Former KPMG Partner, PCAOB Staffer Found Guilty of Inspection Scheme

A former KPMG partner and a former PCAOB employee found guilty on March 11 of taking part in a scheme to give confidential information to the Big 4 firm to help it pass inspections, according to Reuters.

KPMG’s David Middendorf and the PCAOB’s Jeffrey Wada were both convicted of wire fraud and conspiracy to commit wire fraud by a jury in federal court in Manhattan. They were both acquitted of one count, conspiracy to defraud the U.S. government.

Middendorf’s lawyer said in an email to Reuters that they were disappointed with the result and would appeal. A lawyer for Wada declined to comment.

The case emerged from what’s been termed a “steal the exam” scheme that resulted in the dismissal of six KPMG professionals who tried to obtain confidential information that would reveal which audits the PCAOB planned to review in its annual firm inspections.

The PCAOB reports problems revealed in its audit inspections to the SEC. Prosecutors say Wada leaked confidential information about upcoming PCAOB inspections to people at KPMG, including Middendorf, between 2015 and 2017. Also charged was Cynthia Holder and Brian Sweet, two former PCAOB staffers who joined KPMG during that period, bringing confidential information with them to their new jobs. Wada was angling to make a similar move, according to prosecutors, Reuters reported.

Former KPMG executive Thomas Whittle was also charged. Holder, Sweet and Whittle all pleaded guilty before trial.

WSJ: Former Partner at KPMG Faces Trial in PCAOB Scandal

An ex-partner at Big 4 firm KPMG faces trial Monday for his part in an effort to obtain confidential information that would reveal which audits the PCAOB planned to review in its annual firm inspections.

Prosecutors have termed the scandal a “steal the exam” scheme, as it would give KPMG more time to prepare for the inspections, the Wall Street Journal reports. The PCAOB inspections are seen as a report card on a firm’s audit performance. KPMG, whose audits of GE and Wells Fargo were widely criticized, had not performed well on past inspections.

David Middendorf, who was fired as a partner in 2017, is charged with conspiracy and wire fraud in federal court in Manhattan, as is Jeffrey Wada, a former PCAOB inspections leader. They have pleaded not guilty. Middendorf had served as the firm’s national MP for audit quality and professional practice.

The PCAOB says two yearly inspections were compromised by KPMG’s advance knowledge.

It replaced some KPMG audits it initially reviewed with new ones, which had “a much higher rate of problems, illustrating the extent to which the advance access to information could have helped KPMG,” the Journal reported.

The trial, expected to last about four weeks, will include testimony from PCAOB and SEC officials.

1st Global Files Suit for Unauthorized Use of Name, Logos

1st Global of Dallas, a wealth management partner to CPA firms, recently brought suit against Florida-based 1 Global Capital LLC for the unauthorized use of its company name and logos.

1st Global asserts that the Florida firm is marketing itself and operating under the names 1st Global Capital LLC and 1st Global Capital Financial Services in violation of federal law. 1 Global Capital purported to be, among other things, a firm specializing in offering merchant cash advances to borrowers unable to obtain more traditional bank-financing, 1st Global says.

After the filing of 1st Global’s suit on July 27, 1 Global Capital LLC filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of Florida. On Aug. 23, the SEC brought suit against 1 Global Capital LLC, its former CEO Carl Ruderman, and other related entities for an alleged scheme to defraud over 3,400 1 Global Capital LLC customers.

According to the SEC’s suit, 1 Global Capital LLC engaged a network of barred brokers and registered and unregistered investment advisers to offer and sell over $280 million in unregistered securities to investors in as many as 25 states nationwide.

1st Global has been working with the media to make a distinction between the two. Many internet postings and numerous solicitations by law firms have incorrectly referred to 1 Global Capital LLC as “1st Global,” creating confusion.

“We want to make sure everyone understands we are in no way affiliated with 1st Global Capital LLC, 1 Global Capital LLC or 1st Global Capital Financial Services and they have nothing do with our company,” David Knoch, president of 1st Global.

1st Global is a wealth management partner to more than 300 CPA firms and 800 professionals throughout the United States, and is licensed to sell investments and provide advisory services.

California Assembly Passes Strict Data Privacy Rules, Giving Consumers More Control

California consumers will have more control over their personal data than residents of any other state under a new law set to take effect Jan. 1, 2020, the Associated Press reports.

Under the law, companies must tell customers upon request what personal data they’ve collected, why it was collected and what categories of third parties have received it. Consumers will also be able to ask companies to delete their information and refrain from selling it.

The law, which is similar to the new privacy regulations applied in the European Union, may lead other states to make changes, says Cynthia Larose, a cybersecurity expert at the law firm Mintz Levin.

“It’s going to be impractical for companies to maintain two separate sets of privacy protections — one for California and one for everyone else,” says Larose, as quoted by the AP.

The move by California came after large breaches in recent years at Target, Equifax and other companies. Facebook also has faced intense criticisms amid revelations that Republican-linked consulting firm Cambridge Analytica collected data from millions of users without consent.

The bill gives companies the ability to offer discounts to customers who allow their data to be sold and charge those who opt out a reasonable amount based on how much the company makes selling the information. It also prohibits companies from selling data from children younger than 16 without consent.

Gov. Jerry Brown signed the measure just hours after lawmakers passed it with no dissenting votes in a last-minute scramble to persuade San Francisco real estate developer Alastair Mactaggart to remove a similar initiative from consideration for the November ballot. Mactaggart withdrew it shortly after the law was signed.

The bill will likely be amended before it takes effect.

Assemblyman Jay Obernolte of Hesperia, Calif., said he thinks the parts of the bill allowing people to sue companies over data breaches are too broad.

TechNet, a technology lobbying group, urged lawmakers to provide “meaningful privacy protections for Californians while also allowing all the benefits and opportunities consumers expect from U.S. technology to continue.”

Lateral Hiring of Law Firm Partners Changing Pyramid Structure

As the largest law firms ramp up efforts to lure partners away from their competitors, observers note that law firm partnership is a radically different prospect than it once was.

The largest U.S. law firm, Kirkland & Ellis, announced earlier this month that it was hiring a partner from competitor Allen & Overby. The reaction within London was ho-hum, indicating how routine poaching has become, a Financial Times commentator wrote in the May 16 edition.

Law partnerships were granted for life, it seemed, but now the market for lateral hires has heated up to the point that one firm, Freshfields Bruckhaus Deringer, passed reforms to retain partners by paying them six times more than their juniors.

“It is time to accept that the law business has moved on from the era of pyramid-shaped firms with small equity partnerships at the top and multitudes of junior lawyers below working all hours to join the elite,” writes John Gapper. Now, the pyramid is narrowing at the bottom and the rise of non-equity partners is widening the pyramid at the top.

Traditionally, especially in London, firms have given the same compensation to partners of similar age, a practice called lockstep. Lockstep is declining, and “true partnership is fading,” Gapper says.

The result of this is a shift in client-lawyer relationship, observers say. “People in this industry are oblivious to what is going on. A profound change is taking place in the nature of the social contract among the law firm, the lawyer and the client,” Bruce MacEwen, president of New York-based legal consultant Adam Smith, told the Financial Times.

Companies are increasingly taking on routine law work themselves and paying outside firms for only complex issues. But until about 10 years ago, corporations often turned over work on an entire transaction to a single firm that used lawyers on the path to partnership to do much of the heaving lifting. This system trained juniors to become partners, but now companies are “wary of overpaying juniors.”

As existing partners share more money and rewards, questions are being raised relating to who is training future leaders and whether firms built on lateral hires can survive. “True legal partnerships that develop all of their employees are built more sturdily. They were designed to work, and to keep on working, across generations. But the pyramids are not being built any more,” Gapper writes, in conclusion.

EY Reaches Settlement with Partner Who Alleges Sexual Harassment

New York-based EY (FY16 gross revenue of $11.2 billion) has reached a confidential settlement with Jessica Casucci, a tax partner who alleged that another EY partner sexually harassed and groped her in 2015 and that the firm didn’t take the matter seriously, the Wall Street Journal reported May 3.

Casucci filed a complaint in April with the Equal Employment Opportunity Commission. Her complaint stated that John Martinkat made inappropriate comments and grabbed and squeezed her at a conference in Orlando, Fla., in 2015 in front of other colleagues.

“Jessica Casucci and EY have reached a fair and equitable confidential settlement of this matter that involves Jessica leaving the firm,” EY said in a statement. “We are pleased to have reached this resolution.” The settlement was first reported by the New York Post.

Martinkat, who wasn’t part of the EEOC complaint, has been fired from EY, an EY spokesman said. He had been placed on administrative leave last month, around the time Casucci, a partner since 2014, filed her complaint in which she alleged that Martinkat had groped her, lifted her over his shoulder and made lewd and sexual comments during the incident.

Casucci said in the complaint that she was “terrified, upset and deeply offended” and that EY took little or no action against Martinkat when she reported the incident to EY in 2016. The firm showed a “lack of concern for sexual assault and harassment,” she said in the complaint.

He also said her career was damaged because she had to “completely reinvent her career,” by moving to a different EY team and specialty, and declining work on certain projects to avoid Martinkat.

Mandatory Partner Retirement Age Gets Scrutiny in Australia

The Australian arm of EY has decided to maintain its requirement that partners retire at 60.

CEO Tony Johnson told The Australian Financial Review that the decision was made after discussions with the firm’s partners, despite legal opinion that the clause violates the Age Discrimination Act.

“In consultation with elected representatives of the partnership, we recently considered the relevance of the retirement age and it was determined that it continues to operate as an appropriate marker to help partners plan and transition their lives financially and professionally,” he said. He added that “partner retirement and transition is also fundamental to effective succession planning across the organization.”

The Age Discrimination Act, which extends to partnerships, was introduced in 2004. It was widely believed that the law would eliminate mandatory retirement clauses. The Financial Review has been reporting that the clauses were often used at Big 4 accounting firms. KPMG agreements, for example, “expect” partners to retire at 58 and allows the CEO to determine if they continue beyond that age.

Questions were raised during a Senate inquiry into the future of work, during which an EY director, Louise Rolland, testified May 4. “The whole thing around EY’s situation, and I hope I’m not talking out of turn here, is that there has been a tradition in professional services firms to maintain a retirement age for partners,” she said.

Meagan Lawson, CEO of the NSW Council on the Aging, said the continued existence of retirement clauses among the big four had been a “genuine shock to me.”

“I think it’s clearly out of step with community standards at this point. We used to be a lot more accepting of sexual harassment too but we’re not anymore – and I think this is in the same vein.”

She said studies showed many people wanted to work beyond 60 and 65 and she was “genuinely surprised that people haven’t objected to this or taken action through the Age Discrimination Commissioner.”

EY Faces Sexual Harassment Complaint

New York-based EY (FY16 gross revenue of $11.2 billion) is facing a sexual harassment complaint from one of its partners, according to CNBC. Jessica Casucci, partner since 2014, claimed multiple senior colleagues had witnessed a male partner lift her up and sexually harass her at a conference in Orlando, but did nothing to stop him.

Casucci said in her complaint that she was subject to harassment by multiple partners at the firm in addition to the unwanted advances in Florida by a tax partner in 2015. She claims her career suffered after the incident, because she sought to distance herself from the partner by turning down projects and had to “completely reinvent her career.”

“In this day and age, when a woman shows the courage to stand up and complain about physical sexual harassment at work, one would expect her complaint to be treated with the utmost care and urgency,” says Casucci’s attorney, Michael Willemin.

In addition to the events at the Orlando conference, she alleged that another partner repeatedly asked her sexually inappropriate questions before a speaking engagement, while another employee regularly stared at and commented on women’s appearances, including Casucci.

EY said in response to the claim that it was “committed to a workplace free of discrimination and harassment of any kind. The individual who is the subject of the charge has been placed on administrative leave pending the completion of our investigation. We take all allegations of sexual harassment seriously.”

Consulting Now ‘Cash Cow’ for Big 4, Raising Conflict Questions

In the last five years, the Big 4 have come to rely on revenues generated from advisory services, but offering consulting and auditing services within the same firm is raising an old debate about conflict of interest.

As a group, the Big 4 accounting firms saw 42% of their global fiscal 2017 revenue come from consulting and advisory work. From 2012 to 2017, audit revenue grew by only 3%. Consulting and other advisory services grew by 44%, or from $39 billion to $56 billion, according to the Wall Street Journal.

“While consulting can be lucrative – it tends to be more customized, creative and driven by corporate clients than auditing is – the presence of the business at audit firms has been a concern for years,” writes reporter Michael Rapoport in the April 7 edition. “Investors fear it could cause the firms to take their eyes off the ball when it comes to their core auditing responsibilities and that it would be harder for an audit firm to be impartial if it is also reaping large consulting fees from the same client.”

The fears, raised during the early 2000s amid the demise of Enron and Arthur Andersen, are being revived in the U.K. Following Enron and other U.S. corporate accounting scandals, the Sarbanes-Oxley reform legislation prevented firms from providing many kinds of consulting services to audit clients. However, firms can still do both for clients outside the U.S., as well as provide consulting to any companies they don’t audit.

Now, following accounting scandals in the U.K., Stephen Haddrill, chief executive of the Financial Reporting Council, told the Financial Times that authorities should consider breaking up the Big 4, which audit nearly all the largest U.K. companies, so that corporate auditing is separated from consulting. That way, separate firms would only perform audits.

Deloitte and EY have voiced opposition. For example, Mark Weinberger, EY’s global chairman, says that having auditing and consulting together gives auditors easier access to technology and expertise about their clients’ businesses, the Journal reported. It “provides the structure, breadth and depth of technical skills and industry expertise necessary to deliver high-quality audits.” KPMG didn’t comment, but PwC’s U.K. firm said it was “open to ideas.”

While some industry observers think the move could improve audits while sparking competition, there’s been no push in the U.S. – at least lately – for audit-only firms, the Journal reports. The change would be complicated, as regulations differ from country to country. Also, Big 4 member firms in each country are legally separated from others in the same network.

IRS Reminds Taxpayers Cryptocurrency Income Is Taxable

Virtual currency transactions are taxable by law just like transactions in any other property. The IRS has issued guidance in IRS Notice 2014-21 for use by taxpayers and their return preparers that addresses transactions in virtual currency, also known as digital currency.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest.

Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. There are currently more than 1,500 known virtual currencies. Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS.

Notice 2014-21 provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:

  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
  • Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue form 1099-MISC.
  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a form W-2 and are subject to federal income tax withholding and payroll taxes.
  • Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on form 1099-K, payment card and third-party network transactions.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.