Week in Review, August 20


PwC in court over Colonial Bank audit; BHP, Lenovo, Cisco and Santander UK also in the news

Week in Review

A round up of some of the week’s most significant corporate events and news stories.

US court told PwC cut corners in Colonial audit

Control+C, Control+V. The keyboard shortcuts came into focus in a Miami court this week, as PwC stood accused of cutting corners in its audit of Colonial Bank, once the seventh largest in the US. There were billions of dollars of losses for the Federal Deposit Insurance Corporation when Colonial went bust in 2009.

PwC had signed off on six years of financial statements from Alabama-based Colonial, which was brought down by its close relationship with Taylor, Bean & Whitaker, a defunct mortgage underwriter. TBW left big holes in Colonial’s accounts by running up huge loans secured against assets that did not exist.

The plaintiffs, acting on behalf of TBW’s bankruptcy trustee, are seeking $5.5bn plus punitive damages, in the biggest ever trial of an audit firm. They claim that PwC was in a position to catch and stop the fraud but missed multiple red flags; PwC has countered that no auditor can reasonably be expected to catch a well-organised and determined fraud.

In court this week a jury was shown a 2006 document in which a PwC representative — an intern — assigned to identify assets pledged as collateral reported back that she “felt” the collateral was “adequate.” The same report the following year, signed off by more senior staff, contained the same paragraph.

“It’s crazy,” said Steven Thomas, lead trial lawyer. “Saying they “feel” the collateral was adequate really meant they had a belief that was true. But they just copied and pasted what an intern wrote from the prior year.”

The trial is expected to run for another three or four weeks. But even if the case gets bogged down in years of appeal and settlement talks, it could have big implications for the way audit firms carry out their assignments. Mr Thomas noted that the Public Company Accounting Oversight Board, the watchdog for the industry in the US, is keeping a close eye on the outcome.

“If we can keep pushing the issue, we think it’ll make a difference in the US and elsewhere,” he said.

Cisco problems run deep as it seeks to change direction

The problems are not always in the numbers. Cisco might have beaten earnings expectations and met analysts’ estimates on revenue in the fourth quarter when it reported on Wednesday — but it was clear from its earnings call that the network equipment maker is living in troubled times, writes Hannah Kuchler in San Francisco.

A visitor walks past a Cisco advertising panel as she looks at her mobile phone at the Mobile World Congress in Barcelona February 27, 2014. REUTERS/Albert Gea (SPAIN - Tags: BUSINESS TELECOMS SCIENCE TECHNOLOGY) - RTR3FSCD©Reuters

The Silicon Valley company is experiencing a structural shift to “software-defined networking” that has allowed more competitors into its market and pushed it to seek profits in new areas, from cyber security to data analytics. To do this, it announced plans to cut 5,500 jobs, a full 7 per cent of its global workforce, from its slower growing business and to plough the savings into new investments and acquisitions.

Cisco has also warned of a “challenging macro environment”, with some customers delaying major purchases. Chuck Robbins, Cisco chief executive, said the EU referendum had “real impact” in the UK and he called for clarity on how the Brexit process would actually work.

Finally, Cisco has to be wary about the leak from Shadow Brokers, a hacker group that claims to have obtained internal tools used by the US National Security Agency, one of which was a flaw in a Cisco product deployed in companies worldwide.

After the Edward Snowden leaks in 2013, then Cisco chief executive John Chambers came out fighting, asking President Barack Obama to stop the NSA from hacking into his equipment. So far, after this leak, Cisco has fixed the flaw but not yet made a stand.

Worst year for BHP Billiton after Samarco dam collapse

BHP Billiton reported its worst ever annual loss after a year of financial turmoil and a mine accident in Brazil that killed 19 people, writes Pilita Clark in London.

The Anglo Australian group recorded a net loss of $6.4bn after more than $7bn of impairment charges, some related to the November dam collapse at Samarco, an iron ore miner BHP owns jointly with Brazil’s Vale.


A Brazilian dam burst and a slide in commodity prices have led to an 81% year on year contraction in BHP Billiton’s profit

Andrew Mackenzie, chief executive of the world’s most valuable mining company, acknowledged that he and the group were still coming to terms with the accident, which had led to “huge suffering”.

The company also recorded $4.9bn of writedowns, after tax, on its US shale investments, part of an oil business it started developing before crude prices began to plummet in 2014.

The company, like other miners, was broadly hit by sliding commodity prices, especially in the last months of 2015.

It said it would pay a final dividend of 14 cents per share, making an annual dividend of 30 cents, down 75 per cent compared with the previous year.

Chart: BHP Billiton impairments

Average prices for its output during the year fell between 17 per cent for coal and 43 per cent for oil, compared with the previous 12 months.

Mr Mackenzie said he expected commodity prices to remain “low and volatile” in the short and medium term but they were no longer in “free fall”. He suggested BHP could generate more cash this year after productivity gains and cost cuts.

The underlying performance was “strong and getting stronger”, he said.

Related Lombard note: BHP’s mini-Macondo disaster

Lenovo hopes smartphone push will offset PC decline

A decade after Lenovo bought IBM’s personal computer business, propelling itself to the top ranks of the global PC industry, it is hoping to do the same in the smartphone sector, writes Tom Mitchell in Beijing.

SAN FRANCISCO, CA - JUNE 09: Yang Yuanqing, Lenovo CEO, unveils the new PHAB2 Pro, the world's first Tango-powered smartphone at Lenovo Tech World at The Masonic Auditorium on June 9, 2016 in San Francisco, California. (Photo by Kelly Sullivan/Getty Images for Motorola Mobility)©Getty

It is a critical transition for the Chinese group, as PC sales stagnate and consumers turn to mobile devices instead.

Lenovo’s PC shipments, which accounted for about 70 per cent of its $10bn revenues in the three months to the end of June, have declined for five consecutive quarters, although the group remains the world’s largest PC maker.

On Thursday Yang Yuanqing, chairman and chief executive, expressed confidence that the group would “completely turn round” its mobile business unit, which includes Lenovo and Motorola-brand handsets.

In 2014 Lenovo paid $3bn for Motorola’s struggling mobile phone business.

Lenovo is in the process of rolling out higher-end smartphones, such as the Phab 2 Pro, which it believes will help it emerge as a challenger to Samsung and Apple, the industry leaders.

It currently has less than 5 per cent of the global smartphone market.

The Phab 2 Pro includes features that will appeal to players of Pokémon Go and other “augmented reality” games.

However, plenty of challenges lie ahead for Lenovo in its home market, which is also its largest. Its China sales account for about 30 per cent of the group total.

Pokémon Go, which uses Google Maps, is not available in China and is unlikely to be soon.

Santander UK plans to halve rates on key current account

Santander UK shocked savers this week when it said that it planned to halve the interest rate on its flagship current account in a move that other British banks are expected to follow, writes Emma Dunkley in London.

FILE - In this Dec. 14, 2015 file picture people walk past a Santander bank, in New York. Spanish bank Santander has suffered a legal blow in its long-running row with a German rival over the use of the color red. Germany's Federal Court of Justice ruled Thursday July 21, 2016 that the country's publicly-owned Sparkassen are entitled to keep their trademark for a shade of red called HKS 13. Santander ‚Äî which uses the slightly darker HKS 14 ‚Äî has been trying for six years to get the German Patent and Trademark Office to delete its rivals' trademark. (AP Photo/Mark Lennihan,file)©AP

The bank has signed up more than 3m customers to its 123 current account, luring them with a comparatively high rate of 3 per cent.

However, the lender is cutting this to 1.5 per cent in November, blaming the low interest rate environment.

Lloyds Banking Group followed, saying that it would assess its current accounts, which include its Club product. The Club Lloyds current account has been another go-to for the affluent, paying 4 per cent on balances of £4,000 to £5,000.

Lloyds did not disclose when it would change this rate, saying in a short statement that it would be “reviewing our current accounts in due course”.

The changes come after the Bank of England cut the bank rate this month to a new record low of 0.25 per cent. Until now, Santander has paid 3 per cent on balances of between £3,000 and £20,000, 2 per cent on £2,000-£3,000 and 1 per cent on £1,000-£2,000.

“The banks are looking at their future loan book and, post Brexit, they can see a decline in new mortgage lending . . . so they don’t need as many deposits, said Warren Mead, a partner at KPMG. “This has created a perfect storm for savers.”

About three-quarters of UK current accounts pay a zero rate of interest, says consumer group Moneyfacts. The average easy-access savings account pays 0.53 per cent.

Related Lombard note: Universally challenged

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