How Will We Solve The Financial Crisis? The Answer Is Bigger Than You And IBy Francine • Jan 19th, 2009 • Category: Latest, Pure Content, The Case Against The Auditors
I read two interesting articles this weekend, amongst many others and lots of Twitter conversations about the inauguration festivities and the financial crisis. One was a wonderful summary by Jonathan Weil at Bloomberg on the role of the Big 4 auditors in the death of the financial organizations.
“Here’s hoping the big audit firms get busy living, and start sounding alarms at banks that are dying.”
Joanathan and I have exchanged emails and shared insights. I’m so glad he has listened to my whispering in his ear and wrote the article he had in him the whole time he was writing about individual cases. One of the problems I have had in getting attention to this issue is that there are so many other fish to fry – the companies themselves, the ratings agencies, individual executives. It seemed until recently that it was gloves off and the Big 4 was getting a pass.
“The public’s patience may be running out. One sure sign is that investors are starting to blame big accounting firms for frauds at places they never even audited. There’s been no indication that PwC or KPMG, for instance, should have known Bernard Madoff was running a Ponzi scheme when they blessed the books of other funds that sent him money. The firms are getting impugned anyway, even though Madoff’s auditor was someone else.
Then there are the scandals where the firms have lots of explaining to do. Last week, PwC’s India affiliate issued a statement about its work for Satyam Computer Services Ltd., which overstated its cash by $1 billion. The firm said its audits were conducted “in accordance with applicable auditing standards and were supported by appropriate audit evidence.” ”
We’re starting to see a flood of statements similar to the one above by PwC regarding Satyam. Wait! That’s what PwC said when they pulled their audits at Yukos. And that’s what EY is saying as it begins to distance itself from its prior audit opinions at Anglo Irish Bank.
“Ernst and Young confirms that all of the audits conducted for Anglo Irish Bank shareholders were undertaken in accordance with the appropriate auditing standards.
Ernst and Young is confident of all audit opinions expressed to Anglo Irish Bank shareholders in the bank’s financial statements and that the accounts show a true and fair view of the state of affairs and results of the bank in accordance with the information and explanations received.”
So, you may finally be saying to yourself: What’s the point of audits and auditors?
“We can’t do something like that today: the world has changed too much for insolvent banks to be able to hold toxic assets on their balance sheet at overinflated values and operate indefinitely as a going concern. Bankers who rail against mark-to-market accounting are essentially indulging in nostalgia for the 1980s — but we can’t go back there. Instead, the insolvent bank has to be nationalized. Eventually it will go public again, either with the bad assets excised from its balance sheet and moved to some other arm of the federal government, or else after those bad assets have recovered in value enough for the bank to be worth a positive amount of money….”
The FSA, the UK regulator, hired a former EY partner from the firm that audited Anglo Irish to advise it on how to address their banking crisis.
PwC is still auditing AIG and Freddie Mac. Deloitte is still auditing Fannie Mae and now another nationalization due to significant losses, RBS.
“Royal Bank of Scotland (RBS.L) unveiled the biggest loss in British corporate history on Monday, overshadowing a second government bailout for the sector and sending its shares reeling to a 23-year low. RBS said it would report a 2008 loss of up to 28 billion pounds ($41 billion), driven largely by a goodwill impairment charge of 15 to 20 billion pounds related to its acquisition of parts of Dutch rival ABN AMRO in 2007. Excluding goodwill impairment, the bank said in a statement it expects a full-year loss of 7 to 8 billion pounds.
The statement came as the UK government sought to counter a looming recession by unveiling a new rescue package for banks that will see its stake in RBS rise to nearly 70 percent from 58 percent.”
Why are we pretending that a Big 4 firm is independent and objective when continuing to audit an institution that failed under their watch, one that may be dragging them into litigation, one in which they have failed in their duties to protect the shareholders? And the only experts the government seems to be able to find to clean up the mess that happened on the Big 4’s watch are the Big 4?
Let’s tear down the walls and rethink how we should protect the investor, who in many cases is now the taxpayer. Get rid of the for-profit audit firms involvement in the nationalized entities and those receiving government bailout funds and draft all able bodied audit and accounting professionals into the National Service Corp for Accountability and Transparency. TM
How will the current audit firms meet their responsibilities and obligations to the taxpayer when, in service to their partners desire to maintain partner profits in what they see as a downturn, they are cutting professionals from their ranks and reducing them to four-day work weeks?
The GAO, with the support of the PCAOB under a newly restructured SEC that focuses on examinations and enforcement rather than public relations, should be hiring every auditor and accountant they can lay their hands on and putting them to work on the nationalized entities directly. They can audit on a government standards basis (It’s tougher than public standards!) and set up new policies, procedures and processes to provide improved controls and monitoring of the nationalized banks, the Big 3 automakers and financial firms such as AIGand GMAC. It’s a “once in a lifetime opportunity” both to revamp the capitalist process in service to all stakeholders and to provide jobs to well qualified professionals.
And what will the Big 4 do in the meantime? Well, they certainly should not be wasting everyone’s time and money trying to be systems integrators. They’re not that good at it, the market is not going to be moving for a while, and they can’t compete and offer best in class services under the audit firm mantle. Not when their market share is immediately sliced down due to independence considerations.
The government can hire the audit firms like a “staff augmentation firm” for audits of the rest of the public companies. The firms can be “drafted” and work on what the government tells them to work on under government employee supervision, on a “martial law” type basis. After all, it is a crisis of proportions not seen since the Great Depression!