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!
.

Big Four, Three, Two, One....?

If you have ever examined any M&A deal document, you could hardly ever miss the statement “ the New Co shall appoint one of the Big Four as auditors”. Such has been their credibility that shareholders felt at ease if one of them certified the Annual Financial statements – at least until the unraveling of Enron saga of 2001.

When you go back in history, originally we had the Big 8 ( 1970-89 ), a few of them merged to become the Big 6 ( 1989-96), which repeated the act to become the Big 5 ( 1998-2002 ) and with the 2001 Arthur Andersen collapse, became Big 4 as they are now. The countdown it seems is making a steady progress.

Recently five Silicon Valley executives -- including four with ties to Cisco Systems -- are suing Ernst & Young, claiming the Big 4 accounting firm peddled them a tax shelter that left them owing millions of dollars in taxes, penalties and damages.

The lawsuit harks back to the late 1990s, when national accounting firms joined with elite law firms and international financial giants to market tax shelters to wealthy investors so they could avoid taxes. Silicon Valley was a prime hunting ground because it was teeming with executives eager to find ways to slash their tax bills after cashing in stock options during the tech boom.

The explosion of tax shelters triggered congressional investigations into the practices, plus crackdowns by the Internal Revenue Service and the California Franchise Tax Board.

In 2004, the state offered an unusual tax-amnesty program targeting participants in what authorities called ``abusive'' tax shelters. The state originally hoped the amnesty would snare $90 million, but instead it collected a national record $1.4 billion from 1,202 taxpayers. Nearly $1 billion of that came from 860 individuals.

The five plaintiffs' saga began when Ernst & Young pitched them with a complex tax shelter known as a ``contingent deferred swap,'' or CDS. In 1999 and 2000, they were among about 125 people nationwide who paid Ernst & Young nearly $28 million in fees -- an average of $224,000 -- to participate in the program, according to the lawsuit.

What do you think ? Could there be a repeat of Enron & Worldcom ? How long do you give before we say Big three, two, one…