep having an “independent” PCAOB inside the SEC since the board members will now be at the mercy of the towing the political line inside the Commission, “While the court

Failing the CPA Exam the Easy Way…or: How to Use Your Scores to Determine Your Next Move

Nationally, only 43% of CPA exam candidates who sit for any exam part pass on their first try and that number shouldn’t be too surprising to anyone who has gone into an exam completely unprepared or totally intimidated. Failure may be inevitable but it doesn’t have to be the end, nor does it mean you should give up on trying to become a CPA.

So what do you do if you’ve failed?

There are two paths to take and your option from here depends a lot on how you did. Not all less-than-74s are created equal.


If you scored < 70: If you got anything less than a 70, give or take, you can put this exam off until later and move on to the next section if you are having difficulty grasping the information, especially if you scored in the bottom 60s or lower. UNLESS you are on a time crunch (like you have to get this one passed or you’ll lose credit on another section), blow this one off and move on to another. If you want to continue and try this one again you can but you should start from scratch, use your score report to gain insight into where you need more work, and review EVERYTHING as if you have not studied at all.

If you scored > 70: Pay your re-application fee and get a new NTS for this exam ASAP! A score above 70, while disappointing if less than 75, shows that you have an excellent command of the information and you’ll want to retake this one while the information is still fresh in your mind. DO NOT move on to another section. Use your score report to gain insight into your weaker areas but don’t obsess too much over what it tells you, keep in mind the report compares you to other candidates and you don’t care how other people did on the exam, you need to know where YOU need to do more work. DO NOT waste your time watching all of your CPA review lectures again, focus on doing MCQ/simulation practice questions and brush up on the areas you are weak in. Then, just before your exam, give everything a very quick overview one last time to make sure you have not forgotten the things you already know.

The point is that most CPA exam candidates experience failure at one point in the process, and some will experience failure repeatedly along the way. Be smart about your mistakes, learn from them and move on. You CAN pass, it’s just a matter of understanding how to overcome the many stumbling blocks you may encounter along the way.

Also see:
What Happens When You Get a 74?

Adrienne Gonzalez is the founder of Jr. Deputy Accountant, a former CPA wrangler and a Going Concern contributor. You can see more of her posts here and all posts on the CPA Exam here.

PwC May Have Overlooked Billions in Illegal JP Morgan Transactions. Oopsie.

Now £15.7 billion may not seem like much to you if you are, say, Bill Gates or Ben Bernanke but for PwC UK, it may be the magic number that gets them into a whole steaming shitpile of trouble.

UK regulators allege that from 2002 – 2009, PwC client JP Morgan shuffled client money from its futures and options business into its own accounts, which is obviously illegal. Whether or not JP Morgan played with client money illegally is not the issue here, the issue is: will PwC be liable for signing off on JPM’s activities and failing to catch such significant shenanigans in a timely manner?


PwC did not simply audit the firm, they were hired to provide annual client reports that certified client money was safe in the event of a problem with the bank. Obviously that wasn’t the case.

The Financial Reporting Council and the Institute of Chartered Accountants of England are investigating the matter, and the Financial Services Authority has already fined P-dubs £33.3 million for co-mingling client money and bank money. That’s $48.8 million in Dirty Fed Notes if you are playing along at home.

Good luck with that, PwC. We genuinely mean that.

Inquiries mount after PwC ‘failed to notice’ mistakes [Times UK]

PFF Bancorp Creditors Want to Probe KPMG So They Can Determine if They Can Sue KPMG

In anything is better than the shit BP has on its hands news, Reuters reports that creditors of PFF Bancorp Inc are requesting permission from a U.S. Bankruptcy Court in Delaware to snoop around “information in KPMG’s possession” to find out what the firm knew about PFF’s over-leveraged, under-capitalized, risk-loving ways.


The company’s committee of unsecured creditors wrote in their request that “Information in KPMG’s possession may support potential claims against third parties and against KPMG itself, if, for example, it becomes apparent that KPMG knew or should have known at an early date of any overly-aggressive or inadequately-controlled loan practices of the (company).”

So in other words, PFF would like to – pretty please – sue someone’s ass and they’d like to confirm whether or not KPMG will be a good candidate for said ass suing. So assuming the bankruptcy court gives them the thumbs-up, PFF will send in the hounds to find out what’s what. And they’ve covered themselves nicely by using the wonderfully subjective “knew or should have known” so KPMG’s only option will be to invoke the “we were duped” excuse, which isn’t such a flattering option.

KPMG didn’t respond to Reuters’ request for comment or our email but we’re guessing they’re less than enthused about sharing what is in their audit workpapers. Not necessarily because the documentation will have a smoking gun but more so because they might discover that the partner on the engagement has a bad habit of doodling and that’s just embarrassing.

PFF Bancorp creditors seek probe of auditor KPMG [Reuters]

Marin County Accuses Deloitte of, Among Other Things, Using ‘Neophytes’ on SAP Project

Deloitte is being sued by Marin County in California, who is alleging fraud by misrepresenting its “skills and experience.” In other words, the County says that D used their ERP project as more or less a training ground for its newbie consultants. And no client likes it when you bring the blades of grass on site. They can’t even turn on their laptops without causing some sort of scene, amiright?


Channel Web has some of the particulars:

The County in April 2005 hired Deloitte to implement its SAP ERP system. However, the County alleged in the court document, “rather than providing the County with SAP and public sector expd the County’s SAP project as a trial-and-error training ground to teach its consultants — many of them neophytes — about SAP for Public Sector software, all at the county’s expense.”

Plus! The County claims Deloitte promised their very best people. From the complaint: “Deloitte further represented that for the County’s SAP implementation, Deloitte had assembled a team of its ‘best resources’ who had ‘deep SAP and public sector knowledge.’ ”

A Big 4 firm promising their best and brightest on the job in an RFP? There’s a shocker. “Best” being relative, as we all know but Marin County (obviously not familiar with a Big 4 sales pitch) must have been expecting a team to fly in from hyperspace that could slap this thing in lickity.

Thankfully, Michael Krigsman explains over at ZDNet that this isn’t exactly rare:

1. The court filing describes sales practices that are common through the consulting and systems integration industry.

For example, the complaint alleges that Deloitte committed to “dedicate our best resources and bring tailored implementation strategies to meet [Marin’s] long-term needs.” Many IT customers complain their system integrators do not follow through on such commitments and use inexperienced labor in attempts to reduce their own costs and increase profits.

We’d be so bold to say that this true of many Big 4 engagements, whatever the service line. Newbies have to get their teeth cut somewhere – why not on a public service job where money obviously grows on trees?

Deloitte isn’t impressed with this gnat of a lawsuit, claiming that they did exactly what they were supposed to do (not to mention to put up with the amateurs at MC that have zilch ERP experience) and the system was working just fine when they left:

As stated previously, we fulfilled each and every one of our obligations under the contract, as evidenced three years ago when all of our work was approved by the County officials responsible for the project. To be clear, the SAP (NYSE:SAP) software was working properly when we completed our work in November 2007. Not only is the complaint without merit, but we are filing our own claim against the County for breach of agreement and unpaid invoices. Although we are confident that we will prevail in court, it remains our belief that this dispute can and should be resolved in a more logical fashion that benefits the County and its taxpayers.

So Deloitte gets a little huffy basically saying, “Suck it, Marin County. MBAs love Deloitte. OH, and btw, you owe us some money,” but ultimately wants to keep things civilized for the sake of the taxpayers. Let’s hope it stays childish just for the sake of entertainment purposes. Taxpayers in California are f—ed anyway.

Marin County complaint against Deloitte Consulting on failed SAP project

California County Sues Deloitte For Fraud In SAP ERP Project [Channel Web]
Marin County sues Deloitte: Alleges fraud on SAP project [IT Project Failures/ZDNet]

Accounting Fraud on the Stage Fails: Enron to Close Sunday

After mixed reviews, it seems that no combination of nostalgic accounting fraud, raptors in Brooks Brothers and former President Charles Logan could save Enron the musical.


The play will close Sunday, May 9th after 22 previews and 15 regular performances despite Stephen Kunken’s portrayal of Andy Fastow was nominated for a Tony.

Maybe the producers completely misjudged the interest of theatre-goers on this side of the Atlantic. Enron was a huge success in Britain where accountants get red carpets and trophies.

In the States they get on look at porn, support terrorism (allegedly!) and create awkward videos. There’s a disparity there.

Enron on Broadway to Close Sunday, May 9TH, 2010 [Broadway’s Best Shows]

What Will the Aftermath of the Next Big 4 Failure Look Like?

In part one of our discussion, we discussed audit firm failure and why the business model is not sustainable in the current form. We will now look at questions about what the aftermath of a Big 4 firm failure could look like and what some various paths could be:


Why isn’t a “Big 3” audit firm situation sustainable?

Jim Peterson: The industry has gone from 8 firms to 6, to 4. We’ve reached a tipping point where if one more firm fails, the rest of them will get out of the business. The firms have all but admitted that the business model will not survive another failure.

Francine McKenna: The failure of a firm will also have global repercussion in various countries that are dominated by that firm (e.g. PwC in the UK). The remaining firms simply do not have the resources to pick up where the dominating firm left off.

Is government intervention a possibility and is it a reasonable solution?

FM: Personally, I’m in favor of at least a portion of public company audits being performed by the federal government, especially those public companies with a substantial investment by the U.S. Government. I wrote in a post from January 2009, “Let’s tear down the walls and rethink how we should protect the investor, who in many cases is now the taxpayer.” We should get rid of the for-profit audit firms’ involvement in the nationalized entities, except perhaps indirectly as contractors paid by the government but not controlling the client relationship. Those receiving government bailout funds could be “audited” by a team drafted from all able bodied audit and accounting professionals. I call it the National Service Corp for Accountability and Transparency™.”

JP: This is a possible scenario that may be imposed upon the world if proactive solutions are not formulated. Unfortunately, this will be imposed directly upon the U.S. Taxpayer. The product will have virtually no value and the efficiency and trust that would result could be likened it to any other service provided by the Federal Government.

You have both said that “no one would miss the auditors’ opinion.” When did the auditors’ report become such a commodity and is there any way for it to recapture any value?

JP: The auditor’s report as known and essentially unchanged since the 1930’s — an obsolete document. It has been a long time since someone asked sophisticated financial statement users, “What do you want?” and “What are you willing to pay for?” New ideas for assurance services are needed that will allow firms to provide a valuable product without submitting themselves to such huge liability.

FM: A completely different approach is needed, in my opinion, to protect shareholders and investors in public companies than the current product, especially when the shareholder/investor is the taxpayer as has occurred in the recent investments in AIG, Fannie Mae, Freddie Mac, Citigroup, GM, etc”

There are very few sophisticated investors – hedge funds, other large public companies, private equity or sophisticated creditors – who do not perform their own due diligence, using publicly available information or additional access prior to a merger or acquisition. They would be considered irresponsible if they only used the basic financial statements, assuming only the auditors opinion and required footnotes, as a basis for major investment decisons. So why do we expect the retail investor, the employee with their retirement savings in the company stock or a vendor or customer to count on the audited financial statements as the last word? Audited financial statements have certainly not provided any “assurance” that companies would not go bankrupt, that banks were solvent, that global financial institutions would not need hundreds of billions of dollars in taxpayer money to remain viable.

In the wake of the Andersen collapse, what hasn’t the leadership of large firms, primarily Big 4, done to mitigate risk to their firms?

JP: The leadership at the top has a lot at stake financially. They are focused on short-term integrity. The young partners will inherit this problem. The current leadership lacks both the vision to come up with solutions and the fortitude to make the decisions.

FM: I agree. The model needs re-invention. Most professionals that see the problems wake-up and get out or are forced out and their careers and lives are better for it. They don’t have to deal with the problem anymore. People that remain do so because they lose any idea of what else to do. They develop “Stockholm Syndrome” and some eventually become the leaders of these firms.

In an email, Jim Peterson wrote to us, “there is no silver bullet” that will fix this problem. It will take a “a holistic approach and an opportunity for “blank page” re-engineering can hope to address the relationship among all these elements.”

The idea of a wiping the slate clean and starting completely over is difficult for anyone to get his or her head around. Explaining the situation to a multi-billion dollar industry that has been doing “business as usual” for decades is even harder.

But what is clear is that the situation must change in order for the profession to become relevant and valuable again. Eventually, whether by way of the current litigation or other unforeseen events, the failure of the audit firm business model is unavoidable. With some many people calling the profession into question now again, the best thing that young leaders can do is start thinking about solutions now. The profession must re-invent itself in order to serve stakeholders as intended.

Why A Big 4 Failure Is Imminent–and What It Will Mean

In the wake of the Lehman Bankruptcy Examiner’s report, speculation about the future of Ernst & Young is rampant, as is the future of the audit profession as another colossal failure raises questions about the relevancy of Big 4 firms’ audits of public companies.

While many are focusing on the “who” and the “how”, there is a small band of experts that are focusing on a bigger issue. (Yes, there’s a bigger issue.) That is, what happens in the aftermath of the next Big 4 failure?

To put it more clearly, what will another firm failure mean for the audit practice business model? How will the markets react? Will the government attempt to intervene in some
These are questions that will have to be addressed in the post-failure environment, despite the desire of the Big 4 for the problem to magically resolve itself.


In order to try and give you an idea of the possible fallout from the next Big 4 firm demise we asked two experts to expand on their past writings, discuss the current environment, and to speculate a little about the future. We discussed this topic with our own Francine McKenna and Jim Peterson after poring over a dozen or so of their past posts, exchanging a multitude of emails and one very spirited conference call.

Francine’s recent post, “Ernst & Young Looking at More Civil and Criminal Liability for Lehman Failure” examined E&Y’s civil and criminal vulnerability as a result of the Bankruptcy Examiner’s report. She is a skeptic of audit firm relevancy and never put it more poignantly to her readers than in January 2009, “So, you may finally be saying to yourself: What’s the point of audits and auditors?”

Jim Peterson’s blog Re: Balance is dedicated entirely to the subject of the next Big 4 failure and what it means for the financial world. From the “Why this site” section:

A basic re-ordering of the relationship between large global companies and their accounting firms is inevitable — evolution can be postponed, but it cannot be stopped. But the need is neither well recognized nor openly discussed — the very reason for this site.

While the question of the possibility of a firm failure is moot when you seriously consider the items outlined below, the question of “which firm?” is also of little consequence. And to take it one step further, the timing of a large-scale failure is a pointless discussion, as Jim emphasized, “The axe that could fall on any of the firms, depending only on the pace of litigation management by the judges over-seeing their dockets.”

Jim presented us with five reasons that the audit franchise’s very existence is ineffective:

Accounting rules are politicized – The FASB and IASB have been belly aching for awhile now that political influence needs to be left out of accounting rules. The reality is – a reality that both the FASB and the IASB have not yet accepted – this is a fruitless exercise, “Accounting principles are not in the profession’s influence, much less their control, but are politicized and complex, and are subject to manipulation by issuers,” says Jim.

Users’ expectations are not achievable – Somehow everyone in the world – and audit firms are partly culpable here — got the idea that financial statement audits guarantee good information. Jim says, “Users’ expectations are set at zero defects – partly the fault of the profession for over-selling its capability and contributing to the so-called ‘expectations gap’ — a level that is not achievable in any system designed and run by human beings.” In other words, to remain competitive, audit firms gave the impression that they could deliver highly effective results with their audits. By their own inability to effectively explain the purpose and the pitfalls of financial statement audits (until they are on the defensive for failures) the profession has sealed its fate.

Hindsight puts the firms in a bad position when liability is determined – When a firm makes a mistake, the media, politicians and “experts” are shocked — SHOCKED! — that auditors could have missed these errors. This makes for an easy argument before jurors that typically do not have a good understanding of the risks involved prior to an audit occurring. “The legal standards for liability in the major countries, especially in the US, are elusive and subjective; they expose the firms to second-guessing by juries – when ‘after the fact’ means after events that are ugly and there have been visible eruptions of misbehavior. That means ‘bet the firm’ cases cannot be [effectively] tried.”

The liability is, simply put, HUGE – Jim sums it up: “The Big Four firms lack the financial capacity to answer multi-billion dollar exposures…and so they are forced either to pay settlements that are ultimately crippling to their business model, or to go to trial in ‘bet the firm’ environment.”

The vicious circle self-perpetuates – There will continue to be huge audit failures. The firms have not identified a solution, largely because they have not addressed past mistakes with substantive solutions. “The large firms continue to fall into claims of deficient performance — examples of which have continued to arise with depressing regularity despite protestations of improved regulation and performance — in no small part because the profession lacks a forum for real ability to learn, or to avoid repeating the same old mistakes of the past,” says Jim.

Francine also mentioned something many people in the profession forget or don’t realize at all, and that is that a failure could arise unexpectedly from a non-U.S. jurisdiction, “a regulatory action in another country that no one in the U.S. is expecting could be just as crippling to one of the firms as any of the problems in the United States,” she told us. The most imminent risk comes from the Satyam scandal that occurred in India on the watch of PricewaterhouseCoopers.

The problem that the entire financial community in the U.S. finds itself in — not just the Big 4 – is that they are “locked into this arcane method of assurance,” according to Jim. The text of the auditors’ opinion has been essentially unchanged since the 1940s while the rest of the business world constantly evolves.

Stay tuned for part two of our discussion with Jim and Francine that will try to paint a picture of what the post-failure environment could look like.

Here’s Your Study Plan for the Audit Section of the CPA Exam

Friendly reminder: >75 is here to answer your CPA Exam questions so send them over.

A reader sends us the following dilemma:

“I took the audit section only and failed, most of it was due to not committing enough time to it. If you have any tips to develop plans I would like any suggestions to creating a plan.”

First of all, no offense but I think you have already identified where you went wrong, are you sure you need our help? Oh well.


Let’s talk about Audit, shall we? The average CPA exam candidate will spend 60 – 90 hours studying for the Audit section – that assumes watching your CPA Review lectures 1 time and spending 2 – 3 hours on MCQ/sim practice problems for each hour of lecture. If you are taking the self-study route, you will obviously need to spend more time on MCQ/sims (about about 2 or 3 hours on top of the 2 – 3 you would be doing if you had videos to review) and create a structured study plan based on the most current CSOs (Content Specification Outlines), which you can always find on cpa-exam.org.

Those of you taking exams in early 2011 will want to be on top of exam changes planned to kick in in the first quarter, though the AICPA has been helpful and already released the CSOs for that period.

If you’ve taken the exam and failed, you already have an incredibly useful tool at your disposal – your score report. The report provided after you fail will compare you to other candidates: IGNORE THOSE NUMBERS. Who cares how you did relative to other candidates? All you need to glean from that information is an idea of where your stronger areas are in comparison to your weaker sections. The score report is broken down by different components of the CSOs for that section so obviously you will want to focus harder on areas that you performed poorly in.

About a week or two before your new exam date, give the entire section a once over just to be sure you are also sharp in areas you did well in the first time.

Schedule your new Audit exam AS SOON AS POSSIBLE as the information is still fresh in your mind. If you have a new exam scheduled in the meantime, reschedule it if you can. Unless you REALLY bombed Audit (68 or below), you will want to jump right back in while it is still floating around in your brain.

As for exam preparation and planning, we’ve covered that plenty of times on Going Concern so check out this, this, and this.

You Don’t Want to Imagine the World Without Sarbanes-Oxley, Says Michael Oxley

We really don’t foresee any scenario where a politician would denounce a piece of legislation with his/her name on it but since the MSM has the tendency to bludgeon the Enron/Andersen/Sarbanes-Oxley mantra into everyone’s gray matter, Ox figured he’d better get on record saying that SOx might be the most important moment in U.S. history since the Louisiana Purchase.

When asked if pols can ever stop corporate malfeasance, Ox more or less, compared it to Law & Order, “We have laws against homicide and people kill one another every day. That doesn’t mean that you back off and stop fighting.”


When asked if SOx was a success, we expected a resound, “You bet your ass it’s a success!” but he was a slightly more reserved saying that you should only imagine a world without SOx if you want to scare the bejeezus out yourself:

Sarbanes-Oxley was all about accountability and transparency and restoring investor confidence. We lost almost $8 trillion in market capitalization in 2001 and 2002 because of fraud at places like Enron and Worldcom.

Even though the recent meltdown has hurt confidence again, things could have been much worse if accounting regulations had been as lax as financial regulations.

There’s the magic E word! Maybe we should try focusing on the Tonys as opposed to being so negative when it comes to Enron?

So what about this financial regulatory reform, is this a drag or what?

Critics and the financial press said that Sarbanes-Oxley was rushed through, even though it actually took eight months from the time of the first hearing on Enron until the passage of the bill.

Now, more than a year since the financial crisis, Congress hasn’t dealt with regulation and people are criticizing politicians for moving too slowly. But by taking more time Congress has had a chance to delve into complicated and multi-faceted issues like too-big-to-fail, over-the-counter derivatives, and bank regulations. This is heavy lifting and I give the Congress a lot of credit for working hard to put something together.

Do you think Congress would work on something for eight whole months and it would end up being a failure? If elected representatives work on something for that long it’s bound to be an unmitigated success.

Is Sarbanes-Oxley a failure? [Fortune]

Former SEC Chairman Pitt: Criminal Prosecutions Are Possible for Ernst & Young, Lehman Execs

Okay then! Not exactly what you’d want to hear from a former SEC Chairman on Monday but what’s a former SEC honcho to do? Paint a rosy picture for everyone? Hell no! The man is gong to get real about this latest bank/accounting firm disaster. Barron’s ran down Harv to get his $0.02 on the whole Lehman/E&Y sitch and he he laid it out for Dick Fuld, E&Y, et al. as how to best handle this dicey situation.

Regarding the timing of a response to the report, you best explain yourselves ASAP and while you’re at it, none of that fancy-schmancy language. Everyone needs to be able to understand this:

If they want to avoid the logical consequences of the Report’s conclusions-and none of those consequences are at all good for either Fuld or E&Y-they will need to come forward quickly with a very plain, easily understandable explanation of the errors or their defenses. The longer it takes them to do that, the less likelihood they will have of mitigating the publicity the Report’s allegations have already received.

Consequences, you ask? How about indictments? How about no more SEC clients for E&Y? Next Andersen? Maybe! Shockingly, the SEC seems to be dragging its feet, per the usual standard operating procedure (emphasis original):

Many are wondering why there hasn’t been any action taken, and why the government hasn’t reported on the same events itself. Criminal prosecutions are possible, as are SEC civil actions. For Fuld, an SEC action could mean that he would forfeit his right to participate in the securities industry and possible disgorgement of monies he received over the years from Lehman. For E&Y, the SEC has the power to suspend their right to practice accounting, limit their ability to take on new clients, and impose remedial sanctions.

Yeah, that last part is kind of the crux. As you may recall, Andersen did not bite the dust because of the money it had to pay to Enron investors but because it’s reputation took such a bad hit that states began revoking their license even before the firm voluntarily surrendered its license to practice before the SEC. This occurred after Andersen clients started running away from the firm like a band of lepers. There’s no indication that’s what will happen to E&Y but there’s a 2,200 page report with E&Y’s name all over that says nothing flattering about the firm.

And say what you want about Harvey Pitt: bearded Bush yes-man, lawyer, whatever. As far as we can tell, he has nothing to gain by throwing out wild-ass speculation about what the possible outcomes could be.

Lehman: Criminal Prosecution Possible, Says Pitt [Barron’s]

Auditor

Are Big 4 Auditors Irrelevant?

Okay people, the calls for the complete obliteration of the accounting world have begun. Check that. It’s more or less the accounting world as it relates to auditors of public companies (i.e. Big 4 auditors).

Steve Goldstein at MarketWatch, for one, is NOT A FAN, “What precise purpose does it serve to have a supposedly independent auditor (paid for by the company) sign off on accounts? From Enron to Lehman to Satyam to Parmalat, it’s clear that the major accountants lack either the skill or the determination (or both) to ferret out fraud.”


So in case you didn’t catch it, he’s calling into question the Big 4’s (our assumption) integrity, competence and fortitude. Oh and before you start huffing about “it’s not the job of the auditor to detect fraud,” we’d argue that’s not even the point any more. Lehman was engaging in what a former CFO calls “shenanigans” that E&Y knew about for years and went along with it. Why? Because Lehman said everything was kosh.

Goldstein goes on:

Company executives already are forced to sign off on their accounts. When they are caught lying, companies face liability over disclosure.

So the threats that keep (some) companies honest are there regardless of whether the reports are audited. The outside auditors themselves are assigned a negligible value by the market.

A solution? Here’s two admittedly out-there solutions that the Securities and Exchange Commission probably won’t adopt.

One is quite simple: get rid of accountants. Who cares? They add no value, and their expenses weigh on the bottom line.

The other would be for someone else to hire the accountant. How about the company’s top five shareholders? While the likes of Fidelity would grumble about the added costs and the free-rider benefit for smaller shareholders, they would certainly have an interest in securing a far tougher audit.

Okay, Big 4 auditors, here’s your homework: explain why auditing for public companies isn’t irrelevant. We’ll listen, we swear. Or just start shooting off at the mouth if you feel it necessary. Goldstein isn’t the first to make this determination. Francine McKenna and Jim Peterson have argued that the value of an auditor’s opinion has been nil for quite some time and they’re both Big 876454 alums. It’s okay if you admit it. Acceptance is the first step.

What exactly is the point of having accountants? [MarketWatch]

Lehman Brothers sign removal

Ernst & Young Was ‘Comfortable’ with Lehman’s Shady Accounting

Late yesterday, U.S. Bankruptcy Examiner Anton Valukus released a 2,200 page report that details the collapse of Lehman Brothers. It points the finger at Lehman execs for engaging in shady accounting that Ernst & Young knew about and was comfortable with. Lehman’s Board of Directors were not informed of the questionable accounting treatment.

To put it in more technical terms: Ernst & Young is in deep shit. The lead partner on the Lehman audwed more times than Dick Fuld for crissakes.

The accounting in question was known inside Lehman as “Repo 105.” These transactions moved billions of dollars off of Lehman’s balance sheet that were described by emails in the report as “basically window dressing” and their global financial describing them as having “no substance.” The Times reports that the treatment was so crucial to LEH that one executive, Herbert McCade, was known internally as the “balance sheet czar” and that he described in an email that the treatment was “another drug we r on.”


The really bad part for Ernst & Young is that they were okay with the “drug.” From the report, the lead partner stated that E&Y “had been aware of Lehman’s Repo 105 policy and transactions for many years.” For you wonky types, Lehman was accounting for these “Repo 105” transactions based on guidance from Statement on Financial Reporting Standard 140, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.

E&Y’s “team had a number of additional conversations with Lehman about Repo 105 over the years,” although they were not involved with drafting the policy nor did the firm provide any advisory services related to the transactions. According to the lead partner on the engagement, the firm simply “bec[a]me comfortable with the Policy for purposes of auditing financial statements.”

The problem, according to the Examiner’s report is that E&Y was okay with the treatment based on the theory:

Ernst & Young’s view, however, was not based upon an analysis of whether actual Repo 105 transactions complied with SFAS 140. Rather, Ernst & Young’s review of Lehman’s Repo 105 Accounting Policy was purely “theoretical.” In other words, Ernst & Young solely assessed Lehman’s understanding of the requirements of SFAS 140 in the abstract and as reflected in its Accounting Policy; Ernst & Young did not opine on the propriety of the transactions as a balance sheet management tool.

According to Lehman’s Global Financial Controller Martin Kelly, “Ernst & Young ‘was comfortable with the treatment under GAAP for the same reasons that Lehman was comfortable.'” Don’t you love it when things work out like that?

Ernst & Young has issued a statement that simply addresses the final audit that the firm performed: “Our last audit of the company was for the fiscal year ending Nov. 30, 2007. Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view.”

SO! E&Y is in a bit of a pickle. Civil suits have already been filed against both firms and more investigations will certainly be coming. If you’ve got some time over the weekend, take a flip through this beauty. We know there is accounting porn in there for some of you.

Report Details How Lehman Hid Its Woes as It Collapsed [NYT]
Examiner: Lehman Torpedoed Lehman [WSJ]
Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report [Jenner & Block]

Former Andersen CEO: Greed Brought Down Firm

Retired Andersen CEO and Managing Parter, Duane Kullberg was part of a panel discussion that went on at Carthage College in Kenosha, Wisconsin this week where he was the featured speak on the “The Rise and Fall of Arthur Andersen”.

Mr Kullberg was part of a panel that included our friendJim Peterson of Re:Balance and Bill Goodman, President of Schneck SC, a firm with offices throughout Wisconsin that also discussed the future of the audit profession.


Mr Kullberg served as the Andersen CEO from 1980 to 1989 but “the profit-driven company culture in the 1990s, that valued sales more highly than the ethically rigorous auditing practices that built the accounting firm,” was ultimately brought the firm down.

The greed came from the development of the consulting business that became a signficant part of Andersen’s business during the 1980s:

By the time Kullberg took the reins, Andersen was an international player, increasingly involved in providing consulting services. By 1988, it was the largest consulting firm worldwide, deriving 40 percent of earnings from that side of the business.

That brought growing demand for greater independence and a bigger piece of the money pie from partners on the consulting side, while those on the tax-audit side militated against revising the company’s historic approach to treating all partners as financial equals.

So the seeds for the firm’s demise were planted long ago and it was due, dare we say, partners that were jealous over the booming consulting side of the house. After Kullberg split the consulting from the audit/tax the feuding got bad and lawyers got involved. Then the bright idea of rebirthing the consulting business within the audit/tax firm came about:

Under Kullberg, two operating units were created: Arthur Andersen, the tax-audit/accounting group, and Andersen Consulting, both under Andersen Worldwide, each under its own managing partner.

The equal compensation system also was revised, with funds being set aside to reward individual partners and teams of partners for superior performance.

Fissures widened dramatically in 1997 when Andersen Consulting (now Accenture) won an arbitration against Andersen Worldwide and broke off on its own after the tax-audit group set up its own competing consulting service

“All of a sudden, they went back into the arena of business consulting. It was untenable,” Kullberg said.

The rest of this story is well-known. If not, there’s a play coming out this spring. That should catch you up.

Accounting for greed [Kenosha News]
Carthage welcomes Duane R. Kullberg [Carthage College]

UK Financial Reporting Watchdog: ‘We don’t need no Big 5’

Solutions.jpgEditor’s Note: Want more JDA? You can see all of her posts for GC here, her blog here and stalk her on Twitter.
Once upon a time, there were 8. And then 7. And then 6. And then 5. And now 4. I’ve thrown out the idea of a large audit failure sending one of the Big 4 tumbling but the idea has been met with resistance; and naturally so, they’ve survived this long, right?


Accountancy Age:

Stephen Haddrill, the new Financial Reporting Council chief executive, in his first interview since taking the post, said there was little chance a global challenge to the Big Four – PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG – would emerge in the near future.
“I don’t think it is achievable in the near term and the priority for us has to be that we are prepared for the worst and that is where I will put my focus,” he said.

To read the rest of Haddrill’s interview with Accountacy Age, one might be inclined to point out that the guy is only a little bit pessimistic and for good reason. The Big 4 cannot exist indefinitely as they have, deflecting fines each time they bumble a big audit. It isn’t a problem exclusive to the UK and in fact, the Big 4 might not realize it but they are fighting the battle to save American capitalism. To that end, sacrifices may be required in the name of “competition”, whether or not the Big 4 are ready to embrace the idea.
They call them the Final Four because it is widely believed that the large accounting firms cannot lose another player but what’s to stop regulators — either Internationally or here at home — from busting down the joint and shutting one down? Anyone forgotten Satyam?
The firms — clever Trevors that they are — already know regulators are on their asses and behave accordingly. Crossing their Ts and dotting their Is, it was incredibly easy for PwC to say “Satyam wasn’t our problem” here in the states just as they’d have done if it had gone down in the UK, Dubai, China… it doesn’t matter, that’s what the lawyers get paid for.
Anyone get the feeling we’ve got a problem on our hands or is that just me? “Preparing for the worst” eh? Sounds like a plan.

The Latest Badge of Honor for the SEC

[The] GAO says the SEC ended its fiscal year on Sept. 30 with ineffective internal control over financial reporting, a now recurring theme ince [sic] the SEC was first required in 2002 to submit audited financial statements to Congress and the Office of Management and Budget.
“In connection with our prior audits, GAO has made numerous recommendations to SEC to address the internal control issues that continued to persist during fiscal year 2009,” GAO wrote in its report. The deficiencies that most troubled the government auditor were problems with information security, financial reporting processes, fund balance with the U.S. Treasury, registrant deposits, budgetary resources, and risk assessment and monitoring processes.
The deficiencies add up to a material weakness, GAO said, giving good reason to wonder whether data processed by SEC’s systems are reliable and adequately protected.

SEC Gets Another Material Weakness Finding from GAO [Compliance Week]

If Failure = ‘Chaos’, What Does Chaos Look Like?

Riots.jpgThe British government has denied a change in the law there that would limit audit firms’ liability. The Big 4, who seem to enjoy a far more prestigious and influential existence in Britain than in the U.S., lobbied for a change to the law but it was ultimately dismissed by the British Business Secretary.
The British government cites existing law that would allow companies to reach agreements with their auditors to limit their liability.
Continued, after the jump

Under present company law, directors can agree to restrict their auditors’ liability if shareholders approve; however, to date, no blue-chip company has done so. Directors have seen little advantage in limiting their auditors’ liability, and objections by the US Securities and Exchange Commission (SEC) have also been a significant obstacle.

Ahh, the SEC, exerting its far-reaching influence another over sovereign government, not to mention their stellar track record . This does not amuse in the UK:

Peter Wyman, a senior PwC partner, who was involved in the discussions, said that the Government’s lack of action was disappointing. He said: “The Government, having legislated to allow proportionate liability for auditors, is apparently content to have its policy frustrated by a foreign regulator.”

The firms are lobbying, not solely for their own survival, dammit, but the sake of everyone, “They warned that British business could be plunged into chaos if one of them were bankrupted by a blockbuster lawsuit.”
We’re not really sure what ‘choas’ would entail. Hank Paulson had his own version of financial Armageddon but we hardly think that’s a plausible scenario if a Big 4 firm were to fail.
Perhaps there would be an army of accountants roaming the streets in zombie-like states offering their excel expertise to anyone that would accept it. While this is a completely horrifying scene, we’re skeptical of true ‘chaos’.
If you’ve got your own visions of chaos in the event of a large firm failure, describe it in the comments.
Audit firms left unprotected against claims of negligence [Times Online]
Also see: No legislated cap on audit liability [AccMan]

Wanted: Auditor for a Failing Bank (And a Buyer Too)

GeorgeCostanza_art_200v_20090306003944.jpgIn another case of an auditor giving a Titantic-esque bank the ‘It’s not you, it’s me’ routine, E&Y resigned as the auditor of Corus Bankshares, Inc., in a filing late last Friday.
This one really had no chance. After the Chief Accounting Officer resigned after five months on the job, family shareholders continuing to dump their shares, and filing their Q late, you can’t really expect Ernie to stick around.
E&Y had given the going concern paragraph kiss of death on Corus’s audit opinion earlier in the year and according to the last amended quarterly filing, Corus had over $7 billion in assets but negative equity. So, nature seems to be taking its course. Chalk it up, She Bair.
Ernst & Young resigns as Corus’ accounting firm [Chicago Tribune]

E&Y Isn’t On Board with Anything Delightfully Tacky and Unrefined

Hooters_Logo.pngWould someone kindly tell Ernst & Young to get with the program? This country is falling apart at the seams and there are certain time honored traditions that we’ve all agreed on as TBTF.
So when we find out that the Hooters Casino in Vegas may go bankrupt and that E&Y warned of this back in March, we thought that it was a mistake. Of all the businesses out there, wouldn’t Ernie have the sense to help these poor saps cook the books so they can stay in business?
More, after the jump


Where in the name of God will divorced men and former college football players go to eat mediocre misshapen “wings” that come from, we’re pretty sure, a bird that was created by someone that we envision to be a cross of Doc Brown and Dr. Moreau? Served by women in skimpy, tight-fitting uniforms? IN VEGAS?
See the problem here? E&Y, would you care to explain yourselves?
Hooters Casino may go bust [The Deal]

Bank Failures by the Numbers

empty-2dpockets-small.jpgThis isn’t mathleticism, this is simply truth in numbers. With Colonial Bank officially R.I.P. and torn to shreds (North Carolina-based BB&T has picked up the branches, the garbage will likely be marked down and sold off to whichever sucker the FDIC can find) this past week, it might be a good idea to look at the mathematical reality of the situation.
Lately, bank failures seem to lead tangentially to accounting in that banks often point the finger at mark-to-market as the key piece which sent them hurtling toward doom. Sure, blame the accounting, that’s always a classy move. But all’s fair in love and value right?
In an era where the word “trillion” hardly raises an eyebrow, let’s put this into perspective and look at the 5 largest bank failures of all time (in terms of costs to FDIC):
More, after the jump


5. BankUnited, Coral Gables, FL: $4.9 Billion
4. American Savings and Loan, Stockton, CA: $5.7 billion – at the time, the amount to cover American S & L cost the FDIC 10% of its “fund” and was one of the largest failures of the savings and loan crisis.
3. Continental deserves its whole epic tale
2. Washington Mutual (we can’t discuss costs to the FDIC for this one since JP Morgan swooped in to get it and there are still active lawsuits around the deal)
1. IndyMac: $10.7 billion. That wasn’t too long ago so you should still remember the tale.
In one day (this past Friday), the FDIC found itself on the hook for an estimated $3.68 billion, and surely that’s a positively-doctored number. Move along now, nothing to see here.

Authorities on August 14 closed down five banks — Colonial Bank; Dwelling House Savings and Loan Association; Union Bank, National Association; Community Bank of Arizona and Community Bank of Nevada.
As per the Federal Deposit Insurance Corporation (FDIC), which is often appointed as the caretaker of failed entities, the collapse of these five banks would cost the agency a staggering USD 3.68 billion.

Maybe now would be a good time to express a doubt.

Colonial Bank Shouldn’t Make Any Late Summer Plans

thumbs down col.gifSo all that fuss over at Colonial Bank? Accounting irregularities, natch. According to Reuters, “Colonial BancGroup Inc (CNB.N) said it faces a criminal probe by the U.S. Department of Justice (DoJ) related to accounting irregularities at its mortgage lending unit, and the struggling lender warned it may be put under receivership.”
The SEC is also taking a peek at the bank’s participation in TARP. Book cooking for taxpayer funds may have its poster child. Top notch, Colonial. Top notch.
Colonial BancGroup faces criminal probe, FDIC action [Reuters]

The FDIC May Have to Seize Itself

PiggyBank_broken.jpgEditor’s note: Adrienne Gonzalez is founder and managing editor of Jr Deputy Accountant as well as regular contributor to leading financial/investment sites like Seeking Alpha and GoldmanSachs666. By day, she teaches unlicensed accountants to pass the CPA exam, though what she does in her copious amounts of freetime in the evening is really none of your business. Follow her adventures in Fedbashing and CPA-wrangling on Twitter @adrigonzo but please don’t show up unannounced at her San Francisco office as she’s got a mean streak. Her favorite FASB is 166.
In honor of Bank Fail Friday, let’s take a look at our doubt over the FDIC continuing as a going concern. Sure, we know it’s technically a government agency and therefore not subject to the same sorts of worries as public companies but there is certainly something brewing here.
We are not in the business of auditing the financial statements of the FDIC, even if they provided such information. Frankly, if they did, we really aren’t equipped to analyze said statements. Be that as it may, you don’t need to be an expert to see that the FDIC is in a whole shit ton of trouble (yes, that is our qualified opinion).
More, after the jump


Remember Colonial Bank? Surely Sheila Bair has been up late since the news broke on Monday that they’d cooked their books, or something about TARP fraud (though the bank never received TARP funds after that TBW deal for $300 million fell through Friday). Maybe it was undercapitalization? Who keeps track of these things?
Anyway, the point here is that the FDIC well has run dry and there’s no magically conjuring up a Treasury line of credit. While Congress has offered up a $500 billion “line of credit” to our friends at the FDIC, that money technically does not exist. (Psst: hate to break it to Congress but yours truly is only a tad concerned that there may be trouble in the bond market ahead).
I’m no mathlete but this should be fairly simple to understand:
Colonial has about $25.5 billion in assets, while the FDIC has about $13 billion remaining in the fund. According to Sheila’s math, new FDIC fees levied against Too Big to Fail will net the fund about $27 billion this year. To put this into perspective, the FDIC lost $33.5 billion in 2008 to cover 25 bank failures. Add it up, as we’ve had 69 bank failures in 2009 to date. Carry the 1 and I believe we arrive at the following figure: the FDIC is screwed.
Like I said, someone might want to check my numbers but it doesn’t look good.
I could also point out that perhaps the FDIC should have chosen the “proactive” route and collected insurance premiums for the last 10 years instead of assuming the good times would last forever but again, not my jurisdiction.
Disclosure: the author has long since diversified her “investments” in the First National Bank of Her Mattress, thankyouverymuch.

UPDATE 2: SEC Memo says Guaranty Bank to be Seized, not Sold

thumbs down col.gifEditor’s Note: Teri Buhl is a Wall Street investigative reporter who has written for the New York Post, Trader Monthly and HousingWire.com. Her big scoops include breaking news on all things wrong at IndyMac, calling out Bob Steel for lying to investors about losses on CNBC, and shining a light on Wells Fargo for manipulating earnings with paper accounting gains. She resides in lower Fairfield County, CT and actually earned an accounting degree from Uer case of the Feds proping up zombie banks, sources have reported that an SEC memo has stated that the FDIC will seize Guaranty Bank (GFG: 0.123, -5.38%) and it will not be sold as previously rumored.
This continues the trend of bank seizures occurring with virtually no warning. According to one prominent hedge fund manager:
“The problem is that the regulators know that if they call these things anything worse than “well capitalized”…it is a kiss of death. In many ways it is the same issue as rating agencies (curse of the AAA) that know that if they downgrade certain types of companies, they are putting them out of business. As a result, many banks are “well capitalized” until the day they are seized. It is absurd.”
More, after the jump


Austin, Texas based Guaranty Bank just updated its bank reports to show a $1.8 billion loss for the 1st quarter, of which $1.6 bil was due to “Other-Than-Temporary Impairment Charges on Debt and Equity Securities”. Um, not good.
What’s worse is that, according to our OTS sourcing, this will be a full shutdown. This means that after insured deposits are returned the bank will be unwound and put out to pasture. No cash rich private equity groups will sweep in to offset losses and clean up the regulator’s mess this time.
The updated bank regulatory reports show Guaranty’s assets are now $13.35 billion, with over 70% of those assets being real estate related. There are $2.1 billion in deposits listed as uninsured. Guaranty operates 164 branches and employs around 1,700 people.
Sourcing inside the regulator said,”Considering the OTS let the bank defer taking write-downs, I’m sure there will be skeletons that will embarrass the OTS again.”
The seizure will hit the FDIC’s budget to the tune of at least $5.3 bil according to sources within the OTS. Another top bank analyst has predicted the hit to be closer to $8 billion.
This, on top of what’s going on with Colonial Bank failing, should wipe out what’s left of the FDIC’s budget. As a result, they are going to have to borrow from the Treasury and then add that cost to our nation’s banks, which we all know just gets passed on to the taxpayer in the form of higher banking fees.
Paul Miller, analyst for FBR Capital Markets, told Going Concern, he believes that banks will be assessed a fee of 5 bps of total assets this fall in order to fund the FDIC’s empty coffers. This new fee assessment will raise $5 billion for the FDIC’s bank seizure budget.
We’ll continue to update this story as we learn more.

What is Going on at Colonial Bank?

thumbs down col.gifEditor’s note: Adrienne Gonzalez is founder and managing editor of Jr Deputy Accountant as well as regular contributor to leading financial/investment sites like Seeking Alpha and GoldmanSachs666. By day, she teaches unlicensed accountants to pass the CPA exam, though what she does in her copious amounts of freetime in the evening is really none of your businesures in Fedbashing and CPA-wrangling on Twitter @adrigonzo but please don’t show up unannounced at her San Francisco office as she’s got a mean streak. Her favorite FASB is 166.
The Colonial BancGroup audit group is going to have some ‘splaining to do when all’s said and done. Proof that you really don’t want to mess around when it comes to $700 billion taxpayer injections.
SIGTARP top cop Neil Barofsky said early on “I hope we don’t find a single bank that’s cooked their books to try to get money but I don’t think that’s going to be the case” but evidently forgot to knock on a nearby piece of wood in the Treasury basement when he did as SIGTARP agents have raided two Florida offices in conjunction with possible TARP fraud.
The whole thing, after the jump


Via Florida’s Ocala.com:

“I can confirm for you that our office, the Office of the Special Inspector General for the Troubled Asset Relief Program, has executed two search warrants today in the state of Florida,” said Kristine Belisle, communications director. “It’s our investigation. It’s our agents that have executed search warrants.”

Belisle said the warrants were sealed.
“I can’t provide any further information because of the nature of an on-going investigation,” Belisle said.
While Belisle is hesitant to get into the details, we’d be happy to catch you up for now.
The story, as we understand it, goes something like this: Colonial BancGroup, finding itself under increased pressure by both federal and state regulators including the FDIC, Federal Reserve, and the Alabama State Banking Department to bump up capital, thought it had a $300 million deal in the bag with Florida-based Taylor, Bean & Whitaker. We’d like to point out here that while the author enjoys stirring up trouble wherever possible, it’s never a good idea to do so when Federal regulators are involved, especially when they toss out demands like this:

WHEREAS, on July 15, 2009, the board of directors of BancGroup at a duly constituted meeting adopted a resolution authorizing and directing Simuel Sippial, Jr. to enter into this Order on behalf of BancGroup, and consenting to compliance with each and every provision of this Order by BancGroup and its institution-affiliated parties (blah blah blah)
(a) The consolidated organization’s and the Bank’s current and future capital requirements, including compliance with the Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and D of Regulation Y of the Board of Governors (12 C.F.R. Part 225, App. A and D) and the applicable capital adequacy guidelines for the Bank issued by the Bank’s federal regulator;

Our emphasis/edit. Long story short, the Taylor, Bean & Whitaker deal was never a go and Colonial shares have been in full-on death watch ever since. But wait, there’s more!
As of about 11a EST this fine Monday morning, SIGTARP agents have crawled around both Colonial and TBW offices in search of… well, we don’t know exactly what they were looking for as company reps and regulators have been fairly tight-lipped since this story broke but we’re pretty sure they aren’t trying to track down Michael Jackson’s body.
Not so coincidentally, Colonial (CNB) reported a $606 million loss on Friday. The phrase “going concern doubt” was probably invented just for cases like this, although we have our own phrasing that we like to use including “totally screwed!” and “Just Big Enough to Fail”
This is the first large SIGTARP case that we are aware of and if Colonial is closed by regulators, it will be the largest bank failure of the year. No disclosures, though we will be excited to see what else Barofsky’s office is cooking up (no pun intended).
Feds raid Colonial Bank office in Florida [Reuters]