Exchange Seeks More Scrupulous Accounting Oversight of Foreign Companies

On the heels of restrictions recently proposed to the SEC that would make it harder for some Chinese companies to debut as initial public offerings, officials for the Nasdaq exchange stressed that regulators need to do a better job of addressing transparency and accounting issues for firms based in foreign jurisdictions that are looking to go public through U.S. markets.

The new rules include greater scrutiny of the audit firms of overseas companies listed on Nasdaq, the oversight of which is led by both the SEC and PCAOB. The agencies are currently prevented from inspecting audit work papers in China. As U.S. investors have increased their exposure to emerging markets like China in recent years, more and more accounting disclosure shortcomings have come to light.

“The broader issue though is this issue of disclosure and PCAOB oversight of the audit firms and I think that’s an issue for the SEC to address,” says Nasdaq president and CEO Adena Friedman.

The U.S. Senate passed legislation in late May that could prevent some Chinese companies from listing shares on U.S. exchanges unless they follow standards for U.S. audits and regulations, but the measure still must pass the House of Representatives and be signed by the president to become law.

SEC Charges Three Former KPMG Partners

The SEC announced settled charges against three former KPMG audit partners for improperly sharing answers to internal training exams and for subsequent wrongdoing during an investigation at the firm.

The orders against Timothy Daly, Michael Bellach and John Donovan find that each engaged in misconduct in connection with exams KPMG administered to test whether its audit professionals understood certain accounting and auditing principles. The three also subsequently lied about and/or attempted to cover up their actions during an investigation of the matter, the SEC asserts.

Without admitting or denying the findings, Daly, Bellach and Donovan agreed to be suspended from appearing or practicing before the SEC as accountants. This means they will not participate in the financial reporting or audits of public companies. The three have the right to apply for reinstatement after three years, two years and one year, respectively.

“Audit professionals play a critical role in the integrity of the financial reporting process and the protection of investors,” says Steven Peikin, co-director of the SEC’s Division of Enforcement. “These actions reflect our commitment to hold these gatekeepers responsible for breaches of their professional obligations.”

RSM Faces Shareholder Coup in UK

Following months of internal disarray and the revelation of a major accounting error, a group of shareholders of RSM UK is attempting to oust the firm’s board and block the appointment of new CEO Jill Jones, the Financial Times reported.

The group, led by two former RSM UK executives, claimed in a letter that it has power of attorney to vote on behalf of 64% of shareholders in response to the accounting blunder and a CEO selection process that it believes was rigged – a charge RSM UK has denied. One source close to the situation told the Financial Times that anger against the board was so severe that the group decided to move forward with its grievances despite the impact of the ongoing COVID-19 pandemic.

The accounts misstatement related to an error in reported sums set aside for professional liability claims, such as legal action or regulatory fines. The subsequent restatement had a net impact on profits of £2.2 million. RSM UK reported a £5.8 million pre-tax profit in the year to April 2018, which was restated in the 2019 accounts to a loss of £113,000.

More news from RSM

Law Firms Mull Canceling Partner Payments to Boost Liquidity Amid COVID-19 Concerns

As the COVID-19 pandemic has already caused one U.K. law firm to cancel partner payments, a U.S. legal consultant is advocating a similar move for other firms.

Leaders at Gateley, one of six publicly listed law firms in the U.K., announced via the London Stock Exchange that shareholders would not receive their March 31 dividend of 2.9 pence per share, The American Lawyer reported. The move is designed to “maximize the group’s short-term liquidity,” the firm said. Gateley’s share price dropped from 222 pence per share to 122 pence per share in two weeks.

The statement continues that activity has reduced since March 1 as a result of the disruption “caused by the COVID-19 pandemic to our clients and to our staff.”

In the same publication, a legal consultant encouraged law firm leaders to consider deferring payments to partners to ensure financial solvency.

Hugh Simons writes that the move will instill confidence in partners that management’s top priority is the financial viability of the firm. “How am I so confident about this? Because I was directly involved in deferring partner payments in the wake of the dotcom crash; we never regretted the move.” Simons formerly served as a senior partner at The Boston Consulting Group and COO and policy committee member at Ropes & Gray.

His suggestion: “If, thanks to the timing of your financial year, you’ve not paid partners their most recent profit share, then it behooves you to withhold it.” He also suggests telling partners through a series of conference calls rather than in a group email since the intention is to assure partners and answer all questions thoroughly.

“On balance, mid-July, with appropriate wording about flexibility to possibly defer further in a mechanism yet to be determined, is probably the way to go,” Simons explains, noting that payments deferred until July 15 will coincide with the new tax filing deadline. “Disasters only happen when you run out of options; preserving cash preserves options.”

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Two Former Puerto Rico Government Officials, BDO MP Indicted

Six people, including former Puerto Rico officials and the MP of BDO Puerto Rico, have been indicted over allegations of theft, money laundering and wire fraud, Bloomberg reported.

Among those charged is Fernando Scherrer-Caillet, MP of BDO Puerto Rico, Julia Keleher, who served as the commonwealth’s secretary of education from January 2017 until April, and Angela Avila-Marrero, the head of the commonwealth’s health insurance administration until last month. Two others were also indicted.

The “defendants engaged in a public corruption conspiracy and benefited at the expense of the Puerto Rican public and students” says Neil E. Sanchez, special agent in charge of the U.S. Department of Education’s Office of Inspector General’s Southern Regional Office. Comments came at a press conference in San Juan on Wednesday morning.

Bloomberg reports that the move stems from ongoing investigations of the territory, which has been operating under bankruptcy for two years.

Last month, Governor Ricardo Rossello fired his treasury secretary, Raul Maldonado, after the official disclosed that his department was being investigated for potential corruption.

Keleher allegedly pressured her department to execute a contract with a company owned by someone she was close to. The firm, Colon & Ponce, was awarded a $43,500 contract that increased to $95,000, even though it was unqualified under the terms of the request for proposals, according to the U.S. Department of Justice.

Avila-Marrero is accused of steering contracts totaling $2.5 million to BDO and providing internal information to the company. BDO then subcontracted the work and paid unauthorized commissions, which inflated the cost of the contracts, according to the U.S. Department of Justice.

A spokesperson for BDO at an outside public relations firm didn’t immediately respond to a request for comment by Bloomberg.

PwC to Pay $11.6M to Settle Age Discrimination Claims

PwC (FY18 net revenue of $16.8 billion) has agreed to pay $11.62 million to settle accusations that the Big 4 firm discriminated against older applicants for entry-level positions.

The legal settlement requires PwC to start a hiring program that would allow candidates age 40 or older to apply for entry-level positions. The firm must also hire a consultant to advise on inclusivity and age bias in hiring and training processes, advertise positions to older workers, and avoid asking college graduation dates.

The settlement also requires the company to make “public and internal statements” expressing its commitment to diverse hiring, including using age-diverse photos in its recruiting materials.

PwC’s chief purpose and inclusion officer, Shannon Schuyler, who is charged with working with the outside consultant under the settlement, said in an emailed statement to that the firm “is proud to affirm its commitment to identify and hire older workers.”

U.S. District Judge Jon Tigar of the Northern District of California last year conditionally certified a collective action in the case, which accused PwC of systematically discriminating against older applicants for associate, experienced associate or senior associate positions in the firm’s tax or assurance practices. The proposed settlement includes about 5,000 applicants who weren’t hired by PwC.

Plaintiffs’ lawyers came from Outten & Golden, AARP Foundation Litigation and Liu Law Firm.

“We and AARP Foundation believe strongly that age discrimination in hiring, in particular, is a significant problem today and limits older workers access to jobs and contributes to unemployment problems,” says Outten & Golden’s Jahan Sagafi. “It also limits employers access to talent because wherever you have a company discriminating they are shooting themselves in the foot by limiting the pool of talent they can draw from,” reports.

More news from PwC

Legal Tech Looking at Partnerships with Big 4 Firms

The Big 4 are forcing traditional law firms to rethink their long-term strategies in light of the global firms’ inroads into the legal market, according to

The Feb. 28 article cites the example of Thomson Reuters, which sold Pangea3, its legal managed services arm, to EY last year. The question is whether law firms’ tech subsidiaries might follow suit in transitioning “from Big 4 competitor to Big 4 solution provider.”

Kimball Parker, CEO of Wilson Sonsini Goodrich & Rosati’s tech subsidiary SixFifty, told that the company “would love to partner” with the Big 4, but talks have not progressed. “There are layers of bureaucracy depending on what organization you are talking about. Just as a matter of course, it’s easier to partner with smaller, more nimble organizations,”

Legal tech consultant Zach Abramowitz says the Big 4, with their big budgets and expertise, could build their own solutions and “could even disincentivize law firms from bringing their products to the table in the first place.” He adds, “How much are law firms going to want to go and demo products to the Big 4 when the Big 4 might theoretically say, ‘Hey, why don’t we build that ourselves?’ ”

However, some observers say specialization may give legal tech companies a leg up. Accounting firms may be interested legal expertise in the General Data Protection Regulation, for example. Legal tech leaders are watching the competition and studying the complexities involved to see whether a partnership with the Big 4 may be possible.

IPA INSIDER: January 2020 News

Listed below are the Top 10 most-read stories on the INSIDE Public Accounting blog for the month of January.

  1. Big 4’s Massive Technology Investments May Reinvent Accounting
  2. Wall Einhorn & Chernitzer Announces New Leader Upon Retirement of Marty Einhorn
  3. Partners Can Be Complacent And Ego-Driven, But Their Success = Firm Success
  4. Ex-KPMG Partner, Inspector Suspended by SEC
  5. PKF O’Connor Davies Merges in Dworken Hillman LaMorte & Sterczala
  6. KPMG UK’s Most Senior Female Partner Quits
  7. BKD Moves Its New York Office to Midtown Manhattan
  8. MBAF Expands Tax & Accounting Practice With Addition Of Kramer & Associates
  9. HW&Co. Names New CEO and Merges In Finkler & Company
  10. Regulators Eye Accounting, Audit Changes for 2020

Partners Can Be Complacent And Ego-Driven, But Their Success = Firm Success

Without the support of the partner group, MPs can’t move their firms forward. The realities of gaining consensus among hard-driving professionals with different working styles, skills and drivers can be more challenging than even the most insightful firm leader could anticipate. One MP says, “It’s like herding cats, and it’s very difficult to get all partners on the same page because not everybody has the same value proposition and not everyone is motivated by the same metrics.”

No MP owns a how-to guidebook on juggling the multiple – and sometimes competing – priorities demanding their attention every day. INSIDE Public Accounting, therefore, asked more than 70 MPs to offer anonymous insights on the frustrations, challenges, joys and rewards of the top job. In a 12-question survey, they offered unfiltered, candid insights. Here are responses to just a few of the questions.

What are two of your biggest frustrations with the partner group? Two themes – egos and complacency – immediately emerged from MP responses to this question. Some MPs say partners think their way is the only way. They fail to see the benefit of trying a different approach, close themselves off from other points of view, second-guess decisions (after failing to participate in the discussion), and stay in their comfort zone of client service without committing to professional development, marketing, timely billing and collections.

One MP said two or three partners are so negative “they’re like a cancer.” Some partners think they’re “too busy or too important to follow the rules,” says another.

However, with the success of the partners goes the success of the firm, and MPs are quick to acknowledge the massive amounts of work they handle, the numerous clients they serve admirably and the demands they address without fail.

Frustrations With Partners IncludeLack of Participation “They don’t speak up. When we need them to vote it’s like pulling teeth to get them to respond on time.”

Lack of Accountability “Partners like to measure others but don’t like to be measured.” Another MP says, “Too many of our partners are cruisers. Some of these, though, think they are dynamos and they aren’t.”

Self-Centered Thinking One MP is frustrated by “getting them to work together as a team, and not be so concerned about themselves.” Another says, “Partners think they are suited for all jobs because they are successful in one or two areas.” Another disappointment? “Partners who occasionally want to be MP, but only when they don’t like something specific but don’t want any part of the running of the firm on a daily basis.”

Hanging on When it’s Time to Retire “They seem to want to continue to come to the office, take up a large office, and distract staff and have no desire to step away. This can hold back some of the younger partners and potential partners.”

Failure to Use Time Wisely – A top-notch partner, one MP says, should “discuss issues with other partners when they arise and not behind their back, seek to interact more with fellow partners, be joyful in what you do and how you carry yourself, and help others at all times when asked.” Another MP comments that partners often complain about being overloaded with work. “As a result, they can’t hit their goals, or do this or that. What I find is that they’re not looking inside and prioritizing, pushing down or making good choices.”

“What’s the most valuable piece of advice you would share with an MP?…Don’t try to be popular, say many MPs who responded to this question. “You have to make what you feel is the best decision for the firm and don’t take unhappy partners or staff personally,” one MP says. “They will get over it.”

MPs, in various ways, advised new executives to make the tough decisions, but be respectful. Communicate clearly and often, and put the long-term best interest of the firm above selfish or short-term gains. Always.

More advice from the trenches…

  • Don’t Rush – “Be patient. Making changes is like moving a battleship so take it slow and do it right.” Another MP says, “Think more. Do less.”
  • Be Direct – “Establish up front that you’re not going to put up with negativity, complaining, etc., or they’ll be brought up before the executive committee.”
  • Think ‘Big Picture’ – “Communicate, communicate, communicate. There has to be someone in charge that creates the vision and rallies the employees behind it.”
  • Get Support – “Find four or five other managing partners or consultants that they admire and respect and build close relationships with them. That gives them a sounding board outside his or her own partner group. Other MPs are also great sources of new ideas that can be implemented.”
  • Learn the Role Before Taking It – “Just because you’re a good accountant doesn’t mean you know how to run a business.”
  • Watch the WIP – “If you don’t bill, you don’t collect money. If you don’t collect money, you can’t pay the bills.”
  • Manage Your Time – “Block off chunks of time to work on administrative duties and client duties. Constantly switching back and forth is difficult and draining.”
  • Stay Focused – “Work hard, never lose the trust of the partners who are willing to trust, and don’t let the naysayers distract you.”
  • Be Open – “Understand you need to learn as much as you can about how to work with different types of people.” Another MP agrees. “Get to know all your partners, and determine what really motivates them, and what is it that they care most about at the firm. Do not play favorites, and don’t allow little partner groups to form and break down the vision of the firm. Rather, bring their concerns to the table, and resolve them.”

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Ex-KPMG Partner, Inspector Suspended by SEC

The SEC suspended a former KPMG audit partner and a former staffer of the PCAOB after a jury last year found them each guilty of wire fraud charges for interfering with the audit regulator’s oversight, Bloomberg reported.

David Middendorf, the former national MP for audit quality at KPMG, and Jeffrey Wada, who was an inspections leader for the PCAOB, may no longer appear or practice before the SEC, the agency announced.

Middendorf was accused of recruiting PCAOB staffers to provide the firm with information about which audits they would be examining. He was sentenced to a year and a day in prison and three years of supervised release. Manhattan U.S. Attorney Geoffrey Berman, during the sentencing, stated Middendorf was “at the top of a chain of corruption that threatened to corrupt KPMG and the PCAOB’s inspections process,” Compliance Week reported.

Wada was accused of funneling confidential information about the board’s surprise inspections to Cynthia Holder, another PCAOB staffer who had gone to work at KPMG. He was sentenced to nine months in prison.

In a related action, the SEC in November 2019 barred Holder from practicing as an accountant before the SEC. Holder was sentenced to eight months in prison and two years of supervised release for her role in the scandal.

KPMG agreed to pay a $50 million penalty to settle allegations that it altered past audit work after receiving that secret information.