June 19, 2024

DealBook: Regulator Cites Flaws in Ernst & Young’s Audit Procedures

Ernst  Young's headquarters in New York.Lucas Jackson/ReutersErnst Young’s headquarters in New York.

The United States regulator of accounting firms said on Thursday that a Big Four firm, Ernst Young, had been too willing to trust figures supplied by corporate executives instead of evaluating them independently and had failed to improve its procedures even after being told to do so.

The audits in question took place in 2009, covering the first year of the credit crisis. The regulator, the Public Company Accounting Oversight Board, did not identify the clients involved.

In nine of the 58 audits reviewed that year, the board said, Ernst “identified a fraud risk” and found a deficiency in the company’s statements. But in each of those cases, “the firm’s procedures did not sufficiently address the identified risk.”

The report did not say whether any fraud had taken place.

The Sarbanes-Oxley Act of 2002 established the board, which reviews audits by large firms every year and issues a limited public report that does not include board criticisms of the firm’s quality controls.

The accounting industry lobbied hard to prevent those criticisms from being disclosed, fearing they would damage public confidence in audits. Congress provided that they would remain secret unless the board determined that the firm had failed to remedy problems within the 12 months after the report was issued.

Ernst became the third member of the Big Four to face such a disclosure after failing to convince the board that it had made sufficient changes in procedures, joining Deloitte Touch and PricewaterhouseCoopers. Only KPMG has not been cited for failing to make needed improvements.

In a statement, Ernst said it had taken “significant remedial actions” in response to the board report, but added, “We recognize we can and will continue to improve.”

In the report, given to the firm in 2010 but not released to the public until Thursday, the board said its review raised “questions regarding the sufficiency, rigor and efficacy” of the firm’s evaluation of work done by its auditors. “The inspection observations suggest the possibility that more attention needs to be devoted to supervision and review activities in connection with the audits of areas involving a high degree of judgment,” as well as areas subject to management estimates.

That observation could be significant in the current climate as the board considers whether it should require that audit firms disclose the name of the lead auditor on each audit. Accounting firms have generally opposed that suggestion, saying that each firm stands by all of its audits and that all are of similar quality. A decision on the proposal is on the board’s agenda for this year, a board official said.

In the report, the board cited seven audits in which Ernst had not done enough work to verify assumptions used by management. “In numerous instances, the inspection team observed that the firm’s support for significant areas of an audit consisted of uncorroborated management’s views.” In some cases, the board said, companies used assumptions that were contrary to past experience, but the auditor had accepted them without challenge.

Article source: http://dealbook.nytimes.com/2013/05/23/regulator-cites-flaws-in-ernst-young-procedures/?partner=rss&emc=rss

Karzai Blames Western Firms for Kabul Bank’s Troubles

KABUL, Afghanistan — As a delegation of Afghan officials traveled to Washington to present their plan to international financial authorities to dismantle Afghanistan’s largest private bank, President Hamid Karzai on Monday denounced Western accounting firms and advisers for corruption and failing to detect the bank’s troubles.

At a news conference, Mr. Karzai, while reassuring the public that their deposits in Kabul Bank were safe, said that foreign firms should be prosecuted along with those shareholders who took illegal loans and did not repay them.

“International organizations and foreign entities, who have been recruited and paid hundreds of millions of dollars of Afghanistan’s money to improve Afghanistan’s banking system, perform strong audits, and improve and build capacity for us, have not done their job,” Mr. Karzai said.

“They provided the Central Bank with inaccurate information, they deceived Afghanistan’s government and its economic and financial regulatory bodies,” he said.

Three firms were mentioned specifically: Pricewaterhouse Coopers, Deloitte and Bearing Point. An affiliate of the first performed an audit on the bank three months before its troubles began to come to light and pronounced its finances sound. Deloitte and BearingPoint had a contract from the United States Agency for International Development to advise the Central Bank and help build the capacity of the banking system.

Afghan officials are expected to present a plan to the International Monetary Fund and the World Bank this week that would, in essence, put Kabul Bank into receivership, separating its viable parts from the nonviable parts and allowing the Central Bank to recoup some losses by selling off assets from borrowers who have not paid back their loans. In the meantime, they would look for a buyer for the working parts of the institution, like its distribution network for government salaries.

The government has been under intense pressure from the I.M.F. to put Kabul Bank into receivership, prosecute wrongdoers and strengthen the enforcement of banking regulations. The fund suspended Afghanistan’s program last fall, which halted the flow of about $70 million from international donors. The resolution of the Kabul bank crisis is expected to result in a renewal of the program.

While Mr. Karzai’s comments appeared aimed in part at preparing the Afghan public for the expected announcement of the bank’s dismantling, the speech also sounded a theme that has become increasingly frequent in his public comments — that Western interests, and particularly American interests, had harmed Afghanistan. At one point in the news conference, Mr. Karzai noted that “the most prestigious American audit firm PricewaterhouseCoopers” had given the bank and by extension, the Afghan government, a clean bill of health just before its troubles burst into public view.

There are suspicions by Western officials that auditors of the local affiliate of the Pricewaterhouse Coopers Network that performed one of the audits on Kabul Bank were bribed to whitewash the bank’s financial situation. However, those offering any such payoffs would likely have been among the bank’s shareholders, all of whom are Afghans, said Western officials. “When are the Afghans going to take responsibility?” said a frustrated Western official, who asked not to be named because of the sensitivity of the subject. “There’s been a reluctance to accept blame by everyone in the Afghan government,” the official said.

Western officials often express their frustration in private but rarely in public, where the prevailing view appears to be that “we have to live with the Afghan government we’ve got,” as one American official said.

However, a European diplomat warned that Mr. Karzai’s bashing was a “dangerous game” because, especially in Europe, there is little support for the war in Afghanistan and taxpayers could quickly turn against it. “The appetite of the taxpayers and the governments are going to be very little, especially since this appetite is not getting good news from the theater,” the diplomat said.

It was at least the fourth time in the last couple of months that Mr. Karzai had disparaged the Western countries that keep Afghanistan afloat by spending billions of dollars on the country and risking soldiers’ lives to fight the insurgency.

Among Mr. Karzai’s most striking recent statements was one during an emotional public appearance after civilians were apparently killed in Kunar Province, when Mr. Karzai appeared to say that NATO troops should cease military operations in Afghanistan. He later clarified his remarks to say he only meant in operations where there were civilian casualties.

In a speech in early February, he compared NATO’s civilian Provincial Reconstruction Teams to plumbers that should leave when they finished making their repairs. Privately, his government has asked the United Nations to reduce its number of offices and narrow its mission.

Mr. Karzai also said Monday that the Afghan government was studying the options for a strategic partnership agreement with the United States and that in three months he would convene a jirga — a meeting of elders — to discuss the terms Afghans wanted for the agreement.

Rod Nordland contributed reporting from Kabul.

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