Auditing and Assurance Services Update
Auditing and Assurance Services Part 1 Part 2 Part 3
Article Title 1 2 3 4 5 6 7 8 9 10 11 12 A B C D E F G H
1. Ex-KPMG Execs Could Face X
2. Ex-WorldCom Employee X X
3. Class-Action Plaintiffs Head to X
4. Committee Dunks Krispy Kreme X
5. No Poaching from KPMG, Say X X
6. Is Sarbanes-Oxley Compromising X X
7. Guarding the Guardians X X
8. Can Proposed Audit Adjustments X
Challenge Auditor Independence?
9. KPMG’s Tax Troubles X X X
10. Accounting Probe Forces Visteon X X X
To Delay Filings
11. Trial Highlights Vulnerability of X
12. At Online Stores, Sniffing Out X
Crooks Is a Matter of Survival
13. America’s DA X
14. Former Executive Of Cendant X
Receives 10-Year Sentence
15. U.S. Probes Allegations Of Bribery X
16. Sleuthing Boosts Funds' Returns: X
Managers Sort Winners, Losers By
Scouring Companies' Books For
Signs of Faulty Accounting
17. Pricewaterhouse Is Ordered to Pay X X
$120 Million in Suit
18. Report Shows How Krispy Kreme X
19. Sarbanes-Oxley Is a Curse For X
20. U.K. Probes Deloitte Over MG X X
21. Claims of Office Romance Spawn X
Other Allegations about Benefits,
22. Former Executives Of Bristol- X X
Myers Face SEC Charges
23. Kmart Ex-Officers Are Accused By X
SEC of Misleading Investors
24. A Vision Fulfilled X
25. New Guidance for Review X
Engagements: SSARS 10
26. The Role of Audit Committees in X X X
the Public Sector
1. Ex-KPMG Execs Could Face Crime Charges CFO.com, August 4, 2005, Stephen Taub.
A number of former KPMG partners are facing criminal charges for their role in selling tax shelters during the 1990s.
While federal prosecutors recommended filing charges against the firm itself, concerns about reducing the number of large
accounting firms, along with the Supreme Court’s reversal of Arthur Andersen’s criminal conviction appear to be reducing this
2. Ex-WorldCom Employee Sentences
A number of former WorldCom employees were recently sentenced: (1) Betty Vinson was sentenced to five months in prison and
five months of house arrest; Troy Normand was sentenced to three years probation; (3) Buford “Buddy” Yates was sentenced to
one year and one day in prison; (4) former Controller David Myers was sentenced to one year and one day in prison; and, (5)
former CFO Scott Sullivan received five years in prison.
3. Class-Action Plaintiffs Head to Court CFO.com, August 9, 2005, Stephen Taub.
Only nine cases have gone to trial since the passage of the Private Securities Litigation Reform Act of 1995; over 1,700 such
cases were filed. Interestingly, six of these nine cases have occurred this year.
The increase in cases is thought to be the result of large settlements; in 2004, total settlements were $5.45 billion, with seven
settlements in excess of $100 million.
4. Committee Dunks Krispy Kreme CFO.com, August 10, 2005, Stephen Taub..
A special committee comprised of two independent directors concluded that Krispy Kreme’s executives intentionally managed
earnings. This committee directed Krispy Kreme to restate earnings from 2001 through 2004 downward by $25.6 million.
The report specifically indicated that former CEO Scott Livengood did not establish appropriate controls or “management tone”.
In addition to restating earnings, the committee also recommended governance changes, such as ensuring that all directors other
than the CEO are independent.
5. No Poaching from KPMG, Say Audit Firms CFO.com (August 25, 2005), Craig Schneider.
The other Big Four firms have agreed not to poach clients from KPMG while it resolves federal litigation problems.
The purpose of this agreement is to help KPMG avoid a fate similar to that of Arthur Andersen.
6. IS SARBANES-OXLEY COMPROMISING INTERNAL AUDIT? Eric Krell. Business Finance: Aug 2005.
Finance and internal audit executives must find ways to balance internal audit's independence with its ongoing compliance
contributions while keeping it sufficiently staffed.
The compliance contribution of companies' internal audit function seems to be a top-of-mind concern for the regulators,
external auditors and corporate executives who have been most influential in determining how Sarbanes-Oxley will be
implemented, audited and enforced.
At many companies, internal audit's compliance involvement has distracted its attention from operational audits, systems
audits and other project work.
7. GUARDING THE GUARDIANS Joan Hodowanitz, Steven A Solieri. Strategic Finance. Aug 2005.
Now that the Public Company Accounting Oversight Board (PCAOB) has completed its first year of full-scale inspection of
audit firms, it seems doubtful it can fulfill its Congressionally mandated mission within the prescribed period of time.
It has not been able to hire enough experienced inspectors to keep up with its required inspection schedule.
8. Can Proposed Audit Adjustments Challenge Auditor Independence? Peter M Drexler. The CPA Journal. Aug 2005
When the auditor discovers material misstatements during the course of an audit, one of the following may occur:
The auditor notifies the client of the error, and the client's accounting staff investigates the circumstances, then makes the
appropriate adjustments; or
The auditor prepares the appropriate accounting entry and furnishes a copy to the client's accountant, who would
understand the entry, verify the correctness of the entry, and accept responsibility for it in the representation letter; or
The client's accountant is not familiar with the entry's necessity and validity but accepts responsibility for the entry
without understanding or necessarily agreeing with it.
In the last case, could the auditor's independence be adversely affected? Can a conflict arise when an auditor prepares
material proposed audit adjustments for such a client?
9. KPMG Tax Duo Tied to Shelters, Wall Street Journal (August 10, 2005), C1.
Two former KPMG tax consulting executives were linked to the firm's sales of abusive tax shelters. The links came as a
surprise as both were recently appointed vice chairman in January 2004 as part of an internal shakeup related to the
fraudulent tax shelters.
Judge Rejects KPMG Class Action From Former Tax-Shelter Client, Wall Street Journal (August 11, 2005), C3.
A federal judge rejected a plaintiff’s request for class action status involving his purchase of a KPMG tax shelter. The
decision means that all KPMG tax shelter clients must pursue their litigation individually, versus collectively.
KPMG's Settlement Provides for New Start, Wall Street Journal (August 29, 2005), C1.
Initially charged with a single count of conspiracy to defraud the government, the fourth-largest U.S. accounting firm
admitted to criminal wrongdoing. Facing the possibility of an Andersen-like implosion, KPMG agreed to a $456 million
settlement with federal prosecutors which will allow the firm to avoid criminal indictment over its involvement with what the
firm now admits were fraudulent tax shelters. The firm won't be prosecuted as long as it complies with the settlement's
requirements. Despite avoiding criminal indictment, the Big 4 firm faces civil litigation from former tax-shelter clients, as
well as former audit clients (e.g., Xerox). The firm has said it has “turned over a new leaf.” KPMG Chairman Tim Flynn:
“We regret the past tax practices that were the subject of the investigation. KPMG is a better and stronger firm today, having
learned much from this experience."
Nine Are Charged In KPMG Case On Tax Shelters, Wall Street Journal (August 30, 2005), C1.
As a result of the government’s investigation of KPMG’s involvement with abusive tax shelters, a federal grand jury charged
nine KPMG personnel with conspiring to defraud the U.S. government. All nine plan on pleading not guilty, arguing that the
tax shelters in question have never been determined to be fraudulent or abusive. The investigation in ongoing and further
indictments may follow.
10. Accounting Probe Forces Visteon To Delay Filings, Wall Street Journal (August 2, 2005), B3.
After an internal investigation into accounting errors, Visteon, an auto parts manufacturer, announced that its first and second
quarter SEC filings would be delayed. The probe found that the company failed to record transportation expenses in the
correct period (cutoff).
11. Trial Highlights Vulnerability of Databases, Wall Street Journal (August 3, 2005), B1 .
The trial of a spammer has shown how vulnerable consumer information databases can be. Although data broker Acxiom
stated that no confidential information was accessed, spammer Scott Levine was able to download 1.6 billion e-mail
addresses from the company’s servers in 2002 and 2003.
12. At Online Stores, Sniffing Out Crooks Is a Matter of Survival, Wall Street Journal (August 4, 2005), A1.
When Neil Kugelman first opened his online jewelry store six years ago, his very first customer order was puzzling. The
customer’s address didn’t agree with either the shipping address or the credit card mailing address. Attempts to reach the
listed phone number reached disconnected lines. He didn’t fill the order. Other online retailers are not as wise, often
jeopardizing their very survival. Kugelman says that approximately 30% of the orders his business receives are fraudulent.
13. America's DA, Wall Street Journal (August 4, 2005), A12.
Robert Morgenthau has built a reputation prosecuting white collar fraud, including Dennis Kozlowski (Tyco), BCCI, and the
U.N. Oil for Food scam. Assistant DA Jim Kindler says of the 85-year old, "He's just fearless. He's been in office long
enough. He's not beholden to anybody."
14. Former Executive Of Cendant Receives 10-Year Sentence, Wall Street Journal (August 4, 2005), B2..
Former Cendant Vice Chairman Kirk Shelton was sentednced to 10 years in prison for his role in a $3 billion accounting
scandal Shelton was also ordered to pay full restitution ($3.27 billion). Prosecutors argued that Shelton inflated revenue by
$500 million to drive up the company’s stock price. Shelton’s lawyer countered that Shelton did not directly benefit from the
scheme, but instead lost millions. When the fraud was reported in 1998, Cendant's market value dropped $14 billion in one
Mr. Shelton's lawyer, Thomas Puccio, said he would appeal the sentence. He has said the businessman's case is atypical
because Mr. Shelton did not directly benefit from the scheme. He, like the Cendant stockholders, lost millions of dollars.
15. U.S. Probes Allegations Of Bribery at DaimlerChrysler, Wall Street Journal (August 5, 2005), A1.
The Department of Justice have launched a criminal inquiry into allegations that DaimlerChrysler officials bribed foreign
officials. If the allegations are found to be accurate, this would be an example of an indirect effect illegal act.
16. Sleuthing Boosts Funds' Returns: Managers Sort Winners, Losers By Scouring Companies' Books For Signs of Faulty
Accounting, Wall Street Journal (August 5, 2005), C1.
Mutual funds are dedicating more resources to sleuthing companies in their portfolios for financial problems -- and possible
fraud. Henry Ellenbogen, a former analyst turned mutual fund manager, noted that recent accounting scandals have
"reinforced our accounting research and gave us more opportunity to use it," resulting in returns higher than the industry
17. Pricewaterhouse Is Ordered to Pay $120 Million in Suit, Wall Street Journal (August 5, 2005), C3.
A Federal jury ordered the Big 4 firm to pay $120 million related to the audit of Ambassador Insurance Company, a client
that went bankrupt almost twenty years ago. While one of the largest jury verdicts against an accounting firm, the finding
after 20 years of litigation highlights how long the case list against the Big 4 firms really is.
18. Report Shows How Krispy Kreme Sweetened Results, Wall Street Journal (August 11, 2005), A1.
An internal investigation reported that the doughnut maker used “egregious” practices to boost sagging profits.
19. Sarbanes-Oxley Is a Curse For Small-Cap Companies, Wall Street Journal (August 15, 2005), A13.
The Chairman and CEO of the American Stock Exchange comments that, while was established in 2002 to improve
corporate governance, Sarbanes-Oxley’s new regulations “made no distinction between a billion-dollar large-cap company
and a $75-million small-cap one. This has made it extremely difficult for smaller companies to compete and grow in this
20. U.K. Probes Deloitte Over MG Rover Work, Wall Street Journal (August 18, 2005), C3.
The Accountancy Investigation & Discipline Board, the U.K.’s equivalent of the U.S. PCAOB, is investigating Deloitte &
Touche over the firm's audit of collapsed auto manufacturer MG Rover Group Ltd.
21. Claims of Office Romance Spawn Other Allegations about Benefits, Nepotism, Wall Street Journal (August 19, 2005), A1.
Amid soap opera-like allegations of extra marital affairs among the two executives at MassMutual, an internal investigation
discovered that the company’s chairman’s retirement account had suspiciously ballooned to more than $30 million. The
account was overseen by the chairman’s alleged lover. Other allegations include misuse of corporate aircraft, improper
purchase of a company condo at a discounted price, and violation of the company’s nepotism rules involving the hire of
several family members.
22. Former Executives Of Bristol-Myers Face SEC Charges, Wall Street Journal (August 23, 2005), C3.
Two former executives of drug manufacturing giant Bristol-Myers Squibb were charged with a $1.5 billion accounting fraud
involving the premature recognition of revenue. The two face both criminal and civil charges. The company settled with the
SEC last year for $150 million, admitting that it offered incentives to customers to get them to agree to purchase more than
they needed in order to inflate revenue. When insufficient revenue was generated, corporate executives dipped into “cookie
jar” reserves in order to meet profit targets.
23. Kmart Ex-Officers Are Accused By SEC of Misleading Investors, Wall Street Journal (August 24, 2005), A3.
Charles C. Conaway and John T. McDonald Jr., K-Mart’s former CEO and CFO, respectively, were charged with fraud in a
civil suit brought by the SEC. The two are accused of misleading investors about the discount retailer’s finical condition
shortly before the company filed for bankruptcy.
24. A Vision Fulfilled, William W. Holder and Paula B. Thomas, The Journal of Accountancy, July 2005, p. 35-39
Report on the computerized CPA exam including exam content, candidates taking the exam, and implications for education
25. New Guidance for Review Engagements: SSARS 10, Steve Grice, The CPA Journal, August 2005, p. 34-37
SSARS has changed the requirements for review engagements by adding some additional requirements
Article includes requirements prior to the issuance of SSARS 10 and indicates the additional requirements in documentation,
inquiry, fraud and illegal acts, and Management representations.
26. The Role of Audit Committees in the Public Sector, Nashwa George, The CPA Journal, August 2005, p. 42-43
Article indicates how audit committees can work in government organizations
Focus on government auditing standards and how audit committees can work within the framework of those standards