Audit - news
| by Paul Gosling 05 Oct 2004 Topic: News |
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The Big Four firms have missed 'significant audit and accounting issues', indicating 'concerns about significant aspects of each firm's quality controls systems', according to the first limited inspections of their work conducted by the US Public Company Accounting Oversight Board. Numerous documentary failings by the firms were reported by PCAOB, which was set up in the United States by the Sarbanes-Oxley Act. All of the Big Four failed to properly implement EITF 95-22 in some of their audits, with the result that several clients had understated current liabilities and overstated working capital. PCAOB's report on KPMG identified the highest number of disagreements between the watchdog and the auditors over standards interpretations. However, PCAOB is keen to stress that the results should not be interpreted over-harshly. 'As our reports state, their emphasis on criticisms do not reflect any broad negative assessment of the firms' audit practices,' said William J McDonagh, chairman of PCAOB. 'The Board's inspections are unprecedented and, in this first year, our findings say more about the benefits of the robust, independent inspection process envisioned in the Sarbanes-Oxley Act of 2002 than they do about any infirmities in these firms' audit practices.' He added that the firms had shown co-operation with the inspections. But the results are important, not least in illustrating different interpretations of accounting standards by the firms and PCAOB, and, in one case, with the Securities and Exchange Commission producing yet a third interpretation. Wrong interpretations of EITF 95-22 involved revolving credit lines not being treated as current liabilities and which therefore caused clients' accounts to overstate working capital. In several cases the disclosure of this by PCAOB led to companies restating annual accounts. The firms have accepted that some errors took place. On one audit, Deloitte & Touche identified various significant accounting and auditing issues including the ability of the company to continue as a going concern, but failed to adjust the audit engagement risk from 'normal'. Deloitte responded to PCAOB that it believed that its procedures had appropriately addressed the audit risks. With several of its audits, Ernst & Young failed to hold sufficient or adequate documents, said PCAOB, and therefore violated PCAOB requirements and E&Y's own policies. E&Y accepted that there had been documentation deficiencies, but added that it did not believe these constituted performance deficiencies. KPMG were challenged by PCAOB on 11 accounting standards interpretations, including SFAS 109 on accounting for income tax which may have led to an understatement of tax liability for one client and a failure to comply with APB 16 when treating some contingent payments as part of the goodwill for an acquired business. Weaknesses in documentation on some of KPMG's audits were also recorded by PCAOB. KPMG pointed out that it did not in all instances agree with PCAOB's interpretation of accounting standards and that in one case the SEC had made an interpretation at variance with both PCAOB and KPMG, illustrating, said the firm, the 'significant challenges' involved in taking a view in the current environment. PricewaterhouseCoopers accepted that one audit team had, as PwC put it, 'inappropriately shortcut audit work around the tax provision' of a client and on another audit the firm 'did not adequately consider an issuer's disclosure around lease guarantees'. On some audits, said PCAOB, PwC relied too heavily on unaudited assurances. All four firms stressed that they regarded the level of identified weaknesses as small compared with the scale of PCAOB's investigation. PCAOB's second review of the Big Four, for the 2004 year, will be more comprehensive and will expand to take-in another four accountancy firms. The PCAOB's report can be downloaded at www.pcaobus.org. Conrad Black has earned his place in the roll-call of notorious media barons, alongside Robert Maxwell and William Randolph Hearst, if the report into Hollinger International produced by former Securities and Exchange Commission chairman Richard Breedon is correct. Black and key associates at Hollinger Inc, the company which owned a minority of share equity but the majority of votes in Hollinger International, are accused of massive fraud, which has already led to civil legal actions being lodged and will possibly result in criminal charges being laid against Black and perhaps others. Breedon's report alleged an astonishing depth of misappropriation. Millions of dollars were awarded to Hollinger International directors without the knowledge of the board, mostly through passing on non-compete fees awarded to the company when it sold media interests - described by Breedon as an 'unusual and offensive practice'. Breedon also charged Black and his Hollinger Inc colleague, David Radler, with being paid almost $200m in 'unjustifiable management fees'. 'Hollinger wasn't a company where isolated improper and abusive acts took place,' claimed the report. Hollinger was 'an entity in which ethical corruption was a defining characteristic'. Although Black and Radler are the primary accused, Richard Perle is also accused of 'putting his own interests above those of Hollinger's shareholders' and by doing so breaching his responsibility as a supposedly independent director. Perle was a senior adviser to the Pentagon until February this year, Assistant Secretary of Defence under Ronald Reagan and an architect of the plans of the current Bush administration to invade Iraq. His past commercial involvements included being an adviser to the collapsed Global Crossing. The Breedon report, dubbed the 'Hollinger Chronicles', called on Perle to repay $5.4m of fees. Breedon went on to detail a wide-ranging failure in Hollinger International's corporate governance arrangements. SEC returns contained false information, charitable donations from the company's accounts were given and received as if they were the personal largesse of Conrad Black and his wife (the well-known columnist Barbara Amiel), the company's plane was regularly used free of charge for private trips by Lord and Lady Black and personal gifts worth many thousands of dollars from Conrad to Barbara were charged to the company accounts, claimed Breedon. In all, around $400m was wrongly taken from Hollinger International by Black and Radler, alleged the report. Perle is accused of taking performance bonuses of millions of dollars from Hollinger's venture capital arm, which he chaired, while the company was making millions of dollars in losses, and of spending large amounts of money on his corporate card for personal items. The report and the extensive publicity it has attracted is extremely embarrassing and damaging to KPMG, auditors of the Hollinger companies through its US and Canadian practices. Black and Radler are accused of breaching their directors' fiduciary duties and KPMG is accused of failing to alert the audit committee to this. KPMG's ability to act independently for Hollinger International was 'tempered or compromised' by also working for Hollinger Inc and Ravelston, a company used to transmit management fees from Hollinger International to Black and Radler, concluded the report. KPMG was also criticised by Breedon for failing initially to co-operate in his inquiry - a charge strongly denied by KPMG, which said it had 'co-operated fully in the investigation throughout its entirety'. Hollinger International's legal advisers, Torys, faced similar charges to KPMG of failing to provide the company's audit committee and independent directors with information of possible malpractice. The 'Hollinger Chronicles' mark a chapter in the saga, not the end of the story. The damning verdict of the report is vindication for Tweedy Browne, the institutional investor and Hollinger International shareholder which has been a steadfast critic of Black and the prime mover for the inquiry. It is reportedly considering launching a legal action on the back of the report. Black is already being sued by Hollinger International for $1.25bn; a class action lawsuit is being launched against both the Hollinger companies on behalf of shareholders; an inspector is to be appointed into the affairs of Hollinger Inc by the Ontario Superior Court; and the SEC is considering the contents of the Breedon report. Possible criminal action is made more likely as a result of a consent decree signed by Black more than two decades ago after the SEC previously investigated his business dealings. One effect of the decree is to make any further false declarations to the SEC a criminal offence. Lord Black, David Radler and Hollinger Inc all strongly deny all charges and allegations and have said they will defend any legal actions. Reform has been agreed to Europe's Stability and Growth Pact, probably inevitably after it had been repeatedly ignored by member states. But many commentators doubt whether it will resolve the conflict involved in a single economic zone containing varied fiscal policies. Although the annual 3% deficit ceiling remains in place, nominally, there will now be less attention paid to single year deficits and more concern about deficits over the fiscal cycle - putting Italy more centrally in the dock and the United Kingdom less so. Although the UK is not a member of the eurozone, it remains subject to the rules of the pact. Agreement was also reached by member states at the informal meeting of Europe's economic and finance ministers in Schevingen to changes in the way the Eurogroup operates, including a more stable leadership through the appointment of a president for the first time. Jean-Claude Juncker, Luxembourg prime minister, will undertake the job. Part of the role of Juncker will be to ensure more strategic discussions and the formulation of common approaches, coinciding with member states' budgetary cycles. Issues identified as requiring particular attention include the rising costs of health care, labour market participation and the ageing population. But a solution to one European financial row leaves outstanding several more. Hopes of meeting the Lisbon objectives of making Europe the most dynamic knowledge-based economy by 2010 have virtually evaporated, with Germany's finance minister Hans Eichel and British Chancellor Gordon Brown admitting as much. Incoming European Commission President, Jose Manuel Barroso, had previously suggested the target should be regarded as a goal of principle, rather than something that was attainable. UK Chancellor Gordon Brown also said that while stability pact reform is 'essential' it is also 'not sufficient' to drive the required level of growth across the EU. His argument that the failure of the EU as a whole to achieve growth was imbalancing the world economy could be taken as an implied criticism of Germany, France and Italy for not adopting sufficiently radical or urgent domestic economic reforms, both to fiscal and labour market policies. Other European financial heads, though, are concentrating on tax harmonisation as the means of achieving a more efficient European economy. The Schevingen meeting agreed to set up a working group to consider a harmonised method of assessing tax liabilities, which is likely to lead to a new international accounting standard. This would deal with such matters as how to deal with transfer pricing and whether losses incurred in trading in one member state can be offset against profits achieved elsewhere in the EU. This is interpreted as a first step towards the creation of an inner group of EU countries adopting corporate tax harmonisation, which German Chancellor Gerhard Schroeder recently advocated. The target for corporate tax harmonisation would not only be those established EU members with lower than average tax rates, such as the UK and Ireland. Nicolas Sarkozy, outgoing French finance minister, hinted that European regional aid might be suspended for new member states which were undercutting the tax rates of richer nations, such as France and Germany. 'I don't understand how some countries can be rich enough to cut their taxes - to zero for some - and, at the same time, explain to others, that is to say countries who joined Europe earlier, that they are poor enough to need structural funds that we provide with taxpayers' money,' said Sarkozy. Countries in Sarkozy's sights include Estonia, which charges no corporation tax on profits reinvested in the country, and Latvia, Lithuania, Hungary, Slovakia and Poland, which each have corporation tax rates of less than 20%, but are priority areas for regional aid. France's top rate is over 35% and Germany's is over 38%. This dispute could feed into what could be a sustained battle over the size and composition of the EU budget, which could be cut far below the figure proposed by the Commission given the opposition to it by the UK, Germany and current EU President, the Netherlands.
Money laundering controls are having little impact on Al Qaeda's ability to launch terrorist offences, says a report from the United Nations. Instead of impeding Al Qaeda's operations, financial controls have simply encouraged the terrorist network to change the way it works. 'We need to be ahead of the terrorists - not behind them - and they have had a great deal of flexibility to adapt to our sanctions,' said Heraldo Munoz, chairman of the UN Security Council Committee monitoring sanctions against Al Qaeda and the Taliban. 'We are at a critical juncture. We either strengthen the sanctions regime that the UN Security Council has implemented, or we risk those sanctions falling into irrelevancy.' New proposals will now be recommended to the Security Council to impede the flow of money, recognising that Al Qaeda has become looser and more decentralised as a result of governmental actions. This has also led the group to adopt cheaper methods of operating, with any necessary fund-raising more likely to be undertaken locally. Both the Bali and Madrid bombings, which killed hundreds of people, are thought to have cost only a few thousands of pounds. But the report also concludes that many countries are only half-heartedly implementing the range of sanctions, if at all. The vast majority of countries have not recommended any groups or individuals for inclusion on the UN list of suspected terrorists, while there have apparently been no instances of people's movements being restricted as a result of the travel ban which was part of the package of sanctions agreed after the 11 September attacks. Meanwhile, it has also come to light that Al Qaeda may have always relied on non-cash movement to fund distant operations. A leaked confidential UN prosecutors' report says that following earlier US-led sanctions against Al Qaeda, funds for the World Trade Center air attacks were laundered via the purchase and sale of diamonds through the black market. Several rogue West African countries may have been involved in this, including Liberia - under former President Charles Taylor, who was removed from power last year - which is alleged to have assisted the sale of diamonds mined in Sierra Leone. It is reported that Al Qaeda is increasingly turning to organised crime to finance operations, probably through local cells. In this, the war against Al Qaeda has parallels with the experience of the UK in dealing with paramilitaries in Northern Ireland. Even now, 10 years after the beginning of the IRA ceasefire, most organised crime in Ulster remains linked to paramilitaries, who control much of the drug, protection racket and counterfeit sectors. Most counterfeit goods on sale in the UK originate within Northern Ireland, predominantly now supplied via loyalist paramilitary groups. Both Interpol and the World Customs Organisation recently called on governments to recognise the importance in tackling counterfeit goods production, given its annual 500bn euros turnover and connections with terrorism, drug trafficking and other forms of organised crime. Interpol established that proceeds from the sale of counterfeit car parts impounded last year in the Lebanon had been intended for Hizbollah. But the move towards tightening controls over money laundering are unlikely to prevent the Home Office moving ahead with proposals to relieve the obligation on accountants to report clients they suspect are guilty of money laundering, despite objections from the Bar Council and the Law Society. ACCA supports the move, recognising that the UK Government has wrongly implemented the European Union's money laundering directive. John Davies, ACCA's head of business law, said: 'The Home Office has admitted that accountants and the legal profession are treated differently and in a discriminatory way, which is in breach of the directive. We are not saying that accountants should be given an open-ended exemption, just that accountants and lawyers should be given very limited exemptions.' | |