john-glennLast week, I paid tribute to Greg Lake. It turned out that the first full week of December was the final week for several important, if not seminal, figures. So this week I will pay homage to those who have left us, today I begin with John Glenn.

Glenn may have been the closest actual person (as opposed to movie star John Wayne) to have personified the American hero in the last century. He achieved some of greatest feats and successes one could have accomplished, all the while serving his country. He was a fighter pilot in two wars, flying 149 combat missions in World War II and Korea; one of the original seven Mercury astronauts; the first American to orbit the globe in Friendship 7 in 1962; became a US Senator in 1974; ran for President in 1984 and, at aged 77, became the oldest person to go into space when he flew in the space shuttle Discovery. 

Tom Wolfe, writing in his book The Right Stuff, said Glenn was the only astronaut who brought people to tears, his three orbits around the earth restored our faith that American technology could not only match but eventually overtake the Soviet Union in the space race. In that flight the heat shield became dislodged and it was unknown if the spaceship could make it through re-entry but the heat shield held and Glenn splashed down and announced to the world, “My condition is good, but that was a real fireball, boy.” Glenn certainly had the ‘right stuff.’

Even at age 5, we were all glued to the television or radio, listening to Walter Cronkite’s commentary and Glenn communicating to Mission Control. Only a very few times in my life was this country rapt together in one event and that was one of them. I can only add Godspeed John Glenn. 

Also last week, as reported in the Wall Street Journal, (WSJ) the Brazilian affiliate of Deloitte Touche Tohmatsu Ltd., a private UK company, was fined a record $8 million for falsifying audit reports, altering documents and then providing false testimony, under oath to the regulatory oversight board. The PCAOB sanctioned 12 former partners in the firm. In a statement by Claudius Modesti, the Director of Enforcement at the PCAOB said, “This is most serious misconduct we’ve uncovered. Its cover up after cover up after cover up.” Separately, the PCAOB fined Deloitte’s Mexico affiliate $750,000 to settle allegations it had not taken proper steps in documenting its audits.

Brooke Masters, writing in her Top Line column for the Financial Times (FT), in a piece entitled “Big Four auditors can no longer hide behind local models”, took a look at the matter through the lens of the business model of the Big Four accounting firms. She wrote, “In reality, though, they are networks of national firms, legally distinct from one another. That is partly because each one has to comply with local rules and standards, but it has also proved to be reputationally handy: if one far-flung branch happened to get into trouble, the rest of the network could distance itself from the problems.”

Yet the fine by the PCAOB belies this business model. Masters wrote, “Accountancy experts say the Deloitte cases show how regulators are starting to catch up with the international footprint of the Big Four. More than 50 national accounting watchdogs now belong to the International Forum of Independent Audit Regulators, which sets global standards and seeks to co-ordinate cross-border investigations.”

She quoted, Paul Hodgkinson, an executive director of the Institute of Chartered Accountants in England and Wales, who said, “We have been building a system that aligns regulators with the realities of globalisation and these cases are examples of that.” He went on to add, “The system has responded in a way that reinforces the message that we have to do better.”

Francine McKenna, writing in online site Market Watch, in a piece entitled “At Deloitte, the problems with audit quality and professionalism start at the top”, reviewed the leadership failures which led to the Deloitte penalty. She wrote, “The PCAOB’s [Enforcement Director Claudius] Modesti told an audience [last] Tuesday at the American Institute of Certified Public Accountants conference that policies and procedures promoting integrity or PowerPoint presentations about a culture of integrity are not enough. Firms must make a “thorough self-examination and a daily commitment” to focus on integrity and honesty in all aspects of their work and especially when dealing with regulators.”

For the Chief Compliance Officer (CCO) or compliance practitioner, the Deloitte PCAOB enforcement action brings up several issues for reflection. The first is the business model, discussed by both Masters and McKenna. This decentralized business model was developed largely because of (1) disparate country regulations and accreditations and (2) non-organic growth through mergers. If your company uses this strategy, the risk management process you employ must be designed to evaluate and respond to such risks. This requires robust pre-acquisition due diligence, active post-acquisition integration, testing and, if needed, remediation and then continued monitoring going forward.

Masters ended her piece with the following, “Deloitte says that its network “has adopted policies and protocols to be followed by all member firms in an effort to establish a consistently high level of quality, professional conduct and service”. That is all very well. It seems to me it would be a lot more efficient and responsible to actually manage the local offices instead.”

McKenna, as you might expect with her Big Four auditing professional background noted, “In 1990, the judge writing the opinion in a court case related to the failure of Continental Illinois National Bank expressed the common belief, and the frequent legal defense of firms and partners today, that an audit firm and its partners will, above all, think about the firm’s reputation and their own reputations when faced with the temptation to conspire with clients and others in frauds or to cover up the frauds of others. “An accountant’s greatest asset is his reputation for honesty, followed closely by his reputation for careful work. … [C]overing up fraud and imposing large damages on the partnership will bring a halt to the most promising career,” the judge wrote.”

Misrepresenting the financial health of a company as its internal auditor is certainly bad. Lying about it to the PCAOB is very bad. One can only hope the newly installed Deloitte leadership will learn the appropriate lessons and institute appropriate global oversight. Any other way to say it is that your company must actually do compliance rather than just put a paper program in place.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

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