The Connected Accountant

Audit firms left unprotected against claims of negligence

So says the Times of London.  In the article, Alex Spence details that, under pressure from the SEC, the UK government has declined to limit the exposure of auditors to damages.

Apparently, the SEC fears a 'you scratch my back' situation, where auditors issue a less than stringent report in return for an agreed restriction on auditor liability.  A version of this already exists in the UK under the 2006 Companies Act, where auditor liability can be limited if shareholders approve. To date, no major UK companies have taken advantage of this provision.  No doubt investors would experience a certain 'chilling effect' upon disclosure of such a deal.

Spence goes on to list the current firm-killing litigation against the Final 4:

KPMG A defendant in a class-action lawsuit in the Southern District of New York against Tremont, a Bernard Madoff feeder fund

Ernst & Young Sued by investors in a Luxembourg court with UBS for oversight of a European Madoff feeder fund

PwC Included in several lawsuits in Canada claiming damages of up to $2 billion against Fairfield Sentry, a big Madoff feeder fund

KPMG Sued in the US for at least $1 billion by creditors of New Century Financial, a failed sub-prime mortgage lender, which claimed that KPMG’s auditing was “recklessly and grossly negligent”

Deloitte Sued by the liquidators of two Bear Stearns-related hedge funds that collapsed at the start of the credit crunch

No doubt the Final 4 will be ready with their 'too big to fail' arguments should any of these appear to be headed to a finding against the firms.

A career for life....or just a job?

A recent survey at an audit careers website (A UK-based website) indicated that just 28% of those responding were looking for a career in public practice - less than 1/2 of those looking to be in the private sector.

Having said that, 46% of responses indicated that 'accounting is a job for life.'

Perhaps most telling for associations was the fact that 70% were open to working overseas - those associations that offer or encourage inter-firm transfers or experience are in a good position to support the desires of the new auditor.

Additionally, pending visa arrangements, this could be a way around skills shortages!

New Ethics Rules

With the ink barely dry on the last iteration, here come IFAC with some revised independence guidelines - effective 1/1/11.

The full rules are a bit of a grind at 132 pages, but there are some interesting highlights:

The revised codeextends the independence requirements for audits of listed entities to all "public-interest entities."  You will hit page 126 before the definition of a "public interest entity" becomes clear.  In addition to the obvious - quoted companies, the standard will also apply to any entity required to have a similar audit. So, private companies, government departments, charities, etc. might all now be covered by this extension.

The revised code also now precludes audit partners from being evaluated on (or compensated for) selling non-assurance services to their audit clients.

The material that addresses the definition of a network and a network firm for independence purposes appears untouched at this stage.

National institutes (AICPA, CICA, et al) will now have to go through their own consultation and notification process in order to get these revised rules adopted.

The Law Firm Meltdown - Are Accountants Next?

O.K., first the caveats and disclaimers:

I know that law firms are not accounting firms and that law firms are even more transaction driven than accounting firms. No transactions = no work.  Secondly, a lot of the 'sky is falling' stuff comes from the UK, home of one of the deeper recessions currently underway.  Thirdly, and a combination of the two above, a lot of the firms in trouble are related to The City, London's financial sector hub.

Having said that, the news in the Daily Mail was chilling. A Top 200 law firm preparing to 'go into administration.' (A sort of Chapter 11 filing.) With typical British stiff upper lip, a partner is quoted as saying 'the firm is having some difficulties.'

The rot goes deeper too. Clifford Chance, a firm with offices in New York and D.C. has laid off partners and is reviewing all 30 of its global offices for viability.  These are big guys - In New York they boast of being able to house 500 lawyers in their 14 floors of midtown real estate. Allen & Overy, another Top 5 London firm, has frozen rates and cut support staff by 10%. 

Of course, this might all create work for the insolverncy practices of accounting firms! 

Economics & Accountants

A little off topic perhaps, and definitely controversial, as we delve into the world of economics.  But this does have relevancy for accountants and for accountants that do business across borders especially.

 

And the question is, ‘when did the rules change’?

 

In a great article in Ireland’s Sunday Business Post, David McWilliams asks:

 

“Two years ago, Iceland was judged by Transparency International to be the least corrupt country in the world. The place is totally bilingual, and life expectancy is the best in Europe. The prime minister is the world’s only openly gay leader, and it has the oldest parliament on the planet. The country has no enemies. It doesn’t even have an army.

So how did a country with the highest level of educational achievement in Europe, free energy and a brilliant health service come to be regarded as a financial pariah? How come financial markets can judge a place like Iceland as delinquent and yet regard a place like Dubai - where women don’t have the vote and an immigrant underclass slaves away with no rights - as a safe haven? How do we explain this quandary?”

 

Add to this the fact that global economic recovery might well hinge on the willingness of China (a country whose democratic and human rights record is, well, mixed) to purchase even more western, specifically US, debt.

 

It is also worth pointing out that the UN also judged Iceland, as recently as last year, as having the world’s highest standard of living.

 

Viewed with 20/20 hindsight, a couple of things are clear:

 

1.     The UN, and others, when rating wealth, do not appear to distinguish between true wealth and cash flows.  Iceland had great cash flows as their companies and citizens bought up assets globally.  These assets came encumbered with debt, which did not matter as long as cash flows allowed payments to continue.  As asset values and cash flows declined, the debt remained, and goodbye Icelandic economy.

2.     The ‘accepted model’ that non-democracies spend too much on their own internal corruption, armed services and security operations to be successful as a ‘business’ may no longer be the case. 

3.     The ‘global financial system’ is far from the well-oiled machine that many would have us believe. What it actually is is another question, and perhaps it is too early (and too volatile) to tell.

4.     The long marriage of successful capitalism to successful democracy is strained, and other models may yet emerge that, at least in the short term, are as valid.

 

So where does this leave the accountant?  The biggest effect is on risk.  Very few accountants, advising a client expanding into places such as Iceland, the Baltic States or Ireland, would have got a hearing if they started telling the client about the risks involved.  The economic collapse has led to a precipitous decline in asset value, as well as the potential loss in foreign exchange as their currencies decline.

 

Additionally, if that new found ‘poverty’ in such locations translates into a state where the rule of law is less strong, or where corporate and individual malfeasance rises, then the risk profile in audits will change.

 

 

IFRS - The Sound of One Hand Clapping?

IFRS is coming to the US and Canada.  In Canada, implementation is set for 2011, while in the US companies will be allowed to report under IFRS in 2010, and it will be mandated by 2014.

As this looms, the question is why is there so little education on IFRS within North America?

One possible reason, at least within colleges and universities, is that they are so focused on preparing students for the CPA exam that until IFRS is a full part of the CPA exam scant attention will be paid. 

For those already in the profession, there seem to be some better - and growing - resources. A quick review of the AICPA's website shows that they are starting to take it seriously, with a special website http://www.ifrs.com/ exploring the issues for US-based issuers and accounting firms.

Associations of accounting firms are also addressing the issue with education, in some cases drawing on the experience of their firms from outside North America to start the education of those in North America.  Within IGAF Worldwide, we are going to be having a one-day training session at our annual Business Assurance meeting in early January 2009.