Can some CPAs , auditors explain this to me please

[Kenji100]

Paul Gillis is saying this on his blog;

"A lot of people have said that Deloitte's work was the equivalent of a clean audit. Far from it. They were looking for fraud, and they did not find it. PwC was looking for evidence that the financial statements are right - they apparently didn't find that either. But Deloitte can issue a report saying they found nothing. PwC cannot issue an audit opinion unless they find enough of something."

In the forensic audit release it says this:

"(ii) Reviewed and examined selected financial information and records (such as principal financial documents, ledgers and vouchers, bank slips and advices, revenue forecast and other financial forms, invoices, organization charts, and contracts) for any indications of fraudulent activity or improper financial reporting"

(ii) The Investigation Team did not find evidence that the Company's revenues were inconsistent with public disclosures."

So , financial reporting, financial documents, financial forms etc being consistent with public disclosures to me it means that Deloitte looked at all of NQ's financial data, whether it be past 20-Fs etc and verified that the numbers reported were accurate. So can CPAs on the board explain to me how Paul is claiming that Deloitte did not look at financial statements to see if they were right and only PWC was looking at this?

[ccook787]

I've been following this board since pre-MW attack but forgot my password and was too lazy to get activated. That said, i see a lot of people asking this question lately not understanding what is being said. So as a CPA i figured I'd shed some light. I do not know much about finance so i find this forum very useful for all the technical language thrown around here.

I find Dr. Gillis' wording a little off. More so, it sounds like he is attempting to instill some doubt, but at the time I always figured him as an objective and unbiased man. Deloittes work wasn't "Far from" a clean audit. Deloitte was tasked with specific risk factors (MW's assertions) for which they had to develop audit procedures to test for the presence of fraud. Deloittes job in this case is to provide negative assurance. This means use of various wordings like "we did not find", "there were no indications", "did not encounter", etc.

For a financial statement audit, the auditors job is to provide reasonable assurance that the financial statements are, in all material aspects, compliant with GAAP. But, if a significant risk factor arises, the auditor must consider expansion of the scope of audit (i.e. additional procedures/testing).

Auditors must rely on management assertions and internal controls over financial reporting. This is somewhat like when you do your taxes and claim a deduction for a charitable contribution and say you have the receipts to support that - that is all the CPA needs to not be negligent in claiming a deduction, even if you really never gave that charitable contribution (for example). Now if something were to arise where there is suspicion then the CPA should ask for the receipts before claiming the deduction. In this case, PwC did not believe it could rely on management assertions (when asking inquiries), likely because of the statement put out by Deloitte about not being able to give a credible response.

PwC was very much under the microscope in this situation and appears to have taken the ultra-conservative approach. They were also thrown under the bus by Deloitte trashing their previous audits through the internal control wording. NQ has no obligation, and no legal bounds to provide 3rd party documents. It is similar to auditing a prime contractor, that has a subcontractor under it. You cannot obtain documents from the sub (3rd party) just because you are auditing a prime without consent of the prime - it is very much outside the scope of the audit.

Moving forward, MPB will have to develop alternative testing procedures in order to obtain reasonable assurance the F/S can be relied upon. I would have to assume that the audit committee discussed these procedures with MPB prior to engaging them and agreeing on the scope. It also will help if NQ now has adequate internal controls in place, so that MPB can say, although previously...the deficiencies are corrected...etc...if it decides to use Deloittes wording.

So to answer your question, Deloitte found nothing wrong that would suggest the financial statements aren't right.
Another example - you think your wife is cheating on you and have noted a few strange things that suggest this - but you haven't turned up anything to prove it. That's negative assurance. Do you feel comfortable that she actually isn't and willing to stake your rep on that?

The topic that really probably sent confusion is the possibly of re-auditing 2011 and 2012. I think the chances of this happening are minute to non-existent. PwC would look extremely foolish to pull its own audit opinion and open itself up to liability for those years, when it could at this point just walk away using the disclaimer it was fired.

My opinion on this is MPB seems to better understand the business structure in China and is more willing to accept that business structure as different than the US, but still compliant with standards. I expect an unqualified opinion, but there could be a qualified opinion based upon not being able to rely on management assertions or internal controls. Fraud is out of the question w/ the Deloitte findings.

That was a bit of a ramble but hope it clears it up.

[ccook787]

Meant to say without consent of the sub. To add to that, NQ obviously has lots of business partners and verifying revenue of multiple companies like ChinaMobile etc would damage those relationships. No one wants to be audited. Now if PwC was ONLY asking for YTD to open up their books, a small company that is reliant on NQ, that would concern me. But I don't see that as being the case as one revenue verification would not take long.

[Kenji100]

 I expect an unqualified opinion, but there could be a qualified opinion based upon not being able to rely on management assertions or internal controls. Fraud is out of the question w/ the Deloitte findings. That was a bit of a ramble but hope it clears it up.

Thanks cook, I really appreciate the reply. So basically from what I read, it is like a court case where someone is found "not guilty" which DT achieved, but PWCs job was to prove that NQ was innocent, which is much harder to prove. And PWC wanted to cover themselves 100% in this situation, so basically they decided to get fired to achieve that. I thought so too that fraud was out of the question with the DT findings but the market really bashed the stock pretty hard to $3-$4 where labeling the company a semi-fraud at those levels.

[Kenji100]

Now if PwC was ONLY asking for YTD to open up their books, a small company that is reliant on NQ, that would concern me. But I don't see that as being the case as one revenue verification would not take long.

Didn't DT in the case of Yidatong find NQ "innocent". It says revenues are verifiable.

(iv) The Investigation Team found that (a) the Company's past and present relationships with business partners in China and overseas (including Yidatong) serve legitimate commercial objectives, (b) with regard to Yidatong in particular, the Company's revenues and cash flows from customers to carriers through Yidatong are verifiable and consistent with public disclosures, and © the overall relationship between Yidatong and NQ Mobile is consistent with the Company's public disclosures.

[harry2013]

Cook, are you basically saying that P. Gillis is wrong in his paragraph on SA (URL: http://seekingalpha.com/article/2324895-...ing-of-pwc )


"So now MBP will have to re-audit 2013. Then, before the company can file the Form 20F, they will need consent from PwC to use the audit reports for 2012 and 2011. PwC may not agree to this. If PwC will not consent to the use of its reports, then NQ has no alternative but to have the 2011 and 2012 financial statements re-audited. That might take a year."

Why would MBP need PWC's consent to use reports which are already signed off by PwC and in the public domain. Is he assuming that either PwC would withdraw their opinion,

Or,

Is he indirectly suggesting PWC will not consent to handing over their working papers for audit years 2011 / 2012, which given Marcum is working on 2013 audit -- does it even matter?

[ccook787]

Cook, are you basically saying that P. Gillis is wrong in his paragraph on SA (URL: http://seekingalpha.com/article/2324895-...ing-of-pwc ) "So now MBP will have to re-audit 2013. Then, before the company can file the Form 20F, they will need consent from PwC to use the audit reports for 2012 and 2011. PwC may not agree to this. If PwC will not consent to the use of its reports, then NQ has no alternative but to have the 2011 and 2012 financial statements re-audited. That might take a year." Why would MBP need PWC's consent to use reports which are already signed off by PwC and in the public domain. Is he assuming that either PwC would withdraw their opinion, Or, Is he indirectly suggesting PWC will not consent to handing over their working papers for audit years 2011 / 2012, which given Marcum is working on 2013 audit -- does it even matter?

Kenji, that is a pretty good example. Guilty until proven innocent. MW threw out claims and there was no substantial evidence to prove NQ is guilty of anything, therefore the verdict would be not guilty (doesn't mean evidence was found they are absolutely clean, but there is no such thing as absolute assurance which appears to be the standard PWC was holding them to).

Verifying the revenue may only mean it was verified as incoming as publicly diclosed (%'s and recognition policy). It does not neccessarily mean they know or tested where the revenue originated before YTD, which would normally be beyond the scope and require YTD to open its books.  But, that note SHOULD suffice because as stated it should not be expected to audit a 3rd party.  Purchase orders,  revenue sharing agreements, that would be in the normal scope.

As i said to Dr. Gillis' other statement, i believe it was more so poor wording or interntionally misconstrued. You are right the audit reports are public domain and can be used, plus NQ will have all of that information readily available. I believe what he means is PwC may not consent to the use of its working papers, which document the auditors opinion, risk factors identified, evaluation and reliance on internal control, and testing performed to reach its audit opinion. This won't matter unless PwC withdrawals its opinion, in which case MPB would have to re-perform the audits from basically scratch. If PwC shared it's working papers and cites it relied on IC that Deloitte cited were lacking, it would have additional liability. So it is unlikely PwC would overturn its WPs (i know i wouldn't), but I don't see them withdrawing its opinion or it also looks foolish. We also don't know if internal controls were lacking prior to going public or precisely when; or if they improved over time, etc.

I would be hard pressed to believe NQ's audit committee, PwC, MPB didn't come to terms with this before the engagement. Specifically, I don't think MBP would accept this task if it knew it had to perform all 3 years and likely end up in failure due to lack of timeliness. It would hurt ultimately hurt its business. Nor would NQ hire MBP.

[Kenji100]

I would be hard pressed to believe NQ's audit committee, PwC, MPB didn't come to terms with this before the engagement. Specifically, I don't think MBP would accept this task if it knew it had to perform all 3 years and likely end up in failure due to lack of timeliness. It would hurt ultimately hurt its business. Nor would NQ hire MBP.

Thanks cook, good posts. I  think  there is an agreed timeline for MBP to finish the 20-F which was agreed to before hiring them. Also probably an agreement with PWC as well for firing them in exchange for all the previous 20-Fs being ok, and handing over to MBP whatever work they did for 2013 20-F. If my assumptions are correct, I would expect the 20-F to be completed in September. Hopefully we see a clean 20-F and finally we can move on from MW to bigger and better things and the stock price north of $20.