• Updated: “Background Briefing” Australian Radio Quotes McKenna

    By • Aug 17th, 2011 • Category: Pure Content, You Can Quote Me On That

    Stan Correy, a reporter for the Australian Broadcasting Company, interviewed me for his radio show, Background Briefing and the segment, “Auditing the Auditors,” aired Saturday the 13th, at 7pm EST, 6pm CST and 9am Sunday August 14th in Australia.

    It was repeated in Australia at 7pm Tuesday and is available as a podcast. There is also a transcript available.

    Where does the buck stop when big banks and corporations, even nations collapse. Who signs off on the books? The auditors or the directors of the board? And who should tell investors when there’s something shifty going on? Who are the auditors answerable to? Reporter, Stan Correy.

    Stan told me that I speak directly about a subject where so often other people try to obfuscate. One of the problems he had, I’m sure, and that I have every day is making news of auditing, accounting, and the business of the Big Four audit firms accessible to an audience that may think it’s boring or that nothing much happens.

    Even general business professionals are sometimes confused or completely unaware of the role that Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers play in the capital markets and global financial system regulatory scheme.

    Given the serious economic issues we are all dealing with, all over the world, I’m glad to see journalists like Stan Correy push the story of the audit firms and the accounting industry off the business pages and onto the front page.

    Updated: I listened to the show live and had goosebumps. It’s a great summary of the state of the audit industry and, therefore, the accounting profession.

    I was quoted generously based on Stan’s extensive interview with me. I was also pleased to hear so many other distinguished commenters including several university professors, John Carney from CNBC, and Richard Murphy in the UK.

    Stan gives me the last word, in response to investor John Hempton who recently defended the audit firms, in particular Deloitte, for the Chinese reverse merger frauds.

    John Hempton: What auditors do and what they’re expected to do is follow process. And there’s a perfectly good reason why you follow process; if you follow process in a world where most things are honest, the process works, and auditors get into trouble when they don’t follow process. The problem is that the process doesn’t work in China, ‘cos this is so pervasive that there’s no fixed point of reference.

    Stan Correy: John Hempton from Bronte Capital.

    Columnist for Forbes Magazine and herself an auditor, Francine McKenna, doesn’t buy the partial defence argument. She says auditors who take on these jobs should be looking at these clients as extremely high risk. After all, it hasn’t been a secret, even in China, that fraud is a problem in government and the private sector.

    Francine McKenna: The audit firms are so… it’s so embarrassing to the profession for me, their most common response when they get hit with a fraud-I mean, I could show you several examples, quotes-they’ll say, ‘We were victims too. We were fooled; we were duped.’ What other profession is willing to say that they’re idiots and incompetent and can be fooled over and over and over again by their own clients, just for the sake of evading liability? It’s embarrassing! It’s embarrassing.

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    7 Responses »

    1. Book value should represent the floor that a corporation’s fair market value should fall to. If book value is substantially greater than the corporation’s fair market value, then it is clear that investors do not believe the company’s books. What is the auditor’s current impact? None. They are having no impact because the public does not believe tham at least with respect to the banks.

      Bank of America:

      Has book value of 222 billion per latest 10-!. If we subtract $16 billion of preferred stock, we arrive at $206 billion. So if investors actually believed the statements, market cap of common stock should not fall below $206 billion. And even if they question the value of goodwill and intangibles, it should not fall below $126 billion. Market cap of common stock is $73 billion. If investors believed the statements being prepared by Bank of American, the market value would be close to 3x higher.

      Citigroup.

      Has book value of $176 billion net of preferred stock. If investors actually belived the statements, market cap of common stock should not fall below $ 176 billion. Market cap of common stock is $87 billion. Even if goodwill and intangibles are subtracted from book value, that value is still $143 billion.

    2. A quick letter I wrote to Francine…

      I think I was on the show as I was (a) the person who blew whistle on
      Longtop fraud and a few others and (b) strangely willing to defend the
      auditors.

      The defense was limited. Take China Media Express for an example.

      It claimed to have 20 thousand buses. It claimed to show TV on them.
      It claimed to get advertising revenue. It claimed to make very fat
      margins.

      It could show you the buses but on an individual basis. Quite
      reasonably as it did not control the buses it could not show you a
      large number in one place.

      It could take you to the advertising agencies some of whom were
      legitimate large organization. (It just happened that staff at a few
      of them were in on the scam…)

      It could show you the process by which they produced the TV and
      distributed it throughout its bus networks.

      Of course none of that proves it exists.

      The way you prove it exists is you sample transactions. You go find
      individual transactions and check the cash flow.

      If you wanted to prove the business exists you would get the bank
      statements FROM THE BANK. You would do the genuine check of
      transactions.

      Alas the bank gave you false statements too.

      This was a simple fraud (non-existence). The deference auditors
      normally run – and a defense that is normally bullshit – about
      complexity of business did not apply.

      The auditors did precisely the test required of accounting standards
      and a test that seems reasonable (check the transactions took place by
      checking the bank).

      The auditors were fooled.

      Longtop was very similar.

      But the limited defense was limited. It was limited to auditors that
      did all the checks you would reasonably expect and were still fooled
      precisely because the Chinese system is so corrupt there is no honest
      yardpost to check against.

      This covers Longtop, CCME but does not cover 90 percent of the Chinese
      frauds where as far as I can tell no checks were undertaken at all.

      J

    3. I want to thank Mr. Hempton for explaining his position, however, I have to agree with Francine. If CPA’s put themselves out to be capable auditors, surely they must follow basic auditing standards, such as:

      General: “The auditor must have adequate technical training & proficiency to perform the audit.”

      Standards of Fieldwork: “The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.”

      Standards of Reporting: “When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor’s report.”

      If the firm does not have the expertise to audit an entity like the China Media at a professional level, it either refuses the audit or discloses the scope limitations.

      Deceipt is a common Homo Sapien behavior. That is one reason why there is an audit function. Is it any less deceiptful to issue an unqualified opinion when audit standards have not been met than to submit false bank statements?

      At best, the large firms are cowed by countries the size of China and don’t know how to be aggressive without causing a firestorm. At worst, they simply don’t give a damn about the needs of the investing public.

    4. […] traffic this site is getting because of my interview for Australian National Radio’s program “Background Briefing,” I thought I would post it here as well. A judge’s dramatic ruling against directors and officers […]

    5. […] to get in something about John Hempton’s post.  Since we have now spoken on the phone, shared a radio program, and shared thoughts about Chinese reverse mergers and the auditors, I saw his thoughts as a good […]

    6. […] Reverse Mergers: The Auditor Angle (Recent Chinese alleged frauds China Media Express and Longtop were both audited by Deloitte.) Page 1 2 « Previous PageNext Page » […]

    7. […] Reverse Mergers: The Auditor Angle (Recent Chinese alleged frauds China Media Express and Longtop were both audited by […]

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