Over the past few months, we've highlighted some notable project failures, each of which offers insights about what not to do when managing a project of any size. So far, we've discussed the Queensland Healthcare debacle (software project), the disaster that is the Airbus A380 (product design), the Aurora CO Veteran's Hospital fiasco (construction project), and the challenges posed during the construction of the Sydney AU Opera House (all but software).
None of these posts, however, are based on an accounting failure. And, since Beyond Software offers specialized Professional Services Automation (PSA) software, which includes financial management, we wanted to explore some notable accounting failures, too. These cases reveal some of the havoc created by anomalies in accounting practices, and the impact they can have in unexpected places.
No Company is Immune from Error
In just one year, 2017, three of the "Big Four" global professional services networks were assessed hefty fines for "audit misconducts" stemming from work completed in the previous six years. The Big Four - EY, KPMG, PwC, and Deloitte - are purported to oversee the accounting activities of up to 96% of companies traded on the Financial Times Stock Exchange (FTSE), an index for the trading of stock values of hundreds of the world's biggest companies.
As such, much of the world's economy relies on the accuracy of the audits done by these firms. When those audits fall short of expectancies, global economies can falter, and millions of investors are put at risk.
2017 was a Bad Year for Three of the Big Four
EY (Ernst Young)
The British Financial Reporting Council (FRC) fined EY (formerly Ernst Young) more than US $2.4m for misconduct related to three areas of their 2012 audits of Tech Data Limited. In addition, the senior EY auditor was personally fined £59,000 after admitting that the company's actions were "significantly short" of conventional standards. The three areas of concern all related to EY's failure to perform standard accounting and audit activities. The company failed:
- to obtain reasonable assurances that Tech's proffered documentation was free of material misstatements;
- to obtain sufficient audit evidence to justify their conclusions, and
- to exercise the professional skepticism necessary to audit the Tech firm's financial documentation adequately.
The U.S. Securities and Exchange Commission (SEC) fined KPMG US $6.2m for failing to discover the "grossly overstated" value of Miller Energy Resources, and for failing to identify that the company had listed some of its assets twice. Miller Energy had listed its purchase price of Alaskan oil wells at $480m, which valued the company sufficiently to justify its listing on the New York Stock Exchange. The actual amount paid for those assets was a mere $4.5m, and NYSE investors were understandably distressed when they learned of the discrepancy. The SEC also fined Miller Energy an additional $5m.
(Note that in January 2017, the FRC announced that it was launching an additional investigation into KPMG for its audit work on behalf of Rolls Royce in 2010 and 2013. The FRC made the decision in light of the £497m (US $667m) settlement of a criminal case against Rolls Royce for bribery and corruption overseas. We will report the result of that investigation as it unfolds.)
PwC was in regulatory cross-hairs not once, nor twice but three times in 2017 alone:
- Connaught (2010)
Connaught was a British social housing provider that collapsed in 2011. In 2017, the FRC fined PwC a record (at the time) £5m for misstating Connaught's "mobilisation" expenses on the company's 2009 audit report. In the UK, "mobilization" costs are incurred as companies prepare bids for contracts. Some elect to write the cost off as a pre-contract expense, while other companies consider the costs ongoing expenses of the successful contract bid. It appears that Connaught chose hedge on its disclosure of those costs, and PwC failed to notice that fact. The revelation resulted in the eventual issuance of "a material negative restatement of Connaught profits."
- RSM Tenon (2011)
For audit services related to FY 2011 for RSM Tenon (a professional services firm), the FRC fined PwC a record (this time it was an actual record) of £5.1m for an "extensive" list of misconduct behaviors. Falling under the standard expectations of obtaining appropriate evidence and exercising professional skepticism, the PwC violations included inaccurate assessments of
- the accrual of bonus payments,
- the amounts recoverable from contracts,
- the miscalculation of goodwill, and
- the recognition of work in progress.
- Merrill Lynch (2014)
While not as expensive (at only US $1m), the fact that the FRC fined PwC yet again for the shoddy work it did in 2014 suggests that the auditing giant was not as attentive to remedial activities as it could have been. In this case, Merrill Lynch violated a rule requiring it to hold customer securities in a lien-free segregated account. Instead, Merrill Lynch held "tens of billions" of customer securities in banks that were subject to third-party liens. PwC failed to obtain sufficient evidence that Merrill Lynch complied with the rule when it issued its 2014 audit report.
Why do These Cases Matter?
Errors or omissions by any of the "Big Four" could be indications of serious mismanagement of the resources of the worldwide economy. On a less global note, however, each of these cases offers lessons on accounting practices to avoid in order to prevent unnecessary client disruptions and regulatory inquiries.
At Beyond Software, we provide cloud-based, innovative software that offers unparalleled confidence in accounting activities. Our PSA software gives professional services organizations, large or small, the tools it needs to deliver timely and accurate financial results for any purpose, including audits.
And its combination of financial and project accounting modules allows keen insights into both corporate and project level metrics by illuminating key performance metrics across an entire enterprise. Your company doesn't have to trade on the FTSE to benefit from Beyond Software's Professional Services Automation software.