Secrets Fester in 50-Year Relationships: Jonathan Weil
A look at an old KPMG case with Motorola, and what disturbing things are happening now.
Another financial scandal. Another cover-up by regulators. Four years ago, inspectors for the auditing industry's chief watchdog discovered that KPMG LLP had let Motorola Inc. record revenue during the third quarter of 2006 from a transaction with Qualcomm Inc., even though the final contract wasn’t signed until the early hours of the fourth quarter. That’s no small technicality. Without the deal, Motorola would have missed its third-quarter earnings target.
The regulator, the Public Company Accounting Oversight Board, later criticized KPMG for letting Motorola book the revenue when it did. Although KPMG had discussed the transaction’s timing with both Motorola and Qualcomm, the board said the firm “failed to obtain persuasive evidence of an arrangement for revenue-recognition purposes in the third quarter.” In other words, KPMG had no good reason to believe the deal shouldn’t have been recorded in the fourth quarter.
The oversight board didn’t tell the public that this happened at Motorola, though. The maker of wireless- communications equipment, now known as Motorola Solutions Inc., didn’t restate its earnings for the period in question. And there’s no sign the Securities and Exchange Commission ever followed up with an investigation of Motorola’s accounting, even though it oversees the board and had access to its findings.
All of this is business as usual for America’s numbers cops. Since the board’s creation by the Sarbanes-Oxley Act in 2002, its inspectors have found audit failures by large accounting firms at hundreds of U.S.-listed companies. Yet its policy is to keep the identities of those clients secret.
‘Issuer C’
Likewise, in August 2008 when the board released its annual inspection report on KPMG, it referred to Motorola as “Issuer C” in the section on the auditor’s work for the company. For what it’s worth, Motorola paid the firm $244.2 million from 2000 to 2010.
This is the third column I’ve written revealing the name of a client whose accounting practices were a subject of a major auditing firm’s inspection report. Motorola is the biggest yet. I hope a whistleblower comes forward someday to leak many more. This is information investors need to know.
The Sarbanes-Oxley Act authorizes the oversight board to disclose “such confidential and proprietary information as the board may determine to be appropriate” in the public portions of its inspection reports. So it’s the board’s call whether to disclose clients’ names, although the SEC could overrule it. The board never does, bowing to the wishes of the accounting firms.
Identity Revealed
Motorola’s identity was disclosed in public records last month as part of a class-action shareholder lawsuit against the company in a federal district court in Chicago. The plaintiffs in the case, led by the Macomb County Employees’ Retirement System in Michigan, filed a transcript of a September 2010 deposition of a KPMG auditor, David Pratt, who testified that Issuer C was Motorola. KPMG isn’t a defendant in the lawsuit.
