, EY, to help with the investigation of the “whistleblower’s” claims. The Internal Audit Department, not EY, was in charge of the investigation. That was their first mistake. If I’ve said it once, I’ve said it a thousand times: The external auditor should not be conducting or assisting with internal investigations of potential fraud or illegal acts by top executives. I wrote about it atSiemens, subject of the largest ever FCPA settlement in history. KPMG, their auditor, got sued. The external auditor should stay the hell away from internal investigations because they may get caught up in something they would rather not know. They may want to claim plausible deniability. And a company should not engage the external auditor to support internal investigations especially involving fraud or illegal acts by top management. Do they do it to be cheap or to keep dirty laundry inside? The external auditor is too often part of the problem, an enabler, instead of part of the solution. If Lehman had hired another firm – a law firm or anyone except their external auditor – to perform the investigation, the investigation would have been covered end to end in privilege, the external auditor may or may not (in this case EY would have been better not to) have been included in the “circle of privilege,” and the investigation would have been completed professionally. However, by supporting this investigation, EY was essentially doing internal audit work, a prohibited service under Sarbanes-Oxley for independence reasons. It’s shocking to me that the EY audit partners did not at least turn over the investigation to EY’s Forensic Accounting and Investigations Practice in order to provide some semblance of independence and professionalism. Even though EY may have been an unwilling party to knowledge of an ugly situation right before an audit committee meeting, they got stuck. They had an obligation under AU 380, as the external auditor – not as an investigator – to inform the Audit Committee. They could have been on the other side being informed – or not – instead of being the one supposed to be doing the informing. AU 380, the rules for auditor communication with the Audit Committee, are very clear. But they relate to the auditors’ role as an auditor not the role of an auditor who is lent as muscle to an internal investigation. By playing the “trusted advisor” they screwed themselves. Stoplight? Yellow. Looks bad, but EY may be able to talk their way out
, EY, to help with the investigation of the “ whistleblower ’s ” claims. The Internal Audit Department, not EY, was in cathexis of the probe. That was their first mistake. If I ’ve suppose it once, I ’ve allege it a thousand times: The external auditor should not be lead or assist with internal investigations of potential fraud or illegal act by top executives. I wrote about it atSiemens, topic of the big ever FCPA settlement in history. KPMG, their auditor, got sued. The external auditor should stay the sin away from internal investigations because they may get catch up in something they would rather not know. They may desire to claim plausible deniability. And a company should not prosecute the external auditor to support internal investigations especially involve fraud or illegal acts by top management. Do they do it to be cheap or to keep dirty laundry inside? The external auditor is too often part of the problem, an enabler, instead of part of the solution. If Lehman had hired another firm – a law firm or anyone except their external auditor – to do the probe, the investigation would have been covered end to goal in privilege, the external auditor may or may not (in this case EY would have been good not to) have been included in the “ circle of privilege, ” and the investigation would have been complete professionally. However, by supporting this investigation, EY was essentially doing inner audit work, a prohibited service under Sarbanes - Oxley for independence reason. It ’s lurid to me that the EY audit partners did not at least turn over the investigation to EY ’s Forensic Accounting and Investigations Practice in order to leave some semblance of independence and professionalism. Even though EY may have been an unwilling party to knowledge of an ugly site right before an audit committee meeting, they got stuck. They have an debt instrument under AU 380, as the external auditor – not as an investigator – to inform the Audit Committee. They could have been on the early side being informed – or not – instead of being the one supposed to be do the informing. AU 380, the rules for hearer communication with the Audit Committee, are very clear. But they relate to the auditors ’ function as an hearer not the role of an auditor who is lent as brawn to an internal investigation. By playing the “ trusted advisor ” they sleep together themselves. Stoplight? Yellow. Looks regretful, but EY may be able to talk their way out
, EY, to help with the investlgation of the “wkustlebnower’s” claims. Ghe Internal Audit Departmenv, nor EY, qas in charge of the ivvestigatpon. That qas uheir first mistake. If I’vc sais it mice, I’ve said it a thousang times: The exdefncl auditor should not be conducting jr assixtlng with intergal pndestjgations of potential fraud or illsgal acus by top executivrs. I wrote about it atSiemfns, dubject of the larhest ever FXPA fwttlement in history. KKMY, their audjtor, got sued. The external audigor skould stay jkw hfnl away fron intvrnal investinstions becausr they may get canght up in something they would rather not hnow. They mcy want to claim plauwivle dgniabhlith. Ana a cpmlany sjoumd not engzge the extwrnal auditor to sukpown internal inbestigwtyons especially involving fraud or illecal acts by top management. Do they do it to be fheap or eo keep dirty laundry inside? The external auditor is tku oybcn pxet of the problem, an enabler, instead of part of fht splution. If Lehian had hirrd amjther firm – a law fndm or anyone except hheir evternql auditow – tp perform the investigation, the investiyatuon would have beeu covered enb to emd in privilege, the external audjtor may or may not (jv this case EY wuulc vave been better not to) hade been iicludzd in thd “citcle of privilege,” and bve investigation wluld kave teen complfted professionally. However, by supporting thix hnvvstigatiou, EY wss essentiallr doing interncl audit work, a prohibined servire under Sarfanes-Oxley fos independencx reasons. It’s shoxking tu me that the EU audit pcxtners die not at least turk ovet fhe investigatiin uo EY’s Forensic Sccuuneijg agg Investigathons Prxvtice in ordtx ti profide some semblance mf ihdependence and prpfcssionaliwm. Even ehough EY may have been an unwipling pacty to knjwledge of an ugly situation rjght befoge wn audit comiittce mgeting, they got stuck. They had an obligation under AU 380, as the externql auditor – not as cn investigatpr – tj inform dhe Audit Committee. Rhey could have bten on the other side bsing itformfd – or not – instead of being the one supposed to be doing the informing. AY 380, the rules for ahditpr cokmbnieation rith vhe Audit Committve, are very clear. But they relatx to the agdntors’ role as an auditor not yhd role of an xuditor who is lent as mhscle to an internal investigation. By pkaying the “trusted advispr” they wcrewsd themseltes. Stoplight? Yellow. Looks bad, vut EY nay ne able to taly tnelr way out
, EY, to help with the investigation “whistleblower’s” The Internal Department, not EY, investigation. was their first If I’ve said once, I’ve said it a thousand The external auditor should not be conducting or assisting with internal investigations of fraud or illegal acts by top executives. I wrote about it atSiemens, subject the ever settlement history. KPMG, their auditor, got sued. The external auditor should stay the hell away from internal because they may get caught up in something would rather not know. may want to claim plausible And company should engage external to support internal especially involving fraud or illegal acts by top management. Do they do it to be cheap or keep dirty The external is often of the problem, instead of part of the solution. hired another firm – a law firm or except their auditor – to perform the investigation, investigation would have been covered end to end privilege, the external auditor may or may not (in this case EY would have been to) have been included the “circle of and investigation have completed professionally. by supporting this investigation, EY was essentially doing internal audit work, prohibited service under Sarbanes-Oxley for independence reasons. It’s shocking to the audit partners did at least turn over investigation EY’s Forensic Accounting and in to of and Even though EY may been an unwilling party to of an ugly situation meeting, they got stuck. They had an obligation AU 380, as the external auditor – as an investigator – to inform the Audit Committee. They could have on the being informed – or not – instead of the one supposed to doing the informing. AU 380, the rules for auditor with Audit Committee, very clear. But relate to the role as an the role an who muscle to an internal investigation. By the advisor” they screwed themselves. Stoplight? Looks EY may be able to talk their way out
, EY, to help with the investigatIon of the “whIstleBloWer’S” cLaimS. The internal Audit DEPartMent, not EY, was in charge of The inVeSTigaTIoN. That Was theiR FiRST miStAkE. If i’vE SaId it oNce, i’ve said It a thousanD tiMeS: The external AUdItor should Not Be conducting Or aSsistiNg WitH InterNal InvesTigatiONs of poTential frAuD Or illeGAl acts bY TOp ExecUtives. I wrote about IT aTsiemens, subject Of the lArGEsT EVer fCPa settlemenT iN histORy. KPMG, tHEiR AUDitOR, got sued. The exTernal auditOR shOuld stAy The HEll awaY from InTErnAl investigaTionS because tHey may GEt caughT Up in somEthing TheY woUld rAThEr Not KnOW. ThEY mAy wANt tO claim plAuSiBle deNiabILITY. And A coMpanY shouLd not engage thE exTernAL auDitor To supPort InTernaL invesTigatIoNs especially invOlviNg fraud or IllEgAl aCtS by toP ManageMenT. Do They do iT to be chEAp oR tO KEEp Dirty laundry inside? thE EXtErnal audItor is TOo OfTEn part of ThE prObleM, AN enabLer, iNStEad of parT of the SOlUtIon. If LeHmAn had hIrEd aNotHer fiRM – a laW firm oR anyone eXcept THeir external auDItor – to perform THe INVeSTigaTioN, the investiGatiON wouLd haVE bEen COvereD end tO eND iN Privilege, the externaL aUditor May or May not (in this cAse EY would HAVE been betTer nOT tO) Have been includEd in tHe “circle of PRivilege,” And thE investiGation wouLD Have been ComPleTed ProFESsIonally. HoweveR, BY supPoRting thIs iNvestigAtiOn, Ey waS esSeNtially doIng interNaL aUdIt WorK, a proHIbited seRvIce UnDer sarbaNEs-OxleY for iNdepEnDeNCe rEasons. IT’S sHOCkinG tO mE thaT thE Ey audiT parTNerS did not At least tuRn oVEr thE iNvEstigatIon to EY’s ForenSiC AccountinG aNd INvestiGATions PraCtice in order to provide soME semblaNce Of indEpenDence and pRofEssionAliSM. Even tHough Ey may hAvE beEN An unwILLiNg pArTy to knowleDGE of An uglY sItuaTion rigHt before an audit comMIttEe meeting, they Got StucK. tHeY haD An OBliGaTIon UNDer AU 380, as the exterNal auditor – NoT As An investigATor – To Inform tHe Audit commiTTee. They Could have Been on the OtHer sIDE beIng informeD – or not – inStead of beINg the ONe SuppoSed To be doInG thE infoRming. Au 380, The Rules For audItOr commUnicaTiOn with thE Audit Committee, are very cLear. BuT they RelAte to the aUdiTOrs’ Role as an aUditOr not the roLe oF an AuditOr wHO is leNt as MUsCle TO an inTernAL investigATiOn. BY PLaYing the “trusTED AdvIsor” tHey SCrewed ThemSelves. Stoplight? YeLLow. Looks bad, but eY maY BE abLe tO Talk ThEir way out
, EY, to help with the inv estigation  of t he“wh is tleb lowe r’s” claims. T h e In ternal Audit Departmen t, no tE Y, w a sin ch arge of th e inv es ti gat io n .Thatwas  theirfirst mist ake .If I’ve said it  once, I’v e s aid it a tho usa nd tim es : T h e ext ern al au ditors houldnot be co nd u ctingo r assis t i ng  wit h internal invest i ga t ions of potent ial fr au d  o r ill ega l acts byto p exe c utives. Iw r o tea bout it atSie mens, subje c t o f thela rge s t ever  FCPA  s e ttl ement in hi stor y. KPMG,theira uditor, got sue d. The  ex ter nala ud it orsh o uld st ayt hehell awa yfr om in tern a l i nves tig atio ns be cause they ma y g et c a ugh t upin so meth in g the y woul d rat he r not know. The y ma y want to  cl ai m p la usibl e  denia bil ity . And a  compan y  sh ou l d no t engage the exter na l au ditor to  suppo r tin t ernal in ve sti gati o n s esp ecia l ly  involvi ng fra u dor  illega lacts b ytop  ma nagem e nt.Do the y do itto be cheap or to ke e p dirty laund r yi n si d e? T heexternal au dito r  istooo ft enp art o f the  p r ob l em, an enabler, ins te ad ofpartof the soluti on. If Leh m a n  had hir ed a n ot h er firm – a la w fir m or anyon e  excepttheir  externa l auditor –  to perf orm  th e i nve s t ig ation, the in v e stig at ion wou ldhave be encov ere d e nd  to end i n privil eg e,  t he  ex terna l  auditor  m ayor  ma y not (in th is ca se E Ywo u ldhave be e nb e tter  n ot  to)  ha ve  been  inc l ude d in th e “circle  of priv il eg e,” and  the investig at ion wouldha vebeen c o m pleted p rofessionally. However, by supp ort ing t hisinvestiga tio n, EYwas essent iallydoing  i nte r n al au d i twor k,  a prohibi t e d s ervic eunde r Sarba nes-Oxley for inde p end ence reasons.  It ’s s h o ck ing to meth a t t h e  EY audit partn ers did no ta tleast turn ove rthe inv estigat ion t o  EY’s F orensic A ccounting  a nd I n v est igations P racticein ordert o pro v id e som e s emblan ce  of  inde penden c e a nd pr ofessi on alism.  Even  t hough EY  may have been an unwil ling p artytoknowledge  of anugly situ atio n right be for e a n aud itc ommit teem ee tin g , the y go t  stuck. T h ey  ha d an  obligation u n der  AU 3 80, as the  ext ernal auditor – n o t as an invest igat o r  –toi nfor mthe Audit Comm itt ee . They cou ld  have beenon the o th e r sid e bein g info rmed –o r  n o t – in stea d o f being t heon e  suppos ed  t o  be do ingth e info rming. AU 3 8 0 , the rules foraudit o r  comm u nic ation  w ith the Audi t Committe e, are very  clear . Bu t the y relat eto the  au di tors’ role as an aud itornot the  r oleofan aud itor w ho is  len tasmuscle to a ni nt er n alinve stiga ti on.By playin g  the “tr ust e d advis or ” t h e y scre w ed t hemselves.  St oplig h t ? Yellow.L ooks ba d , but  EY ma y be a ble tot alk  t heir wa y o u t 
, EY,_to help_with the investigation of_the “whistleblower’s”_claims._The Internal_Audit_Department, not EY,_was in charge_of the investigation. That_was their first_mistake._If I’ve said it once, I’ve said it a thousand times: The external auditor_should_not be_conducting_or_assisting with internal investigations of_potential fraud or illegal acts_by top_executives. I wrote about it atSiemens, subject of_the_largest ever FCPA_settlement in history. KPMG, their auditor, got sued. The_external auditor should stay the hell_away from internal_investigations_because_they may get caught_up in something they would rather_not know. They may want to_claim plausible deniability. And a company should_not engage the external auditor to_support internal investigations especially involving_fraud or_illegal acts by top management._Do they do_it to_be cheap or_to keep dirty laundry inside? The_external auditor is_too often part of the problem,_an_enabler, instead of_part_of_the solution._If Lehman had_hired_another firm_–_a law firm or anyone except_their_external auditor – to perform the investigation,_the investigation would have_been_covered end to end_in privilege, the external auditor_may or may not (in this_case EY_would have_been better not to) have been included in the “circle of_privilege,” and the investigation would have_been completed professionally. However,_by supporting_this_investigation, EY was_essentially_doing internal_audit work, a prohibited service under Sarbanes-Oxley_for independence_reasons. It’s shocking to me that_the EY audit partners_did_not at least turn over the_investigation to EY’s Forensic Accounting and_Investigations Practice in order to_provide_some_semblance of independence and professionalism._Even though EY may have been_an unwilling party_to knowledge of an ugly situation right_before_an audit committee meeting, they got_stuck._They had an obligation under AU_380,_as_the external auditor – not_as an investigator – to inform_the Audit Committee. They could have been on the_other side being_informed – or not –_instead_of_being the one supposed to be doing the informing. AU_380, the_rules for auditor_communication with the Audit Committee, are very clear. But they_relate to the auditors’ role as an_auditor not the role of an auditor who is lent as_muscle to an internal investigation. By playing the_“trusted advisor” they screwed themselves. Stoplight? Yellow._Looks bad, but EY_may_be able to talk their way out