CategoryAuditing News

Accounting Firms Compete with Academic Institutions

Advanced learning and retooling via degree and non-degree programs has been the exclusive domain of academic institutions. The more reputable the academic institution, arguably, the higher is the quality of learning.

Things are about to change as one of the Big 4 accounting firms decides to enter the field of advanced learning. KPMG, a leading U.S. audit, tax, and advisory firm, broke ground for construction of its $450 million learning, development, and innovation facility in the Lake Nona community of Orlando.


KPMG is one of the world’s leading professional services firms, providing innovative business solutions and audit, tax, and advisory services to many of the world’s largest and most prestigious organizations. KPMG is one of the Big 4 Accounting Firms (the other three being E&Y, PwC, and Deliotte).

KPMG LLP is the U.S. member firm of KPMG International Cooperative. KPMG International’s member firms have 189,000 professionals, including more than 9,000 partners, in 152 countries.

Stylized Facts

  • KPMG’s revenues for 2017 was $26.40 billion
  • Revenue growth for FY2017 was of 5%
  • KPMG invested more than US$1 billion this year in a multi-year program focused on new technology, innovation and developing new services and solutions
  • More than 37,000 new graduates and other entry-level professionals hired, with the total workforce growing to a record-high of 197,263 people.
  • KPMG network achieves gender parity for new hires, and an increase to 28% women in partner promotions across our 10 largest countries.

State-of the-Art Learning Facility

The firm announced on January 9, 2017 its commitment to create a 55-acre, state-of-the-art campus with 800,000 square feet of space for meeting, classroom, residential, and dining facilities. The campus will feature cutting-edge technology, including an innovation center that will support training and client engagement, and a heritage center to highlight the firm’s rich history and culture. KPMG expects to complete the project by year-end 2019.

The facility expected to accommodate 1,000 people at a time and has 800 single-occupancy rooms. It also has a four-star environment which includes multiple dining options, a coffee and wine bar, and a pub-like venue as well as “total wellness” amenities such as a sizable fitness facility and hiking and biking paths.

“This campus is our firm’s largest capital investment ever. More than that, it’s an investment in our people,” said Lynne Doughtie, Chairman and CEO, KPMG LLP. “Today marks a major milestone toward creating a world-class environment that inspires our professionals to achieve their fullest potential and helps enable our firm to attract and retain the best talent.”

Good or Bad?

Is this brand of executive education offered by US corporations good or bad for US academic institutions? The answer is unambiguously yes. Why?

  1. Any healthy competition between the for-profit and not-for-profit organizations can only improve the quality of education.
  2. The executives being trained will benefit as they get a broader perspective that is based on rigorous academic viewpoints and high quality practitioner experience.
  3. It increases the human capital of the attendees regardless of whether these forms of learning yield degrees or certificates in a specialized area.

As one of our Nobel Laureates said “For the times they are a-changing”

February 11, 2018

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Harvard’s Big Bath

We are all familiar with the notion of a bath in our communal lives, but the term “big bath” is equally common in the corporate world. Big Bath is an earnings management technique whereby a one-time charge is taken against income in order to reduce the value of an  assets.  This technique is often employed in a bad year, e.g., when sales are down, or when a company reports losses, to account for overvalued assets on the balance sheet.

Although the process is discouraged by auditors, it is frequently used by public companies. A notable feature surrounding big baths is that this accounting treatment tends to coincide with new management team because the new management team can then blame the one-time charges on the prior management team while simultaneously calibrating current reported income to unusually low levels thereby making it easier to meet or beat income in future periods.   

Big Bath in Non-profit Sector

Does Big Bath happen in the non-profit sector? Bien sûr!

 Harvard University has the largest endowment fund in the world with assets around $37 billion. The new chief of Harvard University’s endowment, Narv Narvekar, actively pushed to slash the value of some of its investments in natural resources portfolio of forests, farms and vineyards given his bearish outlook on some of the assets. Although Harvard University has the largest endowment, it was the only Ivy League endowment which generated less than 10% in the most recent year, which is why there was a “change of guards” at fund management level.

New endowment chiefs often have an incentive to write down investments they inherit because it is easier to blame the losses to the prior investment chief. It also helps remove potentially overvalued assets. Mr. Narvekar described Harvard Management Co. as having “deep structural problems” that would take five years to restructure. “An honest, reflective, and clear-sighted recognition of these problems is the first critical step towards generating solutions,” he wrote in his first annual letter in September, 2017.

Under Mr. Narvekar, Harvard reduced the value of its natural-resources investments by more than 25%, which is an unprecedented amount of a write-down (Harvard had valued the portfolio at roughly $4 billion at the end of the prior fiscal year).

Big Subjective Decisions

Many asset managers and appraisers say valuing assets that trade infrequently or aren’t generating cash—trees, for example, take years to grow before they can be sold for timber—is difficult. However, the new chief investment officer indicated that some natural-resources investments carried more risk than previously calculated. Therefore, he raise the discount rate (because the risk was high), which caused some investments to lose value.

Valuations for the endowment’s private assets were approved by the board, reviewed by Harvard and “the valuation process was independently verified by external auditors,” board Chairman said in a statement.

Big Pay Day

Harvard has guaranteed Mr. Narvekar at least $6 million a year for his first three years on the job. Additionally, the Chief is expected to earn additional performance-based compensation which is expected to be closely tied to the endowment’s performance in the long term.

When a non-profit sector mimics the pay of the for-profit sector in order to generate high future returns on the largest endowment fund!

January 25, 2018

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Taxing on the Brain

Some U.S. multinational companies are avoiding paying high U.S. taxes through relatively simple tax strategies. If a U.S. multination company generates part of its income in a foreign jurisdiction, the foreign income is not subject to U.S. taxes until it gets repatriated back to the US. Contrary to personal income tax, which is levied on all sources of income regardless of where the income is earned, only U.S-based income is subject to taxes for U.S. corporations. The foreign income earned is subject to US taxes once the money is transferred back to the U.S. for redistribution or reinvestment.

Therefore, U.S. citizens cannot shelter foreign income from U.S. taxes, but U.S. companies are able to do so.

Another tax strategy to shelter income from U.S. taxes is more dubious in nature where the objective is to attribute a higher percentage of the income to a foreign jurisdiction with low tax rate even when the income is not economically earned in the foreign jurisdiction.

The Pillar in the Cat-and-Mouse Strategy

Caterpillar is under intense scrutiny for shifting much of the profit from its lucrative replacement-parts business to a Swiss subsidiary where the tax rates are low. The strategy, which dates back to the late 1990s, has generated an employee lawsuit, a U.S. Senate investigation, and a federal criminal investigation that led raids on Caterpillar’s headquarters and two facilities in Illinois.

How large is the tax avoidance? According to a U.S. Senator (see the April request from Sen. Carl Levin, D., Mich., for the PCAOB to look into the tax avoidance matter), Caterpillar has deferred $2.4 billion in taxes under strategies devised by PricewaterhouseCoopers LLP.

CtW, an investment group, wants to shake up the company’s audit committee following the terminator’s (machinery giant) offshore tax strategy. The investment group, has issued a public letter asking shareholders to vote against Caterpillar’s three board members because of inadequate oversight of tax strategy and dysfunctional monitoring of the external auditor. In the case of Caterpillar, PricewaterhouseCoopers LLP happens to be both the external auditor and the  tax consultant!

The audit committee members of Caterpillar include

  • Daniel Dickinson, a private-equity executive
  • Dennis Muilenburg, Chairman and CEO of Boeing Co.
  • William Osborn, former Chairman and CEO of Northern Trust Corp.

Conflict or Efficiency

By serving as the tax consulting and external auditor, does PricewaterhouseCoopers LLP generate efficiencies for the company or is there a conflict of interest whereby the audit quality suffers because the external auditor is no longer an independent monitor of the company’s financial statements.   

Independent or Dependent

PricewaterhouseCoopers has been Caterpillar’s independent auditor since 1925, according to the 2017 proxy statements filed by Caterpillar, which means the big accounting firm has been with this client for almost a century! Can an auditor with a century long relationship with a client provide high quality audit assurance?

How much has the accounting firm earned from this company?

Audit services              Tax consulting             Total Fees

2016                                        $33 million                  $0.1 million                 $35 million

2015                                        $32 million                  $20 million                  $54 million

Why did tax consulting fees drop suddenly in 2016? Too much political heat?

If you use 2016 fees as a proxy for annual fees earned by the auditor for the prior years, which is an exaggerated assumption, PricewaterhouseCoopers has earned around $3 billion from the Terminator since 1925.

I wish we could buy shares of PricewaterhouseCoopers!

Is PricewaterhouseCoopers a tax consultant or an “external” auditor for Caterpillar? Does PricewaterhouseCoopers have the conviction to question accounting practices adopted by Caterpillar and confront questionable accounting practices in light of this money train?

Your guess is as good as mine…..

May 29, 2017

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Italian Job

BT shares, which trade in the US as ADRs (BT Group plc), have declined by more than 45% in less than a year. Around half of that descent was confined to a single day last month (Jan 23) when the company announced accounting improprieties associated with its Italy-based operations. The company also noted that some senior management personnel may have embezzled funds. UK’s parent BT shares have shed more than 8 billion pounds because of this accounting scandal.

Italian prosecutors have initiated their own investigation into BT Italia’s accounting fraud. BT Group Plc has been hit by at least two shareholder lawsuits in the U.S. A number of other US law firms specializing in shareholder class action suits are considering filing lawsuits against the company and senior management.

British Telecommunications (BT)

BT Group plc is a holding company which owns British Telecommunications plc, a British multinational telecommunications services company with head offices in London. The company has operations in around 180 countries. The company’s shares are among the most widely owned stocks in the UK. The ownership of BT shares is widely dispersed ̶ about 700,000 of its 827,000 shareholders own 1,600 or fewer shares of the company.


American depositary receipts (ADRs) were introduced in 1927 as an easier way for U.S. investors to purchase stock in foreign companies. Non-U.S. companies also benefit from ADRs as it makes it easier to attract American investors. ADRs are negotiable certificates issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange.

ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. ADRs are listed on either the NYSE, AMEX or Nasdaq but they are also sold OTC.

Italian Job

The fraudulent transactions related to BT-Italy emerged sometime during the summer of 2016 following an internal probe into its Italian business after a “whistleblower” flagged concerns. A whistleblower is an employee who discloses information about illegal acts, mismanagement, abuse of power, or general wrongdoing occurring in the company. If the company is publicly traded and subject to the filing requirements of the Securities and Exchange Commission, whistleblowers are protected by law from retaliation in the US. Some of the major US companies perpetrating accounting fraud were caught and brought to justice by their own employees (e.g., Enron, Freddie Mac, Madoff).

Upon investigation, BT discovered “inappropriate management behavior” within the Italian division. The expected cost of the rent extraction initiated by the Italian subsidiary was estimated to be around £145 million. Sometime in January this year, just days prior to the announcement of the third-quarter results, the company released a statement declaring that, according to an independent investigation by the Big 4 accounting firm KPMG, the losses to BT from the accounting irregularities related to Italian operations were being reassessed at £530m, which is almost 4 times larger than the previously estimated number.

The company suspended several BT Italy’s senior management team. BT has also appointed a new chief executive of BT Italy who took charge of Italy’s operations from Feb. 1.

Telecom Blues

What remains troubling is why wasn’t the accounting irregularity detected by UK’s parent company much earlier. Nick Rose, the chairman of the BT’s audit committee, flagged internal-control issues in Italy in every annual report since May 2013. Yet, the persistent accounting fraud was not detected until 3 years later. By blaming BT-Italy for all the current problems, the CEO of BT may be attempting to distance the parent company, and himself, from the Italian operations by censuring a few perpetrators.

What is even more worrisome is why didn’t the auditors detect this size of an accounting fraud earlier? Independent auditors are expected to provide an assurance that the financial statement are free of material misstatements. One would agree a misstatement exceeding $600 million is material.

Who was BT’s independent auditor? The answer is PwC, which a Big 4 global accounting giant. PwC has been BT’s auditor for the last 30-year since 1984. It is unclear whether BT intends to end its business relationship with PwC. The big accounting firms are renowned for rendering high audit quality so this type of an accounting fraud is likely to a huge set-back for PwC.

Moody’s has warned it may cut BT’s credit ratings. Analysts are skeptical whether the company can afford to maintain a 10 percent growth in its dividend.

Randoph, February 2, 2017



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Accounting’s Got Talent

accountingtoday-top-100Financial economics, as the title of the discipline suggests, is an embedded field within mainstream economic sciences. Therefore, it should not come as a surprise that quite a few Nobel Laureates in economics are finance professors who have done pioneering work in financial economics.

Closely linked with economics and finance, mainstream accounting research is derived from economics and financial economics. While there are a few strong delineators between finance, economics and accounting, the three fields intermingle and influence one another which is why it is difficult to have a strong grasp of one without at least a basic understanding of the other two.

Yet, accounting has never been considered part of mainstream economic sciences which is why no accounting researcher has won the Nobel Prize. Not to be outdone, the accounting profession has created a list of 100 most influential individuals, thought leaders, and visionaries who are responsible for shaping the accounting profession.

Requirements For Top 100

Gaining entry into the coveted top 100 Most Influential Person in Accounting is a daunting task. The Accounting Today complied the Top 100 list using the following criteria.

  • Innovator and creator. The individual must have created new ways to market the accounting/auditing professional services.
  • Educator. The individual must have taught the profession something the profession didn’t know already.
  • Regulator. The individual must have been involved in enforcing rules which had a game changing influence on the profession.
  • Elevator. Individuals who help achieve the ideals of the profession, or and those who are actively planning the future of the profession, are deemed the most influential of all.

What is the gender composition? Among the top 100 most influential accounting professionals, 70% are males and the remaining 30% are females.

Top 5

The top 100 most influential accounting professionals then voted to pick the Top 5 thinkers within the profession. The Superstars in Accounting are:

  1. Barry Melancon: President and CEO of AICPA
  2. Tom Hood: CEO and Executive Director of MACPA
  3. Mary Jo White: Chair, SEC
  4. Russell Golden: Chairman of FASB
  5. Ron Baker: Founder of VeraSage Institute


Surprisingly, no academic made it to the Top 100 list. Although academics meet the threshold requirement as an educator, presumably, Accounting Today does not consider academics to be influential enough to teach something to the profession that the profession didn’t know already. Academics are merely disseminating accounting/auditing knowledge that is already codified by the profession so academics are not deemed as innovators in the field.

We salute the Top 100 Most Influential Accounting Professionals!

Chatham; September 10, 2016


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GE, The Illuminati

Illuminati-Logo---BlackGeneral Electric, the giant American industrial conglomerate, filed its 2015 annual report (10-K) with the Securities and Exchange Commission (SEC) on February 16, 2016. The annual report document contains 276 pages of text, numbers, tabular presentations and pictures. Large accelerated filers, or large public companies, are required to file their annual financial reports, also termed as Form 10-K, within 60 days of their fiscal year-end unless they are smaller public firms in which case they have either 75 days (accelerated filers) or 90 days (non-accelerated filers) to file depending on their market capitalization.

In an effort to make annual reports more understandable to investors, in a game-changing disclosure strategy, the company released its first ever “Integrated Summary Report.” The key objective is to provide a comprehensive yet concise view of the company using the lens of the Board and management. The compact report contains only 66 pages with pertinent information from several mandated documents including 10-K, proxy statements, and sustainability report. The document establishes links between strategy, performance, board oversight, compensation and sustainability but it remains outside the realms of the heavily regulated financial reporting.

The Illuminati

Navigating through any 276-page document can be challenging for an individual, let alone one that is derived from a complex set of accounting rules and regulation. The Chairman and CEO of General Electric, Jeff Immelt, said “our priority is to provide meaningful information that all investors can readily access. For investors to make investment and voting decisions, we don’t believe that more information is necessarily better. Instead, we’ve challenged ourselves to provide better information. Over the past several years, we have already been enhancing our reporting in response to feedback from investors, and they have told us how much they like it. This year, we are taking it even further.”

According to a GE spokesman, investors downloaded the integrated and summary report 2,300 times in the first 24 hours after it was published. In contrast, GE’s combined downloads of its 10-K and proxy reports 24 hours after they were filed last year were only 638.


The integrated summary report includes a discussion on the following subjects:

  • Chairman’s Letter
  • Strategy and results
  • GE’s Businesses, Portfolio & Capital Allocation
  • Margins and Financials
  • Risk, Governance and Compensation
  • Audit
  • Shareowner Proposals
  • Sustainability
  • Annual Meeting
  • Forward-Looking Statements


It remains uncertain whether other large companies will follow GE’s pathway and start disclosing similar condensed annual reports. The SEC has been deliberating ways to simplify financial reporting so GE might become the vanguard of simplified annual reporting.

New York, April 7, 2016; 2.40P

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2016 UTS Summer Accounting Conference

UTSThe UTS Summer Accounting Conference attracts leading accounting and auditing scholars from around the world. The Accounting Discipline Group at UTS is committed to ensuring that the Australian Summer Accounting Conference continues as the premier event of its type in the Australasian region.

Registrations are now open to attend the 19th annual Australian Summer Accounting Conference.  The 2016 conference will comprise a key-note address by Professor Katherine Schipper, Faqua Business School, Duke University, and 11 paper presentations, each of which will be followed by an invited discussant. 

There is no charge for attending the conference; however attendees are responsible for their own travel and accommodation costs, late cancelations and or no shows to the conference/dinner will incur an administrative fee of $50.00.  Morning tea, lunch and afternoon tea will be provided, on each of the two days.  Additionally, conference attendees are invited to a dinner held on the evening of Thursday, 4th of February at the Park Royal Hotel.  The conference will conclude on Friday, 5th of February with drinks and canapés.  Places are strictly limited and anyone wishing to attend should register as soon as possible.

Presenters Title
Aloke Ghosh City University of New York


Chandra Kanodia University of Minnesota

The Quality of Audit Stress Tests of Goodwill for impairments


What are the Economic Consequences of Fair Value Accounting?

Yu Flora Kuang University of Melbourne The Influence of CEO Social Capital on Firm Value: Evidence from CEO Succession
Xi Li Temple University Mandatory Disclosure Reform, Monitoring, and Executive Compensation
Elisabeth Dedman Nottingham University The Information Content of Accounting Accruals when Accompanied by Cash or Stock Dividends
Thomas Bourveau Hong Kong University of Science and Technology Shareholder Activism and Voluntary Disclosure
Emmanuel De George London Business School Starving for information: Does reporting frequency affect how earnings news travels around the world?
Scott Liao  University of Toronto Does Loan Loss Provision Timeliness Affect the Accuracy, Informativeness, and Predictability of Analyst Provision Forecasts?
Christo Karuna University of Southern California Competition and Earnings Management
Gopal Krishnan American University Do Auditors with a Deep Pocket Provide a High Quality Audit?
Sterling Huang  Singapore Management University Corporate Hedging and the Design of Incentive-Compensation Contracts


4 – 5 February 2016 9:00 am – 4:00 pm


City – Haymarket›CB08 Dr Chau Chak Wing Building, Building 8

Places to the conference are strictly limited.  Please treat your registration as a firm commitment as subsequent cancellations are costly and create administrative difficulties with waitlists. Late cancelations and or no shows to the conference/dinner will incur an administrative fee of $50.00.

14-28 Ultimo Road Ultimo NSW 2007


Complimentary – Please refer to the conditions noted above


General enquiries about the conference (including paper submissions or requests for invitations) should be directed to:

Katt Robertson – Accounting Discipline Group UTS Business School Email: Ph. 61 2 9514 3560

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Beware of Corporate Nip-Tuck

nip-tuckU.S. public companies must prepare their financial statements according to generally accepted accounting principles (GAAP) and much of the investor attention is concentrated on the Income Statement to asses a company’s operating performance. Any income or earnings to be GAAP compliant must be a separate line item reported on the Income Statement.

Over the last few decades, companies have been increasingly deviating from US GAAP earnings/income by underscoring some form of an adjusted income/earnings, also known as pro-forma earnings (e.g., EBITDA, or adjusted net income). What investors may not realize is that any pro-form number is not GAAP compliant and therefore the adjusted number may convey a biased assessment of the company, which may be the hidden purpose. 


The adjustments allow companies to exclude expenses such as asset write-downs, impairments, restructuring charges, losses from foreign-currency translations that management believes is not relevant to the company’s most fundamental operations. It should not come as a surprise that most adjusted measures tend to portray a much healthier image of corporate earnings. Companies are willing to go to any lengths or use any definition of earnings to avoid reporting losses.

According to Deutsche Bank research, about one in 10 major companies use the term adjusted EBITDA, up from one in 40 a decade ago. The difference between standard and adjusted earnings is also growing. Deutsche Bank expects the gap to widen to 40% in the fourth quarter of 2015, from 20% or 30% in recent periods. According to Wall Street Journal analysis, about a quarter of earnings disclosed in earnings announcements don’t comply with GAAP.


United Technologies Corp. CEO Greg Hayes reported “…by adhering to accounting rules, we’re actually confusing people more than we were helping people understand what’s going on in the business. This is a simplification and really allows the investors to more easily understand what the businesses are doing.”

The implication is that we don’t need to adhere to accounting standards, we don’t need to worry about complying with the SEC reporting requirements, and we don’t need auditors or their attestation. Let us disregard the mechanisms in place to generate financial information that is representationally faithful, reliable and transparent; instead, let us trust the numbers generated by management according to what they believe is the best definition of earnings. A compelling story.

Regulatory concerns

 According to Mary Jo White, Chair of the Securities and Exchange Commission, “Non-GAAP measures are used extensively and in some instances may be a source of confusion.. This area deserves close attention.”

Regulators occasionally take companies to task for de-emphasizing US GAAP accounting numbers. The SEC has queried companies at least 100 times since 2006 about non-GAAP measures. For example, the SEC told T-Mobile US Inc.  to include figures that comply with accounting rules in its quarterly earnings release. The company had only used adjusted Ebitda, and omitted net income.


Trust the company’s bottom line number, which is net income, and beware of pro-form or adjusted numbers generated by management!


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Culmination of Identity Holdup

nametagWe know the identities of the top management leading a public company, the names of boards monitoring the performance of the company, names of top owners and blockholders in the company. Yet, the identity of the audit partner signing an audit report remains elusive. The auditor remains a phantom in the US.

The Swiss-styled ‘private bank secrecy’ in the audit industry is about to change. Audit-engagement-partner secrecy is no longer permissible in the U.S. Under the newly approved rules, PCAOB now requires the name of the engagement partner to be disclosed. Accounting firms will be required to file this information in Form AP no more than 35 days after the audit firm files its audit report with the SEC. The form will be publicly available on the PCAOB’s website.

The new accounting-related rule culminates a six-year effort lead by the PCAOB that generated some controversy. Accounting firms were generally opposed to this initiative because they either considered the disclosure to be irrelevant or that such disclosures would subject engagement partners to liability risks. However, political and economic climate in the US prevailed over any opposition from accounting firms.  


Over time, Form AP will enable investors or commercial data aggregators to accumulate information about specific partners’ experience and history. This may incrementally increase investors’ ability to make judgments about audit quality and the credibility of financial statements. Academic research suggests that investors and other capital market participants would generally benefit from such disclosures.

Effective Dates

Upon SEC approval, the new rules for engagement partner disclosure will apply to auditor’s reports issued on or after Jan. 31, 2017, or three months after SEC approval of the final rules, whichever is later. For disclosure of other accounting firms, the rules will apply to auditor’s reports issued on or after June 30, 2017.

Typical Audit Report (e.g., Walmart 2010 10-K)

…….We have audited the accompanying consolidated balance sheets of Wal-Mart Stores, Inc. as of January 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended January 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wal-Mart Stores, Inc. at January 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 31, 2008, in conformity with U.S. generally accepted accounting principles.

Ernst & Young LLP

Rogers, Arkansas

March 26, 2008

As is evident from this audit report, E&Y is signing the audit report and the name of the engagement partner is not disclosed. The new rule does not require the audit firm to disclose the identity of the engagement partner within the audit report. Instead, the identity is separately disclosed in FORM AP to be filed with the PCAOB.

The accounting firms did prevail over PCAOB!


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SEC Trumps the Borders of U.S. Capital Markets

SECThe Division of Enforcement at the SEC is a law enforcement agency established to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The actions of the Enforcement Division provide meaningful interpretations and applications of the U.S.
Securities Laws.

The SEC’s Division of Enforcement filed 755 enforcement actions in 2014, which is a 12% increase from the number in 2013. The number of actions undertaken by the SEC between 2003 and 2014 has been varying between 574 and 755.

Enforcement Actions By Fiscal Year
Year                                # of Actions
2003                              679
2004                              639
2005                             630
2006                             574
2007                             655
2008                             671
2009                            664
2010                            681
2011                            735
2012                           734
2013                           676
2014                           755

The enforcement actions can be grouped into the following broad categories, as identified by Floyd Advisory:

Reporting and Disclosure: Fraudulent financial reporting matters, cases involving misleading statements to investors, and faulty and/or inadequate disclosure matters

FCPA: Bribes and kickbacks to foreign officials to assist in obtaining or retaining
business as well as cases involving internal control violations

Broker-Dealer: Stock price manipulation, violations arising out of compliance deficiencies, naked short selling schemes, improper trading activities by Broker-Dealers

Delinquent Filings: Failures to make required and or timely filings with the SEC including Forms 10K, 10Q, 8K, and other mandated submissions

Insider Trading: Buying or selling a security in breach of a fiduciary duty or other relationship of trust and confidence while in possession of material, nonpublic information about the security

Investment Company: Misleading disclosures, improper fee arrangements,
misappropriation of client assets, market manipulation, and other violations of
the Investment Advisers Act

Market Manipulation: Creating false appearance of a liquid and active market, fraud involving  dormant microcap shell companies, and other disruptive trading activities

Securities Offering: Misleading and fraudulent representations to induce investors to enter into securities transactions

Accounting and Auditing Enforcement Releases (AAER)

Within the enforcement actions (i.e., the population of civil lawsuits brought in federal courts, and its notices and orders), the SEC’s Division of Enforcement separately discloses accounting- and auditing-related actions as Accounting and Auditing Enforcement Releases (“AAERs”).

The AAERs include

• Financial Reporting Frauds
• Foreign Corrupt Practices Act violations (“FCPA”)
• Violations of Books and Records
• Financial reporting issues involving improper revenue recognition, manipulation of reserves, intentional misstatement of expenses, balance sheet manipulation, options backdating and defalcations.

As of December 31, 2014, the SEC issued 93 AAERs, which is a marginal increase from the corresponding numbers in 2013 and 2012 but a 48% decline relative to the number in 2009.

Year                        AAERs
2009                        180
2010                        129
2011                       127
2012                          85
2013                          87
2014                          93

Of the 93 AAERs in 2014,

• 25% of the cases involved balance sheet manipulation
• 22% of the cases involved intentional misstatement of expenses
• 20% of the cases involved improper revenue recognition
• 8% of the cases involved manipulation of reserves
• 5% of the cases involved options backdating
• 20% Other cases


Beware of corporate misconduct in the U.S., you are under the strict surveillance of Uncle Sam.

October 24, 2P.

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