• Warning Signs: I Started Looking And The Bubble Burst…

    By • Sep 1st, 2009 • Category: Latest, Pure Content, The Case Against The Auditors

    Kevin LaCroix D & O Diary: “On July 30, 2009, Eastern District of New York Judge Thomas C. Platt entered an order (here) preliminarily approving the settlement of the securities class action lawsuit that had been filed certain directors and officers of American Home Mortgage Investment Corporation and their auditors. The total value of the settlement is $37.25 million, which alone makes the settlement significant. However, the settlement is also significant because it appears to be the first subprime-related securities lawsuit settlement to which the target company’s auditors and offering underwriters contributed toward settlement.”

    I’ve been following the trials and tribulations of the mortgage originators and their auditors for a while.  I wrote about American Home Mortgage and Deloitte for the first time in August of 2007.

    Yes.

    I’ve been talking about the mortgage originators for more than two years and more than one year before the sudden, unexpected, no one saw it coming, it’s a black swan, impossible to foresee “financial crisis” that hit us like a ton of bricks in the fall of 2008.

    From my blog post, “It’s Deloitte’s Turn To Get “Sub-Primed“” of August 1, 2007:

    The warnings have been coming steadily from American Home Mortgage, in sharp contrast to the rosy picture painted by New Century before it dropped off the cliff. They have also been increasing reserves significantly during this time. However, you have to ask the question whether there is something fundamentally flawed in the business model such that even lenders like American Home who don’t focus technically on the “sub-prime” market have been severely impacted by the US housing market slide.

    One area they did potentially over concentrate on is the high loan-to-value, stated income loans that resulted in the great majority of their delinquency related charges. There were only three lenders who bought up 50% of their portfolio, Countrywide Financial Corporation, Deutsche Bank and Wells Fargo Bank, N.A. , which accounted for 20%, 19% and 11%, respectively, of total loan sales.

    Yesterday’s announcement focused on the disappearance of their credit facilities. I really like the way they worded this, “…hindering of access…”

    “American Home is currently experiencing a hindering of access to its traditional credit facilities. Additionally, American Home’s lenders have initiated margin calls in response to the decline in the collateral value of certain of the Company’s loans and securities held in its portfolio. The Company has received and paid very significant margin calls in the last three weeks and has substantial unpaid margin calls pending.

    Notice the use of the term, “sub-prime” in the title.  I was still hyphenating it.  It was a new term, but not the first time I used it.  That was on March 14, of 2007, before American Home, when I wrote  about New Century Financial for the first time

    New Century Financial, the US subprime lender scrambling to avoid bankruptcy, hit further troubles on Tuesday as it revealed that it was facing a preliminary investigation by the Securities and Exchange Commission and that it had received a grand jury subpoena from the Department of Justice. The struggling backer of high-risk mortgages revealed that it was under criminal investigation by the US Attorney’s Office in the Central District of California at the end of February. It had already admitted that the SEC had asked for a meeting…no matter how much auditing and disclosing goes on, we continue to see “rapid, unexpected declines” in once high-flying companies that suddenly teeter on the edge of bankruptcy, even though the best and the brightest are supposedly “Keeping Watch” for us as their auditors.

    I have written about New Century (KPMG) and American Home (Deloitte) many more times.

    August 3, 2007 American Home – A Self-Fulfilling Prophecy

    August 15, 2007 Jonathan Weil in Bloomberg At Mortgage Banks, `Going Concerns,’ Going, Gone

    “You think your job is tough? Think about the poor schlimazels from Deloitte & Touche LLP who blessed the books at American Home Mortgage Investment Corp., mere months before it went belly up.

    The Deloitte accountants faced a crucial decision as they finished their audit work in March. Deloitte could resign and walk away. The firm could qualify its audit opinion by saying there was “substantial doubt” about American Home’s ability to continue as a “going concern” through the end of the year — as many short sellers already had concluded. Or it could give the company a clean opinion, expressing no doubt, which is what Deloitte did.

    September 4, 2007 Deloitte and American Home – Have They Quit Yet?

    September 7, 2007 Deloitte Disappoints – A Case of Subprime Interruptus (NovaStar)

    I also wrote about more than once about Beazer (Deloitte), Northern Rock (PwC) and the burgeoning subprime malaise in Europe. This was all during 2007 and early 2008, before the “subprime crisis” turned into the “financial crisis” and the global recession.

    But back to American Home Mortgage…

    Kevin LaCroix characterizes the settlement as “significant because it appears to be the first subprime-related securities lawsuit settlement to which the target company’s auditors and offering underwriters contributed toward settlement.”

    Yes.  It’s the first to settle and include an auditor’s contribution.  But the amount Deloitte has to throw in is equivalent to the partner’s monthly Starbuck’s budget.  (The $37.25 settlement is actually a reflection of three separate settlement stipulations: a settlement of $24 million with ten individual defendants; a settlement of $4.75 million with Deloitte; and a settlement of $8.5 million with the seven underwriter defendants.)

    Considering the $1 billion cloud hanging over KPMG for New Century, Deloitte was wise to settle American Home for a pittance to avoid any details going to trial. They can cross this one off their list.  After all,  Deloitte has a long list.

    Because if anyone had cared to look more deeply, they would have found plenty of mistakes on Deloitte’s part to add fuel to the fire of a negligence or accounting malpractice claim. Deloitte had been warned by the PCAOB about its shoddy work on the 2007 audit of AHM.

    From the PCAOB final report on Deloitte’s 2007 audits of 2006 fiscal year activity issued May 19, 2008:

    Issuer E

    In this audit, the Firm failed in the following respects to obtain sufficient competent evidential matter to support its audit opinion –

  • The Firm failed to perform sufficient procedures to assess the valuation of certain of the issuer’s privately-issued mortgage-backed security holdings, which the Firm assessed as possessing “low inherent risk” with respect to valuation, …
  • The Firm failed to perform sufficient procedures to assess the valuation of the issuer’s mortgage loans held for sale…Firm failed to assess whether the issuer’s credit-based valuation approach for delinquent loans held for sale was appropriate given that the approach did not consider changing interest rates and market demand.
  • The Firm failed to evaluate whether the issuer’s use of hedge accounting for interest rate swaps was appropriate…failed to perform procedures to determine whether the issuer had contemporaneously prepared appropriate hedge documentation in accordance with SFAS No. 133.
  • The issuer calculated its allowance for loan losses by applying specified percentages to two categories of delinquent loans, determined by the term of the delinquency.  The Firm failed to evaluate whether this method was appropriate
  • The issuer transferred loans to intermediaries prior to their sales to the ultimate investors, and portions of the consideration to be paid to the issuer by the intermediaries were withheld pending the final sales…no evidence…that the Firm had analyzed all the terms of the arrangements…in order to evaluate what effect these terms may have had on the accounting for the transfer of these loans.
  • Sources tell me that Deloitte is still not off the hook with the SEC on this one. (AHM engagement team members were recently interviewed by the regulator.)   Who knows if there were additional prior warnings by the PCAOB.

    Between the 2007 and 2008 audits, Deloitte changed audit partners on the engagement. Tim Forrester was the partner on the engagement until 2007 before AHM collapsed. Gene Alliegro became the engagement partner while Tim still served as Advisory partner in 2007/2008.  I was told by a source there was another engagement of his which also got reviewed and commented by PCAOB. Gene Alliegro is reportedly still with the firm.

    However, Deloitte has a history of keeping partners who are under investigation, supporting the firm’s defense, or who’ve been sanctioned in non-Audit roles until whatever trouble they got into goes away or they serve no more use to the firm. I see Mr. Forrester here still identified in October 2008 as a Deloitte partner. Tim Forrester left Deloitte at the end of 2008.

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    35 Responses »

    1. Does anyone really drink coffee from Starbucks anymore? yuk.

    2. Deloitte has a long history of keeping bad partners….period (not only those who are suspended from Audit roles). They prefer to get rid of any partner that does not suck up, does not drink the Kool-Aid, posses a moral or ethical backbone, and who thinks outside the box.

    3. So, first off, I’m questioning: “Why is it that such an important post as this one only gets a Starbuck’s comment?” [Yeah, I know, there was also that bad partners keep on keeping on like the Energizer Bunny comment as well]

      I have been talking about the non-financially sound direction we, as a country, have been heading for like 5 years now. I have a friend, who used to be at ABN AMRO, then PWC, now at Bank of America, who years ago told me that the banks don’t care about who they give credit cards to, or who defaults on loans, because of how much revenue they make from credit card finance charges. They actually would rather have someone not clear their bills and over borrow than pay because they know that those people will live their lives paying their minimum principle and maximum finance charge.

      When I saw the traditional college tuition financial concerns getting involved in home mortgage lending I knew we were heading in the wrong direction.

      One cloud easily see that people, who had traditionally been renters (because of their financial situations) were now becoming home owners, which in and of itself is not a bad thing, in fact it is a good thing for the housing market and for their families. Where it is a bad thing is that these people were over buying, and over extending themselves.

      Just as the bubble was bursting either Bush or Cheney gave a press conference where they said something along the lines of “they were not going to allow the American way of life to be destroyed”. They were talking about credit, but not just the availability of credit – they were talking about the ability of unsubstantiated borrowers to over extend themselves, buying housing that was above their means, cars that were above their financial situation, clothes, toys, adult entertainment, etc . . .

      It reminded me of a neighbor who’s wife put their house up for sale because her husband told her they couldn’t afford to go to Disney – her sound financial planning was that if they sold the house they would have more than enough cash to go to Disney or anywhere else they wanted.

      Basically there’s an entitlement mindset here that just doesn’t work in the fiscally sound financial world.

      Yes it’s heartbreaking to see people thrown out of their homes (TV News specials covered a few disposed families – Sheriffs coming to the door and tossing them onto the street in real time). But the reality is they never should have been given those loans to begin with. The news media is all flush with articles about who’s to blame – usually the people are on the list (they took loans they should have known they couldn’t substantiated or that they should have known were of a flux rate that would only go up, but how should these people have known).

      Years ago I decided to do a stint of Junior Achievement – one of the classes was about financial understanding – the courseware walked the student through things like balancing a checkbook (I can’t tell you how many adults that I know who cannot or do not do this and just look at their balance when determining if they can make a certain purchase), and calculating how much money one would require to live the lifestyle (apartment, entertainment, clothing, food, etc) they were interested in living, and thus what sort of job (career) that would require.
      On the wall of my cube I have a quote, picked up off one of the news media blogs, related to this subject. It reads:

      “We, like most Americans, need help getting our loans modified so that the principle match the market value and the payments are ones we can handle. Keeping Americas in their homes is the best way to help the economy. We don’t mind doing two or three jobs to keep our homes, but it needs to be affordable for us.”

      Basically, with the bailouts, these people expected to get what they asked for, unfortunately for them the banks benefited more than some of them did. The bigger question is that Americans, like the person in the quote, seem to think they should get this free ride as long as they claim that they are willing to do the work to support it.

      OK, so if the people aren’t knowledgeable then the expectation falls onto the financial industry for control/reporting/etc

      If the financial watchdogs (Auditors) aren’t telling the truth then where are we at? If a nobody like me could see that there’s a big bill developing down the road that someone is going to have to pay, how is it the people whose job it is to see this couldn’t.

      WallStreet has one objective – make money off of trading, which requires assessing stock values as the means to the ends. We already know how unscrupulous those guys are. We already know companies can be downgraded because they didn’t make projections, even if they make a load of money; WallStreet projections rarely match what companies are capable of [years ago I worked in Ad Sales – my manager told me they wanted to see a 25% increase of sales, in a down spiral market where Advertising Budgets were being cut everywhere – they went so far as to make obtaining that increase one of my salary (raise/bonus) based goals – needless to say I could have tried all I wanted I wasn’t going to make it – and they knew it – plus, no matter how hard I did try all I saw was that sales were decreasing].

      And, just for the record, I rarely buy anything at Starbucks.

    4. I don’t get it. If enough people could have seen this coming, we wouldn’t be in the situation we’re in right now. It’s fun to bash whatever industry, company, or collection of people (there are so many that I don’t need to provide examples) that one believes is in need of remediation, and it’s easy to cast doubt upon anyone associated with the financials of a company when that company collapses. Anyone with a decent knowledge of finance and economics could have “see it coming” had we just paid attention to the fundamentals.

    5. PD – It’s spelled M-O-N-E-Y. We see what we want to see.

    6. A lot of people were blinded by the 20% year over year returns and fast money. I think many more people saw this coming than are willing to admit it. Not that I directly support everything he says, but congressman Ron Paul, a doctor by training, was talking about this stuff before this meltdown.

      I think the “no one saw it coming” excuse is a bit of a stretch, maybe they didn’t realize the full magnitude or scope of what was going to happen, but when housing prices have increased way more than individual salaries and a bunch of folks that otherwise couldn’t afford it, were buying $0.5-$1M homes (along with banks lending out around 90% of their cash), it doesn’t talke a genius to figure out that such a system was destined for some problems.

    7. PD — Let me help you out. Plenty of people, influential people, saw this situation developing. They were incentivized, however, to keep quiet. More than that, they were incentivized to keep touting and pumping in the face of a collapsing house of cards.

      Don’t believe me? Go google John Stewart’s pwnage of Jim Cramer on The Daily Show. It’s on youtube. Cramer confesses, and Stewart takes pity on him toward the end. But the early parts were pretty eye-opening, at least for me.

      — Tenacious T.

    8. Tenacious – are you seriously going to bring up Jon Stewarts “pwnage” of Jim Cramer on the Daily Show. In the world of Wall Street, Cramer is a nobody – the only people that watch his shows are newbie traders who actually think they have a chance of making money through trading stocks. The only reason Jon Stewart attacked Cramer was because Cramer criticized Obama on his show. Sure, Cramer admits to encouraging manipulation by hedge funds and traders, but if Stewart is going to take a stab at the world of Greed in finance, its sort of pathetic to use Cramer as an example.

    9. @ 8 – Cramer’s significance isn’t in being a Wall Street big shot, his significance was that he (and the rest of his network) has been a relentless cheerleader of financial hubris. It doesn’t matter that he himself hasn’t traded anything in years, his daily info-tainment show on CNBC has helped set the cultural tone that has brought on this recession. It was his reckless entertainment disguised as news/analysis that earned him the verbal corn-holing that Stewart administered to him.

    10. Folks, I appreciate the comments and am well versed on the issues that lead us to the mess we’re in. My point is simple: the people that saw this coming either shorted those companies that would be affected by the credit market collapse or moved their money into cash (or both). Other than those people, everyone else missed it.

    11. Auditor No. 2 @ 8 —

      What Philip J. Fry said @ 9.

      PD @ 10 —

      Some people saw the bubble and knew it had to burst some time, but kept hoping that the rollercoaster would keep going up for a while longer, before it came down. It’s called greed, and it blinds a lot of people to the fundamental market conditions.

      — Tenacious T.

    12. Watch this short video on greed http://www.youtube.com/watch?v=RWsx1X8PV_A

      or go to YouTube and type in Milton Friedman – Greed.

    13. @ 12

      Gotta love Milton. That along with Gordon Gecko’s speech in Wall Street show that greed isn’t necessarily the enemy. Greed comes in many forms including love, learning, and other passions. Some greed CAN be good, but it turns disastrous when people become greedy at the expense of others and forget the consequences of their actions.

    14. This is why I’m glad libertarians are the 3% party, and why I ultimately reject this worldview. I like Friedman, but there are limits to Milton’s view, or at least the extreme to which his sychophants push them. Sure, if the only consideration is money, greed is good. So I’m glad the other 97% of us at least acknowledge there are other considerations then our immediate “passions.”

      I’d say “ambition” can be defended, in a more innocent form, much easier then “greed.” But I this isn’t a philosophy board so I’ll leave it at that.

      This does explain callous indifference among “leaders” in the business world, but we don’t have to celebrate it with a Randian lovefest.

    15. I think you may be missing the point of the video. Milton Friedman is not defending greed per se (in itself). What he is saying in the video is that there are no societies or the governments that attempt to control those societies that do not contain greed. The fundamental reason that all societies will always have greed he argues is that people pursue their self-interest no matter what form of government, which he then gives examples of socialist and communist governments in which this holds true. In other words, Friedman argues that no matter what form of government you have, be it socialist in the extremist sense or a welfare state, people will more often than not pursue their self-interest. In addition, he questions what greed is by suggesting that everyone is greedy in the sense that everyone pursues their self-interest. According to the Webster Dictionary, greed is “the desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.” For example, when you go to the mall and try to save a few dollars on clothes you are committing an act of greed according to this definition, regardless of whether you believe it is an extreme sense of greed it is greed. Do you need to save a few dollars on clothes? Do you even need more clothes? When you attempt to save a few dollars you are pursuing you self-interest because maybe you will then try to buy some food with the money you saved, but you are in effect through the act of pursuing your self interest committing an act of greed on some level. So, he is not defending greed per se, he is saying that all societies and the governments they attempt to control are greedy.

    16. The funny thing is one of the fundamental reasons that the audit profession exists is to keep greed in check. We add very little value other than the fact that our opinion essentially tells investors that:

      1) these statemtents are comparable to other companies based on a certain set of principles
      2) we generally believe that management has not lied or majorly goofed up on these numbers.

      Greed is why a third party needs to check the numbers and certify the statements, because companies left unchecked will pull all sorts of shenanigans to improve their respective position. One of the problems is that those in charge with keeping a check on this stuff are themselves motivated by profit and greed.

      With regards to the Cramer example, the funny thing is that if this “small fish” was pulling some of the lies and market manipulation that he was, just imagine what the alpha dogs were doing.

    17. Greed @ 15 — It’s easy to set up a strawman and knock it down. I never said that greed was per se either bad or good. What I said was that greed blinds (or blinded) a lot of people to market fundamentals.

      Let me expand on that. When the Dow hit 14,000, most people could see it was time to sell. If you weren’t going to sell then, when would you sell? 15,000? 20,000? 100,000? Some people wanted the market to keep going up, and so they decided to believe it would, to their subsequent detriment. That was greed.

      When housing prices kept zooming up at 10% annual appreciation, 20%, even 25% value increases in one year (documented by independent appraisals), that was a warning sign. When bidding wars erupted, that was a warning sign. Some people read the signs and got out, locking in equity increases. Others kept hoping/thinking the prices would keep going up forever, even though there were lots of people talking about a “housing bubble” and it was not really likely that prices would continue to go up forever. That was greed.

      Now there is unbridled greed, the biblical love of money, and that’s not good. But greed is human and it blinds people to reality and I never claimed anything else.

      — Tenacious T.

    18. Damn, where’d this thread go since my post only a day ago?

      OK, we are all greedy, no matter what anyone tries to claim. That’s a given.

      But I think, and she can correct me if I’m wrong, that FM was writing more about how certain individuals took advantage and others, who should have known better, might have allowed them to get away with it (and I guess, given her usual tendencies, she was looking for someone to be prosecuted for it – I’m not sure she isn’t right).

      Just like any other incident in history (recent past: greedy industrial hex benefiting from war – pick one, any one; how about banking failures during Regan era (giving away all our money – guaranteed by the Fed) culminating in the Clinton era (someone remind me, what gate was that), or how about this incident from my childhood:

      Two guys moved the 1st down marker on the field during a after school game based on their desire to win a bet (I think they stood to win $3.00). These two guys were probably at Anderson, etc.

      I bring that one up because it is as close to home on this subject as possible. Underwater @16 said “because companies left unchecked will pull all sorts of shenanigans to improve their respective position.” The reality is it isn’t companies – it is people. For every crappy whatever-the-rest-of-us-have-to-deal-with, from laws to shoddy business deals made to promote a stock and line someone’s pocket (BIG TIME) there is a person (not a company) who created that situation.

      So where does the blame lay – is it the Madorff type top or the lowly overworked, ?underpaid? auditor, forced to accept what he was shown or told to do, at the bottom?

    19. I actually enjoy the fact that the comments include a discussion of greed and self interest as they relate to seeing, preventing, or acting to mitigate the financial crisis.

      But the real purpose of the post was to point out that the PCAOB had inspected Deloitte and found the issues with AHM, in time for something to change. Well, maybe not, since the reports take so long to come out. But even so, the number and detail of the deficiencies are quite an indictment of the work, or lack thereof, of Deloitte in this case. It was meant to contrast with the fairly light penalty they paid in the settlement. And to highlight that a settlement is not the end of the game. Delotite is still subject to SEC sanctions and so is the partner who was involved. I was hoping a discussion of how the PCAOB and their efforts, which seem to have been in vain in this case and perhaps others, can be improved.
      Francine

    20. “We are all greedy … that’s a given.” No, we aren’t. And it isn’t.

      FM@19 – I’m not optimistic that we can avoid these sorts of deficiencies, which is kind of ironic since we use the fallout of the credit crisis to justify our headcount reductions and the other cost-cutting measures, which impact quality. To the title of your other post “Can you still do those things you do,” the answer is more negative by the day. We are asking fewer people to do more work. Send work to India, and also, make sure it’s 5% of your audit budget or we’ll send you nasty-grams, and also, here is round 3/4 of “efficiency” meetings, and also, here are the new hires we staffed on your job, plus a couple more since we didn’t want to rescind offers and look bad on campus, you figure it out. So you have that taking time away from the work.

      Now the efficiency push – I’m all for it. But it’s too centralized. And inevitably we will sacrifice quality when teams are told to cut X% of hours, and then bend over backwords to make it happen.

      We’re in professional services, we promise a lot, and we overwork our people. That’s part of it, and yes, we know that going in. But I predict we’ll drop the ball a few more times in the next year or so, and you’ll see more cases like this, because you have to do more than pay lip service to quality. None of these initiatives point to, “How do we avoid another American Home Mortgage?” Because in the long run, one or two of those is in the accepted range. (Now if the punishment was greater, that calculation might change.)

    21. “We are all greedy … that’s a given.”

      Wrong. Ten times…twenty times wrong! Many times wrong!

      “For example, when you go to the mall and try to save a few dollars on clothes you are committing an act of greed according to this definition, regardless of whether you believe it is an extreme sense of greed it is greed. Do you need to save a few dollars on clothes?…”

      So you guys are saying some form of greed is good. I’m sorry, but greed to me is not a virtue to have, never has been, never will be. Greed is always a negative thing (not to mention one of the 7 deadly sins). Greed is what leads to people’s downfall. Greed is what leads to corruption. Greed is what turns a country out of control (we don’t need to travel far in the world to see this). @Greed – if the concept of greed is also supposed to encompass the seemingly noble decisions – shopping at walmart vs. going to neiman marcus to help save money for your children’s/family’s future – then perhaps ‘greed’ shouldn’t be the word to use. No offense to Mr. Webster, but maybe another word should be utilized to describe the “good greed” you folks are talking about.

      So, in my opinion – Greed is bad! – PERIOD

      I’m out of here…I’m going grocery shopping. I’ll be at Food Lion instead of Harris Teeter. I hope I can make it out of the store before someone comes out of the bushes and calls me out for being “greedy”.

    22. I know a discussion on greed wasn’t the intent of the post, but to me it is the fundamental philisophical reason behind the current crisis. Technically, one can point to the derivative markets and the sub-prim melt-down, but unchecked greed is really the reason we’re here.

      I can only speak from an Islamic perspective, but in our tradition greed has been defined and it is unquestionably bad. It can be broadly defined in 2 ways:

      1) Acquiring things (can be wealth, cars, etc) in an unlawful manner or without any regard to the consequences on others (i.e. drug dealers, Bernie Madoff) or society in general.
      2) Being stingy with ones wealth and not using it to benefit anyone but one’s self.

      Greed can be a selfish excessive or uncontrolled desire for possession or pursuit of money, wealth, food, or other possessions, especially when this denies the same goods to others.

      So if a person acquires wealth in a decent manner, without harming others, and decides to by a 7 series BMW and a mansion, this does not make him greedy. A partner at an audit firm, however, who decides to look the other way because he doesn’t want to upset management thereby potentially losing the account and putting his personal wealth at risk is greedy. This is because he is putting his personal benefit over that of the shareholder’s and others whose interests he is supposed to protect.

      And I agree with Tony, it is not a given that we are all greedy and it is a sad world view that would deem this to be true.

      I’m sure if you ask your local priest he may tell you similarly.

    23. Francine’s post encouraged me to search through my own posts on this kind of crap. They go back several years as well. Isn’t the REAL sadness in all this that despite Francine (I and others) have been calling out the various actors for some considerable time that no REAL sanctions have been taken other than the odd slap across the wrist or the imposition of paltry fines? WTF is it going to take to get the boneheads round at PCAOB/SEC to up their game?

    24. […] in reading Francine McKenna’s post about the crisis where she enumerated the years over which she has been talking about subprime. I look back over my own posts on the topic and especially about the parlous state of the […]

    25. […] the meantime, people like Richard, Francine, myself and Adrienne will keep plugging away at the issues – even if that means we individually […]

    26. […] the meantime, people like Richard, Francine, myself and Adrienne will keep plugging away at the issues – even if that means we individually […]

    27. I saw this stuff while reviewing loan applications in 2004/2005. I was doing consulting work on loan documentation verification and just could not believe the applications that were approved. 80%+ of the apps we reviewed originated in CA, and people were getting I/O loans on 600k houses with 50k incomes. Taking out a second mortgage on the downpayment and closing costs, essentially putting nothing down on a half million dollar home. They were taking out second mortgages to buy cars, boats, go on trips, etc. These intentions were CLEARLY stated on their applications. I could not believe these were being approved. Yet they had been and more kept coming in. Even as a newly minted college grad I knew there was no way to sustain this. These people were playing with fire on these I/O loans, and it caught up to all of us. But these lenders paid the big fees to the big 4, so it was easy to issue that clean opinion. after all, an auditor isn’t a forecaster, who knows what the future will bring? will the housing bubble last forever? probably not. but they could “reasonably” assume it would continue for another year, and as long as those engagement fees are padding my K-1 those reserves look OK from 50,000 feet. the intent of GC statements is obvious and noble, but no one wants to tell the guy bleeding out he’s not going to make it. Of course the big 4 were more concerned about fees, not feelings. a GC opinion could lose you an account, and any of the other big 3 would probably be more than willing to hop in and issue a clean one if it doesn’t smell too bad. in all of this stockholders/bagholders are simply casualties of war.

    28. There are some other warning signs you shouldn’t miss, that the Big Four will miss, when we bounce back.

      Bernanke says the recession is likely over, according to a story today. Take that as you will, but in any case, I predict another 18 months will pass before the Big Four catches up to the news. A few other things will happen in those 18 months:

      1) Next fall (2010), when bonus checks clear, you’ll see a mass exodus for companies willing to actually pay their talent. If you think you’re doing more for less, wait until FY11.

      2) Every month until then, we’ll see articles on our company website about the “challenges we face,” and an “attaboy” for all the great work we’re doing, blah, blah.

      3) More audits will be messed up, but we’ll still have that super high success rate some find so relevant.

      4) We’ll be admonished by some B4 apologists that “the firm exists to make a profit,” ignoring a fact that the companies poaching our talent (see #1) are also in it for the money, and are better at exploiting the less than savvy Big Four partners.

    29. […] Every one of the Big 4 (and the next tier) has a handful of lawsuits on their desk related to their audits of the banks and other financial institutions that failed, were taken over in the dead of night, or bailed out by their respective central banks. That’s in addition to the various fraud and Madoff related suits. It may or may not have been better for them to have warned us with “going concern” opinions earlier.  We’ll let the judges and juries decide, if any of the cases are actually tried.  Most often they settle and the audit firm pays, but not as much as you would think. […]

    30. […] published several stories since 2007 on the mortgage originators that failed or were taken over and the lawsuits against their […]

    31. […] at least two cases where I’ve seen adequate identification and warning of poor audit processes: American Home and Huron Consulting. Slow issuance of the inspection reports, the lack of transparency caused by […]

    32. […] look another recent case, the settlement of the American Home Mortgage litigation by Deloitte to see that the question of, “Who is responsible?” is not one the firms like to answer. Who was […]

    33. […] on Deloitte’s part to add fuel to the fire of a negligence or accounting malpractice claim in the American Home failure. Deloitte had been warned by the PCAOB about its shoddy work on the 2007 audit of AHM. […]

    34. […] Lynch, Washington Mutual, Fannie Mae (the only one on this list still sending money to Deloitte) and American Home Mortgage, is the firm on the job to assure us of the integrity and validity of the Fed’s financial […]

    35. […] published several stories since 2007 on the mortgage originators that failed or were taken over and the lawsuits against their […]

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