"Many big Wall Street firms were asleep at the switch in the years leading up to the credit crisis. At least another group--the auditors--seems to be minding the store. They fell down badly during the tech-stock bubble, but their standards seem to be pretty tight these days. The most recent evidence: The apprently hard line taken by [AIG's] auditors [PWC], when it came to how the insurer valued credit default swaps", David Reilly (DR) at the WSJ, 13 February 2008.
"You see things; and you say, 'Why?' But I dream things that never were; and I say, 'Why not'?", George Bernard Shaw, Back to Methuselah, 1921. Similarly, I ask: why didn't PWC find this weakness before? What changed? "In valuing those swaps, AIG ... benefitted from assumed differences in value of the swaps and the securities they were insuring", LP&DR write. Assumed? What's going on here? Did PWC have an "internal inspection" team review its AIG audit workpapers and find no support for AIG's assumption? Is AIG's credit default swap valuation as well documented as Enron's valuation of long-term electric sale contracts that tripped up Arthur Andersen? Stay tuned.