The earth rotates around the sun. Galaxy Doppler shifts
are almost always redshifts. The further away the galaxy the faster it is
I'm learning a lot in my first class, Cosmology, in the University of Chicago Masters in Liberal Arts Program. The
universe has order. There's synchronicity and "smoothness" to where it is and how it came to be that
scientists have a hard time explaining.
Such laws rarely seem to apply very well to human nature.
Where did earthbound humans part ways with the natural world?
I wrote today in Forbes about a small little thing I
noticed in one of the first stories about Scott London. As I tried to research
and write about it, I waited for someone else to pick up on it. (No one else
did.) I've been busy the last couple of weeks since the KPMG press release
about Scott London's breach of client confidentiality hit the wires on April 8
but I researched the issue and called KPMG and Skechers and waited.
There's one small detail that came out early, mentioned
Financial Times by Kara Scannell and Dan McCrum when they interviewed
Skecher's CFO David Weinberg, that matters a lot to the current debate in the
U.S. and U.K regarding audit firm rotation and the compromise rules for lead
partner rotation on audit engagements.
Mr. London had worked on Skechers' audits in
seven or eight of the last 13 years, said Mr Weinberg, returning after a
five-year rotation away two or three years ago. He
said that he had worked with him regularly, and never had questions about his
work or integrity: "not even the slightest", he said.
The rest of the column goes on to explain that London
seems to have subverted the intent of Sarbanes-Oxley
Section 203 that requires lead engagement partner rotation off engagements
to promote objectivity, independence and professional skepticism. But he's not
alone. The more I looked into this the more I realized it's probably pretty
common in the firms. After ten plus years of Sarbanes-Oxley, we've probably got
quite a few of these roll off, roll back on partners out there. An early draft of a paper by four academics, including former
PCAOB academic fellow Brian Daughtery, says almost everyone does it.
Assignments for the lead engagement partner, concurring
partner, and other senior members of the audit team are planned well in advance
of required rotation so members are not rotated simultaneously. Some firms have
policies that specify the qualifications of the partner assigned to client
engagements. Depending on the engagement, regional or national office approval
may be required on partner assignments. One OMP indicated firm policy does not
allow a partner to be a concurring partner before being a lead partner.
Another indicated his international firm now has a policy that does not allow
partners to ever return to a former public client unless the national office
agrees to make an exception based on extenuating circumstances.
An important element of mitigating the negative aspects
of rotation is ensuring partners are properly trained. One OMP noted the path
to partnership is now approximately 13-15 years, primarily driven by the
complexity of GAAP. Another noted many senior managers rotate to larger
practice offices or the national office for training before standing for
By the time the Daugherty/Dickins/Hatfield/Higgs
paper was published in 2012, Brian Daugherty told me that none of the Big
Four audit firms prohibited a partner from returning to a former public client
as lead engagement partner. None, that he became aware of during the research,
prohibit the audit partner from acting as an advisory/consulting partner
before, after, or during the cooling off period as lead audit engagement
partner or as concurring/quality partner. One firm that did forbid partners to
return to a lead audit engagement partner role after a rotation off, except on
an exception basis, dropped the prohibition before the paper was published.
Despite being very open and chatty with the press about
the London incident - looks like KPMG fed a positive story to the WSJ about all they are doing to
review internal policies - KPMG did not want to give me exact dates of London's
assignments on Skechers and what he did during his roll-off. Neither did
Did London act as concurring or quality review partner
during those five years? Even worse, did London act as Advisory partner,
responsible for increasing non-audit tax and consulting fees at Skechers
Tom Flanagan did at the Fortune 500 clients he traded illegally on?
Skechers spent $351,000 for "All Other" services with
KPMG between 2003 and 2008. Given the Sarbanes-Oxley prohibitions against an
auditor providing services other than tax and "audit related" this seems odd.
The explanation? "These are fees for other permissible work performed by
KPMG LLP that does not meet the other category descriptions." Translated, that
means, "We don't think we have to explain it you."
Skechers paid KPMG an awful lot, too, for tax services
compared to its audit fee, $4, 512,000 over the ten year period 2002-2011, or
34% of total audit fees for the same period of $13,129,000. In 2004, Skechers
paid KPMG approximately $680,000 for acquisition due diligence services,
categorized as "audit related" when due diligence services are prohibited
consulting services by an auditor unless they're tax-related.
There's more at Forbes, KPMG's Inside Trader: What The Auditor, and Skechers, Don't
Want To Talk About. You might be asking, though, how can we as investors
know if the Big Four are complying with the audit partner rotation law?
Who checks to see that they are following any of these laws Congress
makes that are supposed to make us believe that auditors are back on the job,
looking out for shareholders after Enron?
If an audit firm violates the rule, we'll probably find
out about it only if something worse happens that causes that information to be
disclosed. The audit firms know which partners are assigned to clients, audit
and non-audit. They have to know to manage their business as well as insure
compliance in case that audit is selected for inspection. Public companies and
their Audit Committees know who is assigned to their engagements. Rarely do the
firms and their clients volunteer information about tenure on engagement unless
there's a lawsuit, or if feelings are hurt such as in the Skecher's case. The
Skecher CFO's disclosures to the FT about Scott London's tenure on the
engagement are unusual since there's been no lawsuit.
Read this article in its entirety at the re: The Auditors, a blog
by Francine McKenna.
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