PCAOB Censure; FASB Moves; Fraud Study

The Public Company Accounting Oversight Board has censured the Spokane, Wash.-based accounting firm of Williams & Webster, barring partner Kevin Williams from auditing financial reports of public companies and suspending another partner, John Webster, from such audits for one year.

The PCAOB said the accounting firm raised concerns about departures from Generally Accepted Accounting Principles during its audit of the 2003 financial statements for insecticide maker Diatect International Corp. But, the Board said, the firm ignored unresolved issues and provided a clean audit report.

The order censuring the firm and suspending Williams and Webster says the partners “failed to exercise due professional care, failed to exercise professional skepticism, and failed to obtain sufficient competent evidence to afford a reasonable basis for an opinion regarding the financial statements.”

The enforcement order says Williams failed to audit properly Diatect’s reported gain on the sale of mining rights and Diatect’s reported revenue related to some products that the customer had a right to return. Webster, the concurring partner on the engagement, raised questions in a memo a month before the audit report was issued but failed to follow through after noting the departures from GAAP, the Board said.

Although Williams’ suspension is permanent, he may petition the Board for reinstatement after two years. The firm is still registered with the PCAOB, according to the PCAOB’s registry of firms authorized to audit public companies. Messages to the firm’s Spokane headquarters were not answered.

The PCAOB has not published an inspection report for Williams & Webster. Board spokesman Michael Shokouhi says he could not comment on whether the Board had inspected the firm, nor could he discuss what prompted the investigation that led to the disciplinary action. The enforcement order does not mention an inspection or any other impetus to the enforcement.

Woodbury

Pat Woodbury, managing director for FTI Consulting and a former staff member at the PCAOB, says the Board is within its authority to discipline for audit failures discovered outside the inspection process. Enforcement actions might spring from tips, referrals from the Securities and Exchange Commission, or investigations into restatements, she says.

Shokouhi confirms that approach, saying, “In general, enforcement actions can arise from inspections, tips, or referrals from other agencies.”

Woodbury says the PCAOB takes some criticism for so far issuing enforcement orders only on small firms. Indeed, the Board has issued only eight enforcement orders, all focused on small audit firms, since its inception in 2003.

There are plenty of cases in the enforcement pipeline related to larger firms, Woodbury says, but the investigation and disciplinary process is entirely confidential until a case is resolved. “The bigger firms have the resources to not settle and a real incentive to not settle just to keep it nonpublic,” she says. “With a smaller firm, if the auditor is inclined to settle, it can take six to eight months [to resolve a disciplinary proceeding], but with the large firms, they can drag those things out for two or three years.”

Woodbury says the confidentiality around the PCAOB’s enforcement process represents a “huge benefit” to the audit firms compared with the open scrutiny their clients often face. “When the SEC brings a matter, it’s public,” she notes.

FASB Promises Guidance On Repurchase Accounting

The Financial Accounting Standards Board has promised to issue a proposed staff position by the end of July to shore up a loophole in how companies account for repurchase financing agreements.

The Board is tackling transactions under Financial Accounting Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, in which a company buys an asset and swiftly refinances it with the entity that sold the asset. The Board wants to clarify when repurchase financing agreements should be viewed as separate transactions or linked transactions for accounting purposes, says Lisa Filomia-Aktas, an Ernst & Young partner and leader of the firm’s on-call advisory services group.

The concern revolves around situations where a company or a hedge fund buys as asset from an investment bank, then finances the purchase by effecting a repurchase financing agreement with the bank. Historically, says Filomia-Aktas, the bank would book a receivable because it sold the asset and the company would recognize an asset with a related liability for the amount financed, but questions are arising about whether that’s appropriate accounting under FAS 140.

Filomia-Aktas

“It’s a question of whether the bank ever really sold the asset,” she explains. “If the bank doesn’t meet the sale criteria under FAS 140, the bank would keep the asset on its books instead of recording a receivable and the company would have a derivative contract. That’s a very different result.”

Filomia-Aktas says FASB’s planned guidance is expected to say companies should presume the transactions are linked unless they meet five specific criteria, generally focused on determining the liquidity of the asset being transferred. The Board’s intention is to allow the separate transaction treatment for highly liquid assets, but to assure the link between transactions related to illiquid assets is reflected in financial statements, she said.

“The intent is not to change the accounting for assets that are liquid,” she says. “The criteria will sort out the assets that are liquid and therefore not linked from transactions that are more unique and illiquid, among other things.”

Deloitte Forms Anti-Fraud Think Tank

Deloitte & Touche is recruiting some heavy hitters in forensic accounting and is planning to provide some independent research and analysis that it hopes will contribute to resolving some of the global economy’s most perplexing corporate crime problems.

Volcker

The financial advisory services arm of the Big-4 firm has formed the Deloitte Forensic Center, an entity it describes as a think tank aimed at exploring new approaches for mitigating the costs, risks, and effects of fraud, corruption, and other issues facing the global business community. Deloitte has recruited Paul Volcker, former chairman of the Federal Reserve Bank, to advise the center on the selection of topics for study.

Toby Bishop, codirector of the center, says the center will operate virtually to focus its resources on the research process. It will focus on issues that have proved “challenging and intractable, like fraud, bribery and corruption,” he said.

The center will invite talents from the ranks of law firms, academic institutions, regulatory bodies’ and other organizations that can contribute to a multidisciplinary approach to research, Bishop says. Research findings will be offered free of charge to companies, regulators, policymakers, and any others who will find it useful.

Bishop

“Our goal is to advance thinking in a number of challenging areas that have proved difficult for the business community to resolve in the past,” Bishop says. “The field that the Deloitte center will study is certainly replete with challenges and opportunities for new insights.”

To kick off its research efforts, Deloitte conducted a preliminary study of financial statement frauds by reviewing SEC enforcement releases from 2000 to 2006. It found that where fraud was discovered, it often involved multiple different schemes—presumably one tactic built on another to conceal the mounting deception, Bishop says.

Bishop says the findings put companies on alert that establishing controls that guard against only a few prospective fraud scenarios is inadequate. “This research says companies need to think about multiple fraud schemes and consider the possibility of several going on, rather than just the most likely one,” he says.