Thursday, March 27, 2008

Docking Big Four yet again!

It is often noticed in business circles that no large scale fraud is possible without the connivance of auditors. But they are the first one to shirk when the ugly underbelly is exposed. We had seen it in Enron, WorldCom scandals and I seem to have had an eerie sense of timing while I posed this question on Auditors.

Then I read this NYT article based on an investigation report commissioned by the DoJ into the collapse of New Century Financial, one of the largest subprime lenders that directly accuses its auditors – KPMG. Some of its accusations echo charges that surfaced about the accounting firm Arthur Andersen after the collapse of Enron in 2001. E-mail messages showed that some KPMG auditors raised red flags about the accounting practices at New Century, but that the KPMG partners overseeing the audits rejected those concerns because they feared losing a client. It also deals with fraudulent accounting practices that masked its likely losses.

The investigator Mr. Michael J Missal, who also worked on an investigation of WorldCom’s accounting misstatements, concluded that KPMG and some former New Century executives could be legally liable for millions of dollars in damages because of their conduct.

I often argue with clients why they insist on a Big Four auditor in every JV deal. They do have a reputation as a firm, but as individual partners they have their own pet prejudices. There are auditors with great track record and reputation that will do a far better job for far lesser fee. But somehow it doesn’t register. Meanwhile Big Four carries on the Arthur Andersen legacy, winking and nodding!

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