• Hello? Big 4? Are You Out There?

    By • Oct 22nd, 2011 • Category: Pure Content, You Can Quote Me On That

    This post was originally published three years ago on September 17, 2008.  Given everything that is going on – ongoing investigation of EY’s role in Lehman collapse, more lawsuits against the Big 4 audit firms for crisis failures, disclosure of Deloitte’s failings as an auditor as far back as 2006 – I thought it may be interesting to revisit it.
    Although the focus for this blog is the business of the Big 4, it’s hard to ignore what’s going on with the financial firms, the Fed, and the political environment. I’ve been writing this blog for almost two years now, so I feel these past few days are a validation of what I’ve been saying all along about firms like AIG, Lehman, Fannie Mae and Freddie Mac,  Merrill Lynch, Goldman Sachs, and Morgan Stanley.

    There have been a lot of false starts, last minute deals, and disappointments during the last few days.  In many cases, the only mention of the Big 4 is related to their role in the bankruptcy proceedings. They may be involved in supporting the analysis that is taking place. They may be involved in helping develop the numbers for the potential acquirers.  But they are most definitely involved in the problems that have caused so many of these firms since Bear Stearns to end up in a “crisis” mode.
    Those of you who have been reading a while know that I don’t believe crises, especially liquidity crises, happen overnight. Many are discussing the “moral hazard” of the Fed bailing out so many firms and what this means for other struggling firms such as the Big 3 automakers. Will the most recent bailouts smooth the way for beleaguered Big 3 automaker GM to ask for government support? It’s not like it’s never happened before. Remember Chrysler making  a case for their significant role in the US economy?  Has the world changed so much?  If a company like GE “suddenly” found itself in trouble, would it be deemed “too important to fail?”
    There are some very prestigious names decrying the use or, in their words, overuse, of the term “moral hazard.” But I think we have already seen the global capital markets, the business community, and the regulators become numb to the ongoing pain being inflicted on the global financial systems and the withering of trust in the current model as a result of the repetitive settlements of large litigation claims against the Big 4 audit firms. Larger and larger settlements cause nary a blink of an eye, much like loans and bailouts for the financial firms in the billions of dollars are passing before eyes that have now glazed over.
    I have no news of an auditor assignment for the new Fannie Mae/Freddie Mac under conservatorship.  It may be that the new Boards required to be formed by the Fed will dump Deloitte and PwC and hire EY, given the connection with one of the new non-Executive Chairmen, Laskawy, who is a retired head of EY.
    I have heard no news of who will audit AIG, as it is now owned 80% by the Fed.  Will the Fed allow PwC, so much a part of their problem and their problematic past to continue, or will they start fresh with someone else? We don’t know. It was not on the list of big concerns for those making announcements, since PwC neither helped AIG avoid problems nor were they obviously instrumental in helping resolve them.
    And Merrill will be audited by B of A’s PwC instead of Deloitte, as the acquirer is usually the one dictating those terms, much like Bear Stearns is now also under the thumb of JPM Chase’s auditor PWC.
    Lehman, a long time EY client will have to say goodbye to their friends. I say “friends” because EY did Lehman no favors in letting them get away with so much for so long.  With some of Lehman disappearing or being sold off in pieces and much of it going to Barclays, there are any number of firms (well, really only four, the Big 4) that will end up as auditors of these businesses.
    If you’re seeing a pattern here it’s no coincidence. All of the Big 4 firms have been very much involved, complicit, aided and abetted and/or been AWOL when it comes to the problems these firms faced and will continue to face. The Big 4 audit firms neither helped them avoid these “crises” nor helped warn others of the severity of the issues in enough time. We find out how bad things really are only once a year, only when pushed, or as a result of a lawsuit. Or in these cases, we only found out when the firms were pushed to the edge of the abyss.
    I wonder if their audit partner was there with them, looking over the edge, and apologizing.

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    45 Responses »

    1. It’s not an auditors role to tell a financial institution what type of investments to make. An auditor is responsible for making sure that as of the date on the financial statements the company has valued and disclosed those investments properly.

    2. @Anonymous An auditor opines on their clients’ risk management program. That is obviously lacking in many of these cases. An auditor opines on valuations. Bad or late valuations have been key in may of these situations. Finally, an auditor opines on the tone at the top and internal control environment of a client. In many of these cases, senior management was clearly self serving, didn’t insist on appropriate controls and, in some cases, complicit in fraud as evidenced by the numerous lawsuits against these companies and their auditors.

    3. @Ms Mckenna – an auditor does opine on the FS and risk mgmt program as outlined by SOX. An auditor might also make other comments about the company. Lawsuits <> existence of fraud – just someone upset. Not sure you can say sr mgmt didn't insist on appropriate controls. If company is in compliance with requirements, even when those requirements are weak, then that's generally the due care required of the auditor.

    4. Almost all of the companies mentioned in this post have had material weakeneases in internal controls, restatements, lawsuits filed by shareholders due to fraud or mismanagement , adverse opinions on internal controls or all of the above. That to me says auditor aiding and abetting mismanagement in the best case and fraud and negligence by management in the worst.

    5. @anonymous: the auditors do FV reviews of these companies’ assets. they absolutely should have caught what was going on, and i guarantee that discussions were going among mid-level staff that brought up this touchy issue of ‘are these assets seriously overvalued due to the understated implied risk’ and those discussions ended with a “well, we better not rock the boat. maybe next year’s audit.”

      The problem w/the Big 4 is that they act like they really know it all. They make proclamations on subjective issues with sweeping generalizations that become de facto valuation methodologies. And b/c let’s face it, who out there can question Big 4? some second tier accounting firm like RSM McGladrey?

      i’ve seen this happen time and time again, and watched this whole CDO meltdown happen in real time slow motion.

      it’s a fact.

    6. Auditors should’ve told these dudes, mark it down, all the way down – CONSERVATIVE. Take your losses up front – be open about it now and stop trying to make this a long big bleed instead of a quick burst of a blood clot.

      But that is assuming a Big 4 would do this…that wouldn’t exactly exude eminence.

    7. The issue of audit profession relevance always rears its head in these situations. When Mr Price & Mr Waterhouse & Mr Coopers (& Mr Lybrand & Mr Peat & Mr Marwick & Mr Ernst & Mr Young) started these audit firms in the late 1800s, it was a marvellous business idea, protecting shareholders, and worked well at the time. Unfortunately, times have moved on, and audit firms are virtually obsolete. The product they offer no longer helps sharehlders in any significant way. I remember one of my audit clients asking me once, 'why didn't you guys prevent company X from failing?'. I replied 'Its not our role to prevent companies from failure', to which he replied 'then what is your role?'. I was stumped for an answer, and the question haunts me to this day. Bottom line, there is a huge opportunity today, similar to that perceived by Big 4 founders over 100 years ago, to provide a service that ACTUALLY HELPS shareholders. I guess one could say analysts and rating agencies play this role, but they are not big enough and their reports are not accessible enough to the common man. There is a niche for someone to come up with a product that can predict company mismanagement and failure, but looks like we don't have the same type of entrepreneurial & visionary people today as we did all those years ago (Big 4 founders).
      And, based on Fannie & Freddie, which are government owned and publicly quoted (and audited by the Big 4) i don't see auditors changing hands. AIG reappointed PwC last year, in spite of everything PwC had done (or not done) there. Don't you just love the audit profession? Its never their fault, whether they do their duty or act negligently. Its a very cosy place to be. I wish all jobs were like that. Sorry for the long post.

    8. Um, as facetious as it seems, the numbers that companies put out on the street are opined on by auditors who have or were supposed to test the companies to ensure that numbers were accurate. Hence why without an auditor what is to stop a company, actually ALL COMPANIES, from just recognizing all revenue prematurely and reporting it as such and hope the business keeps up and if it doesn’t then it’s just a ponzi scheme…but all companies can’t do this because of the auditors – even though some do and auditors don’t catch it and the companies get away with it for some time.

      Bottom line though is if a company wants to commit fraud and usurp an auditor they can and will – but the issue of the MBS, CDOs and CDSs is not that…its a valuation issue…not a fraud issue.

      But analysts are not going to vet numbers and conduct testing the way an auditor can – analyst base their analyses on audited financial numbers among other quantitative factors.

      http://www.footnoted.org is an interesting angle as well.

    9. Francine, I just start tuning into your blog and I must say that I’m hooked. I’m senior staff at a second tier firm (that have in some ways tried to model themselves off big 4 “the standard in our profession”) and I must agree with what you say. Increasingly the audit profession is making itself less relevant by focusing on insulating itself from risks and maintaining client business. On many occassions we as staff have felt pressure to look a certain way on an issue. When you see an issue that you’re not sure of, could go either way, do you bring it up and risk upsetting the partner who’s breathing down your neck or do you overlook it hoping someone else will find it and try to meet the budget to not upset the client. At the end of the day our services are less and less value added (to anyone) and our independence is seriously in question (do you want to be the staff that ticks off a multi-million dollar client that’s a large chunk of your office’s fees?. Any tips on a good value added line of work 😉

    10. Bring it up! Push back and make your stand. Your integrity and fortitude are all that matter when the s’ hits the fan. The partner should thank you for raising the issue…if they choose to ignore it well, thats on them and the risk falls to them. But document your reasoning and that the issue was raised. Turning a blind eye and waiting for someone else to catch it or say something is like Chamberlain before WWII…appeasement does no one any good – especially you. That is like nursing an injured snake back to health and then it bites you in the face and you scream – “BUT I NURSED YOU TO HEALTH! HOW COULD YOU!” Snake would say, “I’m a snake dummy, what did you think i would do.”

      So which firm is it…GT or BDO?

    11. That attitude of not wanting tick off a client is what is wrong with auditors…you are meek and that meekness serves no one and adds no value.

    12. Francine,

      If you don’t believe in liquidity crises after Sept 08, I will be very surprised.

    13. @Anonymous I believe in liquidity crises. I just don’t believe they appear suddenly, overnight. There are always lots of warning signs and opportunities to correct. But if they are only noticed by broader investment community and regulators when they come to a roaring head, then we are destined to continue reacting instead of resolving issues proactively and going through these “crisis” scenarios.

    14. Francine,

      I’ve been following your blog for quite a while, but, as an auditor with a Big 4 firm who specializes in financial service/insurance I find your comments implicating significant responsibility for the current crisis on Big 4 accounting firms misleading. I know from first hand experience that we’ve taken an aggressive stance toward ensuring assets held by our clients are properly valued under FAS 115, EITF 99-20, etc. for years. Proof of this is one of the examples you use, AIG. Without the audit/review function, you can be sure they wouldn’t have been writing down their failed investments during the past few quarters, which would have delayed their demise and possible caused more damage to the financial health of the world. To me, the truth of the matter is that no one could have perceived the size of the asset bubble. Many of us perceived that there would be a cyclical downturn in the US economy based on overly generous macro-credit conditions. Unfortunately, for you, me, and everyone else no one, including auditors, could have predicted the extent of the decline. However, it’s important to remember that auditors are responsible for rendering an opinion on management’s presentation and disclosure of financial information and their internal control environment, not to act as investment advisors and to assess investment strategy. Leave that to the consultants. So to me, we we weren’t/aren’t “aiding and abetting” management in an attempt to swindle shareholders and stakeholders, and it’s irresponsible of you to implicate that we are.

      Look forward to reading more of your posts.

    15. One little comment: IFRS did no good to the world of accounting and auditing, but helped greedy management to have their stock options boom. And all the auditors to applaude the additional work generated by these overoptimistic accounting rules.
      Big 4-1 helped on the implementation of the new rules, Big 4-2 made the audit, Big 4-3 the tax consulting and Big 4-4 the general consulting. A family job!!!

    16. @Francine
      I don’t think we should ever put much credence in the targets of shareholder lawsuit’s as an indicator of who is at fault in any situation. When a company fails, frequently the auditors are the only deep pockets left and that’s all plaintiffs’ counsel really cares about it.

      Too frequently you hear counsel say that it’s not about the money, it’s about doing the right thing. That’s nonsense. Whether or not the auditors are at fault in a given situation, shareholders are ticked off because their at risk investment did not increase their wealth so they look for alternative forms of recovery. So, they target the remaining deep pockets and threaten lengthy unpredictable trials with jurors who wouldn’t know a call from a put and wait for a settlement.

    17. Second tier firm anonymous:
      I saw what you see when I was with Big 87654 30 years ago. There is nothing new here. Until the cost of bad audits rises relative to the cost of good ones, what you see will continue. For an explanation of what you see, read Oliver Wendell Holmes great article, “The Path of the Law”, 10 Harvard Law Review 457 (1897). Find the article and read it. It will make all clear to you.

    18. Anonymous 10:57 at Big 87654:
      Please don't insult Francine's intelligence. Or mine. I was with Big 87654 and spent 45% of my time auditing financial institutions, including some multi-billion dollar ones. Nothing you wrote impresses me. Francine has blasted PW's AIG work as I have at my blog. Did the Big 87654 learn nothing from the 1979-86 S&L crisis? Apparently not. The alternative explanation: the Big 87654 are part of the problem, part of the continuing coverup. Can you imagine a Big 87654 partner calling a press conference say 18 months ago to say Fannie or Freddie was insolvent? Further, telling Hank "formerly of Goldman Sachs" Paulson and Ben "Helicopter" Bernanke, his Big 87654 firm didn't care what the: Fed, Treasury, SEC, OCC or FDIC thinks. That's how his firm sees it and is not backing down. That will never happen. In my other than humble opinion opinion, Big 87654 audits of financial institutions are worthless.
      Why don't you find a real job? Like say, shining shoes in Grand Central Station?
      "Aggressive stance"? Stuff it. Peddle that nonsense at some other blog. Feed it to your firm's public relations people.
      Oh, yes, don't bother to tell me that Big 87654 firms should not deliver "solvency" opinions. They are supposed to consider "going concern". Reading your comments made me nauseous.

    19. “Bring it up! Push back and make your stand. Your integrity and fortitude are all that matter when the s’ hits the fan. The partner should thank you for raising the issue”

      Easier said than done. We’re not talking about clear cut fraud issues here but rather things you’re not sure about, could go one way or the other. Do you investigate and spend more time on it or do you move on. The very notion of independence, the cornerstone of the profession and what we do, is called into question. Read telberg
      s blog post

      “Leading accounting firms are pushing a revamp of the rules for compilations and reviews that would drop the traditional ‘independence’ requirement and replace it, instead, with a new standard aimed at reliability. The idea has been cooking for a couple years, but it’s only now starting to get some buzz in the profession.”

      To the person who said that auditors are meek, yes and no. Auditors do have integrity and ethics but would you walk away from a client that makes or breaks your business? Easy to say yes when you’re not faced with the issue. Maybe it’s time that the PCAOB starts hiring and does the public audits themselves.

    20. Hi, I have a superday coming up in November, can you give any advice or tips?

    21. This has nothing to do with auditors, it has to do with greed and the weak regulation that allowed it to prosper, from the mortgage brokers to the short sellers, it has taken a long journey. Until regulation catches up with the complex investment vehicles used by these FS companies, this is always going to happen every couple of decades.

    22. “This has nothing to do with auditors,”

      Auditors are the ones that are most intimately familiar with the company, its history, and management, so yes there is some responsibility there. They are supposed to be acting on behalf of the public and should be able to give up warning flags, the canary in the coal mine. Maybe they don’t deserve all the blame, but they’re not faultless.

    23. It’s a darned shame so many commenters choose to remain anonymous because it makes it hard to know to whom one is addressing.

      For what it’s worth, anyone and I mean anyone, who genuinely believes the Big 4 are not complicit in this current debacle has their head firmly up their ass. Or they’re cynical apologists.

      The profession as we know it is increasingly irrelevant to the needs of investors. Why else do analysts ferret around on weblogs, the mainstream press and other sources to gain clues as to what’s really going on?

      the message should be plain and clear: Shape up or die. Cuz that’s the logical outcome from all of this.

    24. I’m intrigued to learn whether they had enough info 6-9 months ago (assuming Dec 31 year-ends) to issue going concern notes back then.

      b/c if that’s the case, then boom, case closed, Francine’s argument has been made.

      Of course, if g.c. wasn’t called for but stuff was valued incorrectly, that’s yet another more insidious problem that as much if not more scrutiny.

      Some interesting comments from the Bank of Canada’s former governor here. Very candid stuff, and it sheds a different light on things. It kind of shoots shotgun holes in my previous two paragraphs and presents things in a totally different light: http://www.reportonbusiness.com/servlet/story/RTGAM.20080912.wrdodge12/BNStory/Business/home

    25. It’s a great article, but this is an especially priceless quote:

      “Even seven months after leaving the central bank, he occasionally catches himself when he loses that well-rehearsed central banker reserve and openly shares his unease over market dangers. For example, when applauding the Washington-managed takeover of Bear Stearns, he said: “This was a huge systemic problem and if any of the major counterparties would have gone, the whole house of cards – no, I should say, the whole system – would have frozen.””

    26. As a Big 4 auditor myself I find it disturbing that no one has brought up the issue of fair value accounting. Assets should not be marked to unrealistic fire sale prices based on the crisis of the moment whenever that occurs. Assets should be evaluated based on economic value (read: discounted cash flow analysis). You are arguing over who can mark down the value of assets the best while ignoring the TEMPORARY aspect of the impairmennt.

    27. You know, just for a moment, I think all these audit companies wanted to keep themselves as high profile as their high profile clients are / were; they know which side of the bread is buttered – so to speak! but where should an auditor’s responsibility lie – towards his client and helping his client (management) out of the troubles OR towards the stake holders who invested their money based on their perception and the financials OR towards those who have put their hard-earned money in banks like Lehmann?

    28. @7:07…keep thinking that…you must’ve been an auditor for BSC, LEH, FRE, FNM…or some other financial who is on the brink. Good job and go get yourself a coffee and donut on the client.

      How much will this RTC pay for the toxic waste? .30/$1 less…

    29. Another thought.

      Some are saying that auditors might have been too aggressive with valuation of derivatives etc. This leading to further problems by favouring “low”values and causing capital problems. Well it’s heads we lose and tails we lose.
      Is there some truth here or is it urban myth?

    30. prabhu…

      Francine is going to rip you apart for asking such a naive comment on this blog. AUDITORS ARE NOT WORKING FOR MANAGEMENT! THEY REPORT TO THE AUDIT COMMITTEE BUT THE OPINION THEY RENDER IS FOR SHAREHOLDERS, NOT THE C-SUITE.

      Your question sounds like you worked at Arthur Andersen in 1999.

    31. @Anonymous I don’t like to rip any of my readers a new one. We have all kinds here and they are all welcome. Glad someone else said it and I did not have to.

      Auditors are in service to shareholders. Their client is the shareholders, not management. It may not look like it these days and that is one of the biggest, most serious problems.

    32. Point is the valuation models, while rigourous, are broken. Too subjective, and that’s not because the FASB isn’t smart enough, or the auditors are not conservative enough. Market valuation is meaningless. These companies might as well have been trading baseball cards or beanie babies instead of credit default swaps, nebulous pools of mortgage backed securities, etc. There needs to be strict enforcement of leverage ratios and restrictions on the type of investments that commercial banks can make (come back, Glass-Steagall)…segregate investment management companies into their own economy and let the direct investors decide if it makes sense. We should all be upset that the only way this can unravel without affecting us all is to have the goverment socialize the losses while the profits have been privatized. I think blaming the auditors is a bit off-target.

    33. Isn’t fair value and discounted cashflow one and the same thing? As far as i know, all fair value models are based on discounted cashflow analyses.

    34. ask a leh employee if it matters now

    35. @Anonymous 9/17/08 10:57
      Interesting that you choose AIG to make your case for auditors doing everything they can. I have written extensively on AIG and PWC’s stubborn refusal to opt out of this mess, even though they are even being blamed by shareholders in lawsuits for contributing to AIG’s previous issues and problems. AIG is no angel and PwC has been there with them the whole time.

      So, although there may be instances of auditors doing the best they can then walking away from an incorrigible client, in my opinion AIG is not one of these instances. Thanks for reading and sorry if you feel impugned, but I don’t think this is the best example you could have chosen to make your point.

    36. Nobody needs to worry anymore because The Bald and The Beard and Cox (shout out to http://www.dealbreaker.com) have prohibited short selling so no need to worry, regardless of auditor transgressions, stocks will always (and should) go up now!

    37. Francine,

      Potent post here!

      There hasn’t been much public discussion of the role of auditors in the collapse of the monoliths. I wish there was because the whole going concern of accounting and auditing is to ensure reliable and usable information for investors and the public.

      I think part of the problem goes back to some auditing fundamentals. When I started my career, I was always amazed at the vague but legally disclaiming language of auditing statements. There didn’t seem to be enough (pardon the expression) *balls* to those statements.

      How did this profession get to this? When did it start to go south? Was it when auditors became their clients’ consultants?

      Or, have financial instruments gotten so convoluted that auditors don’t even understand what’s going on?

      I hope that we get more brains on this problem. Your blog might be a good start, but I’m a pessimist. Any optimists out there?

    38. Great discussion! IMHO, while the situation doesn’t look great for audit firms, in reality this mess is far beyond something that could have been anticipated — at least by the audit firms. Essentially, the whole crisis hinges on people not re-paying their mortgages. The rest is a by product of being over leveraged – but not illegally — as the house of cards rapidly deteriorated. As the credit markets froze, these investment banks primary assets became illiquid — hence the bankruptcy’s. All it took for AIG was a few large firms for which it backed default swaps on their debt and they were screwed. To tell the truth, I haven’t read the footnote disclosures in their latest filings, but I’d assume there is at least a mention of the risk. Again, IMHO, this risk was unquantifiable — both by management( a much bigger issue) and the audit firms. Like others have commented, it’s not the role of audit firms to comment on investment strategy -only to opine on the financial position at a given point in time. To those who suggest that these companies should have marked down their assets up-front, that would have resulted in a mis- representation of their assets at that point in time. These assets lost value in such a short period of time (literally days in some cases), that there wasn’t much that could have been done by the audit firms. The blame here lies solely on management — heck if it were true that housing prices never fall, we’d be fine…one last point — do the audit firms place reliance on the ratings agencies debt ratings, or not?

    39. In my opinion, the audit firms must also be audited by other independent audit firms appointed by the Government as to whether they performed their duties in the best professional manner and the results should be publicised in newspapers. This will ensure that good audit firms get their rightful eminence and bad audit firms are closed down.

    40. Anonymous @3.28am, there is already a 'peer review' process where Big 4 audit firms audit each other. The problem is that it degenerates into an 'i won't tell if you won't' kind of scenario, where no audit firm dares upset the other by giving a negative review. I have also participated in internal quality reviews (where an 'independent' partner review another partner's audit) and the same thing happens. Audit partners are also masters of the 'push-back', where they use all forms of manipulation, spin & intimidation to get themselves out of tight situations. Don't underestimate their ability to do this – they 've honed the skill over several years. The problem with the audit profession is that, whilst the intentions are good, 'human' issues (greed, cya, negligence, incompetence) end up messing up everything. The challenge is how to mitigate/eliminate those human factors that compromise the profession.

    41. I have been thinking that we 're all being a little hard on the auditors until a thought occurred to me last night (yeah, that's how pathetic my life is). Was the Wall Street crisis a SOX failure? Surely, if the banks were lending irresponsibly, if the valuation models were not properly designed, the auditors should have flagged these as control failures (significant deficiencies/material weaknesses)? Does this mean that SOX opinions issued on Bear, Merrill, Lehman & AIG were deficient? Knowing how the audit industry works, if these issues were raised at all, there were probably passed on as significant deficiencies, "SD", (and not material weaknesses, "MW") hence not worthy of mention on the auditors report. But if they were mere SDs as opposed to MWs, then they shouldn't have threatened the financial viability of these institutions, hence something somewhere is not right. From a financial statement audit perspective, the auditors must have relied on the rating agencies (who, if my memory serves me right, have been accused of giving some sub-prime securities triple A ratings), so the auditors get a pass on that, i guess. But on the SOX? Not so sure.

    42. Hi…I’d been following this up quite some time and just wonder.. why so much hype about big 4? Think..if a big 4 as someone said is so worried abt losing the client that would compromise their independence so would that be for smaller 1000 auditors…now, that brings to focus only the question on “relevance of audit”…Audit is only a opinion expressed on accounting policies and consequent values expressed on the financial statements. Now, we need to note that in all these failed firms no one has come up with a lititgation (or that has not been publicised) that applicable acounting standards weren’t followed. (That would include valuations as well)…You need to understand that securities were so complex in nature that even God couldn’t have determined their fair values until the entire market came crashing..let me take one example..Say bank A issued a loan to Mr.X..and this was classified as good loan (against documents that would pass even a third party scrutiny)…now, the loans are accumulated and interest is sold as interest rate swaps..and the loans are insured / re-insured. With the market turning down and values going low…even Mr. X would be tempted to default since he doesn’t see values in his investment anymore…and these kind of complex structures are difficult to value…Having said this I don’t know if there is a concurrent audit mechanism in America like the one in India…If it exists then it’s squarely the blame of concurrent auditors that they should have spotted and typically they should report to FED..If they don’t have, then it’s problem with regulatory mechanism in itself…You don’t see these kind of mega failures in India more because of regulatory mechanism..if you were to start blaming someone it’s the people first for their greed for trying to have something they can’t afford, the bank employees for trying to sell to people with low credit work for the sake of promoting their own sales target, the management of not doing enough internal audit to see if controls are proper, of the FED for not regulating bank and insurance exposures, the rating agencies for not giving a fair value and finally the auditors for relying on management statements on internal control and for not challenging the generally accepted accounting standars themselves per se..

    43. Where have we come in 3 years? I figured since its been that long given the most recent comment to this piece… a bit of an update from someone on the ground @ a Big 4 who actually participates in substantive testing (unlike sr mgrs, partners/directors):

      The root issue that plagued every Big 4 firm during the past 5 years has not been adequately identified and addressed and will not be addressed anytime soon by the firm.

      What I mean is that like anything else in life, one must first understand the current up-to-date landscape of a situation thoroughly before they can go about attempting to identify potential issues and improvement of said situation.

      The fact remains that a strategic initiative was not built around educating those who are responsible to actually identify significant risks (seniors/managers) on not only the root causes of the financial crisis, but also on the ever changing landscape and current systemic issues that remain for financial services companies like JPM/BofA/GS/MS. I’m telling you that it is mind blowing the level of ineptitude and general “well it’s not my problem” type of attitude that exists within the Big 4 as a whole. We realize that there is no way one of us can go down. Its impossible.

      The Auditing side of the Big 4 is all set up for failure at the beginning. Ever since a first year walks in the door and isn’t even asked simply “what industry would you say you know the most about at this juncture? Is there one?” and then using that data to staff jobs with knowledge instead of dead weight. It’s been happening for years and what has occurred is you have those same first years who knew nothing coming into the job about the industry or the client 4 years ago now being seniors and managers who… STILL know nothing about the current issues that plague their industries, most importantly within the banks. (I dare anyone to question me on this)

      How can a senior or a manager who do ALL of the work be able to “question” managements assumptions when the firm as a whole does ZERO to keep them up to speed specifically about what’s going on? You’d expect at least something like weekly calls with seniors and managers and senior managers within the same Big 4 firm and most importantly, on the same type of clients (say TBTF banks) discussing issues such as cross border transactions or gross vs net exposure to French banks and actually devising a way to question managements “word” with collective intelligence.

      NONE OF THIS HAPPENS. ZERO.

      All of this confirms that the audit side of the big 4 is just a sham that the overall company utilizes to gain relationships with said client/industry so further siphoning can occur with tax/consulting/advisory services which are growing at much higher rates. Its a giant ponzi scheme.

      It’s (Auditing) a job that to do correctly and adequately….. one must be AT LEAST one step ahead of their clients… We as audit professionals are 20 miles behind…. with a failed business model geared towards keeping its employees incompetent when it comes to ACTUAL risks that can lead to a misstatement of the financials.

      Its disgusting.

    44. So when will you push to have the auditor’s fee paid by someone other than the Client? Isn’t this the ultimate conflict?

    45. @bob

      Oh, I push and push for this. I’ve been talking about the “ultimate solution” for ages. See: National Service Corp for Accountability and Transparency. TM

      http://retheauditors.com/2009/01/19/how-will-we-solve-the-financial-crisis-the-answer-is-bigger-than-you-and-i/