April 19, 2009
Credit rating agencies depend on audited financial statements to evaluate company finances. If garbage arrives in the form of erroneous audited financial statements, garbage goes out in the form of erroneous credit ratings.
In order for any credit rating agency to function reputably and effectively, it must have ways quickly to discipline misbehaving auditors.
CPA auditors are supposed to provide reliable figures to the public. But they instead have promoted the financial fiascos of the past year. Each of these debacle companies had CPA auditors who assured the public that the financial statements were all just fine:
AIG – PricewaterhouseCoopers
Merrill Lynch – Deloitte Touche
Lehman Brothers – Ernst Young
Fannie Mae – Deloitte Touche
Freddie Mac – PricewaterhouseCoopers
Washington Mutual – Deloitte Touche
Wachovia – KPMG
Bear Stearns – Deloitte Touche
Countrywide – KPMG
IndyMac Bank—Ernst Young
Reform of this industry requires essential reforms:
1. Fully fund the Public Company Accounting Oversight Board.
2. Double the SEC enforcement budget.
3. Triple the FBI white collar budget. It was decimated in 2002. Theres never been a criminal prosecution under the Sarbanes-Oxley Act.
4. Require CPA firms to put all their partners at risk for the misdeeds of the firms. They should not be allowed to be Limited Liability Partnerships. They should all be required to go back to General Partnerships, as they were until the 1990s.
5. Encourage state boards of accountancy to discipline CPA firms. No significant penalties have been imposed on the Big 4 auditors for years. See below for fuller reporting.
Much more is on the website www.cpawatch.org.
Fund for Stockowners Rights
P. O. Box 65563
Washington, D. C. 20035
West Coast Office
P. O. Box 6102
Woodland Hills, California
Americans Strike Out 0-55 with State Boards of Accountancy,
None Discipline Big Four CPA Auditors for Major Debacles
By Carl Olson
Chairman, Fund for Stockowners Rights
The American public has so far struck out 0-55 for help from boards of accountancy in the ongoing national financial system crisis. None has imposed significant discipline on any of the Big Four CPA auditing firms in years despite the spate of multi-billion dollar financial fiascoes aided by faulty CPA audit opinions.
Complaints were lodged against Deloitte Touche, Ernst Young, PricewaterhouseCoopers, and KPMG for numerous adjudicated lawsuits and regulatory findings. Out of the 55 boards, twenty-seven did not even respond in writing. The other 28 have not yet reported any discipline on their auditing problems. (See chart at www.cpawatch.org.)
CPA audit opinions engender trust by the investing public for financial statements. Boards of accountancy are supposed to protect the public of each state plus the District of Columbia, Puerto Rico, Virgin Islands, Guam, and Northern Marianas. The boards license Certified Public Accountants, CPA firms, and other accounting professionals. The boards can investigate complaints about misbehaving licensees over malpractice, negligence, fraud, and other offenses. Offenders are subject to fines, costs, mandatory re-training, and suspensions and revocations of licenses.
Complaint letters were sent on June 16, 2008, with follow-up letters on October 22, to all 55 boards of accountancy with significant CPA transgressions.
For PricewaterhouseCoopers, The Wall Street Journal of November 1, 2007, reported, The suit alleges, among other claims, that Tyco International Ltd. committed securities fraud by improperly accounting for acquisitions and manipulating quarterly results. Earlier this year, Tyco agreed to pay about $3 billion to settle the case, which would be the largest payout in a securities litigation by one company. Tycos auditor at the time—PricewaterhouseCoopers LLP, which was also a defendant—has agreed to pay $225 million.
For Ernst Young, The Wall Street Journal of February 16-17, 2008, noted, Ernst Young LLP settled for $300 million a lawsuit brought against it by Cedant Corp., according to a securities filing late last year by a former Cedant subsidiary. It its suit, Cedant alleged that Ernst negligently failed to detect massive fraud during its audits of a unit of the company. Ernst had already, in 2000, paid out $335 million to Cedant shareholders as a result of the fraud. That is believed to be the largest-ever settlement by an auditor related to work for a single client.
For Deloitte Touche LLP, The Wall Street Journal of December 11, 2007, reported, In its first-ever enforcement case against a Big Four accounting firm, the nations audit watchdog fined Deloitte Touche LLP $1 million and censured the firm over its work checking the books of a San Diego-based pharmaceutical company Ligand Pharmaceuticals. In another case, The Wall Street Journal of December 28, 2007, noted, Accounting firm Deloitte Touche has agreed to pay $38 million as part of a $328 million settlement of investor claims of misconduct by Delphi Corp. and those that oversaw its finances.
For KPMG, The Wall Street Journal of March 28, 2008, reported, Xerox Corp. said it will pay $670 million to settle a shareholder lawsuit over alleged accounting misdeeds, while its former auditor KPMG LLP, will pay $80 million. Additionally, The New York Times of March 27, 2008, reported, New Century Financial, whose failure just a year ago at the start of the credit crisis, engaged in significant improper and imprudent practices that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department.
In another case, The Wall Street Journal of July 18, 2005, noted, A California superior-court judge sanctioned KPMG LLP last week for withholding documents in an accounting malpractice lawsuit brought by a small private computer-case maker, the third time the big accounting firm has been criticized by a judge for its legal tactics in recent months. In an order issued Wednesday, Orange County Superior Court Judge Geoffrey Glass instructed KPMG to pay $30,000 for its abuse of the discovery process and directed the jury to consider such behavior as it weighs the case brought by Targus Group International Inc.
KPMGs multi-billion dollar illegal tax shelters have resulted in disciplining in 3 of 55 jurisdictions. In January 2008 the California Board of Accountancy issued a stipulated settlement and disciplinary order imposing a fine of $1 million and investigative costs of $385,000 on KPMG. The Texas Board of Accountancy imposed fines of $1000 each for 96 violations plus administrative costs of $3842.45, and Washington imposed a $10,000 fine.
Much better enforcement needs to come from boards of accountancy. The American public cannot continue to rely on bogus CPA audit opinions. These CPA firms must be deterred effectively and swiftly from continuing to inflict such dangerous mis-directions on millions of investors.