Accountants Professional Liability
Scorecards and Commentary
Mark Cheffers, Audit Analytics, CEO
Robert Kueppers, Deloitte LLP, Senior Partner, Global Regulatory & Public Policy
September 19-20, 2013
ALI CLE - Accountants’ Liability Conference
Liability Exposure
• Managing Current Case Exposures
– Large Settlements
– Historical and Current Cases
– Madoff/Ponzi Cases
– Credit Crisis/Subprime Cases
– Other Federal Class Actions
– Financial Restatements
– Going Concerns
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2
Expanding Theories of Auditor Liability
• Auditor as……
– Global Firm Guarantor (vicarious liability)
– Guarantor in Client Bankruptcy (Trustee
cases)
– Third Party Investee Investigator
– Predictor of Future Business Failure (going
concern)
– Fidelity Bond/Fraud Guarantor
– Aider and Abetter in Fraud
– Arbiter of the Complexity of Standards
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3
Top 50 All Time Accounting Malpractice Settlements (1991-2013)
Totals by Year
1135
1200
955
1000
800
628
600
495
418
400
200
328
193
82
118
65
245
204
217
393
448
422
200
186
200
68
0
0
0
Total Settlements (US$ Millions)
Note: The settlement figures above do not include two cases involving a firm formerly known as BDO Seidmen. In 2007, a Florida
state jury in the Banco Espirito case ordered BDO to pay $521 million ($170 million in compensatory damages and $351 million in
punitive damages). This verdict was reversed on appeal in 2010 and a new trial ordered. In 2011, BDO entered into a confidential
settlement. Also in 2011, a verdict in a second Florida state case, Barchelor, ordered BDO to pay $91.7 million ($36.7 million in
compensatory damages and $55 million in punitive damages). This verdict is now under appeal and thus is not reflected in the slide.
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4
3000.0
Top 50 All Time Accounting Malpractice Settlements (1991-2013)
Totals by Firm
2530.6
2500.0
2000.0
1574.0
1500.0
1153.5
1000.0
1072.5
783.5
500.0
0.0
Andersen
Deloitte
EY
KPMG
PwC
Total Settlements (US$ Millions)
Note: The settlement figures above do not include two cases involving a firm formerly known as BDO Seidmen. In 2007, a Florida
state jury in the Banco Espirito case ordered BDO to pay $521 million ($170 million in compensatory damages and $351 million in
punitive damages). This verdict was reversed on appeal in 2010 and a new trial ordered. In 2011, BDO entered into a confidential
settlement. Also in 2011, a verdict in a second Florida state case, Barchelor, ordered BDO to pay $91.7 million ($36.7 million in
compensatory damages and $55 million in punitive damages). This verdict is now under appeal and thus is not reflected in the slide.
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5
Top 50 Accounting Malpractice Settlements as of August 2013
(in US $ Millions)
$3,643.2
$3,470.9
Public
Non-Public
$2,966.0
$4,148.1
Government
Non-Government
Note: The settlement figures above do not include two cases involving a firm formerly known as BDO Seidman. In 2007, a Florida
state jury in the Banco Espirito case ordered BDO to pay $521 million ($170 million in compensatory damages and $351 million in
punitive damages). This verdict was reversed on appeal in 2010 and a new trial ordered. In 2011, BDO entered into a confidential
settlement. Also in 2011, a verdict in a second Florida state case, Barchelor, ordered BDO to pay $91.7 million ($36.7 million in
compensatory damages and $55 million in punitive damages). This verdict is now under appeal and thus is not reflected in the slide.
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6
Notable Exposures - From 2006: Current Status
-
Fannie Mae ($76.5M KPMG)
Delphi Corp ($38.3M DT)
American Int’l Group ($97.5M PwC)
Tenet Health Care ($65M KPMG)
REFCO ($25M GT)
Dell Co ($0.0M PwC)
Computer Assoc. ($0.0M KPMG & EY)
UnitedHealth Group ($0.0M DT)
AOL Time Warner ($100M EY)
Parmalat ($157.5 DT & 6.5M GT)
-
Tyco International ($225M PwC)
HealthSouth ($142.5M EY)
Freddie Mac ($0.0M PwC)
Royal Dutch Shell ($0.0M KPMG & PwC)
Dynegy ($1.05M Arthur Andersen)
PNC Financial ($9.08M EY)
Sprint ($0.0M EY)
Nortel Networks (DT $0.0M ± in Ontario)
Doral Financial ($0.0M PwC)
Note: A strike-though indicates that the case was settled. The parenthetical provides auditor settlement amount in millions.
Since this slide noted “Exposure,” a settlement value of $0.0 is used even if the auditor was never named in an action.
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Notable Exposures - 2010 (excl. 2006 list)
-
E.S. Bankest/Banco Espirito
Satyam (PwC portion $25.5M)
Madoff (J. Griesa: feeder fund auditor $0.0)
New Century Financial (KPMG $44.8M)
Moody’s (Class Cert. denied; PwC not named)
UBS (EY not named; 10/26/12 dismissal appealed)
Royal Bank of Scotland (DT not named)
Goldman Sachs (PwC not named)
Blackstone Grp (Remanded, but DT not named)
Wachovia (KPMG $37M)
Merrill Lynch (Settled; No DT contribution)
-
Citigroup (KPMG dropped in consolidated complaint)
Bear Stearns (DT $19.9M)
Bank of America (PwC exposed)
Wells Fargo (KPMG not named)
Washington Mutual (D&T $18.5M)
Sallie Mae (PwC not named)
Royal Bank of Canada
Societe Generale (EY and DT)
State Street Corp (EY motion to dismiss denied)
Oppenheimer Funds (no auditor named)
Lehman Brothers (E&Y partial win)
Note: a strike-though indicates that the case was settled or otherwise closed.
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8
Federal Securities Class Action Litigation Summary
Big 4 Auditors
Number of Claims Filed
Public Accounting Firm
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Deloitte LLP
10
6
9
12
4
4
2
7
10
0
0
2
1
Ernst & Young LLP
8
6
12
16
8
4
20
1
9
14
2
5
1
KPMG LLP
9
4
15
3
8
7
8
4
7
8
4
1
2
PricewaterhouseCoopers LLP
15
5
10
8
15
10
5
5
5
22
2
2
1
Big Four Total
42
21
46
39
35
25
35
17
31
44
8
10
5
Open Cases
0
0
0
0
0
0
0
1
6
7
1
5
4
Note: The year displayed represents the year the action was filed with the court. The counts include all cases where an auditor
was named as a defendant even if the case was subsequently consolidated. The list of Open Cases refers to the auditor, so if the
auditor is terminated as a defendant, the case is listed as closed even if the case is ongoing for other defendants.
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9
Top 14 Securities Class Action Defense Law Firms Representing Audit Firms
(by number of cases from 2000 to August 2013)
Defense Law Firm
Cases
Mayer Brown LLP
39
Latham & Watkins LLP
32
Sidley Austin LLP
25
Gibson Dunn & Crutcher LLP
24
Davis Polk & Wardwell
23
Kirkland & Ellis LLP
19
King & Spalding LLP
17
Hughes Hubbard & Reed LLP
16
Hogan Lovells US LLP
13
Orrick Herrington & Sutcliffe LLP
13
Cravath Swaine & Moore LLP
12
Willkie Farr & Gallagher LLP
12
Bingham McCutchen LLP
11
WilmerHale LLP
11
Notes:
1) Some cases may involve more than one Big 4 defendant. A total of 279 law firms represented audit firms from
2000 to August 2013. For a complete list contact Audit Analytics.
2) This list does not include Heller Ehrman LLP, which dissolved.
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10
First Stock Option Backdating Litigation:
Symbol Technologies
•
•
Securities class action filed in New York Eastern District Court on
3/5/02
In related 6/3/04 Accounting & Auditing Enforcement Release No.
2029, the SEC charged an executive, in part, as follows:
“manipulated stock option exercise dates to enable select senior executives,
including himself, to profit unfairly at the company's expense. Rather than use
the actual exercise date as defined by the option plans, Goldner instituted,
without board approval or public disclosure, a practice of using a more
advantageous date chosen from a 30-day "look-back" period so as to reduce
the cost of the exercise to the executive. To create the false appearance that
these exercises occurred on the selected dates, Goldner had his staff backdate
transactional documents and use the phony exercise dates in the forms on
which the executives reported their acquisitions to the Commission and the
public.”
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11
Stock Option Backdating Cases: An Overview
(Federal Court Cases)
- Total Stock Option Backdating Cases: 181 (consolidated from
206 cases)
- Specifically Asserting Backdating: 158
- Cases Resulting in a Financial Restatement Addressing Backdating and/or Deferred StockBased Issues: 23
- Subset of the 181 Cases Filed by the SEC: 32 (16 naming only individuals)
- Subset of the 181 Cases Filed as Derivative Actions: 74
- Subset of Cases Naming Auditor as Defendant: 13
- Law Firms Representing Defendant Auditors: 15
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12
Stock Option Backdating
Federal Court Cases Where Auditors were Named as a Defendant
# Cases Filed: 181
# Auditors Presently Named: 4 (13 cases)
Accounting Firm
Cases
Arthur Andersen LLP
1
Deloitte & Touche LLP
0
Ernst & Young LLP
3
KPMG LLP
6
PricewaterhouseCoopers LLP
4
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13
Stock Option Backdating Cases
Top Accounting Firm Settlements
Total
Settlement
Auditor’s
Settlement
In Re Louis Grasso v. Vitesse Semiconductor
Securities Litigation
$43,274,322
$30,250,000
KPMG LLP
Peregrine Systems Inc. Securities Litigation
$56,292,922
$30,000,000
Arthur
Andersen LLP
In Re Symbol Technologies Inc. Securities Litigation
$126,000,000
$24,000,000
Deloitte &
Touche LLP
In Re Sonam Bakshi v. Henry Samueli et al.
$173,500,000
$13,000,000
Ernst & Young
LLP
Case
Auditor
Notes:
1) The cases above concerned multiple assertions and the portion of the settlement attributable to the stock option backdating
conduct is unknown. The settlements by audit firms for other stock option backdating cases were less than $1,000,000.
2) The Arthur Andersen case was filed on May 6, 2002 in the California Southern District Court and was identified as a stock option
backdating case by using the Audit Analytics Restatement database
3) The prior slide indicates that D&T was not named as a defendant in a stock option backdating case. In an apparent contradiction,
D&T is listed above with a settlement. D&T paid the settlement after filing a motion to voluntarily intervene in a stock option
backdating case for the limited purpose of objecting to the proposed settlement and thus listed above because of D&T’s connection
to the matter as an intervenor, not as a defendant.
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14
Stock Option Backdating Cases
Law Firms that Represented Defendant Audit Firms
# Cases Filed: 181
# Auditors Named: 4 (13 cases)
Defendant Law Firm
Cases
Bingham McCutchen LLP
3
Davis Polk & Wardwell
3
Latham & Watkins LLP
3
Gibson Dunn & Crutcher LLP
Howrey LLP
Morrison & Foerster LLP
2
2
2
Sidley Austin LLP
2
Alschuler Grossman Stein & Kahan LLP
1
Butz Dunn Desantis & Bingham
1
Foley Hoag LLP
1
Heller Ehrman LLP
1
Hill Ward & Henderson PA
1
Powell Goldstein LLP
1
SEC Law Firm
1
Stradling Yocca Carlson & Rauth PC
1
Note: In some cases, auditors were represented by more than one law firm. Although listed above, Howery LLP dissolved effective
March 15, 2011.
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15
The Total Foreign Indefinitely Reinvested Earnings (IRE) Balances Held by the Russell 3000
Increased by 70.3% Over the 5 Years from 2008 to 2012.
Growth in Foreign Indefinitely Reinvested Earnings (IRE) Balances
Year
# of Firms
with an
Accumulated
IRE Balance
Total Foreign
Indefinitely
Reinvested
Earnings
(Billions)
Total Assets
For Firms
with an IRE
Balance
(Billions)
Total IRE
As a % of
Total
Assets
2012
1056
$1,943
$23,791
8.17%
2011
1051
$1,684
$22,137
7.61%
2010
972
$1,410
$21,052
6.70%
2009
930
$1,473
$19,211
7.67%
2008
948
$1,141
$19,390
5.88%
Source: Foreign Indefinitely Reinvested Earnings: Balances Held by the Russell 3000: A 5-Year Snapshot, published May 2013 by Audit
Analytics.
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16
Top 20 Companies with Foreign Indefinitely Reinvested Earnings (IRE)
General Electric Co.
GE
Period
Ended
Date
12/31/2012
Pfizer Inc.
PFE
12/31/2012
21.00%
Microsoft Corp.
MSFT
6/30/2012
Merck & Co. Inc.
MRK
Johnson & Johnson
Foreign
IRE
(Millions)
$108,000
10-K
Total
Assets
(Millions)
$685,328
$73,000
10-K
$185,798
24.00%
$60,800
10-K
$121,271
12/31/2012
28.00%
$53,400
10-K
$106,132
JNJ
12/30/2012
24.00%
$49,000
10-K
$121,347
International Business Machines Corp.
IBM
12/31/2012
24.00%
$44,400
10-K
$119,213
Exxon Mobil Corp.
XOM
12/31/2012
44.00%
$43,000
10-K
$333,795
C
12/31/2012
0.00%
$42,600
10-K
$1,864,660
Cisco Systems, Inc.
CSCO
7/28/2012
21.00%
$41,300
10-K
$91,759
Apple Inc.
AAPL
9/29/2012
25.00%
$40,400
10-K
$176,064
Abbott Laboratories
ABT
12/31/2012
5.00%
$40,000
10-K
$67,235
Procter & Gamble Co.
PG
6/30/2012
27.00%
$39,000
10-K
$132,244
HPQ
10/31/2012
6.00%
$33,400
10-K
$108,768
Google Inc.
GOOG
12/31/2012
19.00%
$33,300
10-K
$93,798
PepsiCo Inc.
PEP
12/29/2012
25.00%
$32,200
10-K
$74,638
Coca-Cola Co.
KO
12/31/2012
23.00%
$26,900
10-K
$86,174
Chevron Corp.
CVX
12/31/2012
43.00%
$26,527
10-K
$232,982
JPMorgan Chase & Co.
JPM
12/31/2012
26.00%
$25,100
10-K
$2,359,141
AMGN
12/31/2012
13.00%
$22,200
10-K
$54,298
UTX
12/31/2012
25.00%
$22,000
10-K
$89,409
Company
Citigroup Inc.
Hewlett Packard Co.
Amgen Inc.
United Technologies Corp.
Ticker
Effective
Income
Tax Rate
14.00%
Form
Type
Source: Foreign Indefinitely Reinvested Earnings: Balances Held by the Russell 3000: A 5-Year Snapshot, published May 2013 by Audit
Analytics.
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17
Quality of Financial Reporting – During the Last Four Years, the Quantity of
Total Restatements Appears to have Leveled Off.
Total Restatements by Year
2012 Restatements
Unique filers
• 713 Unique Filers
Restatements
1771
1539
• 768 Restatements
1550
1389
1213
1091
931
794
584 620
2001
692
922
852
827
737
668
641
2002
2003
2004
2005
2006
2007
2008
715
2009
765
820
803
742
2010
2011
713
768
2012
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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18
The Quantity of Restatements from U.S. Accelerated Filers has Increased for
the Third Straight Year.
Restating Registrant by Accelerated Filer Status
Restatement Count
From 2009 to 2012
•
U.S Accelerated Filers Increased
from 153 to 245
•
U.S Non-Accelerated Filers
Decreased from 397 to 386
US Accelerated filers
US Non-accelerated filers
865
692
622
510
465
434
468
453
459
397
304
245
219
202
153
2004
386
283
209
2003
396
2005
2006
2007
2008
2009
158
2010
2011
2012
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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19
Although the Number of Restatement Disclosures Slightly Decreased, the Number
Disclosed by Companies Traded on the NASDAQ Notably Increased.
Restatement Breakdown by Market
(Unique Registrants Restating)
Disclosure
Year
Amex
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
9
7
10
25
35
42
28
30
24
22
33
23
NASDAQ
61
67
80
115
194
224
145
138
113
112
125
153
NYSE
32
59
82
104
176
155
116
70
62
90
111
138
OTC
11
9
13
21
24
49
40
41
54
71
85
74
471
499
552
587
960
1080
762
548
415
470
388
325
584
641
737
852
1389
1550
1091
827
668
765
742
713
Not listed
Total
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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20
Restatement Analysis Largest Negative Restatement by Year
Largest Negative Restatements
(U.S. $ in Millions)
Largest Negative Restatements
$7,000
$6,335
$6,000
$5,000
$5,193
$4,513
$4,000
$3,465
$3,000
$2,377
$2,000
$1,557
$717
$671
$1,000
$357
$459
$341
$0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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21
The Highest Negative Restatement for 2012 Represents the Third
Lowest Negative Restatement During the Last Eleven Years.
Largest Negative Restatements by Year
Disclosure
Year
Company
Market
Impact on Net Income
(U.S. Dollars)
2002
Tyco International Ltd.
NYSE
-4,512,700,000
2003
Healthsouth Corp.
NYSE
-3,465,294,000
2004
Federal National Mortgage Association
(Fannie Mae)
NYSE
-6,335,000,000
2005
American International Group Inc.
NYSE
-5,193,000,000
2006
Navistar International Corp.
NYSE
-2,377,000,000
2007
General Electric Co.
NYSE
-341,000,000
2008
TMST, Inc.
NYSE
-670,730,000
2009
UBS AG
NYSE
-357,210,000
2010
Telecom Italia S.p.A
NYSE
-716,971,200
2011
China Unicom (Hong Kong) Ltd.
NYSE
-1,556,743,500
2012
JPMorgan Chase
NYSE
-459,000,000
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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22
Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally
Low in Severity.
1. Average Cumulative Impact on Net Income per Restatement (companies on Amex,
NASDAQ & NYSE)
•
Calendar Year 2012 Experienced an Average Negative Impact of $5.8 Million, Substantially Lower than
2006 and Years Before.
Average Income Adjustment Per Restatement
$0
($3,640,142)
($5,000,000)
($4,624,605)
($6,125,967)
($5,934,222)
($5,831,183)
($10,000,000)
($12,941,142)
($15,000,000)
($17,807,709)
($20,000,000)
($21,331,433)
($25,000,000)
2005
2006
2007
2008
2009
2010
2011
2012
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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23
Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally
Low in Severity (continued).
2. No Impact on Income (Companies Presently on Amex, NASDAQ & NYSE)
•
In 2012, a Total of 157
out of 335 Restatements
(46.87%) had No Impact
on the Income Statement.
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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24
Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally
Low in Severity (continued).
3.
•
Average Number
of Days Restated
Average Restatement Period per Year
The Average
Restatement Period
Peaked in 2005.
Average Number of Days Restated
749
•
Year 2012 Experienced
a Slight Uptick, but the
Time Period is
nevertheless Short
Compare to the Years
from 2003 to 2007,
Inclusive.
597
725
644
633
551
462
2001
2002
2003
2004
2005
2006
2007
511
503
519
508
534
2008
2009
2010
2011
2012
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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25
Indicators of Severity Show that the Restatements Disclosed in 2012 were Generally
Low in Severity (continued).
4. Average Number of Issues per Restatement
•
•
Average Issues per Restatement
A Taxonomy of Over
50 Issues Monitored
and Graded
In 2012, the Average
Number of Issues
Implicated in a Restatement
was only 1.38 Financial
Accounting Issues, the
lowest during the 12 years
under review.
Average Number of Issues per Restatement
2.44
2.00
2.12
2.18
2.20
2.01
1.89
1.66
2001
2002
2003
2004
2005
2006
2007
2008
1.54
2009
1.52
2010
1.48
2011
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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26
1.38
2012
In 2012, the Debt, Quasi-Debt, Warrants & Equity (BCF) Security Issues Declined to Converge with
the Other Top Issues to within a Percentage Window between 8% and 15%.
Top Restatement Issues between 2001 and 2012
Note: One reason for the increase in debt related restatements in 2010 and 2011 was the publication of new guidance by the
Emerging Issues Task Force (“EITF”). EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock,” became effective on January 1, 2009. Before EITF 07-05, companies treated warrants (stock) as equity, but after
EITF 07-95 they were to be treated as a liability. Since the EITF took effect on January 1, 2009, many companies that did not adhere
to the guidance in 2009 found themselves restating their financial statement in 2010 in order to reclassify warrants as a liability.
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27
Revision Restatements
The percentage of restatements that were Revision Restatements, restatements revealed in a
periodic report without a prior disclosure in Item 4.02 of an 8-K, has trended higher since the
disclosure requirement first came into effect in August of 2004 and reached the value of
64.69% in 2012.
Revision Restatements
Percentage Revision
64.69%
50.18%
42.15%
53.65%
57.30%
48.10%
41.52%
32.80%
2005
2006
2007
2008
2009
2010
2011
2012
Note: A registrant is required, within four business days, to disclose in an 8-K, Item 4.02 when it is determined that a past financial
statement should no longer be relied upon.
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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28
Reissuance Restatements
Although the number of restatements disclosed by U.S. Accelerated Filers increased for the
third straight year (see Slide 19), a focus on Reissuance Restatements shows that the number
of Reissuance Restatements did not experience the same increase.
Reissuance Restatements
Disclosed by U.S. Accelerated Filers
Restatements with a Form 8-K, Item 4.02
433
371
217
138
84
2005
2006
2007
2008
2009
62
2010
79
2011
65
2012
Note: A registrant is required, within four business days, to disclose in an 8-K, Item 4.02 when it is determined that a past
financial statement should no longer be relied upon.
Source: 2012 Financial Restatements; A Twelve Year Comparison published March 2013 by Audit Analytics.
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29
Going Concerns
(Percentage of Auditor Opinions Qualified with a Going Concern Assumption)
Going Concerns Per Year
Percentage of Going Concerns (Year 2012 Estimated)
% of Auditor Opinions with Going Concern Uncertainty
25.0%
19.9%
20.0%
15.9%
15.0%
16.4%
14.4%
14.1%
15.2%
16.2%
21.1%
19.9%
19.0%
17.4%
17.7%
17.5%
2011
2012*
10.0%
5.0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Going Concern Review published September 2013 by Audit Analytics.
Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the
opinions expected and 93.2% of the GCs expected).
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Going Concerns
(Number of Auditor Opinions Uncertain of its Going Concern Assumption)
Going Concerns Per Year
Number of Going Concerns (Year 2012 Estimated)
Number of Going Concern Uncertainty Auditor Opinions
3309
2827
2998
2817
2552
2000
2001
2002
2003
2554
2004
2712
2005
3352
3103
2878
2978
2644
2006
2007
2008
2009
2010
2011
2517
2012*
Source: Going Concern Review published September 2013 by Audit Analytics.
Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the
opinions expected and 93.2% of the GCs expected).
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Going Concerns Twelve Year Review
Going Concern Twelve Year Review (Fiscal Year 2012 Estimated)
Fiscal Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Going Concerns
2827
2998
2817
2552
2554
2712
2878
3309
3352
3103
2978
2644
2517
Total Auditor Opinions 20009
18907
17194
17765
16795
16788
16548
16631
15885
15592
15668
14958
14404
% of All Opinions
14.13% 15.86% 16.38% 14.37% 15.21% 16.15% 17.39% 19.90% 21.10% 19.90% 19.01% 17.68% 17.47%
Source: Going Concern Review published September 2013 by Audit Analytics.
Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2012 (about 98.5% of the
opinions expected and 93.2% of the GCs expected).
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32
Going Concern Percentages
(Breakdown by Market Status)
Fiscal
Year
NYSE
Total
Going
Going
%
Concerns Concerns
NASDAQ
AMEX
OTCBB
Non-Tickered
Going
Concerns
%
Going
Concerns
%
Going
Concerns
%
Going
Concerns
%
12 (Partial)
2345
11
0.47%
99
4.22%
24
1.02%
620
26.44%
1591
67.85%
2011
2644
8
0.30%
78
2.95%
21
0.79%
595
22.50%
1942
73.45%
2010
2978
12
0.40%
78
2.62%
28
0.94%
510
17.13%
2350
78.91%
2009
3103
21
0.68%
108
3.48%
31
1.00%
390
12.57%
2553
82.28%
2008
3352
27
0.81%
101
3.01%
41
1.22%
330
9.84%
2853
85.11%
2007
3309
9
0.27%
60
1.81%
29
0.88%
271
8.19%
2940
88.85%
Note: The market designation is based on the company’s status as of 7/8/13. As compared to last year's slide, a number of
going concerns shifted from OTCBB to Non-Tickered. This shift, in part, was due to the efforts of the SEC's Microcap Fraud
Working Group to suspend the trading of registered shell companies. For example, this working group suspended 379 shells in
May 2012 and an additional 61 in June 2013. Not all suspended shells filed a going concern, but this effort would also
discourage the creation of new shells.
Source: Going Concern Review published September 2013 by Audit Analytics.
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33
New Going Concerns by Year
Number of Going Concerns (Year 2012 Estimated)
1400
1200
1182
1169
1040
1000
938
902
824
800
726
711
663
705
600
518
543
2011
2012*
400
200
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Number of New Going Concern Auditor Opinions
Source: Going Concern Review published September 2013 by Audit Analytics.
Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the
opinions expected and 93.2% of the GCs expected).
IVES Group Inc. phone: (508) 476-7007
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34
Going Concern History Status Breakdown
New GCs and Repeated GCs (Year 2012 Estimated)
4000
3500
3000
1169
2500
1182
938
663
726
824
1040
711
705
902
518
543
2000
1500
1000
1976
2140
1816
1879
1889
1828
2001
2002
2003
2004
2005
2006
2007
Repeated GC from Year Prior
1888
2312
2392
2273
2126
1974
2011
2012*
500
0
2008
2009
New GC
2010
Source: Going Concern Review published September 2013 by Audit Analytics.
Note: The value for 2012 is estimated, based on audit opinions filed with the SEC on or before July 8, 2013 (about 98.5% of the
opinions expected and 93.2% of the GCs expected).
IVES Group Inc. phone: (508) 476-7007
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Companies that Filed a GC for the Year then No GC the Year After
(Classified by Outcome: Subsequent Improvement or Disappearance)
1200
1000
265
200
251
266
800
374
600
400
277
346
760
288
331
797
200
378
378
405
2003
2004
2005
140
253
854
554
207
694
553
485
645
624
2010
2011*
0
2000
2001
2002
Those that Disappeared
2006
2007
2008
2009
Those that Improved
This graph shows, for each fiscal year, the number of companies that filed a Going Concern (“GC”) for that particular year, but not the
year after. A company can stop filing a GC for two reasons: (1) it files a clean audit opinion the next year or (2) it files no audit opinion
the next year. The top number in the data above indicates the quantity of companies that improved their condition (filied a clean audit
opinion the next year) while the bottom number shows the quantity that failed to file an opinion. For example, fiscal year 2007 received
997 GCs from companies that did not file a GC in 2008. The graph indicates that 200 companies filed a GC in 2007 and then filed a
clean audit opinion in 2008. It also shows that 797 companies filed a GC in 2007 and then filed no audit opinion in 2008.
Source: Going Concern Review published September 2013 by Audit Analytics.
Note: The values for 2011 (GCs in 2011 that were not repeated in 2012) is based on audit opinions filed with the SEC on or before
July 8, 2013 (about 98.5% of the opinions expected and 93.2 of the GCs expected). Therefore, the 729 figure is inflated slightly
because other opinions will come in for 2012.
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36
Audit and Non-Audit Fees
(2,408 Accelerated Filers)
After Three Years of Steady Decline, Non-Audit Fess Appear to have Leveled Off at about 21% of
Total Fees.
Audit Fees & Non-Audit Fees
as a Percentage of Total Fees
90.00%
72.77%
80.00%
79.88%
78.51%
21.45%
20.12%
21.49%
2005
2006
2007
79.32%
79.78%
79.33%
78.22%
77.88%
58.55%
70.00%
60.00%
78.55%
49.13%
50.00%
40.00%
50.87%
30.00%
41.45%
27.23%
20.00%
20.68%
20.22%
21.78%
20.67%
2009
2010
2011
22.12%
10.00%
0.00%
2002
2003
2004
Audit Fees
2008
2012
Non-Audit Fees
Notes:
1)The research above is based on fees disclosed in SEC filings as of June 18, 2013.
2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17,
2013 that disclosed audit fees for each and every year displayed.
3) The total non-audit fees represent the aggregate of all other disclosed fees that are not audit fees: audit related fees, benefit plan,
related fees, FISDI fees, tax related fees, other/miscellaneous fees.
Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.
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37
Non-Audit Fees
(2,408 Accelerated Filers)
During the Eleven Years Under Review, Accelerated Filers Paid the Second Lowest Amount of NonAudit Fees as a Percentage of Revenue During 2012.
Non-Audit Fees (US $)
Per Million Dollars in Revenue
450
400
387
350
287
300
250
222
200
150
162
146
146
138
145
142
132
134
2005
2006
2007
2008
2009
2010
2011
2012
100
50
0
2002
2003
2004
Notes:
1)The research above is based on fees disclosed in SEC filings as of June 18, 2013.
2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17,
2013 that disclosed audit fees for each and every year displayed.
3) The total non-audit fees represent the aggregate of all other disclosed fees that are not audit fees: audit related fees, benefit plan,
related fees, FISDI fees, tax related fees, other/miscellaneous fees.
Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.
IVES Group Inc. phone: (508) 476-7007
e-mail: info@auditanalytics.com
38
Audit Fees
(2,408 Accelerated Filers)
The Cost of Audit Fees as a Percentage of Revenue Experienced a Slight Uptick in 2009 (an Uptick
Due to a Decrease in Revenue Rather than an Increase in Fees) Followed by Three Years of Decline.
Audit Fees (US $)
Per Million Dollars in Revenue
700
592
600
592
579
572
533
531
511
500
400
374
476
472
2011
2012
406
300
200
100
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
Notes:
1)The research above is based on fees disclosed in SEC filings as of June 18, 2013.
2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17,
2013 that disclosed audit fees for each and every year displayed.
3) The total non-audit fees represent the aggregate of all other disclosed fees that are not audit fees: audit related fees, benefit
plan, related fees, FISDI fees, tax related fees, other/miscellaneous fees.
Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.
IVES Group Inc. phone: (508) 476-7007
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39
Number of Auditor Attestation Filers
(in Audit Fee Population of 2,408)
Accelerated Filers Experienced a downward Trend in Audit Fees despite an Increase in the Number
of Companies Required to Adhere to SOX 404(b).
Number of Auditor Attestation Filers
(in Research Population)
2800
2600
2311
2400
2311
2292
2317
2369
2403
2209
2200
2030
2000
1800
1600
1476
1400
2004
2005
2006
2007
2008
2009
2010
2011
2012
Number of Auditor Attestation Filers
Notes:
1)The research above is based on fees disclosed in SEC filings as of June 18, 2013.
2) The fees above are based on fees paid by a population of 2,408 accelerated filers, all accelerated filers as identified on June 17,
2013 that disclosed audit fees for each and every year displayed.
Source: Audit Fees and Non-Audit Fees, A Eleven Year Trend published June 2013 by Audit Analytics.
IVES Group Inc. phone: (508) 476-7007
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40
The Total Number of SOX 404 Adverse Auditor Attestations and the Number of Material
Weaknesses Noted therein have Consistently Declined Since Year 1.
Number of Adverse Disclosures and Materials Weaknesses
in Auditor Attestations
Total # of Adverse Disclosures
Total # of MWs
1607
1030
954
700
629
431
387
465
355
332
218
153
286
141
Yr. 1
Yr. 2
Yr. 3
Yr. 4
Yr. 5
Yr. 6
Yr. 7
Notes:
1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with the
SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov. 15,
2004.
Source: Audit Opinions of Financial Controls: Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review,
published June 2013 by Mark Cheffers..
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The Total Number of SOX 404 Adverse Auditor Attestations and the Number of Material
Weaknesses Noted therein have Consistently Decline Since Year 1.
SOX 404 Auditor Attestations
SOX
404
Year
Total
Auditor
Attestations
Material Weaknesses (MWs)
Noted in Adverse Disclosures
Total # of
Adverse
Disclosures
Total #
of MWs
Yr. 1
3789
629
1607
Yr. 2
3916
431
1030
Yr. 3
4316
387
954
Yr. 4
4576
355
700
Yr. 5
4430
218
465
Yr. 6
4275
153
332
Yr. 7
4019
141
286
Notes:
1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with
the SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov.
15, 2004.
Source: Audit Opinions of Financial Controls: Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review,
published June 2013 by Mark Cheffers..
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42
The Total Number of SOX 404 Adverse Management-Only Assessments and the Number
of Material Weaknesses Noted therein have Not Displayed Any Significant Improvement
Since Year 4.
Number of Adverse Disclosures and Materials Weaknesses
in Management-Only Assessments
Total # of Adverse Assessments
Total # of MWs
3549
3536
3361
2999
1521
1474
1402
Yr. 4
Yr. 5
1519
Yr. 6
Yr. 7
Notes:
1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with
the SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov. 15,
2004.
2) Non-accelerated filers were required to provide a management assessment (but not an auditor attestation) in their annual
reports for the fiscal years ending on or after December 15, 2007. Year 4 is from Nov. 15, 2007 to Nov. 14, 2008, so Year 4
above is shortened by one month.
Source: Audit Opinions of Financial Controls: Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review,
published June 2013 by Mark Cheffers.
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43
The Total Number of SOX 404 Adverse Management-Only Assessments and the Number of
Material Weaknesses Noted therein have Not Displayed Any Significant Improvement Since
Year 4.
Notes:
1) Year 7 is defined as annual reports for fiscal years ending Nov. 15, 2010 to Nov. 14, 2011, inclusive, to be consistent with
the SEC requirement that accelerated filers comply with Section 404 annual reports for fiscal years ending on or after Nov. 15,
2004.
2) Non-accelerated filers were required to provide a management assessment (but not an auditor attestation) in their annual
reports for the fiscal years ending on or after December 15, 2007. Year 4 is from Nov. 15, 2007 to Nov. 14, 2008, so Year 4
above is shortened by one month.
Source: Audit Opinions of Financial Controls: Ten Years after Sarbanes-Oxley Act of 2002, A Section 404(b) Review, published
June 2013 by Mark Cheffers..
IVES Group Inc. phone: (508) 476-7007
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44
Of the 53 Restatements Disclosed by Russell 1000 Companies that also Had an Auditor Change,
5.7% (a Total of 3) were Detected, in Part, by the “Fresh Eyes” of the Newly Engaged Auditor.
Note: The pie chart above is based on October 2011 research of all restatements disclosed since January 1, 2006 by a Russell
1000 companies (a 6-year aggregate population of 1,355 companies) that also experienced an auditor change since Jan. 1, 2005.
Source: A Restatement Analysis of The Russell 1000 Companies: The Extent to which the “Fresh Eyes” of a Newly Engaged
Auditor Provided Assistance in the Discovery of the Misstatement published February 2012 by Audit Analytics.
IVES Group Inc. phone: (508) 476-7007
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45
Audit Accounting
System
Rules
Ethics
Principles
Pakaluk, Michael and Mark Cheffers, Accounting Ethics … and the Near Collapse of the World’s Financial System. (Sutton: Allen
David Press, 2011)
Image of three legged stool from the following website: www.clker.com/clipart-three-legged-stool-outline.html
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46
Audit Analytics provides detailed intelligence research on all public companies and 1,500 accounting firms. Our data includes detailed
categorizations of issues and is considered by many professionals to be the best primary data source for tracking and analysis of the
following public company disclosures:
Sarbanes-Oxley Disclosures
-Track Section 404 internal control disclosures and Section 302 disclosure controls.
Auditor Information
-Know who is auditing whom, their fees, auditor changes, auditor opinions and more.
Restatements
-Identify company restatements by type, auditor and peer group. Analyze by date, period and specific issue.
Legal Disclosures
-Search all federal litigation by auditor, company and litigation type. Know who is representing whom.
Corporate Governance
-Track director & officer changes, audit committee members, C-level executives and their biographies.
SEC Comment Letters
-An extensive collection of more than 125,000 fully analyzed SEC Comment Letters indexed according to a taxonomy of 2,800 issues
and rules.
Examples of Recent Assignments from Law Firm Clients
• Identify all SOX 404 filings where the management assessment disagrees with the auditor attestation.
• Discover examples of SOX 302 disclosures that identified and remediated the control weakness in the same reporting period.
• List of all Revision Restatements (restatements filed without a prior 8-K, Item 4.02 disclosure) during or after 2007 and identify which
of those restatements were disclosed by a company with an IPO during or after 2007.
• Provide the SOX 302 and SOX 404 disclosure text from companies with an IPO during or after 2007 that subsequently filed a Revision
Restatement.
• Supply excerpts of SEC Comment Letters that discussed a Fin 48 with the phrase “change in estimate” or “correction of an error.”
• Provide SOX 302 disclosure text from companies that engaged a Big4 auditor and filed a SAB 108 that noted a “change in estimate.”
• Identify financial restatements that made adjustments in goodwill that also addressed issues regarding company acquisitions and
accounts payable. Provide stock price history of companies that filed such restatements.
IVES Group Inc. phone: (508) 476-7007
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47