Bramwell’s Lunch Beat: Big Four in China Talk Settlement with SEC

KPMG says it expects relationship with golfer Phil Mickelson to continue
In Monday’s “Bramwell’s Lunch Beat,” I wondered – based on a piece over the weekend by Bleacher Report columnist Michael Fitzpatrick – if KPMG would pull the plug on its sponsorship of golfer Phil Mickelson, due to the FBI and the US Securities and Exchange Commission (SEC) investigating the three-time Masters champion’s involvement in insider trading in 2011 and 2012.

But according to an article by Michael Rapoport of the Wall Street Journal on Monday evening, KPMG indicated it continues to support Mickelson, with whom the Big Four firm has sponsored since 2008.

“We have had a very strong relationship with Phil for a number of years, and we fully expect it to continue. We have great respect for him,” KPMG said in a statement, according to the article.

Big Four audit firms in China in settlement talks with SEC enforcers
Rapoport also reported yesterday that the Chinese affiliates of the Big Four firms and the SEC enforcement division have been discussing a potential settlement of their dispute over access to the firms' audit documents about their Chinese clients, according to a filing late Monday.

The firms – the Chinese arms of PricewaterhouseCoopers (PwC), Deloitte Touche Tohmatsu, Ernst & Young (EY), and KPMG – have been in “continued settlement efforts” with the SEC, according to the filing.

“We've definitely been trying” to reach a settlement, said Amy Call Well, an EY spokeswoman, according to the article.

Rapoport noted that the settlement talks, which haven't been previously reported, come as the firms' Chinese affiliates appeal a judge's ruling that ordered them suspended from auditing US-traded companies for six months. An SEC administrative law judge issued the suspension in January after the firms refused to give the SEC some documents it had sought from them about Chinese audit clients who are under SEC investigation.

[For additional reading, here’s an article on the settlement discussions from Bloomberg.]

Bad news for the Big Four in China
The Chinese Institute of CPAs (CICPA) issued its annual rankings of Chinese CPA firms for 2013, and EY is no longer in the top four, Paul Gillis wrote on May 31 in his China Accounting Blog.

BDO’s Chinese affiliate Lixin jumped over both KPMG and EY to take the No. 4 spot. PwC continues to be the largest CPA firm in China, extending its lead over Deloitte. PwC’s growth was a modest 4 percent, while Deloitte actually shrunk by 5 percent. EY now sits fifth, and KPMG is sixth on the list.

“The future does not look bright for the Big Four in China,” Gillis wrote. “I expect capital markets to continue to migrate to the Chinese stock exchanges, meaning fewer US and Hong Kong IPOs that the Big Four historically dominate. Other than dual-listed companies, the Big Four have a nearly insignificant market share of domestically listed companies. Multinationals, which the Big Four dominate, are also taking a beating in China, likely making it harder for the Big Four to make up the difference from their core international clients.

“The Big Four had better find their game soon,” he continued. “If the trends of the past five years continue, China may be the place where the Big Four are beaten by the second tier.”

IBM avoids SEC penalty over accounting of cloud computing
Spencer E. Ante of the Wall Street Journal reported yesterday that IBM Corp. appears to have sidestepped any government penalty over its accounting treatment for cloud computing.

The SEC enforcement division doesn't intend to recommend any enforcement action by the SEC against IBM, after the division concluded its investigation into how the computer maker reports cloud-computing revenue, according to a company filing with the SEC.

Last July, IBM disclosed that the SEC was investigating the way it reported its sales in its cloud-computing business, according to a filing detailing its second-quarter results. Ante noted that at the time, IBM said it was confident that the information it provided was consistently accurate, and that it reports its cloud revenue in line with US Generally Accepted Accounting Principles (GAAP).

However, after IBM disclosed the investigation, it did change the way it described its cloud revenue in subsequent earnings press releases to make the description more clear, according to the article.

Credit Suisse faces no ‘rubber stamp’ in pension review
The US Labor Department is one regulator that hasn’t immediately fallen into line to give Credit Suisse Group AG a pass following its May 19 guilty plea for helping Americans evade taxes, Neil Weinberg of Bloomberg reported yesterday.

Now Credit Suisse needs a waiver from the Labor Department to retain its status as a qualified professional asset manager (QPAM), a key designation for institutions overseeing pension assets. Otherwise, it will automatically lose that privilege after its August 12 sentencing. Under pressure from prosecutors, the Federal Reserve Bank of New York and the SEC have already shown the bank some leniency.

The Labor Department, which oversees $7.9 trillion in pensions, “is not a rubber stamp,” said spokesman Michael Trupo, according to the article. “This is a very serious matter, and we are closely monitoring the situation.”

Zurich-based Credit Suisse, Switzerland’s second-largest bank, declined to disclose the amount of public and private pension assets that could be affected by the ruling.

Deloitte report unveils new theme in audit failures
The Public Company Accounting Oversight Board (PCAOB) published its first major inspection report of the 2013 cycle, giving Deloitte a 28 percent audit failure rate after studying 53 audit files.

The audit failures called out by the PCAOB in Deloitte's 2013 inspection report presented a new buzz phrase that promises to be the theme for 2013 inspection reports for the major firm: “level of precision,” Tammy Whitehouse of Compliance Week wrote yesterday.

The inspection report calls out a number of instances where Deloitte auditors failed not to identify or test controls, but instead to show that a particular control operated at a level of precision necessary to prevent or detect a material misstatement in financial statements.

With only 13 Deloitte audits flagged, 12 of them contained problems in the internal controls audit, an area the PCAOB has identified as one that needs work, according to Whitehouse.

Quick Links:

  • J. Michael McGuire named CEO-elect of Grant Thornton (Grant Thornton)
  • What investors must know about new accounting rules (MarketWatch)
  • How preparers can make revenue recognition implementation smooth (CGMA Magazine)
  • California hit with $31.6 billion audit misstatement (American Thinker)
  • US Republican tax writers criticize global corporate tax project (Reuters)
  • Could EPA’s new greenhouse gas rules open the door to a state-based carbon tax? (TaxVox)
  • Japan clears way for corporate tax cut (Wall Street Journal)
  • Applying the final 3.8% net investment income tax regulations to individual taxpayers (Forbes)
  • Surprise change to R&D tax credit rules is big help for small businesses (Forbes)
  • Toward a progressive tax policy (Bloomberg View)
  • Corporate expatriations: More deals are likely (Tax Analysts)
  • Camp waves the white flag (Tax Analysts)
  • Tax moves to make in June 2014 (Don’t Mess With Taxes)

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