Latest Updates: My Clients Are Failing, My Clients Are Failing

By • Oct 7th, 2008 • Category: Deloitte, EY, Goldman Sachs, KPMG, Northern Rock, PricewaterhouseCoopers, Societe Generale

Update:
Chicago’s John “Dr. J.” Najarian co-founder of OptionMONSTER on the need for transparency when the assets bought by the US government are eventually sold.

On YouTube.

Part 2 from Jon Najarian is here.

 
I have been updating this information throughout the weekend as other banks failed and other deals have been done.
A summary of “the mother of all bailouts” from The Corporate Counsel.net.
I have also been on Twitter, passing information along to those that follow me there and remarking on developments as they happen.

Stay tuned for updates to this post and more on the financial crisis.

***************************************************************
Originally posted September 26, 2008
The Big 4 are no Chicken Little.  They’re not even the boy who cried wolf.     

If only we had received the benefit of warning, however early, potentially exaggerated, and conservatively based.  If only the Big 4 had told us, in the form of significant deficiencies, material weaknesses, going concern opinions, or some other way of signaling, that some of the banks were technically insolvent or potentially illiquid under certain scenarios.  
And what if the FAS 5 required statements on contingencies had been used to signal something other that the probability of a legal catastrophe or a natural disaster?  What if they had been, instead, made useful in pointing to less than doomsday market breakdown contingencies and that company’s readiness to weather them? Unfortunately, they’ve decided to shelve those proposals for fuller disclosure for now.  And we get more and more and more opaque…
My esteemed friend Richard Murphy in the UK states the obvious.  Who has not yet been called to account for this mess?  The Big 4.  
So let’s look at an update of where things stand , at least from a competitive position and as the shifting sands may have a potential impact on the staff and partners of the Big 4.
My expert assessment:  Feds better watch how much toxic risk JPM and B of A have taken on in addition to what they already have.  Both are audited by PwC and we know what I think of those guys….

And Citi (KPMG) has been suspiciously silent during all of this. What’s going on over there???? Update: Citi is in the running to take over Wachovia.   Update (2) Looks like Wells Fargo is getting Wachovia instead and Citibank is suing.  Yeah, thats a good use of capital. 
Red
AIG – Taken over by the Feds.  Why is PwC still the auditor when they are paying off their clients, the shareholders, for misleading them? Why isn’t this an independence violation?
Bear Stearns – Purchased by JP Morgan who uses PwC (Formerly Deloitte)
Merrill Lynch – Was Deloitte, bought by Bank of America (PwC)
Lehman Brothers – (EY) Bankrupt.  Pieces being picked up by Barclays and Nomura. Dick Fuld gives less than satisfying performance in front of Congress on 10/6.
Washington Mutual – Deloitte
Northern Rock – Nationalized (PwC)
New Century - (KPMG)
Fortis – (PwC and KPMG) Update  Looks like they are now on the way out, perhaps as soon as the weekend of the 9/27-28.  Update (2) Looks like BNP Paribas will pick up most of Fortis.
Bradford and Bingley UK  – Nationalized over the 9/27-28 weekend.
Royal Bank of Scotland (Deloitte) moves from Green to Red on news of a run and potential bailout.
LLoyds (PwC)

   


Yellow

 

Fannie Mae -Suing Former auditors KPMG, now with Deloitte and recently put under US government conservatorship.
Freddie Mac – PwC and recently put under US government conservatorship. (For a nice timeline and commentary on Fannie/Freddie issues and takeover check out this report from Currency Trading.net)
Morgan Stanley – (Deloitte) – Morgan Stanley has agreed to sell a 21 per cent equity stake to MUFG, Japan’s largest bank, for a cool $9bn.
Goldman Sachs – Recently accepted capital infusion from Warren Buffet (PwC)
HSBC – (KPMG) Largest European bank by market value is also teetering.  Cut 1100 jobs on 9/26
Societe Generale (Deloitte and EY)
Credit Suisse –  (KPMG)
UBS - EY
Wells Fargo – (KPMG)
Green (for now) 
JP Morgan – (PwC) Has picked up Bear Stearns and now Washington Mutual, both formerly audited by Deloitte
Nomura – (EY)
Barclays -  (PwC) Buying US portion of Lehman 
Bank of America – (PwC) – Bought Countrywide (KPMG) and Merrill Lynch (Deloitte)
BNP Paribas (Deloitte, PwC, and Mazers) Looks like BNP will pick up Fortis.
Credit Agricole (PwC and EY)
Santander – (Deloitte)
Wells Fargo – (KPMG) – Wells Fargo moves to Green now that they theoretically have the strength to buy Wachovia.  However, Maria Bartiromo asked some tough questions of their CEO on Friday and I was not convinced. 

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31 Responses »

  1. Are you arguing that this crisis has been caused by a quality of earnings issue, similar to the tech meltdown (Shame on the audit firms). I’d argue the information available to investors is more than adequate as evidenced by the sell-off in recent months. I’d argue further the crisis is due to poor business practices (Shame on the businesses, and our government who has let them do it)

  2. @mike I’m “arguing” that the auditors are entrusted, have a government sanctioned mandate, to protect shareholders and I’m seeing shareholders getting screwed left and right.

  3. whats the status of citigroup? i haven’t heard them mentioned either

  4. Apparently, Wachovia is in talks with citigroup about a potential merger.

    http://dealbook.blogs.nytimes.com/2008/09/26/wachovia-begins-early-deal-talks-with-citi/index.html?hp

  5. Government auditors? Hopefully, they hire higher quality people than what we see at the IRS.

  6. Francine, I’m just curious. What is the most efficient way to find who the external auditor is for a particular company? Is there an aggregated database somewhere that gets updated?

  7. John H:
    The easiest way I’ve found is to go to the SEC’s website and look at the most recently issued 10-K for the company in question. Then see who signed the opinion.

  8. The Republicans and their fat cat friends espouse the success of a free market, but behind the scenes, use their good old boy network influences to help one another simply make more money. Not such a free market after all? This is similar to the greedy public accounting firm partners help one another make more money, by exploiting their employees. How disgusting!

  9. You missed BBBD which was nationalized this weekend

  10. pnb paribas is deloitte.

  11. Francine,

    Curious if you saw this meltdown coming, and protected your own assets/retirements savings accordingly. And if not how you can blame the auditors – its a meltdown of epic proportions that no one saw (aside from Warren Buffet).

    Problem is with the mark-to-market accounting treatment. Most of these mortgage-back-securities, regardless of what the market prices them at, still have calculatable cash flows, even if you discount them heavily for the inherent risk of default, exacerbated by falling home values. That is what they are worth, and by and large that is what we assumed the markets were pricing them at. Turns out that was not the case, but the accounting standards essentially assumed the market was independent and rationale, which it is not. The auditors were neither right nor wrong.

  12. @6:40:00 Personally I have a very simple financial situation. I did see the real estate bubble for a while and warned others for along time. I have chosen to be a writer and self-employed. I live subject to consulting income and other self-employment income which is erratic at times. I keep it simple and minimal for that reason.

    I have limited holdings in the stock market. That has to do with lots spent on luxury hotels, shoes, tequila, new artists, first time fiction authors, lots of dog food for my big Rottie, and charities benefitting new immigrants and other causes I’m interested in. I’m generous to a fault. Take fault with it, but this blog is not intended to give personal financial advice to anyone.

  13. Nice retort. Well done Francine. Well done.

    -Rottie

  14. Anonymous (Wed Oct 01, 06:40:00 PM CDT) I agree with you.

    An auditors role would never be able to account for systemic risk.

    Much like an audit has a presumption of ‘going concern’, the audit is generally conducted that way.

    If, like Bear Sterns, the company goes insolvent/illiquid overnight there’s not much the auditor could have done to detect/notify/report in time.

    Another example would be if after the auditor reports their statement, the government outlaws the very business of the client.

  15. I can’t help but feel that auditors played some role in this situation. I am not sure to what extent, but all one has to do is read ANY PCAOB inspection report to realize that even the big 4 firms consistently “failed to obtain sufficient competent evidential matter”, “failed to test the underlying data”, “failed to substantively test to existence and valuation of accounts receivable”, and the like for almost EVERY audit that the PCAOB has performed an inspection for.

    When I was with a big 4 firm back in 2006, we let a good number of our mortgage related clients go. Word around the office is that these clients were deemed to be too high risk. I admit that this could very well be hearsay, but this memory resonates especially well with me now.

    In order for the public to see some truly quality audits, the big 4 would have to change the way engagement profitability is calculated.

    Just my $.02

    In any case, I appreciate and enjoy your blog.

  16. Francine:
    I lived through the S&L crisis and saw it first hand. The Big 87654 are as complicit in this mess as they were the S&L crisis of 1979-86. As for the PCAOB, it's a joke. It's staffed with "former" Big 87654 flaks whose job it is to protect their "former" firms and throw small CPA firms into the volcano of the financial propriety god. As I have pointed out before, the Big Four audit about 98% of SEC registrants by market cap, Grant, BDO and McGladrey audit 1%, 1300 smaller firms audit 1. Why look at them? As for the competence of the PCAOB, who is Mark Olson kidding? These guys are a bunch of "tick and tie" clerks. They don't get into the substance of audits.
    Anyone who thinks replacing the Big 87654 with SEC auditors will imprve things is crazy. The SEC is controlled by big business interests.

  17. EY has received their subpoena for Lehman. Lets not forget to mention the hoards of civil suits that have already been filed and the hoards that are left to be filed by other investors, especially state pension funds. Lets see what investigators find.

  18. “If only we had received the benefit of warning, however early, potentially exaggerated, and conservatively based. If only the Big 4 had told us, in the form of significant deficiencies, material weaknesses, going concern opinions, or some other way of signaling, that some of the banks were technically insolvent or potentially illiquid under certain scenarios.”

    Your basic premise in this blog, as you have stated, is to show how overly-conservative the Big 4 are. Sounds contradictory to this extract, which also shows a surprising lack of understanding of AS 5, FAS 5, or going concern considerations.

  19. [...] It’s, therefore, an amazingly apposite and evocatively contrary position from the one he took immediately after Enron. In April of 2002 he told Frontline correspondent Hedrick Smith that the accounting firms were in integral part of the process of “financial engineering,” specifically the structuring of off-balance sheet vehicles that we learned so much about in Enron. Have things really changed that much since? Of course not.  His audit firm training ground, PwC, is the “financial engineer” for Northern Rock, AIG, Goldman Sachs, Barclays, JP Morgan, and Bank of America. [...]

  20. [...] The hard rain has already started to ruin PwC’s parade. Amongst the four largest firms, they benefited the most from the financial crisis in terms of new and bigger audit clients.  But for every from that [...]

  21. [...] expertise in restructuring and troubled companies?”  Well, we may be getting warmer.  Between PwC’s clients and PwC Advisory itself, there’s going to be a lot of work for him, but I’m not sure how [...]

  22. [...] each of the notorious “financial crisis” institutions collapsed, were bailed out/nationalized by their governments or were acquired/rescued by [...]

  23. [...] CEOs about anything important nowadays?  Seems like meddling to me. Deloitte, in particular, has a lot fewer clients to call these days anyway. Maybe instead of the CEO of the global firm calling, the local partners [...]

  24. [...] The auditors’ ability to fight the scope reduction demands was limited by economic reality and losses of clients due to failures, takeovers, and the bailouts. They started to cut their overbloated rolls and then were hard pressed to push for more given [...]

  25. [...] Add to this perfect knowledge the additional capital markets insight PwC has given their audit relationship with other large global financial institutions such as JP Morgan, Bank of America, Freddie Mac, Fortis, Barclays, Northern Rock… [...]

  26. [...] Add to this perfect knowledge the additional capital markets insight PwC has given their audit relationship with other large global financial institutions such as JP Morgan, Bank of America, Freddie Mac, Fortis, Barclays, Northern Rock… [...]

  27. [...] Add to this perfect knowledge the additional capital markets insight PwC has given their audit relationship with other large global financial institutions such as JP Morgan, Bank of America, Freddie Mac, Fortis, Barclays, Northern Rock… [...]

  28. [...] For the record, Bank of America’s auditor is PwC, Countrywide’s was KPMG, and Merrill Lynch used Deloitte. And Lewis J. Liman, BAC’s attorney, is not balding, not naked in this photo, but probably pretty smart. [...]

  29. [...] though the largest global banks escaped the taint of actual failure – if not bailed out, they were acquired instead before a technical bankruptcy – there were [...]

  30. [...] Lehman bankruptcy in the UK is a prime example. Some of PwC’s financial services audit clients JPMorgan Chase and Bank of America also grew because of acquisitions during the crisis. Combined with their audit of Goldman Sachs and [...]

  31. [...] we saw during the crisis, any one of the Big Four auditors could at any time, by virtue of failure, acquisition, or merger, become the auditor of any of their [...]

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