WSJ Swallows Big 4 Public Relations

By • Feb 15th, 2008 • Category: Pure Content

Update: At least Bloomberg isn’t buying the Big 4 firm PR line. They cared enough to give us the detail on PwC.

American International Group Inc., the world’s largest insurer by assets, fell the most in 20 years in New York trading after its auditor found faulty accounting may have understated losses on some holdings.

So-called credit-default swaps issued by AIG, which protect fixed-income investors against losses, declined by $4.88 billion in value in October and November, four times more than previously disclosed, the company said today in a regulatory filing.

AIG said Oct. 11 that it rehired PricewaterhouseCoopers after considering other auditing firms as part of its February 2006 settlement with then-New York Attorney General Eliot Spitzer.

PricewaterhouseCoopers, AIG’s auditor for more than two decades, had approved financial results from 2000 to 2005 that were restated amid Spitzer’s probe, lowering earnings by $3.4 billion. AIG in 2006 agreed to pay $1.64 billion to end probes of its accounting and sales practices under Greenberg.

David Nestor, a spokesman for the accounting firm, and Ken Frydman, a spokesman for Greenberg, declined to comment.
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I’ve been complimentary of the WSJ lately, in particular of the WSJ Law Blog. Despite everyone’s concerns about Rupert Murdoch taking over, it seems that the WSJ has been out of the gate fast and hard with stories about Wal-Mart, for example.

But just as I was about to give up looking for a good story for Wednesday’s post, I came across this piece of cotton candy fluff. I usually don’t show the journalist’s name when I reprint segments of the story. You can look that up with the link. But when a journalist does an exceptionally poor, an exceptionally stupid, or an exceptionally good job of covering the story, I want you to know right away who it is. In this case, this is not the first time David Reilly has disapponted me.

This piece of “journalism” seems to have been dictated directly by Deb Harrington .

After Losses, Auditors Take A Hard Line
By DAVID REILLY

Many big Wall Street firms were asleep at the switch in the years leading up to the credit crisis. At least another group — the auditors — seems to be minding the store.
They fell down badly during the tech-stock bubble, but
their standards seem to be pretty tight these days.

The most recent evidence: The apparently hard line taken by American International Group Inc.’s auditor, PricewaterhouseCoopers, when it came to how the insurer valued credit default swaps — which are contracts AIG wrote as insurance against default on securities sometimes linked to subprime mortgages. That resulted in AIG upping its loss estimates for these contracts by about $3.6 billion, a move that shocked investors and sent its stock plunging.

Markets tend to be healthier when auditors insist that companies value their assets conservatively. (Blogger Note: Duh Di Duh Duh!)

The result: Investors can place more faith in the numbers they are getting.

There’s other evidence that auditors have been on the job. Companies aren’t restating previously reported results as much as they used to. Restatements fell in 2007 for the first time in the post-Enron era, according to separate studies by research firms Glass Lewis & Co. and Audit Analytics. Audit Analytics said the number of restatements in 2007 was 1,237 compared to a peak of 1,801 the year before. Glass Lewis said the number of companies restating fell to 1,172, compared with 1,346 in 2006. Back in 2001, as the last financial crisis gathered steam, there were only about 600 restatements…

I guess Mr. Reilly has not considered the fact that PwC has been AIG’s auditor for a while. In fact, they were just reappointed with the blessing of Arthur Levitt, in spite of having advised and approved previous valuations and presided during the period when they were investigated and fined by the New York Attorney General.

I guess Mr. Reilly also forgot that the auditors were the ones that advised and approved on the accounting for all of their clients that went through all of those restatements. I don’t think the supposed reduction in restatements is so much due to the fact that the auditors are getting tougher. After all, they are still asking to be able to use their judgement finally instead of just ticking the boxes. They want auditor liability caps before they start using any judgement.

I think the reduction in restatements is because the firms are tired of arguing with their clients and getting fired or resigning. Just look at Pwc and AIG. PwC is hanging on despite being sued by their client and being the one who presided over all of their other messes.

It would be nice if the traditional media did not disguise PR as reporting. The markets and investors would be better served in not being encouraged to have confidence in what has become worthless paper – the auditor’s annual certification of financial statements.

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10 Responses »

  1. Francine:
    You beat me to this post. I see it the same way you do. I will provide a reference to your comment at my website.
    I call the WSJ’s piece a “fluffball”.

    George

  2. The last point you made concerning the audit opinion was immature on your part. No one would suggest the system is perfect, but worthless?

    If you have a better alternative, then say what that might be. Would you want the government to take over that role? Would you want auditors to examine every transaction? What do you want?

    The real reason restatements will decline is because the hysteria to restate for things that don’t matter is waning fast. No one has really gotten any smarter or is better. Even the SEC has latched onto the concept of requiring restatements only when there would be reasonable expectation that an investor would care.

    In any event, you, just like so many politicians, so easily declare something broken and then propose a solution.

    I suggest that you invest in third-world markets where perhaps the lack of transparency and oversight would make sense to you.

  3. You elected to respond to the easy comments. The real point is what are you proposing as an alternative? It is easy, and frankly boring, to continue to wail away at the auditing profession. Are they perfect? No. Is any organziation? No. Should they be perfect? The answer you, and others seem to have is “Yes”, but please don’t charge us too much, you greedy auditors. So here is the question, again:

    If you have a better alternative, then say what that might be. Would you want the government to take over that role? Would you want auditors to examine every transaction? What do you want?

  4. The blog is about raising awareness of the issues and giving exposure to others who are in a position to influence the solutions. I’m also highlighting where those who have a responsibility to monitor and regulate are not serving investors and the public in general very well. Based on the huge audience I’ve built and the positive feedback I’ve received, u know people are very interested in the information I’ve provided. I’m writing a book which will have my humble opinion of what I think should be done. Unfortunately for investors, they will probably still be looking for answers and someone to act by the time the book is published.

  5. I am amused and entertained by your blog. So it is interesting to see a wholly different view than my own. It would just seem to me that you are hiding behind the “awareness” card and not presenting a balanced view or suggesting any alternatives other than to bash the profession, and by association, the good men and women that work for the auditing firms.

    For example, the AIG matter, a balanced view would have included that a big big part of the issue was the fabricated fair values for financial instruments (i.e., CDOs, sub-prime MBS, and other complex or structured instruments) that were sourced from broker quotes or a pricing service that used a proprietary model. Companies and auditors likely relied upon those quotes to support valuations contained in the financial statements. It will turn out that many of these models are flawed or insufficent, or that the brokers had a vested interest in the values. Should management and the auditors done more? Probably. But lets also include blame for the corrupt or inadequate system that still exists today to determine fair value for complex, structured or illiquid investments.

  6. Well, I’m tickled bright pink… Being amusing and entertaining is part of my goal, since the topic is pretty dry for other than the diehards. In fact, my agent says I have to be even more provocative to appeal to a general business audience rather than the limited one that he thinks constitutes auditors and the people that sue them. Wait until you see the book title!

    Can I use your comment as a book jacket blurb?

    I write a blog (not a column in a global media owned magazine or newspaper,) and I work independently, so I can be biased. It’s my bias, my opinions, my twenty-plus years of experience, non-filtered by anyone else’s strategy or agenda.

    You can take it or leave it.

  7. Actually I have made money investing in Latin America. The advantage is not due to their lack of transparency but the fact that these markets are typically undervalued by prejudiced “1st world” investors.

    With regard to my comment about the lack of value in the auditor’s opinion, my opinion is shared by many others and is being heard more and more these days outside of the self-serving circles of the firms and the regulators who serve them. See the links in the post for more critics.

    Immature? Oh, to have the luxury of immaturity and naivete. Unfortunatly I am burdened by age and broad, no pun intended, experience.

  8. Indeed, this is YOUR blog, your agenda. I’m just part of the peanut gallery, too lazy to do my own blog.

    Anyhow, I intend to express my own views, which are based on 24 years of experience. It will be clear that this will become “Point/Counter-point”. But I promise not to call you “Jane” (reference to the old Saturday Night Live skits, where they did a parody of the 60 Minutes show)

    Lastly, feel free to use anything I post in anyway you see fit.

  9. Thanks for your interest. You can call me Jane, if it inspires you. I publish all comments, unless you call me an “ignorant slut.”

  10. David Reilly is one of the biggest shills in the media. His career is entirely dependent on parroting the agendas of his benefact errr…. I mean sources…

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