Going Concern

Here are Barack Obama and Joe Biden's 2012 tax returns. [THP]

"Obamacare" Tax Increases Could Cost The President Less Than $2,000 In 2013 [Tony Nitti/Forbes]

Here are some Tax Day ecards that you some of you should use for your most favorite clients. [SomeeCards]

More than a third of us like, or even love, doing our taxes [DMWT]

After booze's victory in GCMMBSSF&BvsT, this post seems appropriate. [Gizmodo]

A Florida man tried to steal ten cans of Axe Body Spray in his pants, but a broken bicycle foiled his getaway. [TGD]

Banana, Lobster Accused Of Stealing $1,000 Sculpture [HP]

I'm not sure about this, but whatever, it's been a weird week. [YouTube]

Our friends at Vault will release their Accounting 50 ranking on Monday, but if you simply cannot contain your excitement until that day comes, they've got a little teaser in this post that reveals Big 4 men are happier than Big 4 women. Is this a shock or is it more predictable than a creep with "free candy" written on the side of his windowless van?

As usual, all findings—as well as the forthcoming rankings—are based on results of the annual Vault Accounting Survey, which was administered earlier this year to nearly 8,000 accounting professionals across 85 firms. The survey, along with asking professionals to rate their competitor firms in terms of prestige, asks accountants to evaluate their firms in various workplace areas on a scale of 1 to 10, with 10 being the highest and 1 being the lowest.

Now, to the good stuff. The data show that not only are Big 4 men happier than Big 4 women, male partners are the most satisfied while female senior associates are the least.

Interestingly, female accounting professionals tend to be most satisfied with their firms' promotion policies when they have just one year of experience and are least satisfied in the three to five year range. You'll notice that blue is the highest ranking for each area and yellow is the lowest. We need not point out what these results are saying based on that information:

Both men and women are obviously pooping rainbows over their firms early on, sputtering out to piss-colored misery at the 3 - 5 year mark and coming back around to feel all warm and fuzzy around by the time they've served 10 years or more on their life sentence. It is unclear how many of those in the 10+ year range are suffering from late stage Stockholm Syndrome.

Vault's Derek Loosvelt has a guess as to why the 3 - 5 year professionals are so unhappy in comparison to those fresh-faced first years:

As for what could be causing this dip, my thoughts are these: It’s likely that first-year accounting employees begin their initial jobs out of college with a lot of hope and promise and are pretty darn pleased that they’re getting paid some quality cash to work in a professional setting with smart colleagues and sharp managers, not to mention that they're getting to work on accounts involving giant, household-name clients. Soon, though, like a piece of sugar-loaded chewing gum, all this loses its flavor, as newbies become experienced professionals, meaning they get a couple of tax seasons in them and realize that life in a professional setting, even when you’re taking home a good amount of dough, is not all that their cheerful colleagues in HR cracked it up to be when they handed over that crisp offer sheet with a bunch of zeros to the left of the decimal. However, despite the thankless overtime and busy seasons that seem to never end, seniors keep cranking out those long hours, fighting for those promotions, navigating the tough cultures, the tough managers, all in hopes of becoming a big swinger—that is, a partner. And if they can stick it out long enough and make to that highly desired destination, they'll find that the long hours at work lessen, while the hours on the golf outings and at home increase, and of course they start taking home salaries that are not just nice looking but dashingly handsome.

In other words, if public accounting were a dog turd, it would start turning white around 3 - 5 years.

So this of course begs the question: what color is your dog turd and do you agree with these results?

Andy Bishop is the chief financial officer of Hallador Energy, a publicly traded coal company. Like many CFOs, he did a little bit of time at a large accounting firm, so he knows a thing or two about auditing and pays attention to the haps in that space. So when he heard that the PCAOB was going to propose an auditing standard to require the name of the audit partner for public company audits, he thought that sounded like a swell idea.

[Bishop] decided to publish the names and ages of his auditors on his proxy statement this year. He made the shift after he heard about the Public Company Accounting Oversight Board’s proposal and because he knew auditors in Europe are often required to sign their names to accounting statements.   His audit firm, Colorado-based Ehrhardt Keefe Steiner & Hottman PC, had no problem with the idea, he said, so he went ahead and identified the firm’s lead audit partner and concurring partner in his corporate proxy this year.   “I said, ‘This is what I’m doing,’ and they said, ‘OK,’ ” Mr. Bishop said. As for those pansies who say that it'll make for riskier audits? “I think that’s BS,” Mr. Bishop said. “I’m the CFO of a public company, so my name’s already out there and so is my salary, my age, my bio, how many shares I own, and if I buy or sell them.” Auditors of public companies have a similar responsibility and should be able to handle similar levels of scrutiny, he said.   “Our firm thinks it’s a good idea,” Mr. Bishop added, noting investors may get additional confidence from the disclosure. “I want people to know the audit partner’s not a kid and he’s not 100 either,” he said.

For the record, Hallador's audit partner is 39-year-old Doug Reeb. The concurring partner is 60-year-old Gaylen Hansen.

Huh. That's not hard at all.

Why One Company Names Its Audit Partners [CFOJ (Subscription)]

Via the New York Times, ex-KPMG Partner Scott London (right) leaves court with his attorney, Harland Braun yesterday in Los Angeles.

Have you or someone you know considered passing some non-public information to anyone who has access to concert tickets and/or is offering a discount on a timepiece and/or envelopes of cash? If so, the ethics and compliance folks at E&Y are asking that you take few minutes to read this quick refresher:

Internal memorandum    To:        US personnel        April 12, 2013    A message regarding insider trading    The investigation of insider trading violations has been prominent in the US business news again recently. While working at EY, many of you regularly have access to confidential information about our clients and other businesses. As a reminder, it is imperative to our firm and to you personally that you handle confidential information with great care. Trading on confidential or "inside" information, or tipping others to this information, is a violation of our policies and may violate criminal laws.    Please take the time to review our insider trading global policy linked below. The policy reaffirms our obligation not to trade in securities with insider information, provides greater detail with respect to what insider information is and identifies with whom our people need to consult in the event there are questions regarding the application of this policy to particular situations.    For those of you who have taken the mandatory Protecting Confidential Information WBL you will recall the section on insider trading. Others, be sure to complete the WBL by the April 30 deadline.    If you have any questions or concerns, please contact [lawyer, ethics, and compliance types]. And remember, the EY/Ethics Hotline is also available to anonymously report concerns about an ethical, legal or professional issue.  Seems like as good a time as any to bring it up.

Statement From KPMG Chairman & CEO John Veihmeyer [KPMG]
KPMG LLP Chairman and CEO John Veihmeyer issued the following statement upon reviewing the criminal complaint filed today against former partner Scott London.  London was charged today in the Central District of California for conspiring to commit securities fraud through insider trading. “I was appalled to learn of the additional details about Scott London’s extraordinary breach of fiduciary duties to our clients, KPMG and the capital markets.  We unequivocally condemn his actions, and deeply regret the impact that his violations of trust and the law have had on our clients and our people. KPMG will be bringing legal actions against London in the near future. “As a result of his unlawful activities, it was clear that our independence had been impaired with respect to the two companies for which he served as lead partner, Herbalife and Skechers. Due to this impairment, we were professionally obligated to take the regrettable action to resign as the independent auditor for these two companies and withdraw our previously issued audit reports.  The sole reason for these steps was the actions of our former partner and we have no reason to believe that their financial statements are materially misstated.”

Ex-KPMG Auditor Freed on $150,000 Bond in Tips-for-Cash Scheme [Reuters] On Thursday afternoon, a federal judge in Los Angeles freed London on a $150,000 bond, ordered him to turn over his passport, and directed the former KPMG auditor not to make contact with Shaw unless in the company of attorneys. London's attorney, Harland Braun, said his client intended to plead guilty when he is formally arraigned on May 17. "Had my client been asked to give information for cash, he would have said no," Braun told reporters in the courthouse hallway after the proceeding. "This is that gray area, when you talk at the country club. But once you take money, you're dead."   A Plot Twist at Herbalife Draws in the Auditors [NYT]
All audit firms have risk groups that review new business, including the quality of the company to be audited, and that decide that some prospective clients are not worth the risks. It will be interesting to see if any of the other major firms conclude that the risks are acceptable, particularly given that Herbalife’s 2012 audit fee was under $4 million, which is not a large sum to a major firm. If Herbalife turns to a second-tier audit firm, it will be embarrassing to the company.

Bad Week for KPMG Could've Been Worse [WSJ]
No clients have said they dismissed KPMG since the news of the Scott London case broke earlier this week. Two clients in the Southern California area that Mr. London oversaw—Reliance Steel & Aluminum Co. and medical products company Volcano Corp. —filed proxy statements Thursday indicating they continue to recommend that shareholders approve KPMG as their auditor.

Scott London’s Other Crime: Tax Fraud [Fraud Files]
Something to look forward to!

Senate Releases Tax Reform Option Paper on Business Investment and Innovation [TaxProf]
People have been busy.

Significant decline in IRS staff leads to fewer audits [JofA]
The Transactional Records Access Clearinghouse (TRAC), reports that the IRS plans to expend 18% fewer staff hours auditing large businesses with assets of more than $10 million in fiscal year 2013 (which ends Sept. 30) than it did in FY 2011. These lower numbers do not take into account the effects of budget cuts that resulted from the sequester. TRAC, a data research organization at Syracuse University, based the report on information it has received after filing a Freedom of Information Act (FOIA) suit against the IRS.

Carnival Offers Motel 6 Price for Caribbean After Triumph [Bloomberg] Carnival Corp. (CCL) is offering a Caribbean cruise for as little as $38 a night, less than a stay at Motel 6, after an engine fire on the Triumph stranded passengers at sea for several days. A four-night trip on Carnival’s Imagination, leaving Miami on April 22, costs $149 a person, including meals and some beverages, according to the cruise company’s website yesterday. The lowest nightly rate at the budget-priced Motel 6 chain was $39.99, according to an online ad.

 

KPMG's Independence, Herbalife's Stock Price, and the Game of Name Blame [Re:Balance]

Promises, Promises President Obama has abandoned his promise to reform the Alternative Minimum Tax. He did so in a way that makes it unlikely it will get attention from the mainstream news media – instead of an announcement, he just stopped proposing reforms. [DCJ]

U.S. urged to bridge accounting body cash gap [Reuters]

SEC accused of dawdling on JOBS Act enabling rules [The Hill]

Does my share of partnership debt let me deduct K-1 losses? [Tax Update]

SEC Asks Judge to Allow Deloitte Subpoena Suit to Proceed [BBW]

Grant Thornton wins dismissal of case over Parmalat collapse [Reuters]

Tax Lawyers Who Charge $1,150 Per Hour [TaxProf]

Video Proves That Angry Beavers Are No Joke, People [Gawker]

~ Update below includes details from the criminal complaint, including Springsteen tickets!

From the Journal:

Mr. London was charged with one count of conspiracy to commit securities fraud through insider trading, according to the criminal complaint. He faces up to five years in prison and a $250,000 fine. The complaint said the trades generated a profit of more than $1 million for his friend, Bryan Shaw. The complaint also says Mr. London tipped off Mr. Shaw about five KPMG clients, more than was previously known.  Fox Business has posted the complaint which includes an exhibit photo of Bryan Shaw handing an envelope to London that you see above. The five clients that Mr. London says he tipped Shaw about are Herbalife, Skechers, Deckers Outdoor, RSC Holdings, and Pacific Capital Bancorp.   We'll continue to update this post as we wade through the complaint, but you can help us find the interesting stuff too. We've included it on the next page for your reading pleasure.   UPDATE: Go read the complaint if you haven’t. Seriously. FBI Special Agent Jeremy Tarwater doesn’t spare the details. Here are some of the notable ones I pulled out.   The criminal complaint says Shaw made “more than $1 million in illegal profits” from the trades. The SEC’s civil complaint puts at $1.2 million. All of the companies mentioned in the complaint are KPMG audit clients.   Typically, London would give Shaw a few days heads up on press releases for the companies. Sometimes London would read them to Shaw over the phone. Shaw would give London a little taste of the action afterwards. London would “usually remark that Shaw was too generous and did not have to pay him for the information, but London always took the cash that was offered to him.”   Including the cash, Shaw bought London “expensive meals and paid for concert tickets [...] including tickets to a Bruce Springsteen concert.” Shaw says he spent $25,000 to $45,000 on concernt tickets. And yes, there was a Rolex Daytona Cosmograph involved.     The complaint says that when Fidelity put a hold on Shaw’s account, London told him there was no cause for concern and “that insider trading was like counting cards in Las Vegas -- if you were caught, they simply ask you to leave because they cannot prove it.”   On a February 14th phone call, London told Shaw that Herbalife’s earnings guidance was going to be raised and Shaw wanted to know if that meant the stock would go up. London then said, “I’ll find out, I’ll ask my team just to send me...what the guidance, what they’re, how they’re raising it.”   The spat between hedge fund titans Bill Ackman and Carl Icahn over Herabalife played into London and Shaw’s strategy. London told Shaw on a February 19th phone call that because of Ackman’s activities, they should “take a pass on this one” and that there would be future opportunities because Herbalife was raising their earnings guidance. Then there was this exchange regarding Icahn’s large purchase of shares:   Shaw: “I wish you would’ve known that he was going to release that and we could’ve made some money.”   London: “Yeah, that would’ve been nice.”   Over the phone on March 4th, Shaw and London set up to meet on March 7th. “I will get you some cashola,” Shaw said to London.   During that meeting, Shaw wore a wire and a video recorder and the picture of above was taken during the encounter.     Former KPMG Partner Charged [WSJ]
Ex-KPMG Exec Charged in Insider Trading Scam [FBN]

London Complaint

 

Taking a break from KPMGate/LondonFalling for sec -- here's a blind item for your Thursday afternoon that came to us via text message:

[Major accounting firm] Tax Partner starts crying when anouncing firm's commitment to work-life balance b/c she convinced sr. to stay

There are lots of things that can happen at work that could get people emotional -- losing your job; letting down your team/firm; seeing business evaporate in a matter of seconds -- but a firm's commitment to work-life never struck me as one of those things. It works fine as the butt of jokes or a recruiting script, but in front of people that already work at the firm? Maybe I'm cynical.

When a giant insider trading turd hits the fan of independence, KPMG spokesman Timothy Connolly is there with a Clorox wipe to sanitize the minds of the American public. Here's what he said. Be careful, it'll probably sting your amygdala.

Late last week, we were informed that the partner in charge of KPMG’s audit practice in our Los Angeles business unit was involved in providing non-public client information to a third party, who then used that information in stock trades involving several West Coast companies.

No. Herbalife and Skechers makes TWO companies, not SEVERAL companies. It's weird that the spokesman for the fourth-largest accounting firm in the whole damn world sucks at counting.

The partner was immediately separated from the firm.

Immediately "separated"? What does that even mean? Say "fired" or "forced to resign" or "put on indefinite leave with pay in Samoa1." Laundry gets separated. People get shitcanned.

KPMG’s 22,000 partners and employees unequivocally condemn this individual’s rogue actions.

But wait. According to the KPMG profile on NYJobSource.com, "KPMG employment is made up of 7,953 partners, 106,973 client service professionals, and 25,309 administration and support staff working in member firms around the world." That’s 140,235 partners and employees; ergo, 118,235 KPMG partners and/or employees support these rogue actions2.

KPMG remains committed to the highest standards of professionalism, integrity and quality.

This commitment to professionalism is why they always wear suits and never say "shit" or "fuckin'" when providing non-public client information to third parties.

Scott London, former partner in charge of KPMG's SoCal audit practice and insider-trading pooch-screwer, issued the following statement:

Let me first say that I regret my actions in leaking non-public data to a third party regarding the clients I served for KPMG.

Apparently Scotty doesn't regret any embezzlement, fraud, or prostitution that he may or may not have engaged in.


Most importantly, and I cannot emphasize this enough, is that KPMG had nothing to do with what I did.

You couldn't emphasize it enough, but you could have emphasized it more. Try using all caps. The mere absence of exclamation points makes me think that KPMG maybe did have something to do with it.


These leaks started a few years back in an effort to help out someone whose business was struggling.

See. Scott London wasn't insider trading; he was championing small business.


From time to time over the last couple of years, this third party would ask me how these clients were doing. On a few occasions over the past few years, this individual would ask if he should buy or sell a stock and I gave him my thoughts indicating whether the stock was a good buy or not. Never once did I pass any documents to him.

Except the check at Hooters.


But rather we spoke on the phone and the information I provided was in the form of a suggestion.

Like, "Silver Linings Playbook is a fantastic date movie. I suggest that you and your wife go...short on Skechers."


He traded on the information, but to this day I am not aware of how much he profited from the information.

I only saw one Bentley in his garage. There could have been more in the carriage house.


Regardless, what I have done was wrong and against everything that I had believed in.

Except my belief that he should go short on Skechers.


I spent nearly 30 years at KPMG and I dedicated my entire life to that Firm.

<<Pan to picture of London's children and cue "Cat's In The Cradle.">>


Knowing that I have caused harm and embarrassment to those that I respected and admired in the Firm has caused me tremdous grief that I am sure I will never overcome.

I'm sure he'll get over his tremdous grief about the same time he learns to use his spell-checker.


1A non-extradition country. 2 There are approximately 22,000 KPMG partners and employees in the United States, so maybe it’s just the foreigners who support the rogue actions. That’s why I say, kill all those Flemish cock suckers.

Trader Who Received Tips From KPMG Partner Issues Apology [Bloomberg]
Bryan Shaw, a trader who said he received insider tips from fired KPMG LLP partner Scott London, apologized and said he’s been cooperating with the Justice Department and U.S. Securities and Exchange Commission. “During 2010 through 2012, I received non-public information from Scott London about a number of companies and then profited substantially from stock trades based upon that information,” Shaw said in a statement provided yesterday by Nathan Hochman, a lawyer at Bingham McCutchen LLP in Santa Monica, California. “I cannot begin to apologize for my incredibly stupid actions.” [...] Shaw is listed in online business directories as a partner with Encino, California-based Shaw Diamond Co., a wholesale jeweler and diamond broker founded in 1957. “Over the past several months, I have fully cooperated with the FBI, the SEC, and the U.S. Department of Justice in their ongoing investigation of this matter,” Shaw said in his statement. “I expect that my actions will result in significant civil and criminal consequences, but I realize that this is the painful price I will pay for my transgressions.”

Tips Traded on Golf Course Led to KPMG Executive’s Downfall [DealBook, Earlier]
Both are members of the North Ranch Country Club in Westlake Village, Calif., according to the United States Golf Association Web site. Mr. London has a 10 handicap and Mr. Shaw plays to a 12, the U.S.G.A. says.   How Your Accountant Quits [WSJ]
David Weinberg, chief financial officer of sneaker retailer Skechers USA Inc., was working after lunch Monday when two senior partners from accounting firm KPMG appeared in his Manhattan Beach, Calif., office. The men sat down in a conference room. The KPMG partners read from a prepared statement, answered a few questions, then left. The whole episode took less than 45 minutes.   After KPMG, Audit Firms Reconsider Procedures [DealBook] James D. Cox, a securities lawyer at Duke University, called the case a “bombshell that has the industry circling the wagons on training.” The profession, he said, “suffers from an acute case of schizophrenia. They drink the tea about being professionals, but the other side is that they identify all too closely with their clients.” [...] The sector has already been under scrutiny, particularly after the accounting scandals of the last decade. A proposal by the Public Company Accounting Oversight Board, which regulates the profession, would require accounting firms to disclose an engagement partner’s name on a client’s audit reports and other papers. After the KPMG case, that could gain new support. The accounting oversight board would take up the matter “within the next three to six months,” said a board spokeswoman, Colleen Brennan. “I can envision that the KPMG case will be used to promote a listing of the names,” said Charles D. Niemeier, a former board member now in private practice at the law firm Williams & Connolly.

Split FASB Proceeds With Complicated Lease Standard [CW]
In a regular weekly board meeting, FASB voted 4-3 to issue the package it has developed after years of re-deliberating its 2010 proposal. At least two board members said they planned to include alternative views, or different ideas on how to approach lease accounting. The board has struggled long and hard over how to develop a logical approach to account for the wide variety of leases companies typically enter, with some resembling the financed purchase of assets and others serving more as short-term rental agreements.

The Masters: A Tax Break Unlike Any Other [Forbes]
Will Phil Mickelson be so put off by the idea of having to pay oppressive new tax rates on the $1.5 million winner’s purse that he’ll start purposely firing balls into the water a la Roy McAvoy in Tin Cup? Regardless of who sits atop the leaderboard on Sunday afternoon, however, understand that some of the biggest winners of the weekend will have never lifted a club. That’s because courtesy of a tax break that’s steeped in Masters history, dozens of local residents will be pulling in upwards of $25,000 in tax-free cash over the course of the four-day tournament by renting their homes to visiting spectators.

Why Transparency Is Like Porn [Tax Analysts]
Christopher Bergin: "We want to end abuse of the corporate tax system by companies shifting profits around, and, we want to do it in a transparent way. What should we do? I've got it! Get rid of the hidden deals facilitated by [advance pricing agreements]. I mean, you can’t get any more non-transparent than completely secret."   Teen daughters find strength to lift 3,000-pound tractor off father [NBC] Jeff Smith of Lebanon, Ore., was trying to pull a stump out of his garden last Monday when his muddy boot slipped off the clutch. The tractor flipped, and the steering wheel pinned his chest to the ground. The daughters, 16-year-old Hannah and 14-year-old Haylee, heard him screaming and ran to help. They reportedly lifted the tractor enough to free his torso and give him room to breathe. “It’s amazing. You hear about this kind of stuff — this adrenaline rush, being able to pick cars up and slide people out,” Smith told KGW, the NBC affiliate in Portland. “You never realize it’s really there until you actually witness it.” The girls tried to dig their father’s arm out but struck compacted dirt. Hannah got on her four-wheeler and found a neighbor, who brought his own tractor and used its shovel to finish freeing Smith, the Albany Democrat-Herald newspaper reported. Smith was treated at the hospital for a broken wrist and other injuries. Hannah said she called her mother before the ambulance ride. The mother thought it was an April Fool’s joke.

 

Accounting Class Action Suits Plunged in 2012: Report [WSJ]

Palm City accountant charged with fraud to be sentenced May 30 [TCPalm]

Accountant gets prison term for stealing from client [The Progress]

The Obama budget as interpreted by FOX News, Bloomberg and the New York Times. It is unfortunate Andrew Breitbart is no longer with us to give us his interpretation.

IRS may be reading your email without a warrant, documents suggest [NBC News]

The IRS and Nonprofit Media [HuffPo]

Victims of Madoff fraud can't sue SEC: appeals court [Reuters]

Thief's mistake alerts lawmaker to tax fraud Perhaps also a lesson in why you don't mess with dudes named Bubba. [USA Today]

Oh and there's more on KPMG's horrible week just in case you haven't read enough about it yet.

When laypeople think of accountants, we all know they generally picture green eye shade-wearing dorks, socially inept slobs and that bald asshole in the bowtie from those annoying H&R Block commercials. They likely do not picture a 20 year old "with bushy red hair and a goatee" who fantasized about stabbing people to death since elementary school:

Dylan Andrew Quick, described as a shy loner by neighbors, has been charged with three counts of aggravated assault, accused of jabbing and slicing people with a "razor-type knife," the Harris County Sheriff's Office reported late Tuesday. At least two people were critically wounded in the attack.

He told investigators that "he has had fantasies of stabbing people to death since he was in elementary school" and that "he has been planning this incident for some time," a sheriff's office news release said.

A recent profile of Dylan published just last week - which has since been removed (cache here) - described a young boy who was born deaf and fell in love with books:

Current LSC-CF student Dylan Quick has had a long association with Lone Star College – CyFair. Almost 21 years old now, Dylan first started coming to campus at the age of 12 when his mother Tiffany involved him in the library’s teen activities.  Initially reluctant to participate, Dylan was homeschooled and very shy, and Tiffany wanted him to be in a setting to socialize with other teens and also to be intellectually stimulated. Tiffany had removed Dylan from the public school system when the school placed him in a classroom for students with special needs. There, Dylan stagnated.   Dylan was born totally deaf and at the age of 7 received a cochlear implant. The first few years after receiving the implant, Dylan says that he was busy learning English, just as if he were an ESOL student.   During the first two years of Dylan’s participation in the library’s teen activities, he rarely spoke.  But after those two years it was if a floodgate had opened up and Dylan became loquacious, sharing his analyses of literature and socializing with his book club comrades. Dylan attributes his attendance at the two monthly teen book clubs (Classics for Home Schooled Teens and Contemporary Books for Everyone) and the weekly summer book groups, to an increase in his hearing and communication skills. The post goes on to say Dylan decided to pursue a career in accounting and planned to transfer to the University of Houston after receiving his Associates from Lone Star College.   It would be pure conjecture at this point but can you imagine what just one busy season would have done to this troubled young man?

Part of the reason this KPMG resignation is such a conundrum for both Herbalife and Skechers is that the firm withdrew its audits back to 2010. The clean-up crew for each company will have its work cut out, and according to Georgetown professor James Angel, Herbalife's new auditor, especially, will "be walking into a war zone":

They know the previous auditor was compromised and has partially disavowed their results. They said there’s nothing wrong them, but they took their name off of them anyways. That in and of itself is a very curious thing and I’m not aware of any cases of that ever happening in the past. So the new auditor knows there’s a lot of land mines here and everything Herbalife does will be scrutinized very closely. 

Yes, that is quite a curious thing. But the answer is quite a simple, really. Matt Levine explained it in a footnote to his post yesterday:

Because KPMG explicitly provides an opinion, as of February 2013, that HLF’s financials for the three-year period ending December 31, 2012, are accurate. People who care about auditor independence would thus say that, if the guy insider traded at any point before February 2013, you can’t trust his opinion on those three years of financials – even the past ones, he might have reopened if he hadn’t been profiting by trading the stock, I guess. Even if he insider traded after that February 2013 opinion you could probably find a reason to disclaim the financials, which I leave as an exercise for the reader because I don’t care. People are pretty anal about this stuff.

Yes, people are anal about this stuff. Especially people like risk managers and the office of general counsel at accounting firms. There were really no good options here, but they chose wisely to pull the opinions. I mean, they're getting sued anyway.   

Anyway, back to the future auditor of Herbalife. KPMG charged Herbalife $3.9 million for its 2012 audit. The firm charged the company $3.8 million for 2011. Those aren't wet dream fees but they're nothing to sneeze at. But because this is not your typical auditor musical chairs situation, there's going to be a lot more money going into the new firm's pocket. Back to the professor: 

If I were one of the companies involved, I would be extraordinary [sic] angry. Not only do I have to find new auditors, I have to get re-audited for the last few years. That’s going to cost a boat-load of money. This is not a good time for Herbalife to shop for a new auditor. There are only three of the big four accounting firms left that they can choose from at this point. Because of the battles going around the company, any auditor going in there is going to demand more money. They’re going to scrutinize everything twice as hard as they normally would because they know that everything they do is going to be examined with a  fine tooth comb.

All true. Herbalife is undoubtedly pissed. They have to find new auditors to audit three years of financial statements and they need it done pronto. And yes, Herbalife has been in the news recently because a rich guy used "pyramid scheme" and "fraud" to describe their business and another rich guy didn't like that. Oh, and rich guy #2 really doesn't like rich guy #1 and the feeling is reciprocated. This gets lots of people interested, including people at the SEC. And that's always fun. 

The next auditor of Herbalife will be very careful during its engagement but if one of the firms was smart (and they are when it comes to winning new business), they would give Herbalife a bit of a break on the re-audits in order to win Herbalife's heart and then charge them a big premium if they find problems. After things quiet down, they'll settle on something that's amicable to both parties. Herbalife will be very grateful to their new audit firm for helping them out in a jam and the new audit firm will be VERY grateful for the millions in new fees.

See? All it took was some positive thinking and some loose talk at the club. Things will turn out just great!

For Herbalife, New Auditor Will Be ‘Walking Into a War Zone’ [WSJ]

Bracket season came to close yesterday afternoon on Going Concern and your Busy Season Survival champion is none other than booze. Hooch. The Sauce. Firewater. Whatever your flavor, alcohol managed to overcome it all to win GCBSSF&BvsT.

Yes, those of you who cry busy season tears into beers managed to outnumber the BYU alums, CPAs in recovery, and Excel nerds with too much time on their hands. You've all survived (?) busy season in your own way, but we now know that you find comfort by taking the edge off. And there's definitely nothing wrong with that, just so long as you're responsible. But not this kind of responsible.

Anyway, I'd toast you all to another busy season conquered1 but lots of you are way ahead of me. Cheers.

1 Yes, I know some of you have five days left. Just file the extension and move on.

 

I love Peter Henning's suggestion that ex-KPMG partner Scott London was swapping Caddyshack quotes with his golfing buddy. Everyone having few drinks after playing a round inevitably sees someone walk by with a hideous headpiece and says, "When you buy a hat like this I bet you get a free bowl of soup." I think it's a law in Florida that you have to recite that line. 

The unnamed tippee provided London with "a discount on a watch, a few dinners and occasional cash payments of $1,000 to $2,000 in return for the confidential information" on Herbalife and Skechers. [sinking in] Uh huh, okay. Look, I don't want to rub salt in a wound here, but for God's sake, man -- this was really dumb. I know you know. You said so yourself. But right now, your wife can't even look at you. I mean, you're not Eliot Spitzer, but everyone who is reading about this story is giving you facepalm. The kind of facepalm that leaves fingerprints on your temples from squeezing them in utter disbelief.  Sorry, I won't harp. We were talking about golf movies and insider trading. Henning explains what London has in store: There is a good chance that criminal charges will be filed because of Mr. London’s prominent position as KPMG’s lead audit partner for Herbalife and Skechers. Prosecutors will want to send a message that any improper disclosure of client information will be punished. The potential sentence from a criminal prosecution will depend in large part on the amount of any gains or losses avoided by the friend. Mr. London’s cooperation will certainly be helpful, and may allow him to avoid prison if the trading resulted in only small gains. But if the benefits were worth more than $200,000, then federal sentencing guidelines would recommend a prison term of about a year, and higher as the dollar figure grows. The S.E.C. can be expected to file civil charges, and the usual price for a settlement is a penalty equal to the benefits derived from the trading activity, plus disgorgement of any profits or benefits received. Even though Mr. London does not appear to have traded for his own benefit, under the law, he is responsible for any profits of his tippee and will have to pay the price.As anyone that has ever worked in a Big 4 firm can testify, talking about work in a social setting is unavoidable because you spend 100% of your time outside of work with...co-workers! Usually it's people on your team but even if you're speaking to other people within the firm, it's natural to ask about the clients you're working on. And everyone more or less knows there's this unspoken understanding this client gossip is between prudent business colleagues and is not, ya know, for outsiders. To take that even a step further, if you're an auditor, thinking about trading a client's stock is like thinking about going on serial killing spree -- it doesn't even occur to you because "WHOA. THAT IS SO MESSED UP."   Scott London's situation was a little different, obviously, as the in-charge of the Los Angeles audit practice. He was a man about town, serving as the Chairman of the Los Angeles Sports Council and other nonprofits. An enormous part of his job was talking business with people outside KPMG. "We can do this for you, we can do that for you. How 'bout Kobe? Yuk, yuk, yuk." And as we all know, a lot of these guys (yes, guys) get a lot of business down on the golf course and at the club. But sharing information about specific clients to a golfing buddy that had a struggling business? [getting upset again] Maybe professional judgment likes to relax at the club, too?  London says his "heart sank" when he learned his pal was trading on the info. That sounds a lot like someone who was hoping -- PRAYING -- his words were going in one ear and out the other. But when the inevitable happened, he was overcome with disappointment rather than surprise.   Sigh. But as Henning notes, professors nationwide now have another real-world example for classroom discussion:Mr. London is likely to become well-known in university accounting programs for what not to do as an auditor, a lesson in how anyone can commit a crime when they betray a trust.In other words, Scott London will be a legend. So he's got that going for him. Which is nice. KPMG and the Pain That Comes of Breached Trust [DealBook]

Scott London: 'These leaks started in an effort to help out someone' [Telegraph via WSJ]
"Let me first say that I regret my actions in leaking non-public data to a third party regarding the clients I served for KPMG. Most importantly, and I cannot emphasize this enough, is that KPMG had nothing to do with what I did. The Firm bears no responsibility in this matter. These actions were by my choice and mine only. These leaks started a few years back in an effort to help out someone whose business was struggling. From time to time over the last couple of years, this third party would ask me how these clients were doing. On a few occasions over the past few years, this individual would ask if he should buy or sell a stock and I gave him my thoughts indicating whether the stock was a good buy or not. Never once did I pass any documents to him, but rather we spoke on the phone and the information I provided was in the form of a suggestion. He traded on the information, but to this day I am not aware of how much he profited from the information. Regardless, what I have done was wrong and against everything that had believed in. I spent nearly 30 years at KPMG and I dedicated my entire life to that Firm. This is the main reason why this is so difficult for me to go through. Knowing that I have caused harm and embarrassment to those that I respected and admired in the Firm has caused me tremdous [sic] grief that I am sure I will never overcome."

Trading Case Embroils KPMG [WSJ] "Rogue employees do these types of things, but the question is, what controls does KPMG have to ensure that this kind of thing does not happen or will not happen in the future?" said Lester Aaron, chief financial officer for Unico American.

Another "Rogue" Audit Partner; Another "Duped" Audit Firm [Forbes]
But surely Scott London, KPMG’s “rogue”, had access to confidential information about more clients of the firm than just the ones he was directly responsible for. He was the partner in charge of the audit practice for a huge market, Los Angeles. He has the right, and the responsibility, to know about every interesting or problematic thing going on at the audit clients in his practice group.  He may be a “concurring” or quality review partner on more companies’ audits and can “drop by” audit committee and other client meetings on a relationship-building basis. The exposure to KPMG and to the clients of this practice unit, and perhaps others, may be larger than what’s been admitted by the firm so far.

Was KPMG audit partner truly a ‘rogue’? [MW]
[I]n the corporate world there is a written code and an unspoken one. Junior employees follow the lead of senior ones. In this case, the “rogue” employee was the head of the audit practice in Los Angeles. Golf Pal Chats Led to Probes [WSJ]
Scott London's path from KPMG LLP partner to subject of insider-trading investigations began with a casual conversation in 2010 with "someone I'd known from the golf club, " he said in an interview. Mr. London said the discussions—which began after he had spent a quarter of a century at KPMG—concerned corporate audit clients Herbalife Ltd. and Skechers USA Inc. It wasn't until the second or third chat that he realized that his unidentified friend was trading on the information, he said. "Once he told me he had traded, that's when my heart sank," Mr. London said in an interview with The Wall Street Journal Tuesday. "We had discussions this wasn't right—I knew it was wrong—but it just happened." Mr. London said he continued talking to this person, usually giving him "no real significant information."   Fired KPMG auditor can't explain 'lapse of judgment' [LAT] "Every day since this occurred I'm saying to myself how stupid I am," Scott London said. "I have no idea what I was thinking." [...] By his account, a friend with money trouble was poking around for information on Herbalife Ltd. and Skechers USA Inc., two Los Angeles-area companies whose audits London personally oversaw. Soon, he says, he was passing inside tips on the companies that resulted in as much as $100,000 in profit for his buddy. In return, he says, he collected "about $25,000" in cash, was treated to fancy dinners and received a Rolex watch as a gift.

Proposed rule would have forced KPMG to name auditor sooner [Reuters]
The name of Scott London, a KPMG veteran, emerged late on Tuesday, but would likely have been known sooner if the panel that regulates the audit industry had adopted a proposed rule to require disclosure of audit engagement partners. The Public Company Accounting Oversight Board, aiming to shine more light on public company audits, proposed the rule in October 2011, but has not enacted it. "We don't know how many other audits of public companies this person did," said Lynn Turner, former chief accountant for the U.S. Securities and Exchange Commission. "It is a shame the PCAOB has elected not to move forward with this significant proposal," he said. Ernst & Young opens new member firm in Myanmar [NST]
Is that everyone?   Your Least Engaged Employees Might Be Your Top Performers [HBR]
And your most engaged might be your worst.    Eel Removed From Man After Getting Stuck, Chewing Through Colon [HP]
A man in China's southeastern Guangdong province admitted himself to a local hospital after he reportedly got a live eel stuck inside him. According to British tabloid The Sun, the man inserted the 20-inch-long Asian swamp eel into his anus after seeing it done in a porn movie, and he had to endure all-night surgery to have it extracted.

Herbalife's KPMG Auditor Was a Cheerleader, Too [Bloomberg]

Looking for KPMG's Mystery Man [WSJ]

"I thought he was a nice guy…he was personable, understanding and seemed very knowledgeable and professional," said Mr. Weinberg, who recalls having dinner with Mr. London on several occasions. [WSJ]

Tax-writers: Secrecy needed for reform “There’s no question that there are going to be times when, to find a conclusion, you’re going to have to probably do it behind closed doors,” Sen. Orrin Hatch (Utah), the top Republican on the Senate Finance Committee, told The Hill recently. [The Hill, Earlier]

Here's something PCAOB Chairman James Doty said very recently: "We need a profession that is revered for insight and clarity, not box-checking. Knowing the name of the engagement partner on an audit, and the various other firms that participate in a global audit, may help the investing public identify and judge quality, leading to better auditing." [PCAOB]

Here's a point and counterpoint on the return-free filing. [Forbes]

Bobby Jindal’s Tax Failure [Bloomberg]

Dumpster Diver Who Found $20k in Recycled Book Giving Rightful Owner One More Month to Claim It [Gawker]

Oh, to be a Big 4 firm these days. Yes, billions of dollars flow in from every corner of the world thanks to your professional services, but thanks to the audit practice, there's peril around every corner! 

The news that former KPMG audit partner Scott London passed along inside information to someone outside the firm is just the latest incident that would give an audit firm leadership and compliance folks raging headaches. Another recent cause for heartburn is PwC's situation: it is one of only two firms (Deloitte being the other) that have had the distinct pleasure of the PCAOB releasing Part II of their inspection report to the public.

Now, just for fun let's put ourselves in an imaginary nightmare scenario -- if your firm had to go through one of these two predicaments: 1) Discover that a partner engaged in insider trading activity or 2) Have Part II of the PCAOB's inspection report released, which would you choose? Let's examine each, shall we?

Predicament A: Partner is involved in insider trading -- This particular situation is bad for all kinds of reasons that we are watching unfold this very day. An individual partner and his office have been positively identified. Clients fees have evaporated. Also, because this involves an audit partner, the offense looks especially egregious.  The G-men are involved. According to a general counsel friend we spoke to, "more collateral damage could result from this," meaning more clients could leave or regulators might insist on a more in-depth investigation. Insider trading attracts a huge part of the financial media so it has the firm's PR people on the run. The faint silver lining in this scenario, however, is that it can be plausibly blamed on a rogue agent within firm, which KPMG has aptly done. That person was promptly eliminated. Problem solved!

Predicament B: PCAOB Part II is released -- This is no treat either. One of the firm's core functions, a function that evokes virtues from the firm's leaders that they wear like a badge of honor, is being questioned. Many people will see this as indicative of wider, systemic issues at the firm. Part II could have a direct effect on audit professionals by way of  more robust methodologies that would increase their workload. The national leadership is forced to address a firm-wide issue that happened on their watch. If there is a bright side to this fix it is the fact that a large portion of the details -- the clients affected, the partner and offices responsible -- are still kept secret. Yeah, the PCAOB may be trying to change that, but it's not exactly moving at light speed on the issue. 

Our general counsel friend, if (s)he had to choose one situation that would ruin their life for the foreseeable future, went with Option B. The secrecy afforded by the PCAOB's inspection process, even if Part II is released, makes for a slightly more desirable pickle.  

And really it seems like a no-brainer. Yeah, your firm might suck at what it's supposed to do, but at least it can suck with relatively anonymity and obscurity. Scott London's name will be in every single one of those reports out there. A lot of financial reporters don't even know what the PCAOB is or does. If a Part II gets released, most of them barely notice.

So, which one would you choose? No copping out with "I'd quit" either. You have to assume you're under duress from Lucifer or some other unholy figure that has tied you to chair and is holding your family hostage. Sorry to make it such an extreme scenario, but imaginary white-collar adventures like this are important exercises.  

I suppose there had to be other things going on today besides KPMG resigning from audit clients:

Gordon Ramsay is being sued by a Manhattan accounting firm for unpaid bills totalling $75,000, it was reported today. The celebrity chef, 46, and his businesses owe the firm the money for three unpaid invoices dating back to 2010 and 2011. Marks, Paneth & Shron say the British personality and his companies have 'breached their contractual obligations by failing to make payment'. Ramsay, who is temporarily based in Los Angeles, is said to owe them three payments of $14,000 for work in July 2010, $35,000 in May 2011, and $25,000 from October 2011. All we're saying is -- think about it. Not having to relocate is a bonus.   [Daily Mail]   Image source: Wikipedia