The Big4 Blog

Rob Starr, Big4.com

1 September 2010

(blog) Douglas Farquahar, Head of Sustainable Outsourcing at Capgemini U.K has jumped squarely on the green data center bandwagon, and with good cause. A big portion of the company s revenues are generated through IT and when you consider the statistic that the green IT service sector is set to grow at a rate of 60% until 2013, it’s easy to see why companies like Capgemini need to make clear which side of the fence they’re on.

Things are not always what they seem and that applies to information technology. It seems data centers are huge part of the IT wave in the business world, and they contribute greatly to the world’s carbon footprint. As much as 2% of that bit of nasty business can be traced to data processing and storage.

Still it s clear there is no turning back now as the world races towards its new technological future in both business and consumer arenas. However, there’s no need for Greenpeace to hang a banner off the nearest data center just yet; it appears that the industry is being proactive and Capgemini is at the forefront.

Capgemini’s new data center will be located in Swindon and have the lowest Power Usage Efficiency (1.08) rating in Europe (and perhaps the world). Maybe we’re getting things right this time and business is putting the horse before the cart and not the other way around like we did with the fossil fuel industry. The old warehouse with 33,000 square feet of space will be totally upgraded for targeted occupancy on September 17, 2010. The first phase will have four 10,000 square feet modules for a total capex of $18.5 million dollars, with total investment pegged at $43 million, and 100% occupancy by Q2-2011.

There’s more evidence to support the claim that we’re headed for a greener consciousness. Fittingly, the U.K. Environment Agency will occupy two of the floor space modules in the new building. Hats off to Capgemini. That kind of thinking will have them racing past the big business dinosaurs that are still playing hide and seek with all the oil in the Gulf Of Mexico. (blog)

 

Susan Black, Big4.com

30 August 2010

(blog) Yes, the old lady turns a 100!

KPMG Switzerland celebrates its 100th year anniversary as a firm in 2010, growing from its small roots when Dr. Eugen Keller-Huguenin founded the Zürcher Treuhand-Vereinigung in 1910 with only 6 employees and a share capital of 400,000 Swiss francs. And going through several name changes (Fides for the longest time, which in 1991-92eventually merged into KPMG Fides Peat and then into KPMG.), changing financial regulations, two world wars, multiple management teams, varied partnership structures, the firm has emerged stronger than ever, now KPMG Suisse has 1,600 people from 45 different nations.

There’s a fun and quirky look back at 100 years of memorable history at http://www.kpmg.ch/docs/Clarity_2010_Web_E.pdf

It’s a must read for all those associated with this firm, especially the hilarious pictures of KPMG staff with hairstyles through the ages (page 32) and the rib-tickling comic book pages following, showing that KPMG folks can still think outside their audit and tax boxes and come up with lots of fun.

And on 23rd September 2010, the firm will be celebrating the 100th anniversary with clients and partners in the stately atmosphere of Villa Wenkenhof in Riehen, with a brief greeting by the office manager and Executive Committee followed by a concert from four cellists from the University of Music, and culinary delights served on the terrace where guests will have the opportunity to chat and wrap up the evening.

It’s just a nice feel-good story, and we have nothing to add that’s not been so poignantly said in the 100th anniversary magazine issue of Clarity. (blog)

 

Lisa Chapman, Big4.com

30 August 2010

(blog) It’s been a while since we saw some news from the KPMG tax shelter case, which was being judged by Justice Kaplan in New York, and we have blogged a lot about all the twists and turns that the case has taken.

Now we hear that a federal appeals court has stood by Justice Kaplan’s convictions of an ex-KPMG partner and an ex-KPMG senior manager and an ex-Sidley Austin lawyer, but reduced the previously imposed fine for the ex-KPMG senior manager John Larson from $6 million to $3 million on the grounds that the maximum fine for each offense of $250K under prior court precedent multiplied by the number of convicted offenses of 12 mathematically leads to $3 million and the earlier $6 million judgment was way over the correct limit.

Not that it matters for Mr. John Larson, who has been sentenced to 10 years in prison, and it is not clear when the $3 million will need to be paid.

The 3-judge Second Circuit panel found no errors in U.S. District Judge Lewis Kaplan s jury instructions and rejected Larson s argument that his sentence was too long relative to the other defendants. J. Scott Ballenger, a lawyer representing Larson, had this to say, "We re deeply disappointed with the court s decision affirming the conviction and are considering our options for further review. Of course, we re gratified by the court s recognition that the fine imposed was unconstitutional."

Here’s a list of convictions and payments under this long-drawn affair:

KPMG, the firm - in August 2005, pays $456 million to the government in an accord to avoid possible prosecution; and likely loss of licence and other disastrous consequences

Ex-KPMG tax partner Robert Pfaff, convicted to 8 year term

Ex-KPMG senior tax manager John Larson, convicted to 10 year term

Ex-Sidley Austin LLP partner Raymond Ruble, convicted to 6.5 year term

Ex-KPMG partner Robert Pfaff, convicted

Ex-Brown & Wood LLP partner Raymond Ruble, convicted

Earlier in June 2006, Justice Kaplan threw out the government’s case against 13 other ex-KPMG employees. Hopefully this puts an end to the whole sordid affair, and sends out a strong message that illegal white collar activities to defraud the government will eventually meet their just end. (blog)

 

by Rob Starr, Big4.com

August 25th, 2010

(blog) Here’s another one for the truth is stranger than fiction file. According to a new report from KPMG UK, almost half of the British employers surveyed said that they were having a hard time filling open job vacancies. In fact 45% of the 600 that were surveyed said that they were having this problem to such an extent they were looking offshore to fill the vacancies, especially for key positions where historically talent has been sourced from outside the UK as in engineering, accounting/finance and IT.

When you start to break down the numbers, you see that the answer to what at first looks like an anomaly might just be business emerging from the recession with an eye to the new global economy. Case in point:

• British employers said that they plan to use call centers in India and China.

• IT and finance will also be ‘offshored’

The head of KPMG UK head of markets, Malcolm Edge, put a realistic spin on the whole thing by saying that British companies are looking toward a future that they see as increasingly bright so that want to make sure they keep the momentum by plugging the gaps where they need to in the employment sector.

“In moving forward, businesses need the right people with the right skills. Increasingly, they are looking overseas to address this skills gap recruiting people to the UK or deciding to offshore both work and jobs,” he recently told hrmagazine.co.uk.

This could be a big test for the new Coalition government since there has been talk about introducing a migration cap on these business and their jobs. The fact that there doesn’t seem to be enough specialized trained workers in the UK to fill these vacancies might just be an oversight for the British; but the transition in other countries where there has been a loss of manufacturing jobs like Canada has left similar holes to fill. (blog)

 

Lisa Chapman, Big4.com

25 August 2010

(blog) We saw it yesterday buzzing around in the news, and also confirmed by the Financial Accounting Standards Board (FASB) that its current chairman Robert Herz is retiring on his own accord almost two years before the end of his term, much to the surprise of the industry, the Board and the Financial Accounting Foundation (FAF). Robert H. Herz was appointed FASB chairman on July 1, 2002, and was reappointed to a second term effective July 1, 2007 for a 5 year term. Previously, he was a senior partner with PricewaterhouseCoopers.

Leslie Seidman has been appointed Acting Chairman, effective October 1, 2010. Ms. Seidman started her career as an auditor in the New York office of Arthur Young & Company (now Ernst & Young LLP) and is a CPA.

In other developments, The Board of Trustees of the Financial Accounting Foundation (FAF) today announced that the will grow from five to seven members. From 1973 until 2008, it had 7 members and then got reduced to 5 last two years before it goes up again.

So, a lot happening over at the FASB in the course of one evening!

One of the significant changes supported by Mr. Herz was the “fair value” model for reporting of financial assets, which we covered comprehensively in our previous blog post:

http://www.big4.com/?page=blog_item&url=we-talk-to-pricewaterhousecoopers-on-financial-instrument-reporting-599

And we said there,

“The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) undertook a joint project in late 2008 to look at all accounting aspects for financial instruments, with a view to improving the usefulness and increasing the consistency of financial instrument reporting through simplification and convergence of the current US and international accounting models.

While jointly begun, the IASB and FASB have moved to different end points. The FASB has been more radical in suggesting a complete change - in that all financial instruments should be reported at fair value, including bank loans and deposits. On the other hand, the IASB preferred to stay in line with current reporting guidelines - in that instruments to be held for the longer term be reported at amortized cost, and those held for the shorter term be reported at fair value.

The FASB would like to present all financial instruments at fair value in the balance sheet and include that measure in the determination of GAAP equity. (the “fair value” model). Net income would continue to be based on amortized cost for longer term instruments and fair value for shorter term instruments. Any periodic differences between amortized cost and fair value for longer term instruments would be booked as other comprehensive income. The FASB also requires presenting financial instruments at amortized cost on the balance sheet supplementally, thus providing investors both sets of information for their analysis. Some argue that the advantage of reporting assets at fair value is that it incorporates all market information, not just management’s opinion; and it can be an early warning system when markets are trending down.

PwC’s survey reveals….But one theme dominates - investors responding to this survey generally prefer the mixed model, since they indicated that it better reflects how the institution is thinking about the asset. They tend to use amortized costs in their analysis for future cash flow predictions.”

Yes, the PwC survey indicated that investors, and many banks prefer the IASB’s version of the “mixed measurement” model more than the drastic change required by the FASB’s “fair value” model.

With the surprise departure of Mr. Herz, his crucial swing vote for the “fair value” model drops off, leaving Ms. Seidman with the power to influence her choice, the “mixed measurement” model, much to the delight of US banks, who much prefer this approach. Mr. Herz’s departure leaves the leaves the board split 2-2, and Ms. Seidman, who dissented to FASB’s model and favours the IASB’s model will now as acting chairman, have the crucial casting vote to swing the board quickly before the board again increases its size to seven members.

Mr. Herz’s departure is being widely speculated, as his term was marked by intended and then modified changes to the “mark to market” rule, which the FASB proposed and then had to back-down due to intense pressure from banks, investors and politicians.

In any case, this departure brings back the focus to new standards, and how this all plays out with a new Chairman and an expanded board will be an interesting story, with many twists and turns. (blog)

 

Rob Starr, Big4.com

25 August 2010

(blog) Fair Investment.co.uk has an interesting story about how “Andrew Lilico, chief economist at Policy Exchange claims that interest rates could have to increase to eight per cent to combat the high inflation that will couple the boom he is predicting.”

And this totally contrary to the Ernst & Young ITEM Club report from last month which states the opposite—that in fact those rates will remain at 0.5 percent until 2014. See our write up on this at http://www.big4.com/?page=news_detail&url=ernst-and-young-calls-it-right-on-uk-boe-interest-rate-decision-1431.

Does anyone remember what happened to the interest rates in the 1980s? Let’s hope so.

Still Andrew Lilico suits squarely on the other side of the fence for the Policy Exchange. His prediction does have a bit of a silver cloud however in that he thinks there’s a boom coming that will necessitate the rise in interest rates to combat inflation. There’s still that negative talk mixed in with his ideas that we’ll need to go through a double dip recession first however.

The Ernst and Young report seems to be the more realistic of the two. It suggests that there will be slow economic growth over the next two years to be followed by a gradual pick up in 2012.

They seem to have taken the crystal ball out of the formula and just relied on some solid facts here, stating that the UK deficit will be reduced by 2015-2016. All this without any talk of a double dip recession. To be completely fair, the recent slowdown in global growth forecasts, the steep drop in the long-bond yield, persistently high unemployment, talks of deflation – all point to lower rather than higher interest rates, at least at this point in time.

Though a high-growth high-inflation scenario as envisaged by Lilico would be in some sense better than true deflation, it seems that the world is not veering in that direction Which is why the more conservative estimates by Ernst and Young seem to mirror what the successful investors and perhaps even governments like Canada are doing it by playing it safe with their money in low-cost but sure-play debt instruments. (blog)

 

Susan Black, Big4.com

24 August 2010



(blog) PricewaterhouseCoopers LLP (PwC) is plunking down $378 million in cold hard cash for Diamond Management & Technology Consultants, Inc. in another sign that the M&A market in the consulting business is heating up – see all our previous blogs on this, notably Booz-AT Kearney, Deloitte UK, Accenture and Capgemini being key newsmakers in recent months.

Diamond trades on the Nasdaq as DTPI had $210 million sales in the year ending March 31, 2010 and $12.3 million in net income, and $15.8 million in Earnings Before Interest and Taxes. So this is a good 24 times of transaction value on EBIT. With 2009 Depreciation and Amortization at $1.6 million, EBITDA is $17.4 million and so the transaction value divided by 2009 EBITDA is 21.7 times, a nice premium for DTPI shareholders.

The stock was trading at about $9.50 per share at the end of trading on Monday August 23, 2010 and zoomed 30% higher to $12.50 per share on the opening on Tuesday August 24, 2010 as PwC made the announcement after market closed on Monday August 23, 2010. This is a definitive merger agreement where PwC LLP acquire all of the outstanding common shares of Diamond for $12.50 per share in cash and values Diamond at $378 million. Diamond will join the PwC Advisory practice. The transaction, which has been unanimously approved by both companies' boards, is expected to close in the fourth quarter of calendar year 2010, subject to customary closing conditions, including the approval of Diamond's stockholders and antitrust clearance.

Adam Gutstein, President and CEO of Diamond, was obviously pleased, "This is an attractive all cash opportunity for our stockholders” etc. etc. and this is also Robert Moritz, US Chairman and Senior Partner of PricewaterhouseCoopers LLP first deal after taking over his new role, "We are pleased to bring to PwC a group of highly talented professionals with a proven track record of consistently delivering world class service.”

According to Yahoo Finance, 52% of DTPI is held by institutional investors, with

BlackRock Advisors, LLC holding 1,643,184 shares (6.00% of outstanding); RENAISSANCE TECHNOLOGIES, LLC holding 1,196,500 (4.37%); BlackRock Institutional Trust Company, N.A. holding 1,140,577 (4.16%); VANGUARD GROUP, INC. (THE) holding 1,044,613 (3.81%); and Fidelity holding 823,630 (3.01%).

Among individuals with the biggest share ownership are:

BERGSTEIN MELVYN 1,057,918 shares

GUTSTEIN ADAM J 523,205 shares

BUPP KARL E 434,619 shares

MIKOLAJCZYK MICHAEL E 281,784 shares

WEAKLAND THOMAS EDWARD 93,978 shares

What does Diamond do? It was founded in 1994 and has 88 clients, 527 consultants and 116 operations employees; and provides management and technology consulting services. The company offers skills in strategy, information technology, operations, and program management. It provides managing technology and business transformation, information management strategies, and compliance and risk management services, as well as assesses various technologies for financial services industry.

We brought to attention earlier that KPMG was making a case that the Big Four do need to shore up their consulting services to match client needs, and return back to their erstwhile dominance in the business consulting space. This acquisition of a public company is probably the first of many to come where a large Big Four firm quickly and decisively acquires a general mid-sized consulting firm, incorporates it into its Advisory Services and expands the top line by offering such services to its audit client base. Classic Big Four strategy but notable in that PwC is willing to pay 30% premium in hard cash to prevent competing bids (see HP trumping Dell for 3PAR) and then jumping into the space with size much quicker than an organic ramp-up.

Watch out for more in this space quite shortly as Big Four acquisitions get more frequent and perhaps larger too.(blog)

 

John Fowler, Big4.com

20 August 2010

(blog) Stagnation plus inflation is “Stagflation”

Breakfast plus lunch is “Brunch”

You have very likely heard of these common blended words.

Now PricewaterhouseCoopers (PwC) UK introduces “Slowth” into housing lexicon, which is not what the Urban Dictionary defines as “Slowness. Generally sloth-like behavior, especially of computers or co-workers” but presumably a blended word of “Slow” plus “Growth”.

In this case, slowth has hit the UK housing market.

Essentially, UK house prices have fallen by around 17% in real inflation-adjusted terms from their peak in 2007. And PwC feels they may not regain their previous peak in real terms until 2020.

Which is really sad news, and reiterates that the housing market has been hit hard by slowth.

This 2% annual real growth in house prices on average between 2010 and 2020 is far below historical average real UK house prices growth of around 4% annually between 1984 and 2007 and around 3% per annum between 1984 and 2010.

For comparison, PwC calculates the expected return for a number of other financial asset classes between 2010 and 2020:



House prices at 2% per year

House prices (purchase and rent-out) at 3% per year

Stocks at 5% per year

Risk-free bonds at 1% per year

From above, it appears housing falls between bonds and stocks in terms of annual return, and so concomitantly between them also in terms of risk (variability of the return). Housing appears similar to a mix of stocks and bonds.

John Hawksworth, PwC’s Chief Economist aptly comments, “There remains significant uncertainty in the UK housing market and it seems probable that it is set for a protracted period of relatively slow growth by historic standards. Housing is certainly a significantly riskier asset than index-linked gilts, although not as risky as equities. Our analysis suggests that, as an investment, housing is similar in terms of both risk and expected return over the next decade to a 50:50 mix of equities and index-linked gilts.”

2% means that housing just inches along each year, far below stocks and a smidgeon above bonds, though with some risk.

Ugh!.....slowth is perhaps a good way to describe housing. (blog)

 

James Spencer, Big4.com

19 August 2010

(blog) The recent release of the Communities and Local Government spending data for the last year 2009 may have been meant as a political gimmick, but it’s proven very useful to see who is really up and down in the reasonably secretive world of public sector procurement.

So we decided to try to mine this data to the best possible extent to see how the Big Four firms fared With all indications that there is going to be a slowdown on public sector procurement by the LibDem government, it would be a good to see who has the biggest share of this pie.

Of course we should point out some caveats in using this raw data. For a start, most name changes cannot be quickly spotted. Secondly, there were some surprising omissions, for example Accenture. Could the entire local government departments not have done any business with Accenture? A notable omission means that it must be so!. Finally this data cannot be extrapolated - what’s going on in the Department of Communities and Local Government may not be representative of what’s going on elsewhere. After all there are big discrepancies across departments.

So without further ado, let’s see who is winning and who’s losing.

As we did our number crunching across all these multiple spreadsheets, there were a number of small names which popped up. Winston Gross & Co, a nine person, two partner firm in Camden charged the least (that we’ve found) with £1,500 for “Financial Services” to the Community Development Foundation.

More familiar middle tier names then started to appear. Littlejohns is charging £4,836 to the Thames Gateway Development Corporation. And there are others with surprisingly low scores, such as Baker Tilley, Grant Thornton and Chantrey Vellacott. Jeffreys Henry has a decent contract with the Community Development Foundation, while Moore Stephens has an internal auditing contract (through AHL Business Assurance) with the Valuation Tribunal Service.

Then there’s a big jump in the numbers. Ernst & Young are the lowest scoring of the Big Four, which is a sole contract with the Home & Communities Agency, and this agency does do business with all the Big Four firms. The National Audit Office also ranked among the top five.

PKF is the highest scoring firm outside the big four, largely also on the back of the Home & Communities Agency. This agency also provides the main income for both Deloitte and KPMG. If its role is to create “thriving communities and affordable homes” we may be pushed to ask why it is spending a ton of money with top accountancy practices?

Finally there is the outright winner, PricewaterhouseCoopers. The firm charged more than all the other accountancy firms combined. Just over £4 million was charged in 2009 to a wide variety of departments. A whopping £1.8 million alone was for “Strategic Consultancy” from the Communities and Local Government department.

This is only the opening salvo, and many interesting facts have emerged. With other departments laying open their spending shortly, a more balanced figure may emerge, though we doubt the Big Four rankings will change that much. (blog)



Provider - Total Spend in GBP

Winston Gross & Co - 1,500

Littlejohn Chartered Accountants - 4,836

Baker Tilly Tax and Advisory Services - 10,975

Grant Thornton - 14,789

Chantrey Vellacott DFK - 23,476

Jeffreys Henry - 23,978

Moore Stephens - 29,957

Ernst & Young - 197,441

PKF (UK) - 293,329

National Audit Office - 345,450

Deloitte - 758,982

KPMG - 773,505

PricewaterhouseCoopers - 4,036,993

(Note: Big4.com believes in these figures, but does not guarantee their accuracy)



 

Rob Starr, Big4.com

20 August 2010

(blog) It’s easy to imagine that the money gurus at PricewaterhouseCoopers (PwC) have done more than a few jobs in their time which might have caused them some strife. After all, dealing with some of the biggest names in the financial world and having to juggle complicate money systems from one end of the globe to the other can’t be easy.

That’s why it seems so interesting ( and maybe even a little reckless) that anything at all could cause these heavyweights to be ‘tearing their hair out’, but that’s just what The Sunday Express in Britain is reporting. It seems that the firm who espouses the virtues of

“industry-focused services for public and private clients in order to build public trust and enhance value through the application of what we call Connected Thinking” might be regretting ever looking into the former Duchess of York’s affairs.

It appears that a team of these professionals was called to look at Fergie’s books after Price Andrew summoned them to see why his ex-wife could no longer afford to pay her staff. What they found of course was far from good. In fact, the team was able to determine that the former royal favorite had in fact pawned much of her jewelry. Items that had been passed off included:

• A necklace with diamonds on it that had been given to her by her former husband.

• A series of items given to her by Queen Elizabeth

• Some other items that were Wedding gifts from the Saudi Arabian royal family.

Fergie is reportedly GBP 4 million pounds in debt and at least part of the problem stems from her entrepreneurial ways gone astray. Her own company, Hartmoor, fell apart after just a little over a year in business and after Fergie had sunk a substantial amount of her own money into the doomed firm.

 

Rob Starr, Big4.com

19 August 2010

(blog) Earlier we had blogged about how KPMG Australia was going to fight its case against Australian Securities and Investments Commission (ASIC) in the Australian High Court arguing that the case against it was unconstitutional under Australian law (http://bigfouralumni.blogspot.com/2010/05/kpmg-goes-to-high-court-down-under.html)

We said in that blog post…

“From our viewpoint, this is an interesting situation, in that a regulatory authority is using its own platform and powers to start a case against a defendant on grounds of negligence on behalf of thousands of plaintiffs, and is justified in doing so under the purview of its own governing act. However, that its seeking property as damages (in this case A$200 million) from the defendant is seen as unconstitutional is a technical point that can be best judged by experts in Australian constitutional law. We take it that KPMG is objecting to the ASIC claiming money from the firm, as Section 51 of the Australian Constitution does say that only the Australian Parliament has this power.

More so, we are fascinated by the length that KPMG will go, in reaching out to the highest court in the land to defend its position, and challenging on a constitutional basis the authority of the governing investment authority of the country.

We have only touched the surface of a suit that is likely to be very complex and precedent setting. If KPMG wins, clearly ASIC will not be able to get the money it is seeking, but will it also lead to a weakening of its powers as it potentially goes against the country’s constitution.”

Now it appears that things are likely to get even more sticky for the Australian Securities and Investments Commission (ASIC) with a new report that states it claims to suppress a critical document dealing with the state of a collapsed property group, Westpoint, to the tune of $300 million.

The document was prepared by Deloitte before the collapse of Westpoint back in 1996 where it showed that Westpoint was arguably solvent. Then ASIC did take the step of declaring Westpoint insolvent, and was trying hard not to make the Deloitte report public as it potentially underscored ASIC’s position.

At the Victorian Federal Court, Justice Ray Finkelstein made draft orders that the Deloitte report into Westpoint's solvency was now in the public domain and should be released.

The suppression and then any future release of the documents are of course going to lead to big questions about the management at ASIC since the reports were not included in the Federal Court wind-up application. And of course, to make matters even more complicated, KPMG is also being sued by ASIC for negligence as Westpoint’s auditors.

Westpoint’s founder Norm Carey knows how this game is played and has a cross-claim against ASIC for actually causing the downfall of his company.

And to add to all of this, the political angle, with Australian Senator Nick Xenophon making a statement that says, “ASIC timed their action to prevent the rollovers and repayments proceeding and that led to a chain of events that led to the collapse of this group when a solvency review found that the group was still solvent at that time.”

One wild card is Deloitte’s reaction on the release of its report, and whether it has any case or argument to suppress or release it depending on the firm’s best interest – and that is still not known yet.

This case seems to have many ingredients of a modern-day court thriller with all its twists and turns, and we’ll try to keep up as much as possible in our blog posts. (blog)

.

 

Chris Nelson, Big4.com

16 August 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") is expected to help lawyers, lobbyists, lawmakers….now Big Four firms.

Yes, Big Four firms are looking at streams of consulting revenue as clients try to understand and make sense of this sprawling act with many procedures which are unclear now and are left to further study .

KPMG’s recent hiring of Jon D. Greenlee, 47, formerly with the Board of Governors of the Federal Reserve System's Division of Banking Supervision and Regulation, and bringing him into the Financial Services Regulatory practice is a classic outcome of the uncertainty associated with the Act and the need for knowledgeable professionals who can provide advice and direction to generally distraught clients.

Greenlee was most recently the associate director of risk management with the Board of Governors of the Federal Reserve Systems Division of Banking Supervision and Regulation, where he supervised credit, market and liquidity, operational, and compliance risks and ensured the Federal Reserve had appropriate guidance and policies in place to address them. Not only did he have this great background (in addition to tons of experience in other Fed positions), he was also part of creating new regulatory standards such as updated guidance on commercial real estate lending, revised liquidity standards, and interest rate risk.

According to KPMG, Greenlee will provide regulatory and compliance advisory services for financial services clients to meet their various regulatory requirements and guide institutions in becoming more proactive in identifying, measuring, monitoring, and managing regulatory risk.

There is sure to be a good match between clients clamoring for clarity and KPMG’s ability to deliver solid advice on this front (and of course, to make good money along the way).

We think this is going to be a trend (albeit a small one) as experienced policy makers are wooed to Big Four firms and using some of their valuable backrounds in increasing the bottom lines of these partnerships.

 

John Fowler, Big4.com

August 16, 2010

PCAOB just released its 2009 annual inspection report on PricewaterhouseCoopers using inspections from October 2008 through October 2009 at the Firm's National Office and at 34 of its approximately 61 U.S. assurance practice offices.

They found only problems in only 9 issuers (of a total of 76, that is about a 11% error rate, much lower than what we saw in Deloitte but slightly higher than the 9% in Ernst & Young).

We are noticing, at least in this report and perhaps as a general trend that the PCAOB is focusing a lot on fair value determination, with four issuers (A to D) being cited for failing to independently test management’s process and documentation and get its own competent evidence to support the audit opinion. This was also noticed in the recent E&Y inspection report. We wonder if this is anything to do with the increased focus on this topic by the IASB and the FASB.

On another note, it has become rather routine that firms respond with the boilerplate that they have fully examined the PCAOB’s report and find no need to restate either their audit opinion or issue revised financials. That leads us to slowly believe that either the more controversial issues are highlighted and addressed in the Part 2, 3 and Appendix A, which are not revealed to the public, and what we see is just a sanitized look at some issuers and the firm’s standard, cordial but firm response to hold on their initial opinions. We just hope that the PCAOB is really bringing up substantial issues, which may have been overlooked by the firm and thus the Board is really doing its bit to improve audit quality.

With three of the Big Four firms reports out, this leaves only KPMG’s 2009 report to arrive – and it’s much later this time, last year the KPMG report was out on June 16, 2009.

Here is the full text of the findings on each issuer. We look forward to your comments and your insights on this

Issuer A)

One issuer estimated the fair values of certain investment securities that were not actively traded using a weighted average of two fair value estimates. One estimate was determined using a discounted cash flow model and the other was obtained from an external pricing service. For the fair value estimate determined using the discounted cash flow model, the Firm failed to test certain key assumptions underlying the cash flow projections.

(Issuer B)

The engagement team had requested that the Firm's internal investment securities pricing group obtain third-party pricing information to corroborate the issuer's fair value estimates for its investment securities. The Firm's internal investment securities pricing group was unable to obtain pricing information for a portion of the issuer's investment securities.

Issuer C

One issuer held investments in auction rate securities that had failed at auction. As a result, the issuer used a discounted cash flow model to estimate the fair value of these securities at year end. The Firm failed to evaluate the reasonableness of the discount rate the issuer used in light of the contractual maximum rates and the credit and liquidity risks that suggested the discount rate should have been considerably higher

Issuer D

In one audit, the Firm failed to perform adequate audit procedures to evaluate the fair values of various types of the issuer's investment securities and derivatives

Issuer E

In this audit, the Firm failed to sufficiently test certain assumptions and key inputs used to develop a significant portion of the issuer's loan loss allowance. Specifically, the Firm tested one of the inputs through inquiry only on a few loans. In addition, the Firm used the work of the issuer's internal loan review group to test certain key inputs; however, it did not reperform any of the group's testing or perform its own independent testing of these inputs.

Issuer F

One issuer had a deficiency in its internal control over financial reporting at year end that the Firm and the issuer classified as a significant deficiency. The deficiency resulted from the aggregation of access control deficiencies regarding information technology systems that maintained the contract pricing of sales transactions, customer account set-up, and the financial reporting system.

Issuer G

One issuer had numerous foreign locations, which accounted for over 20 percent of the issuer's revenue. The Firm did not visit any of the foreign locations in connection with the audit, nor did it use the work of its international affiliates or other auditors in reporting on the issuer's financial statements in the year under audit. The issuer's foreign locations did not have common information technology systems, processes, or controls. With respect to these locations, the Firm's procedures were limited to testing the issuer's entity-level controls, the performance of analytical procedures for a few of the locations, and inquiry of management. The Firm failed to properly test revenue from the foreign

Issuer H

One issuer had numerous foreign locations. For certain of the issuer's foreign locations, which represented 29 percent of its revenues, the Firm's planned approach placed significant reliance on certain entity-level controls and the performance of substantive analytical procedures for a few of the foreign locations. The Firm failed to properly test revenue from these foreign locations

Issuer I

In this audit, the Firm identified a significant error at year end in the issuer's calculation of impairment for one of its asset groups. In the prior year, a material weakness had existed in the internal control over the calculation of impairment for assets in a similar asset group. A control implemented by the issuer to remediate the prior year's material weakness failed to detect the error discovered in the current year.

PwC simply responded, “In no instance did our evaluation result in a change to our audit opinion, or the restatement of the issuer’s financial statements.”