Monday, December 10, 2007

The Big Four Lack Substance

"Britain's biggest accountants have had a crisis meeting with the Government to ask it how to value billions of pounds of debt stuck on UK banks' balance sheets by the credit crunch. ... In an unprecedented move, PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young met officials from the Financial Services Authority late on Friday afternoon to plead with the regulator to sanction a common valuation code in an attempt to push some of the responsibility for quantifying banks' liabilities on to the Government. ... However, the auditors, who fear there is a far greater risk they could be sued this year, want the FSA to rubber-stamp a common approach to valuation which would provide uniformity for bank audits and also limit lawsuits", Helen Power at http://www.telegraph,, 9 December.

Why can't the Big Four (BF) exercise "professional judgment" and individually determine how to value the assets in question. Are BF partners just bookkeepers that need an FSA, Great Britain's SEC, "template" to value securities? What did they do last year? What is the BF's job? What are they paid for? How will they obfuscate the fact that in all likelihood, they did not consider the fair value of any of the securities in question and rubber stamped their bank clients' models? The BF's bank "audits", for the last five or so years, will likely prove worthless, just like many S&L audits the Big Eight did in the early 1980s. See my 1 December and 29 September posts mentioning Adam Smith.

We've seen this before. "An important case is that of Arthur Young & Company [AY], now called Ernst & Young, whose top officials are scheduled to appear before the House Banking Committee on Tuesday. ... To be sure, [AY] is not the only big accounting firm to encounter problems. The Office of Thrift Supervision ... has sued two other big firms--Touche Ross for its auditing of the Beverly Hills Savings and Loan Association [S&L] of Mission Viejo, Calif., and Deloitte, Haskins & Sells for its role in auditing the Sunrise [S&L] of Boyton Beach, Fla. ... For [AY], Lincoln was only the latest in a series of giant--and now failed--banking institutions it audited. The list includes two large insolvencies in Dallas--the collapse of Vernon [S&L] which will cost the taxpayers $1.1 billion and the collapse of Western Federal [S&L] , which could also cost as much as $1 billion", NYT, 14 November 1989, 18 years ago! Don't these guys ever learn? According to Fortune, 5 November 1990, 96% of Vernon's loans were delinquent shortly before it failed. What did AY do at Vernon? Ernst & Young paid the US government $400 million to settle lawsuits arising from its S&L audits,, 24 November 1992. Why any regulator should cut the BF any slack is beyond me.

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