2 whistleblowers say they've seen the accounting industry's problems up close, and they're willing to testify to Congress about the shortcomings of the Big Four
Brian Brainerd/The Denver Post via Getty Images
Joe Euteneuer left his position as Mattel's chief financial officer after a whistleblower complaint led the company to acknowledge an accounting error restate two of its quarterly reports.
- Data compiled by watchdog groups has indicated that there are widespread problems in the accounting industry, but few industry insiders have spoken up publicly about those shortcomings.
- Two who have are Mauro Botta and Brett Whitaker, each of whom say they saw accounting problems and tried to report them internally only to be ignored and to eventually lose their jobs.
- Botta says he observed problems with the accounting at multiple companies while working in the Silicon Valley office of auditing firm Pricewaterhouse Coopers; Whitaker, meanwhile, says he raised a red flag about accounting problems at Mattel that later resulted in the company restating its quarterly results.
- Both have essentially offered to testify to Congress about what they saw and experienced.
- Pricewaterhouse Coopers has largely denied Botta's assertions and is fighting against him in court. The firm declined to comment specifically on what Whitaker said he experienced.
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The biggest accounting firms are doing a poor job of auditing public companies, data from their public regulator indicates.
But while the problems appear to be widespread, few insiders have talked about them publicly. Mauro Botta and Brett Whitaker are exceptions to that rule. Each says he encountered accounting problems at public companies and tried to get them addressed internally. Both say they were ignored and responded to that by trying to draw attention from the outside to the shortcomings they encountered, each in his own way.
Now they've each gone one step further, signing on to a letter sent by watchdog groups to the House Financial Services Committee earlier this month urging it to hold a hearing on the problems in the accounting industry and with its overseer, the Public Company Accounting Oversight Board. Essentially, both are offering to testify before Congress about what they see as the failings of the industry.
"I believe a hearing is needed," said Botta, a former accountant with PricewaterhouseCoopers, also known as PwC, told Business Insider. "It is very much needed because it seems one of those things that is under everyone's eyes."
The Public Company Accounting Oversight Board, or PCAOB, is the quasi-governmental body charged with overseeing the auditing industry. Periodically, it samples audits performed by the various accounting firms, most notably by the four biggest ones, which audit the vast majority of the largest public companies.
Between 20% and 50% of the latest audits the PCAOB sampled from the Big Four firms had critical errors in them and shouldn't have been relied on, according to a report by the Project On Government Oversight, or POGO. POGO is among the groups that sent the letter calling on Congress to examine and try to get to the bottom of such findings.
That so many audits are flawed is a big concern, because literally trillions of dollars are riding on the accuracy and veracity of companies' financial statements. Investors determine how much they will pay for particular stocks based in large part on the revenue and profits reported by the companies behind those shares.
The accounting firms are supposed to serve as watchdogs themselves, ensuring for investors that those reports are true and that the corporations have in place working processes to ensure that those statements are corrupted by mistakes or fraud. If investors can't trust those reports, the system can break down, leading to massive sell-offs in particular stocks or even to financial crises.
Botta reported finding problems at numerous tech firms
Botta and Whitaker, the former director of tax reporting at Mattel, each say they've seen the industry's failings up close. In both of their cases, the Big Four firm involved in the accounting problems they say the discovered was PwC.
For its part, PwC has largely denied Botta's assertions and is fighting against him in court. The firm declined to comment specifically on what Whitaker said he experienced.
Botta joined PwC, one of the Big Four, in 1999 and moved to its San Jose office - ground zero for the firm's tech industry auditing practice - in 2004, according to a lawsuit he filed against the firm. Beginning in 2012, he started finding errors and problems in the audits of three different companies, according to his suit.
In one case, one of his colleagues listed Botta as the leading manager of an audit when that wasn't actually the case, according to his legal filings. That particular audit was found to be "non-compliant with accounting standards," according to both Botta and PwC's filings in the case. Botta didn't want to be associated with a failed audit, but when he objected to his name being on it, his concerns were dismissed by the colleague who put his name down and ignored by PwC's human resources department when he complained, according to his suit.
Mauro Botta has accused PricewaterhouseCoopers of firing him after he raised concerns about accounting problem he said he found at tech companies Cavium and Harmonic.But Botta encountered much more serious problems than that, according to his court filings. For example, while working on the audit of Cavium, a chip maker, he said that he found repeated problems in the company's internal controls, the systems and protocols corporations are required to have in place to prevent accounting mistakes and fraud.
In one particular case, he found that the company lost $500,000 in a phishing scam that targeted its controller, according to a whistleblower complaint he filed with the Securities and Exchange Commission. The controller sent the money to a supposed vendor after receiving emails that appeared to be from Cavium's CEO and chief financial officer, according to the complaint. Before sending the money, the controller didn't follow the company's protocols, which required at least two people in the company to sign off on such as disbursement, according to the complaint.
Botta later discovered a myriad of accounting problems at Harmonic, a company that offers video streaming software and services, according to his whistleblower complaint. Among them were errors in the way it calculated its revenue and shortcomings in the way it determined everything from its accounts receivable to depreciation of its assets, according to that complaint.
Netra Ghosh, general manager for client services at Harmonic, declined to comment on Botta's claims in his suit against PwC, because the company is not party to that suit. But, Ghosh said, "Harmonic has received clean audit opinions for decades."
Representatives for Marvell Technology Group, which now owns Cavium, did not respond to requests for comment sent by email.
Botta and PwC are battling in court over his claims
Feeling like his superiors at PwC were ignoring or playing down the importance of the problems he found, Botta filed his whistleblower complaint and later met with staff members in the office of Sen. Diane Feinstein, D-Calif, to solicit their help in getting the SEC's attention, according to the complaint. After the SEC launched an investigation, Botta believes that PwC found out he was the whistleblower, according to the filing. PwC not only fired him, but it contacted his subsequent employer and told that employer that he was incompetent and should be removed from the project he was working on, according to the complaint.
Both the SEC and the PCAOB investigated PwC as a result of Botta's complaint, but neither has taken action against the firm to date. For his part, Botta believes that's further evidence that the agencies are failing at their jobs - and ample reason why Congress needs to take a closer look at the accounting industry.
"It's clear to me that the government institutions - both the SEC and PCAOB - are not able to or willing to fix the issue that I believe exists in the auditing industry," he said.
In a statement, PwC said that Botta signed off on the same audits about which he raised alarms. PwC fired him for "misconduct," the firm said, adding that he allegedly "fabricated a client's internal control and related audit documentation." Despite that assertion, the PwC does not appear to have withdrawn its certification of the effectiveness of those internal controls.
The firm has gotten most of the causes of action filed against it and its employees by Botta dismissed, but a trial on the remaining cause of action is set for November.
"PwC looks forward to demonstrating at trial that Mr. Botta's allegations are baseless," it said in the statement.
Whitaker raised a red flag at Mattel
Whitaker, meanwhile, is a tax expert. During his career, he has worked for Ernst & Young, another Big Four firm, and for major companies including Amazon and Nike. Last fall, in an article in The Wall Street Journal, he blew the whistle on another company he had worked for, Mattel.
While at the toy maker in early 2018, he discovered an accounting error that had led Mattel to understate its loss in the prior third quarter, according to The Journal article. Instead of restating its results, the company's finance team, in conjunction with its auditor, PwC, decided to essentially fudge things, reclassifying the $109 million amount in dispute for the third quarter and deducting that amount from its fourth-quarter results, Whitaker told The Journal. The point of the reclassification was to avoid publicly admitting it had made an accounting mistake, Whitaker told The Journal.
Whitaker resigned from the company soon after the decision was made to essentially cover up the accounting error, according to The Journal. And the problem might have stayed buried if another, anonymous whistleblower, hadn't sent a letter to the company last summer, tipping it off to the reclassification. After an investigation, Mattel ended up restating its earnings. Following that, the company announced its chief financial officer, Joe Euteneuer, would step down from his position. Additionally, the PwC partner in charge of the audit has since left the accounting firm, PwC said in a statement.
In an interview with Business Insider, Whitaker declined to go into details about his experiences at Mattel due to ongoing investigations into the matter by the SEC and others. But he did say that what happened at Mattel highlights the need for more discussion about what's happening in the accounting industry.
"I think there does need to be more of a dialog around that, and I definitely would like to be a part of it," he said.
A Mattel representative did not respond to emails seeking comment on Whitaker's claims.
For its part, PwC said in a statement it "took immediate action" in response to the anonymous whistleblower's letter from last summer. It declined to comment on Whitaker's claims that firm members initially worked hand-in-hand with Mattel's finance team to cover up the accounting error to avoid a restatement.
"At PwC, integrity is at the heart of who we are and how we operate as a firm," the firm said in an emailed statement. "We will always strive to do the right thing and we will continue to take the appropriate actions in response to any allegations of misconduct."
Whitaker thinks auditors are too close to their clients
From Whitaker's perspective, one of the biggest problems in the accounting industry is the Big Four firms have gotten too close to the companies they audit, he told Business Insider. As of last fall, PwC had been Mattel's auditor for 45 years, The Journal reported. In addition to examining Mattel's financial books, PwC has also provided Mattel tax consulting and advice, charging $1.2 million in 2018 for such services, according to a document the company filed with the SEC.
"The world that has kind of evolved in the tax-accounting realm in my 15 years of doing it is that the company and the audit firm are really hand-in-hand and one-in-one," Whitaker said. "There really isn't a lot of separation between those two when it comes to decisions that are made both in terms of accounting and tax."
In theory, audit firms are supposed to work on behalf of corporate boards and the shareholders they represent to ensure the honesty, reliability, and accuracy of corporate managers and the financial reports they compile. But the close-knit relationships that have developed between the auditors and their corporate clients has undermined their ability to serve as independent overseers, Whitaker said.
Before and after the passage of the 2017 federal tax cut, for example, Mattel was looking for ways to change its corporate structure to take advantage of its provisions, he said. PwC was Mattel's lead advisor on that work, essentially telling the company what to do and telling it what the impact would be on its taxes, he said.
But then the firm turned around and served as Mattel's auditor, checking over the tax calculations PwC had made and the structure it had advised Mattel to create, Whitaker said.
PwC was "effectively auditing their own work," he said. He continued: "We relied 100% on what they told us."
Mattel's relationship with PwC is anything but unusual in the accounting industry, Whitaker said. Audit firms regularly tell their corporate clients that choosing their tax and consulting services will make it easier for the firms to audit the companies, because they'll already know the information they would have to check, he said.
The PCAOB and other regulators have tried to promote auditor independence, but these kinds of relationships - which are allowed under the rules they've put in place - "are completely contradictory to that," Whitaker said.
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