KPMG has been asked to answer for their audits of Wells Fargo. Wells Fargo has been plastered all over the news for their fraudulent sales practices, and now KPMG has to answer for them. Wells Fargo has been a KPMG client for over 85 years. 

They have been called by a group of senators to answer questions. The group of senators asking questions are:

Elizabeth Warren – Democrat Massachusetts (self-described nasty woman)
Bernie Sanders – Independent from Vermont
Mazie K. Hiron – Democrat from Hawaii
Edward J. Markey – Democrat from Massachusetts 

Self-described “Nasty Woman”, Elizabeth Warren, questions KPMG over Wells Fargo audit

The group of senators are especially interested in the audits from 2011 to 2015. From 2011-2015 Wells Fargo was unable to detect fraudulent sales practices by thousands of their employees. Wells Fargo also recently settled with regulators over the creation of millions of fraudulent bank accounts and credit cards. They settled to the tune of $185 million over this fraudulent activity. 

The senators also asked about the effectiveness of the Sarbanes Oxley act and the public company accounting oversight board (PCAOB).

The full list of questions asked by the senators are below. 

Questions for KPMG about Wells Fargo

1) Was KPMG aware of any of the illegal sales practices committed by Wells Fargo employees from 2011-2015 and addressed in the CFPB Settlement?

If yes:

A. DId KPMG communicate this knowledge with top executives at Wells Fargo? If so, please provide electronic or paper copies of any and all communications. 

B. Did KPMG have any internal discussions about Wells Fargo’s illegal sales practices and their potential impact on the company’s financial statements and on the outcome of the annual audits? If so, please provide all electronic or paper documents relating to these discussions.

If no:

A. Please provide a detailed explanation of why KPMG failed to contemporaneously identify or otherwise learn of Wells Fargo’s illegal activity during your audits.

B. Did you assess whether Wells Fargo had controls in place to prevent this illegal activity? What was your assessment about the quality of these controls and how well they were executed?

2) Did any employee of Wells Fargo mislead an employee of KPMG about the extent and impact of the unauthorized account creation addressed in the CFPB settlement during your audits? 

3) Has KPMG conducted any internal reviews, reexaminations or reassessments of its Wells Fargo audits in light of the information revealed in the settlement?

4) Has KPMG faced any disciplinary action or queries from the Public Company Accounting Oversight Board in relation to your audits of Wells Fargo? If so, please provide details on these actions or queries.

5) Based on your present knowledge of the creation of unauthorized accounts at Wells Fargo, does your firm stand by its conclusions from 2011-2015 that “Wells Fargo maintained, in all material respects, effective internal control over financial reporting?”

KPMG has until November 28, 2016, to provide answers to these questions. 

Conclusion

KPMG has a lot of questions to answer and will have to be careful about how they answer. They will want to be careful that they don’t send emails around that differ from the answers they give to congress. There is opportunity to perjure themselves.

They also have to be careful from an optics perspective. If they answer that they did not detect anything, then they will show that they were essentially clueless for the 4 years when this fraud was conducted. 

There has been a lot of scrutiny over the big 4 accounting firms lately. EY has caught a lot of heat from the SEC, and now you have KPMG getting grilled by Elizabeth Warren.

The big 4 accounting firms have to be more diligent in their audits. Even if it is not necessarily within their scope to detect this stuff, it is the public’s expectation that they do. They need to start factoring it into their scoping procedures as well as their fees. 

KPMG looks foolish in this situation which tarnishes their brand. The only way they should be willing to accept that going forward is to be compensated for it. 

Let us know your thoughts in the comments below. 

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The fine of EY will be combined with the fine of Weatherford to return over $150 million to investors.

Two partners at Ernst and Young were also penalized as part of this settlement with the SEC. Craig Fronckiewicz, who coordinated the audits of Weatherford, was suspended. Sarah Adams, who was the tax partner on Weatherford, was also suspended as part of the order. 

They agreed that they missed red flags as part of the audit.

Even though the SEC categorized Weatherford as high risk, they did not catch some fraudulent adjustments. EY didn’t detect anything wrong with the audit until 4 years into the fraud. 

The main problem with the audit was that the tax team booked a lot of post-close adjustments that were fraudulent. The tax team was making post-close adjustments to decrease the tax provision and increase net income. 

Instead of performing detailed work around the adjustments, EY just relied on management’s explanations to determine that the adjustments were reasonable. 

The SEC stated that EY and their national office did not perform sufficient audit procedures to cover the areas of weakness. 

Weatherford SEC Case Background

In September 2016, the SEC fined Weatherford Internaitonal for deceptive income tax accounting practices. The SEC fined Weatherford $140 million dollars over the matter. The deceptive income tax accounting practices were attributed to two top accounting executives. 

The two executives involved were James Hudgins and Darryl Kitay. James Hudgins was a vice president of tax. Daryl Kitay was a tax manager in the tax department. 

Weatherford allegedly lowered their income tax provision by about $100 million to align their earnings with projections. Both Hudgins and Kitay made post-close adjustments to the tax provision to help close earnings gaps. The two also wanted to make the effective tax rate (“ETR”) look better to management and investors. Weatherford regularly brought up its favorable ETR as a differentiator in the marketplace. The problem was the ETR was not accurate so they misled many investors. 

Weatherford was forced to restate their financial statements.

Hudgins and Kitay also had to pay fines to the SEC. Hudgins has to $334,067 while Kitay had to pay $30,000. Both cannot participate in the financial reporting or audit of public companies. They can ask for reinstatement in 5 years. 

Conclusion

Ernst & Young has been receiving a lot of heat lately on its audits, especially from the SEC. Weatherford has had trouble with its taxes for years. EY should have known to look harder at the numbers in the midst of all Weatherford’s problems. PwC was also involved in advising Weatherford around their taxes, so we’ll have to see whether PwC is pulled into this scandal as well. 

The SEC is stepping up their investigations making it harder to be a partner at the big 4 public accounting firms.

Being an audit and tax partner at the big 4 is not what it used to be. The toughest decision partners used to make was what cognac they’d drink after dinners with clients. Now they have to decide whether or not they want to be on a high-risk client. 

Being a partner is not a feet-up job anymore. You can severely damage your reputation and career if you don’t put some effort into your job. This might sound obvious, but there are many partners in the big 4 that don’t take their jobs very seriously. They think their jobs are to just entertain their clients. If you are in the big 4 or want to work in the big 4, keep your eyes peeled for fraudulent activity. If you don’t, you risk damaging your reputation and losing your job. 

The post Ernst & Young Settles with SEC over Weatherford Fraud appeared first on The Big 4 Accounting Firms.

Ernst and Young released their latest revenue numbers for 2016. Their revenue for 2016 is $29.6 billion. This makes them the third largest accounting firm in the US and the world.

They had $28.7 billion of revenue in 2015.

This represents almost a billion dollar increase in revenues year over year.

Deloitte revenue also increased by almost a billion dollars.

EY was able to gain some ground on PwC though because PwC revenue grew by only $500 million.

Ernst & Young Revenue by line of service

The assurance line of service was responsibe for 11.3 billion of revenue.

Advisory was the second highest earning line of service for EY. It earned 7.8 billion in revenue in 2016.

The tax line of service was responsible for $7.8 billion in revenue.

Transaction advisory services was responsible for $2.7 billion in revenue in 2016.

The fastest growing line of service is transaction advisory services. Ernst & Young transaction advisory services grew by 14.2 %.

We provide an overview of EY transaction advisory services on our EY careers page.

EY Revenue by Region

EY’s highest earning region is the Americas.

• The America’s region earned $13.6 billion.
• The EMEIA region came in second with $11.7 billion.
• Asia Pacific was the third highest earning region with $3.3 billion.
• Japan was responsible for $1 billion.

Investments in quality

Ey invested $500 million in training their employees. Their employees took over 12 million hours of training in the fiscal year 2016.

Ernst & Young People

EY partner Admits - EY promoted 714 individuals to partner across all global firms. 35% of the partner class came from emerging markets. 29% of partners admitted were women.

EY grew their headcount by 9% to 231,000 people.

Their headcount grew from 212,000 in 2015.

People by Line of Service

Ey’s largest line of service remains is the Assurance practice. The assurance practice has 82,555. The advisory practice has 48,104. The tax practice has 46,216 people. Transaction advisory services has 12,236 people in the practice. EY's firms support employs 41,689.

The advisory practice had the most growth in people with 15.6% growth.

Transaction advisory services had the second most growth with 14% growth in people.

People by Region

EY’s region with the most people is EMEIA. The EMEIA region employs 112,871. The Americas region has the second most people with 69,718. Asia Pacific has the third most people with 40,491. Japan has 7,720 people in their practice.

The highest growing region is 12.1%.

Social contributions

The big 4 public accounting firms usually release social contribution numbers in the revenue press releases.

EY contributed 700,000 professional hours to social causes. They also contributed $90 million directly to community projects.

Conclusion

In conclusion this appears to be a great year for Ernst & Young. They have almost a billion dollars in growth. They were able to maintain their position as the third largest accounting firm in the world. If EY keeps having years like this while PwC struggles, they might be able to become the second largest accounting firm in the world one day.

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I recently read the book “Arms and the Dudes” and I saw the movie War Dogs as well. 

What intrigued me about this story was how two young people could succeed in an industry run by huge old companies. The industry was defense contracting. I viewed it as something similar to 2 twenty year-olds establishing an accounting firm that competed with the big 4.

 I recommend reading the book because there was a lot of detail about the levels of corruption in our government in the book that was not shown in the movie. 

The two men in this book were gun runners.  They were gun runners because they were  involved in transporting guns. 

Their main task was to ship guns and ammo to the Afghan Army after the Iraq war. America was trying to help build the Afghan army, so it decided to stock them up with guns and ammo. 

The only problem was that the American government wanted to do this cheaply. They did not want to deal with crooked people. There was no easy way to do this cheaply without dealing with corrupt people, so the American government built a buffer. The solution was to do this through contractors. 

During this period in American history, the Bush administration was awarding many no-bid contracts to contractors like Halliburton. Halliburton was associated with Dick Cheney and other Washington insiders. The public wanted that rectified. 

Thus Washington passed a series of laws that required the government to consider small businesses when awarding contracts. That’s how the two dudes in this book pop up. They had family members who were gun runners and they both had entrepreneurial can do spirits. They saw the ability to succeed in the massive build up to the war, and they took advantage of it.

This is where the lessons come in that I think can be applied to public accounting

Lesson 1: Time in chair is valuable

Older individuals (in corporations or in the government) trust people that have spent a lot of time in one chair at one company. People are always suspicious of young successful people. Old people that took a long time to succeed always dislike and are suspicious of young successful people. Just because someone is young doesn’t mean they aren’t more driven than you and can succeed in business and in their careers faster than you did.

The two dudes in this book and movie were constantly battling that perception. They always had to fight against the stereotype that they were young and didn’t know anything. At the end of the day, they delivered functioning guns and munitions to the Afghan army. By doing this, they were central in America’s war efforts in Afghanistan. They deserved some credit but never received it. 

This same lesson is also true in accounting. Young people have to work against partners thinking you don’t know anything. Even if you’ve had a over 20 clients throughout your career and have experienced a lot of things, partners still discount you. You don’t start garnering respect until you are around 40. Additionally clients don’t think you know anything until you are older. A lot of the time in accounting people don’t listen to you until you have more grey in your hair. I think this is ludicrous. 

Lesson 2: Always make other people look good

The one thing these guys didn’t do well was make others look good along the way. They didn’t hire a lobbyist when they needed to. This was one of their central problems. They also ran into many legal issues but never had someone in Washington that could make their lives easier. A lobbyist could have greased the right wheels and help grow the dudes’ business. 

Lesson 3: Don’t be cheap

They also underpaid or didn’t pay a lot of the people they worked with along the way. No one stood up for them in the end because everyone had a bad taste in their mouth from working from them. The people they underpaid, paid late or didn’t pay at all were central in making sure these dudes failed. 

You see this a lot in the big 4 accounting firms. Partners and the big 4 in general love underpaying associates and administrative employees. Administrative employees can make the big 4  much more successful if the partners were willing to pay for good assistants. Instead this is where the big four firms skimp the most. The partners are millionaires working with assistants that earn barely anything. If partners paid for great assistants, the big 4 firms would operate more efficiently. More time could be spent on servicing clients versus going back and forth with assistants. Since partners and firms don’t hire good assistants, associates, senior associates and managers are often left doing a lot of the admin for the partners. Admin at the top accounting firms should be done by well-paid assistants or completely outsourced, but the firms are too stubborn and cheap to pay for it. 

Lesson 4: Treat everyone well

Make sure you treat everyone well. When something goes south, people won’t be swift to throw you under if they remember you in a positive light. For example if you treat a client well, and something goes wrong on the account because of you; they won’t throw you under to your partner.  

Additionally if you screw something up on a partner’s account and he or she figures it out, they won’t punish you if you’ve always treated them well and made them look good. 

That’s another thing that happened in War Dogs. The main character was consistently an asshole and trying to screw people over. In the short term it served him well, but in the long term it landed him in legal trouble and behind bars. Being an asshole is easy. Being nice is not, but it is better and yields lasting results.

Lesson 5: Don’t do unethical things unless you are prepared to go all the way

In this book, the main character was definitely a sociopath and evil, but his partner was not. Yet he did ask his partner to do unethical things. One of the unethical things he had him do was forge documents and financial statements. He always thought that I just have to forge these last set of documents and then that will be it. He also always saw the main character screw people over and never thought it would be him.

Surprise the unethical deeds did not stop, and he got screwed over. 

This lesson always applies to public accounting. Don’t think just because other people do unethical things, that you can do it and get away with it. Also don’t do unethical things and think that will be the last time you have to do it. 

All you have to do is look at the recent headlines. PwC getting sued by Taylor Bean for $5.5 billion. Deloitte involved in a whistleblower case. Senior Partners at EY violating independence. 

In the case of EY, senior partners at the firm were aware of unethical behavior, and they did nothing about it. 

Conclusion

Don’t get involved in unethical situations and if you see something shady say something. Even if you have to go to the SEC. 

You don’t want your name to hit the headlines because you thought unethical behavior would stop by itself. All the people in the unethical accounting situations mentioned above thought nobody was looking. They also thought that none of the bad behavior was ever going to pop. Now their names have been dragged through the mud on the front page. 

Don’t let that be you. Read Arms and the Dudes and watch War Dogs and ask yourself how you’d fare in similar situations. Would you bend the rules to earn an extra buck or would you do the right thing. You’ll never know unless you start asking yourself the question now. 

The post 5 Lessons From War Dogs appeared first on The Big 4 Accounting Firms.

Deloitte added 623 partners in 2016

Deloitte recently announced that 623 professionals were promoted to partner across the global firm this year. This represents an increase of 4% versus 2015.

They added that there was a significant increase in female partners. 26% of the new partner class was represented by females.

48 of the 623 new partners were in Deloitte Australia. 

80  out of the 623 were promoted in Deloitte UK. 30% of the new partners in the UK were women.

EY at the Emmys

EY is responsible for counting and securing the votes at the Emmy’s similar to what PwC does at the Oscars. It is usually an uneventful thing for EY, but this year they got a little bit of publicity out of it.

Leslie Jones called out EY saying that nobody cares about Emmy votes and that their nothing to guard. What they need to protect is her twitter account. This comes after Leslie Jones has faced a lot of bullying on twitter over the past year.

She was wondering if E&Y could protect her twitter account for her

The post Deloitte 2016 Partner Class appeared first on The Big 4 Accounting Firms.

We’ve updated our wiki pages for each firms revenue for the fiscal year 2015.

• PwC Wiki
• Deloitte Wiki
• EY Wiki
• KPMG Wiki

You can also check out the 2016 revenue numbers for the big 4 public accounting firms on the following pages

• PwC Revenue
• Deloitte Revenue

The big 4 accounting firms don’t release their revenue until the summer because they all have fiscal years that differ from December 31. The primary reason they have fiscal years in the summer is because they are busy auditing other companies during the December 31 fiscal year end time-frame.

The revenues for the big 4 accounting firms were as follows:

1. PwC 2015 revenue – $35.4 billion
2. Deloitte 2015 revenue – $35.2 billion
3. EY 2015 revenue – $28.7 billion
4. KPMG 2015 revenue – $24.4 billion

The revenue growth by firm was as follows:

1. EY 2015 revenue growth – 11.6 %
2. PwC 2015 revenue growth – 10%
3. KPMG 2015 revenue growth – 8.1%
4. Deloitte 2015 revenue growth – 7.6%

Ernst and Young’s revenue grew the most, but they are still well behind PwC and Deloitte in revenues. PwC grew the most between the top two firms which pushed them into first place as far as total revenue.

Growth of staff by firm was as follows

1. Deloitte’s headcount grew by 15%
2. EY’s head count increased by 12.3%
3. KPMG head count increased by 7.4%
4. PwC grew global head count by 6%

PwC obviously enjoyed the most revenue growth per employee because they did not increase headcount as much as the other firms did yet experienced great revenue growth. Deloitte added a significant amount of people without seeing a large impact in the topline. Deloitte obviously needs to have a firm townhall about charging codes. If people do not charge codes, then the firms do not make revenue.

PwC 2015 revenues

PwC leads the pack this year with $35.4 billion in revenue. The mix of revenue was:

• $15.2 billion from assurance services
• $11.2 billion from advisory services
• $8.9 billion from tax services

From this pie chart you can see that advisory is a large piece of the revenue puzzle now for PwC. Revenues increased overall by 10%. The growth in assurance was largely attributed to mandatory audit firm rotations in europe while the growth in advisory services was largely due to M&A deals and cyber security. The increase in tax revenues was attributable to M&A activity and transfer pricing demand. The transfer pricing demand was most likely due to an increase in global scrutiny around inter-company transactions.

Deloitte 2015 revenues

Deloitte came in second with $35.2 billion in revenues for the fiscal year ended May 31. This represents a 7.6% growth in revenue for Deloitte per their press release.

Deloitte went a different route than PwC in their press release. They chose to speak about investments in their business and society. They also chose to highlight how they have been able to attract and retain their talent.

The mix of revenue for Deloitte & Touche LLP was:

• $12.2 billion from consulting
• $9.8 billion from assurance services
• $6.7 billion from tax & legal services
• $3.5 billion from enterprise risk services
• $3.1 billion from financial advisory

You can see that Deloitte blows PwC out of the water in all their consulting services, but PwC dwarfs Deloitte in audit revenue. PwC has been making a lot of acquisitions in the consulting space, so we will still have to wait and see if that pays off for PwC in the future.

This will most likely push PwC way ahead of Deloitte in a year when the economy is down. Consulting revenues dip in those years, so Deloitte’s revenues will sag while PwC’s audit revenues should remain stable as long as they don’t lose clients.

Ernst & Young 2015 revenue

Ernst and young LLP reported revenues of $28.7 billion for the fiscal year ending June 30, 2015. This represented an increase of 11.6% for EY which is pretty significant compared with prior years. The highest flying practice for Ernst & Young LLP was advisory services which grew by 17.6%.

The mix of revenue for Ernst & Young LLP was:

• $11.4 billion from assurance services
• $7.5 billion from tax
• $7.3 billion from advisory services
• $2.5 billion from transaction advisory services

KPMG 2015 revenue

KPMG’s revenue grew 8.1% to $24.4 billion for the fiscal year ending September 30, 2015.

The mix of revenue for KPMG LLP was:

• $10 billion from assurance services
• $9.1 billion from advisory services
• $5.3 billion from tax services

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Ernst and Young has signed a lease for 168,000 square feet at the Waterfront Corporate Center in Hoboken, New Jersey. EY will be relocating a portion of their New York City operations to Hoboken beginning in June 2017. They will not be moving all of their operations to Hoboken.

The location is at 121 River St in Hoboken, New Jersey.

New Jersey’s Economic Development Authority lured EY to Hoboken by offering a $39 million tax credit.  This no doubt swayed the partner vote to move to Hoboken. $39 million is bound to make an impact on someone’s K1.

Benefits to EY employees

Hoboken is easily accessible. You can get to Hoboken on the Path trains, NJ transit (bus and train) or various ferries. The Path trains run to/from midtown Manhattan or downtown Manhattan. Hoboken is also very close to both the Lincoln and Holland tunnels. 

This office is located extremely close to the Path station and NJ transit traffic hub. 

The Big 4 accounting firms all have that same young social culture which will be embraced in Hoboken. Hoboken is a young city with tons of bars. The last census shows that Hoboken has 55% of its population between the ages of 25 and 44.

 The big 4 accounting firms in the New York City area all have frequent happy hours. The large amount of bars in Hoboken are ready to support this culture.

The most popular bars in Hoboken that are close to the Waterfront Corporate Center are Texas Arizona, 1 Republik, Wicked Wolf Tavern and Black Bear.

Del Frisco’s Grille just moved into the Waterfront Corporate Center as well which will fit those with more upscale tastes. 

Downside

Commuting from the office to a client site in Manhattan will be more of a pain at the new location. We all have those days where we have to head to a client in the middle of the day. For those people that will be in the new Hoboken location, it will be a little harder to get to their clients in various areas of Manhattan in the middle of the day. 

Parking is by far the biggest downside to Hoboken. There is very limited parking in the Hoboken area, so anyone trying to park in the area should be ready for that.

The downside of the move to Hoboken is that all the employees that live in Long Island or Westchester will have a pretty significant commute. 

Quick Facts about Hoboken

Hoboken is one square mile. Frank Sinatra was originally from Hoboken. Hoboken has a population of about 50,000 people.

Hoboken is directly across the Hudson river from Manhattan.

Washington St is the main street that runs through Hoboken. 

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