Auditing Update
By NYSSCPA.org E-zine Staff
Posted on 3/20/08

NEW YORK -- This week in auditing news: New charges in the KPMG case; BDO Seidman may owe millions more; and auditing watchdogs grade Sarbanes-Oxley high.

New Charges Brought Up Against Ex-KPMG Partner Pfaff

Former KPMG tax partner Robert Pfaff has been charged in a new two-count criminal indictment over alleged fraudulent tax-shelter transactions in the U.S. and the Northern Mariana Islands, The Associated Press reported Wednesday citing court papers made public.

Pfaff, who was at KPMG from 1993 to August 1997, was charged with conspiracy and obstructing or impeding the due administration of the Internal Revenue laws, according to the new indictment made public Tuesday, according to the AP.

The government also separately filed a civil forfeiture action against Pfaff, seeking nearly $1.84 million related to fee income he allegedly received as a result of the implementation of the tax shelters, the AP reported.

Pfaff, 57, of Englewood, Colo., already faces a trial on unrelated charges stemming from other tax shelters, Reuters reported.

No date was set for Pfaff's arraignment on the new charges, Reuters reported

U.S. Attorney Michael Garcia said that if convicted, Pfaff faces a maximum sentence of five years in prison on the conspiracy count and three years in prison on the IRS obstruction count. He also could be fined up to $250,000 or twice the gross gain or loss from the offenses, Garcia said, according to Reuters

The new charge contends that Pfaff, who used his tax shelter fees for personal expenses like a Steinway piano and a Mercedes-Benz for his sister, The New York Times.

A lawyer for Pfaff did not return calls for comment from The Times.

Prosecutors contend that Pfaff used elaborate front companies in the Northern Mariana Islands, a United States commonwealth, to conceal his tax shelter work for wealthy individuals, whom the charge does not identify, The Times reported.

One transaction supposedly involved the sale to Continental Airlines of landing rights in Saipan, the capital of the Northern Mariana Islands, The Times reported.

Prosecutors say that Continental Airlines did nothing wrong in the transaction, but that a Saipan-based company that had acquired the rights and then sold them back to the airline used a fraudulent tax shelter to avoid paying taxes on the deal, The Times reported.

The new indictment names California businessman Chandler S. Moisen and Domenick DeGiorgio, a former executive at German bank Bayerische Hypo & Vereinsbank AG, as co-conspirators. Moisen and DeGiorgio have separately pleaded guilty to criminal charges, The Wall Street Journal reported.

The indictment appears to be an attempt by the U.S. attorney's office in Manhattan to bring Pfaff to trial before three other defendants in a separate, closely watched tax-shelter fraud case, The Journal reported.

In the earlier separate case, Pfaff, former KPMG tax partner David Greenberg, former KPMG senior tax manager John Larson and former Sidley Austin LLP lawyer Raymond J. Ruble have been expected to go to trial in September on charges of conspiracy and tax evasion, The Journal reported. The men have denied wrongdoing.

BDO May Owe for Failing to Reveal Fraud

BDO Seidman's international parent company may have to pay part of $521 million in damages that an allied U.S. firm owes Banco Espirito Santo, an appeals court ruled last week, according to The Miami Herald.

Judge Vance Salter concluded Miami-Dade Circuit Judge Jose M. Rodriguez erred in dropping BDO International as a defendant, but the attorneys in the landmark case brought by Banco Espirito Santo had starkly different views of what comes next, according to the Daily Business Review.

The bank's lawyer said the ruling means BDO International and other BDO firms are jointly liable for the judgment. But a BDO International attorney said the entire case would now have to be tried again so that BDO International could contest the evidence, The Herald reported.

CAQ: Post-SOX Audit Quality Has Improved

More than three-quarters of audit committee members who took part in a recent survey commissioned by the Center for Audit Quality (CAQ) rate overall audit quality "very good" or "excellent," and 82 percent say it has improved in recent years, according to a press release from CAQ.

According to CAQ’s survey, about 53 percent of the audit committee members agreed that overall audit quality is "very good," while 25 percent described it as "excellent." About 87 percent said the risk of inaccuracies in financial statements due to fraud is "not very high," and 60 percent agreed that the risk declined after the passage of SOX. Audit committee members indicate they believe the risk of fraud and materially inaccurate statements is low due to tightened internal controls and increased external auditor scrutiny.

Nearly two-thirds (65 percent) agreed that investors should have more confidence in the markets as a result of the 2002 law.

Participants in the audit committee survey represented a broad range of publicly traded companies. All served on at least one audit committee in 2007. Six in 10 served on two or more audit committees, and half were committee chairs. About 56 percent began their service as audit committee members prior to enactment of SOX, according to CAQ.

Overall, 58 percent of the audit committee members said changes resulting from SOX had a positive impact. They offered several reasons for the improvement, among them:

Nearly all of the audit committee members (99 percent) said they devote more time to their committee work as a result of SOX. About 90 percent said they work more closely with external auditors, according to CAQ.

The audit committee members expressed mixed views on the efficacy of audited financial statements filed with the Securities and Exchange Commission. Although most described financial statements as "easily accessible" (81 percent) and "relevant to investors" (87 percent), 78 percent said they are too complicated.

The Internet survey of 253 audit committee members was conducted between Jan. 7 and Feb. 20, 2008, by The Glover Park Group.

The survey questions and complete results are posted on the CAQ's Web site at http://www.thecaq.org/newsroom/pdfs/auditsurvey.pdf .

FASB Issues Statement No. 161

The Financial Accounting Standards Board (FASB) Wednesday issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, according to a press release.

The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows, according to FASB.

It is effective for financial statements issued for fiscal years and interim periods beginning after Nov. 15, 2008, with early application encouraged, according to FASB.

The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows, according to FASB.

According to FASB, Statement No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk–related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments.

FASB Statement No. 161 is available at http://www.fasb.org.

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