In a Real Sense
Boards of Accountancy Are More Important than Medical Boards.  Doctors Can Injure Patients Only One at a Time.  CPA Auditors Can Wipe Out Thousands with the Stroke of a Pen with Faulty Audit Opinions.


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In The News




JANUARY 20, 2010


             1.    Keep Shrinking Enforcement Against Offending CPAs and Others

             The Board is down to 3 Investigatory CPAs for 80,000 licensees.  The Board was presented with the fact that the health care boards just received 107 investigators in Governor Schwarzenegger’s budget update costing only $12.8 million.  The Board was satisfied at the current low level of enforcement personnel.  No initiative to increase enforcement was proposed.

               2.    Failure to Retrieve $20 Million from General Fund

             With its shrinking enforcement effort, there was discussion about reducing the license fees which fund the Board.  The Board had previously suffered “borrowings” of $20.3 million from its license fees into the General Fund in 2002, 2003, and 2008.  No effort is being made to retrieve these funds for the Board to pursue its mission of consumer protection.

              3.    Refusal to Post the 2224+ Restatements on Board Website

             Generally-Accepted Accounting Principles (GAAP) value the importance of restatements of CPA audited financial statements.  Restatements reflect the fact that the original CPA audited financial statement was false and/or misleading in some material way, and needs to be corrected and re-released.   Restatements by government agencies, nonprofit organizations, and some publicly-traded companies are reportable events which CPA licensees are required to submit to the Board.   A chart of restatements is kept by the Board as a public record, as are the restatements themselves.  Restatements could easily be used as a basis for investigating CPA auditor performance.

             Several board members argued that restatements are not really very important to the public, investors, clients, or anybody else.  There was wide sentiment to abolish the requirement for CPA licensees to report on restatements.

             Out of 2224 restatements from 2003 to September 2009, the top 10 CPA firms have:

 501 Deloitte & Touche (23% of 2224), 352 PricewaterhouseCoopers, 205 KPMG,

96 Vivranek Trine & Day, 89 Bartig Brasler & Ray, 72 Matson & Isom, 71 Diehl Evans,

69 Caporicci & Larson, 60 Ernst & Young, 57 Macias Gini, and 57 Vicenti Lloyd & Stutzman.

             A regulation was proposed to post the chart of  restatements on the Board’s website.   It was dated December 4, 2009.  The law requires are reply within 30 days.  The Board deferred any action on it.  Most discussion opposed posting the chart.   The chart is posted here.




      All restatements of financial statements are significant.  Every one involves material mis-statements that need to be corrected.  They also indicate questionable CPA auditor quality, inasmuch as the auditor did not catch the material mis-statement the first time.

      For publicly-traded companies in 2005 there were 1599 restatements and in 2006 there were 1876.  With about 12,000 publicly-traded companies, this is a failure rate in excess of 10%.  Restatements are also issued for governmental agencies and nonprofit agencies.

      California's Board of Accountancy requires licensees to report on restatements for California publicly-traded, government, and nonprofit entities.  The definition of California publicly-traded companies is somewhat narrow, such that only about 200 restatements are reported annually.

      Restatements are public records in California.  A copy can be obtained by writing to President, California Board of Accountancy, 2000 Evergreen Street #250, Sacramento, California 95815.  916-263-3680.  One need only pay for the cost of copying.  One needs to act quickly because the Board has a policy to discard restatements after only six months for publicly-traded companies, and only one year for government entities and nonprofits -- rather than keeping them as a public depository.

     A list of restatements received is also a public record.  Click here for the California listing from 2003 to Sep. 9, 2009.  Total of 2224 restatements.  Of the 2224 restatements, the top 10 CPA audit firms are

            501 Deloitte & Touche (23% of 2224)

            352 PricewaterhouseCoopers

            205 KPMG

              96 Vivranek Trine & Day

             89 Bartig Brasler & Ray

             72 Matson & Isom

             71 Diehl Evans

             69 Caporicci & Larson

             60 Ernst & Young

             57 Macias Gini

             57 Vicenti Lloyd & Stutzman

           Click here for a list by CPA auditor company and its restatements by publicly-traded, governmental entity, and nonprofit category.





     Many victims of the Madoff $65 billion Ponzi scheme may get help from the California Board of Accountancy if it adopts a proposed rule that is before it for action.  The rule would direct the investigation staff to seek out victim groups whose financial statements were audited by CPA auditors.  These CPA auditors would be investigated for their apparent negligence for failing to confirm the validity of the investments in Madoff's investment scheme.  Anyone wanting to support the proposed rule can write to Mr. Robert Petersen at the California Board of Accountancy at the address below.  Persons in other states should propose the same rule for their boards of accountancy.

     UPDATE:  Board turns down regulation, won't help Madoff victims or general public.  Vote unanimous at Board's meeting July 24 meeting.


The Petition Letter:

                                  April 5, 2009

Mr. Robert Petersen
California Board of Accountancy
2000 Evergreen Street #250
, California 95815

 Re:  Petition for Regulation Making
      on Investigating CPA Auditor Involvement
      in Madoff-type Schemes

 Dear President Petersen:

      This is a petition for regulation making by the California Board of Accountancy.  The Board has the power to adopt regulations, per Business & Professions Code section 5018.

     Section 5103(a) provides, “Notwithstanding any other provision of law, the board may inquire into any alleged violation of this chapter or any other state or federal law, regulation, or rule relevant to the practice of accountancy.”

     Section 5000.1 provides, “Protection of the public shall be the highest priority for the Board of Accountancy in exercising its licensing, regulatory, and disciplinary functions.  Whenever the protection of the public is inconsistent with any other interest sought to be promoted, the protection of the public shall be paramount.”

     I am interested in the proposed regulation as an individual California resident, as a college accounting teacher, as a donor to charitable and other organizations, and as a potential beneficiary of services from a charitable or other organization.

     The proposed regulation would require the following:

     The board shall investigate CPA auditor involvement in Madoff-type schemes either upon its own initiative or upon complaint from any person.  A “Madoff-type scheme” shall mean any fraudulent investment scheme whose alleged victims include charitable groups and other entities whose financial statements are audited.  The investigation shall focus on the adequacy of the audits with regard to the verification of assets invested in the Madoff-type scheme.

     The need for the regulation is as follows:

     The Madoff investment Ponzi scheme of about $65 billion worldwide has apparently defrauded over 13,000 “customers” worldwide.  These include numerous charitable groups and other entities.  Many are either California-based or are national in scope with significant California involvement.  For instance, the Jewish Community Foundation of Los Angeles has reported losses of $18 million.  The national Hadassah organization, with headquarters in New York, has numerous programs and donors in California.  Steven Spielberg’s Wunderkinder Foundation is headquartered in Los Angeles.  Many of these groups have audited financial statements.

     No CPA auditor for any of these Madoff customer victims has been reported publicly as alerting any client as to the questionable investment asset validity.  An inquiry/confirmation of the investment in the Madoff scheme would have raised some obvious “red flags”.  If an auditor had obtained Madoff’s audited financial statements, the auditor would have found that Madoff’s auditor was a small one-CPA firm which (a) could not adequately audit Madoff’s firm, and (2) apparently had Madoff as its overwhelmingly dominant client with a vast majority of fee income.  If an auditor had inquired about the performance of the Madoff scheme, the auditor would have found the incredible performance record of very steady returns in both up and down markets over many years.  The financial analyst Harry Markopolos compiled extensive studies of the bogus nature of the Madoff scheme without any inside information and attempted for years to alert the investing community.  He identified 29 separate “red flags”.

     The investigation by the board could be very simple, economical, and effective.  It could be done by requesting audited financial statements from groups and other entities on a list of alleged victims with a California nexus of being headquartered or incorporated in California or conducting significant programs or fundraising in California.  From the audited financial statements, the board could determine the identity of the auditor.  If the auditor is a California licensee, the investigation would continue with an examination of such licensee.  Non-California auditors would be referred to other state boards of accountancy for investigation.

     You will find enclosed for your consideration:

     1.  List of Madoff “customers” from Wall Street Journal: madoffclientlist020409.pdf.

     2.  Chart “Madoff’s Victims, March 6, 2009” from Wall Street Journal:


     3.  “The World’s Largest Hedge Fund is a Fraud” by Harry Markopolos, from Wall Street Journal:


     4.  Los Angeles Daily News article of April 2, 2009, “Jewish foundation loses $18 million in Madoff scandal”

      Please let us work together to enact this proposed regulation.




                                  Carl Olson
                                  P. O. Box 6102
                                  Woodland Hills, California 91365


CPA Watch comment:  Satyam Computer Services has traded on the New York Stock Exchange for years.  It maintains
                                                                                                                                  many offices in the United States, serving about 1/3 of the Fortune 500 with outsourcing of workers to
                                                                                                                                  India.  Numerous American investors have probably lost millions or billions of dollars.  The quick
                                                                                                                                  action by the police in Hyderabad, India, should provide a model for American law
                                                                                                                                  enforcement. The motto on the National Emblem of India is "truth alone triumphs".

Business Week

Letters, February 9, 2009


             Regarding “A Scandal Shakes India’s Outsourcers” (News, Jan. 19):  How bad can CPA auditors get?  For eight years, PricewaterhouseCoopers was the auditor for Satyam Computer Services but didn’t notice the $1 billion of cash missing.  Satyam’s stock has traded on the New York Stock Exchange for years, and many American investors have thus been plundered.

             The Indian police raided PricewaterhouseCoopers’ office in Hyderabad to find out what the apparent culprits did.  Maybe U. S. law enforcement can learn something about speedy justice from the Indian system.

Carl Olson
Fund for Stockowners Rights

TheNew York Times Magazine    

January 18, 2009 Letters

Re:  Risk Management (January 4 issue)

     No matter what amount of statistical manipulation was done with Value at Risk, it ran into the problem of reality. The “facts” about asset values it was churning turned out to be phantoms. GIGO (garbage in, garbage out) took over with a vengeance.

     The analysts were taking the audited financial statements at their word. Financial managers were more than happy to promote them, and the C.P.A. auditors were happy to collect fat audit fees with little regard to confirming the realistic value of the bogus assets.

     PricewaterhouseCoopers O.K.’d AIG and Freddie Mac. Deloitte & Touche certified Merrill Lynch and Bear Stearns. Ernst & Young vouched for Lehman Brothers and IndyMac Bank. KPMG assured over Countrywide and Wachovia. These “big four” C.P.A. firms apparently felt they could act with impunity. Undoubtedly they knew that the state boards of accountancy, which granted them their licenses to audit, would not consider these transgressions seriously. And they were right. State boards of accountancy are underfinanced and dominated by the accountancy industry; protecting the public’s interest doesn’t seem to be their priority. Not one of them has taken up any serious investigation of the misbehaving auditors of the recent debacle companies.

     The lesson to be learned in the investment-management world is that we should fear C.P.A. auditors bearing opinions. We hope that C.P.A. auditors will be incentivized to straighten up and fly right, and soon.

Chairman, Fund for Stockowners Rights


The Washington Times

Friday, January 9, 2009

"Red ink"

By Carl Olson


     The odds 10,000 to 1 are not good for the public's financial health.

     Every one of the well-known debacle companies had CPA auditors who said the financial statements were just fine. For AIG it was PricewaterhouseCoopers. Lehman Brothers (the largest bankruptcy in American history) had Ernst & Young. Fannie Mae's fiascos were OK'd by Deloitte & Touche. KPMG was responsible for Countrywide. The $50 billion Madoff Ponzi scheme somehow could not be detected by numerous CPA auditors for its investors.

     Is the loss to the investing public $1 trillion, $2 trillion, or more? How many life savings are destroyed? How many pension funds are imploding, including private and public? With the biggest state population California, has had the most to lose.

     We all know that there is no good reason for an individual to believe and act on any financial statement of any company without a positive CPA auditor opinion. We all presume that these opinions are reliable and backed up with not just some ethics code but with some financial guarantee by the CPAs.

     But wouldn't it be great if the errors in financial statements were detected by CPA auditors before they are issued and become egregious rip-offs? Lawsuits are after-the-fact remedies, usually taking many years. The public needs immediate and effective discipline and punishment for misbehaving CPA auditors. They need to be stopped before they can strike again.

     CPAs and CPA firms are licensed by state government boards of accountancy. Without a license, they cannot conduct any auditing business. In a real sense, boards of accountancy are more important than medical boards. Doctors can injure patients only one at a time. Negligent CPA auditors can wipe out thousands with the stroke of a pen.

     California has a typical, ineffective Board of Accountancy which is underfunded and dominated by the CPA industry. It has 15 members, seven of whom are CPAs and other licensees. Gov. Arnold Schwarzenegger appoints all seven of these plus four other non-licensee members. The other four are appointed two each by the Speaker of the Assembly and the Senate Rules Committee.

     The board is funded by annual licensing fees from the 76,000 licensees in the state. The Accountancy Fund is supposed to ensure ongoing consumer protection functions without regard to the state government budget appropriation process, since it does not involve any tax dollars. However, this structure has not prevented the governor and legislature from recently borrowing $11 million from the Accountancy Fund. This is in addition to the $6,270,000 borrowed in 2002 and 2003 but not repaid. The Accountancy Fund would be about $31 million without these borrowings. The board's annual budget is about $12 million with the current staffing level for processing licensees and investigating complaints.

     The statute requires that licensees submit to the board financial re-statements they have been involved in. Re-statements are very significant because they involve materially false or misleading information in the original financial statements. These original statements have been relied upon by the public with obvious misdirection until the re-statements are issued and distributed. For the 15,000 publicly traded corporations nationwide, there have been about 1500 restatements per year for the last few years. This is an astounding failure rate of 10 percent and it's not getting better. No wonder the CPA malpractice insurance rate runs about 15 percent of their revenues.

     What does the board do with the re-statements? One would think they would be a key quality control measure that would be immediately used in enforcement actions. Every one of them is a confession of material error. The board has decided that it won't require re-statement submissions for all publicly traded companies even though all of them impact California investors. Instead, a very narrow selection has been imposed, such that only about 200 of the 1,500 annual re-statements are received by the board. The other 1,300 are ignored.

     But it gets worse. The board has a “check it and chuck it” policy with re-statements by throwing them away six months after receipt. They are not maintained as a public document library for Californians to utilize. A revealing sentiment was expressed by past board President David Swartz CPA at the September 2008 board meeting when he opined that only 2 percent of re-statements were important, and that the other 98 were not.

     As for enforcement against misbehaving and dangerous licensees, the public is on the losing end of the 10,000 to 1 odds. For the 76,000 licensees, there are only 7 board investigators. There is not even a Southern California office. It is next to impossible to recruit competent investigating CPAs because the state pay scale is so low. Competitive pay for experienced CPAs is at least $125,000 per year. The state currently pays only about $65,000. The board, its supervising Department of Consumer Affairs, and the Governors Finance Department have all been dragging their feet for years over correcting this crippling defect. Apparently, this is their intentional policy. It was recently expressed in Capitol Weekly by the current board president Robert Petersen, CPA: “We've got all the positions we need.”

     Hope for Californians could come from a governor who has changed his mind about the ineffective board. Or by a legislature which takes command of the ongoing travesty. The board is in the jurisdiction of the business and professions committees. Each of 120 members of the legislature in either party could introduce a bill to fix the mess. Who will be first to be a hero for the financial health of Californians?

Carl Olson is chairman of the Fund for Stockowners Rights.

Accountancy board seeks pay increases

By Malcolm Maclachlan (published Thursday, December 04, 2008) Capitol Weekly

     The California State Board of Accountancy is looking for someone to carry legislation that would allow them to raise the pay offered to board investigators. Both the board president and outside critics agree that the pay for these investigators is probably too low to attract a large enough number of qualified applicants.

     The need for qualified investigators has been highlighted by the financial scandals that have rocked the country in recent months and years. But any rise in pay would also have to take place in the midst of perhaps the worst budget crisis in state history—a budget crisis caused, in part, by those very same financial scandals.

     “Those wages are set by the legislature, not by ourselves,” said board president Bob Peterson. “It’s certainly made it difficult to hire people.”

     The pay for an investigative certified public accountant for the Board ranges from about $61,000 to $74,000. A supervising investigative CPA makes between $67,000 and $81,000. As state jobs go, these pay quite well.

     But CPAs are also highly educated and expected to work long hours. In the private sector, a well-qualified CPA can make twice what the state is paying. Even in the down economy, a quick search of jobs websites shows multiple advertised positions paying $120,000 to $140,000.

     While many other boards hire investigators who don’t actually hold the qualifications of the professional group they police, it requires a lot of specialized knowledge to find accounting irregularities, Peterson said.

     “We require our investigators to be CPAs because they’re investigating CPAs,” he said.

     Carl Olson, chairman of the Fund for Stockowners Rights, said that the lack of pay for investigators is troubling because of the way the board is structured. Its budget is paid for by fees paid its 76,000 licensees in the state. While the state may be in trouble, he said, the board has been sitting on a $25 million bank account. Late last year, the Schwarzenegger borrowed $11 million from this fund to help cover operating expenses in the general fund. It also borrowed money from several other professional boards.

     “It’s not tax money, it’s supposed to be a protected fund,” Olson said. “The licensees are being double-taxed, because the money they pay in to be regulated is being appropriated for other purposes.” 

     Olson said his group has been on a campaign to push the board towards a more aggressive stance—in editorials, appearances at board meetings and public clashes with groups like the National Association of Boards of Accountancy. Even while state retirements funds like CALPERS have lost 20 percent of their value due to rampant financial mismanagement across the country. The California Board and other boards of accountancy have not done enough to investigate and require information from the large companies it watches, Olson said.

     “As they’re dithering around, all of these giant fiascos are going unpunished and encouraged,” Olson said. He added: “If you’re going to get a CPA who understands what they need to, you need to pay at least $100,000 to get someone who is competent and devoted.”
Peterson noted that the borrowed money is guaranteed to be returned with interest, and said it was a completely different issue from the pay scale for investigators.

     “We’ve got all the positions we need,” Peterson said. “We’ve got to get them filled. Salaries are one of those factors, but there’s a multiple of factors that go into that equation.”

"From the Mailbag" of The Insurance Forum, February 2009

     "Thank you for the articles in your December 2008 and January 2009 issues about AIG and the financial crisis generally.  You missed an important group of culprits--independent auditors.  Investors, insurance buyers, regulators, rating firms, and security analysts depend on reliable figures, but the auditors failed at every turn.  For example, these companies were audited by the Big Four firms indicated:  AIG (PwC), Bear Stearns (Deloitte), Countrywide (KPMG), Fannie Mae (Deloitte), Freddie Mac (PwC), IndyMac (Ernst), Lehman (Ernst), Merrill (Deloitte), Wachovia (KPMG), and WaMu (Deloitte).  State accountancy boards, which are supposed to discipline auditors, are moribund. No major case against a Big Four firm has been pursued in years."--Carl Olson, Chairman, Fund for Stockowners Rights, Washington, D.C.

    The Insurance Forum February 2009 newsletter contains the article "Capital Infusions Into Life Insurance Companies by Weakening Statutory Accounting Rules".  It points out that the insurance industry regulatory system does not use Generally Accepted Accounting Principles, but rather "statutory accounting rules" under the National Association of Insurance Commissioners (NAIC). The definitions of "assets" and "liabilities" differ from those under GAAP.  Analysis of an insurance company's capital size, structure, and adequacy may thus be difficult and take particular scrutiny.  



CFA Magazine January/February 2009


“Further Statements on Restatements”

            An article on “The State of Restatements” (Standards in Practice, September/October) elicited the following response from the chairman of the Fund for Stockowners Rights.

            The investing community has a crucial problem with misbehaving auditors.  Each one of the recent debacle companies---AIG, Fannie Mae, Freddie Mac, Countrywide, and so on—had auditors who for years told the public that the financial statements were just fine.

            Every restatement results from some materially false and/or misleading item in the original financial statement.  That material item was not detected or looked for by the auditor.

            Prior to the Sarbanes-Oxley Act of 2002, auditors were disciplined by various lawsuits over financial fiascos and by state boards of accountancy.  The state boards have been generally non-aggressive in enforcement, in as much as they are typically underfunded and dominated by the CPA industry.

            Sarbanes-Oxley created the Public Company Accounting Oversight Board to set and oversee auditor standards.  It has done terrific work so far with truly insightful inspections and reports.  PCAOB’s existence has probably prompted the surge in voluntary restatements, which have reached about 1,500 per year, or about 10 percent of publicly traded companies.  This is truly an astonishing failure rate.  No wonder the malpractice insurance rate for CPA auditors is about 15 percent of revenues.

            We all need to find ways to incentivize auditors to do the right thing the first time and could breathe much easier with such real assurance.

Carl Olson
Woodland Hills, California


CFA Magazine is a publication of the CFA Institute, which is the professional group for Chartered Financial Analysts.  They include investment managers, investment analysts, investment advisors, and others who rely upon the integrity of the figures from companies to make significant decisions.  See 


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