Regulators still drawing the line on auditors
Allegations continue to challenge the reputations of some of the nation's largest accounting firms, even as they try to repair the damage from the excesses of the 1990s.
chicagotribune.com
By Ameet Sachdev
Tribune staff reporter
October 7, 2003
Early last year, auditor KPMG LLP was ready to make public its doubts about Spiegel Inc.'s ability to continue as a business. But the Downers Grove-based retailer, according to a subsequent SEC complaint, decided not to disclose to shareholders its auditors' warning until just before it filed for bankruptcy in March.
Now a bankruptcy-court investigator faults KPMG for standing by while its client allegedly broke securities laws by withholding material financial information from the public.
"KPMG did not make a report to Spiegel's board, did not resign and did not report the matter to the SEC," independent examiner Stephen Crimmins, who was appointed by the bankruptcy court, said in a report last month. "As a `Big 4' auditor of public companies, KPMG should have been aware of an illegal act here."
For its part, KPMG said it acted appropriately at all times in the Spiegel matter.
Two years after the fiasco at Enron Corp. led to the collapse of its auditor, Chicago-based Andersen, major accounting firms have failed to clear away questions about their business practices and, in fact,face a mounting pile of woes.
The influential Big Four firms are under scrutiny for at least one high-profile audit failure. In many cases, accountants are paying the price for shoddy audits during the stock market boom of the late 1990s.
But as more questionable audits come to light, the public fails to distinguish the past from the present era of reform, said Charles Mulford, accounting professor at Georgia Tech.
The steady stream of negative publicity, he said, overshadows the steps that the firms have taken to regain trust.
PricewaterhouseCoopers, for instance, has started a pilot program under which teams of auditors, including forensic accountants, review the books of 50 clients to search for possible fraud. One proposal includes auditors reviewing the culture of a management team.
Another Big 4 firm, Ernst & Young, has parted ways with about 200 public and private clients in the past year.
Some left after fee disputes--audit fees have risen as much as 20 percent in some cases. In other cases, the major firms have stopped working with some clients voluntarily because of new rules that bar auditors from performing technology consulting work and from doing internal audits for clients.
"I think the accounting profession does get it," said Dennis Nally, chairman and chief executive of PricewaterhouseCoopers' U.S. operations. "It's now up to us to demonstrate that we get it."
But redemption is hard to come by, especially when accountants continue to make headlines.
In Spiegel's collapse, KPMG is criticized for not going far enough to inform the public after the retailer failed to timely disclose the auditor's concerns, according to the independent examiner's 214-page report. The examiner also criticized Spiegel's other professional advisers, including Chicago law firm Kirkland & Ellis.
The report concludes that there is no indication that KPMG discussed the matter with Spiegel's audit committee, as called for by U.S. securities laws and the accounting industry's own professional guidelines.
KPMG said in a statement that it "remains confident that it acted appropriately at all times and stands behind its actions in the Spiegel matter." It adds that the firm was "aware that Spiegel and its audit committee were being advised about its disclosure obligations by competent and respected legal counsel."
The unwanted attention came as KPMG was already fighting fraud charges related to Xerox Corp.
In January, the Securities and Exchange Commission filed a civil fraud complaint against KPMG and four partners, claiming that they knew for years that Xerox was inflating profits and helped it do so.
KPMG called the suit "clearly unjustified," adding that "at the very worst, this is a disagreement over complex professional judgments."
It was only the second time in recent years that the commission accused a major accounting firm of fraud. In 2001, the SEC obtained a consent decree against Andersen stemming from the firm's audits of Waste Management.
The SEC also is flexing its muscles with other major firms. In August, the agency permanently banned PricewaterhouseCoopers accountant Richard P. Scalzo from conducting public company audits after it found that he had turned a blind eye to improper accounting practices at troubled Tyco International Ltd.
On several occasions Scalzo did not force the company to disclose details of bonuses and other perks paid to its top executives, regulators said, and he allowed the company to offset unexpected costs through an undisclosed reserve fund.
In settling the case, Scalzo neither admitted to nor denied wrongdoing.
PricewaterhouseCoopers was not cited in the SEC's order against Scalzo, but the nation's largest accounting firm was slapped earlier this year. In May, the firm agreed to pay $1 million to settle SEC allegations that it acted improperly during a 1997 audit of a telecommunications company.
PricewaterhouseCoopers also agreed to be censured and to make changes in how it conducts audits. As is customary in such proceedings, the firm neither admitted to nor denied wrongdoing.
The regulatory actions, nonetheless, have embarrassed the firm, which at the beginning of the year began advertising that it would conduct more thorough audits and take tougher stands with clients.
"PWC looked really silly with their ads about integrity," Mulford said. "You've got to let some time go and make sure you've got your arms around the problems."
SEC officials have stressed that accounting firms will be held responsible for substandard audits and closely watched for conflicts of interest.
Wrongdoers face stiff penalties, as Ernst & Young recently learned.
The SEC is attempting to ban the firm from accepting new audit clients for six months as a penalty for allegedly violating conflict-of-interest rules in the 1990s.
The dispute stems from Ernst's practices while it was the auditor of PeopleSoft Inc., a software company.
The SEC alleges that Ernst compromised its independence by co-developing and promoting a software product with its client. Lawyers for the firm, in court papers, called the proposed sanction "draconian" and "outrageous."
Despite the ongoing turmoil, the industry is not in danger of another Andersen-like collapse, says Mark Cheffers of AccountingMalpractice.com.
"I think at this point the Enrons have pretty much been flushed out," he said. "At the end of the day, I think the firms will be better off because of the public scrutiny."
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