Comments on: Continuing The Conversation: If Auditors Weren’t There, Why Not?

By: re: The Auditors » Blog Archive » Happy 2010! So Much To Talk About…

Mon, 04 Jan 2010 02:35:51 +0000

[...] Jim Peterson compiled the top responses to our posts about the future of the audit firms, given their minimal role in preventing, warning, mitigating, or supporting the development of solutions to the financial crisis. To greet the new year, instead of a backwards look at a dreary 2009, this will revisit last month’s lively exchange, initiated by Francine McKenna’s provocative post of December 7, “They Weren’t There: Auditors and the Financial Crisis.” My response of December 13 is here, and hers of the 14th is here. [...]

By: jd

jd — Tue, 29 Dec 2009 20:49:19 +0000

@ esa. There is no mystery. It’s called accounting arbitrage. Traders make good money on it.

By: esa

esa — Tue, 29 Dec 2009 04:36:40 +0000

David:

You are certainly correct on that point. ML had huge write-offs and Lehman did not. I still believe that the assets were recorded at fair value in both cases but somebodies fair value seemed a little more fair to management than the investors. The mystery is how one investor determined it had enormous losses while another didn’t in the same market. I guess time will answer that question.

By: JD

JD — Sun, 27 Dec 2009 22:05:44 +0000

@ David.

GAAS works fine. If we accept your analysis (that Lehman and Bear Stearns were clearly going to fail based on their 2007 financial statements), which I understand many people argue, then the case against the auditors becomes simply that they simply got their judgements around the going concern assessment wrong. Those judgements are or will be subject of some very long lasting litigation. If it weren’t possible to sue the auditors for enormous multiples of their fees then the debate around this would be over much more quickly.

By: David

David — Sat, 26 Dec 2009 06:21:13 +0000

My biggest concern is that it wasn’t any secret that the investment banks were in a lot of trouble in 2007. If I remember correctly, in the third quarter of 2007, Merrill Lynch reported huge losses on its CDOs. A hedge fund run by Bear Stearns collapsed in the second quarter.

Yet, the Lehman and Bear Stearns 2007 financials didn’t reflect the spectacular losses on CDOs. Why? You didn’t even have to do an audit to know that these companies had big problems. You could look at their balance sheet and see that they had billions invested in the CDOs and had leveraged themselves to do so. Maybe an hour of analysis would have given you the answer that these companeis were going down. It was obvious. A company leverages itself to invest in something that collapses is in a great deal of trouble.

That’s a major problem for me. An audit not detecting a problem that could have been detected by relatively simple financial analysis. I don’t know. If the auditors followed GAAS and didn’t detect the problems, then GAAS needs to be scrapped. GAAS either works or it doesn’t work.

By: Professional huh?

Professional huh? — Fri, 25 Dec 2009 18:31:22 +0000

Financial professionals believe that our model needs more than a bit of tweaking. I will get back to this after xmas weekend.

By: esa

esa — Thu, 24 Dec 2009 00:33:10 +0000

#37 — If you know of a better model that allows us to hold someone responsible for unforeseen future events, I’m all ears but that’s not a job I want.

A lot of people think the model is relevant though it certainly has flaws. The SEC, institutional investors, financial analysts, etc. all think the model requires tweaking but none suggest wholesale changes.

If fact, I haven’t heard anyone propose something that even comes close to a reasonable alternative that is actually feasible. If you have ideas on that front, please share them.

By: Anonymous

Anonymous — Wed, 23 Dec 2009 02:42:05 +0000

@esa,

You make good points. They absolve the auditors, but they still don’t justify why the model is still relevant.

By: Tony Rezko

Tony Rezko — Tue, 22 Dec 2009 05:08:59 +0000

@35 – yeah, maybe, or we’re all tired and on a working holiday. I’m too sleepy to read the comments, but maybe I’ll give them a read later because there have been some very thoughtful discussions around here lately. Happy Holidays, everyone.

By: Annonymous auditor 2

Annonymous auditor 2 — Sat, 19 Dec 2009 18:00:36 +0000

@ esa.

I think we can presume from the failure of the ‘auditor bashers’ to respond to your posts that they are unable to counter your arguments.

Well done.