November is the cruelest month (for audit)

NOT EVEN HALFWAY through November, and already it is proving a tough month for high-profile firms.

PwC is really up against the wall, pilloried by negative press for not one but four unfortunate-looking audits.

It is hard to pick the most embarrassing. The high-profile collapse of MF Global uncovered suspicious handling of clients’ funds, raising questions as to why PwC failed to flag up the problem.

Not new news, but headline-grabbing nonetheless, the Accountancy and Actuarial Discipline Board announced it will see PwC in court (the International Dispute Resolution Centre, to be exact) over alleged failings related to JP Morgan.

Unfortunately for PwC, those failings tally closely with MF Global-related accusations. The Financial Services Authority claims reports logged by the firm in respect of JP Morgan Securities’ compliance with Client Asset Rules were sub-standard for the six years to 31 December 2008.

The Client Asset Rules draw strict lines between company and client money to prevent one bleeding into the other. A UK PwC spokesperson insisted procedures have been tightened up since the JP Morgan case, and pointed out MF Global is audited by the firm’s US arm.

Nevertheless, it is an unfortunate concurrence that sharpens the focus on procedures and controls.

And we’re not done there.

Sub-prime lender and former client Cattles is bringing action against PwC which could cost the UK number-one firm £840m, The Telegraph recently reported.

PwC was also recently forced to defend its audit of collapsed nightclub operator Luminar, saying: “Our opinion in Luminar’s annual report for the year ended 26 February 2011 clearly highlighted the severe issues the company faced in relation to its ongoing business. We do not include emphasis of matter paragraphs lightly in audit opinions.”

Not a stellar month by anyone’s estimation.

But peers should not revel too much in PwC’s discomfort, as the embarrassing public meltdown of camera maker Olympus has dragged Ernst & Young and KPMG’s Japanese arms into its boiling wake.

Olympus has held up its hands to financial mismanagement, after its short-lived chief executive Michael Woodford asked questions about an unusually high consultancy fee paid during an acquisition, and was promptly sacked.

The company admitted that since the 1990s it has been “deferring the posting of losses on investment securities” and using advisors’ fees and purchase funds set aside for acquisitions to smooth rough patches in its accounts.

Those in the accountancy-watching world have inevitably turned their gaze to the auditors, asking why no one flagged up Olympus’s innovative use of funds.

KMPG Azsa, Olympus’s auditor until June 2009, signed off its client’s accounts in March of that year despite disagreements over the way it recorded the acquisition of medical equipment maker Gyrus, The Financial Times reported.

Tsuyoshi Kikukawa, then Olympus chairman, admitted in an email to Michael Woodford that Ernst & Young ShinNihon was engaged as a result of this dispute with KPMG, but E&Y also failed to flag up the problem.

The Japan Institute of Certified Accounts is to investigate the two firms’ roles in the scandal.

Deloitte is the only Big Four player not to have hit the headlines for questionable work in recent weeks, but it shouldn’t get too comfortable with its ephemeral halo.

The whole of Europe and the US have fixed their gaze on audit, and firms are facing an in-depth UK Competition Commission investigation, while waiting anxiously for the final audit reform paper from Brussels expected in late November.

It is not a good month to be accused of audit shortcomings, but at least the Big Four will have lots of practice fighting their corner.

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