Wednesday, February 4, 2009
Silver Blaze and the CPAs
"Here's hoping the big audit firms get busy living, and start sounding alarms at banks that are dying. ... And yet barely a glove has landed on the Big Four accounting firms that didn't bark. One after another, huge financial institutions collapsed last year bearing fantasyland balance sheets, while their accounting firms couldn't manage to find anything wrong. ... The public's patience may be running out. One sure sign in that investors are starting to blame big accounting firms for frauds at places they never even audited. .... Then there are the scandals where the firms have lots of explaining to do. Last week, PWC's India affiliate issued a statement about its work for Satyam Computer Services Ltd., which overstated its cash by $1 billion. The firm said its audits were conducted 'in accordance with applicable auditing standards and were supported by appropriate audit evidence.' The statement came only one day after Satyam's chairman disclosed the fraud. How could that have been enough time to conduct a thorough investigation? Beats me. ... Undoubtedly there will be pressure the next several weeks--if not express pleas by banking regulators--for auditors to let lots of phony asset values slide. ... KPMG, for one is fortunate to still be alive. On June 13, 2005, its new chairman, Timothy Flynn, ... promised that KPMG would 'go back to our core business' of auditing corporations and focus on being an audit watchdog. ... Almost four years later, we're still waiting for the auditor to bark at Citigroup Inc.", my emphasis, Jonathan Weil (JW), 16 January 2009 at http://www.bloomberg.com/apps/news?pid=20670001&refer=columnist_weil&sid=acBPDxgc7Et8.
JW's comments are like mine at my "31 More Years" series. PWC's deciding its Satyam audit was fine in one day is easily explained. PWC could have said that in one minute! Since any audit PWC does is by definition done in accordance with GAAS, why delay? JW hits at another area of concern: pressure on the Big 87654 to conceal banks' cooked books. Some people think replacing the Big 87654 with federal auditors would improve audits. Huh? Who will run the federal audit agency: the SEC, PCAOB or Social Security Administration actuaries? Who? Does anyone remember "regulatory capital" created to delay the S&Ls collapse? Or Congress recent attempt to have the SEC suspend bank mark-to-market accounting? A federal audit agency would be even more compromised than the Big 87654. As for the Big 87654 resisting Treasury, FDIC, SEC, OCC pressure to keep the banks afloat, can you imagine this: a Big 87654 firm buys newspaper ads in the WSJ, NYT, LAT, Chicago Tribune, WaPo, Houston Chronicle, SF Chronicle and Dallas Morning News that starts with: "Last night at 6:00 PM one of our partners, Jack Spratt (JS) received a phone call from Zimbabwe Ben (ZB). ZB told JS "the Fed put $25 billion into Megabank and if Big 87654 makes Megabank write its assets down under GAAP, Megabank would need $75 billion in writedowns, making it insolvent. That Big 87654 would help the Fed by letting Megabank not record the $75 billion. And oh, yes, Big 87654 would be in the good graces of the: Fed, Treasury, DOD, DOJ, etc., and would get billions in computer consulting contracts over the next five years. Further a grateful country would appreciate Big 87654's help in keeping Megabank alive". Big 87654 partners ain't got those stones. Imagine a Big 87654 having its general counsel stroll into the SDNY US attorneys office screaming that ZB attempted to aid and abet securities fraud, 18 USC 2, 1348. IA must be eating too many magic mushrooms to have dreamed this up.
JW apparently referred to the Sherlock Holmes story, Silver Blaze, 1892. See http://en.wikipedia.org/wiki/Silver_Blaze for a description of the relevant part of the story. The Big 87654 are paid not to bark. At least when they audit banks.