Large-scale
auditor scandals
“I
can’t think of one major financial fraud in the United States in the
last 10 years that was uncovered by a major brokerage house analysis or
an outside accounting firm.”
—Jim Chanos Kynikos Associates
In my opinion, the auditing profession has systematically abused the
trust that the public has in them to give an accurate picture of a
corporation's finances. Since it has has happened so often with the
big, prestigious players, it shakes the confidence we may have in the
audits done by the little guys.
Creative
accounting
Creative accounting and earnings management are euphemisms referring to
accounting practices that may follow the letter of the rules of
standard accounting practices, but certainly deviate from the spirit of
those rules. They are characterized by excessive complication and the
use of novel ways of characterizing income, assets, or liabilities and
the intent to influence readers towards the interpretations desired by
the authors. The terms "innovative" or "aggressive" are also sometimes
used.
The term as generally understood refers to systematic misrepresentation
of the true income and assets of corporations or other organizations.
"Creative accounting" is at the root of a number of accounting scandals
involving the world’s biggest corporations and the biggest and most
prestigious accounting companies as you can see below.
Corporation |
Year |
Accounting
firm |
Country |
Phar-Mor |
1992
|
Coopers & Lybrand |
United States |
Castor Holdings
|
1992
|
Coopers & Lybrand |
Canada
|
Informix |
1996
|
Ernst & Young |
United States |
Sybase |
1997
|
Ernst & Young |
United States |
Cendant |
1998
|
Ernst & Young |
United States |
|
|
Waste Management, Inc. |
1999
|
Arthur Andersen |
United States |
Lernout & Hauspie |
2000
|
KPMG |
Belgium |
MicroStrategy |
2000
|
PricewaterhouseCoopers |
United States |
Unify Corporation |
2000
|
Deloitte & Touche |
United States |
Computer Associates
|
2000
|
KPMG |
United States |
Xerox |
2000
|
KPMG |
United States |
One.Tel |
2001
|
Ernst & Young |
Australia |
Enron
|
2001
|
Arthur Andersen |
United States |
Tyco International |
2002
|
PricewaterhouseCoopers |
Bermuda |
WorldCom |
2002
|
Arthur Andersen |
United States |
Reliant Energy |
2002
|
Deloitte & Touche |
United States |
Qwest Communications |
2002
|
Arthur Andersen, KPMG |
United States |
El Paso Corporation |
2002
|
Deloitte & Touche |
United States |
Dynegy |
2002
|
Arthur Andersen |
United States |
Duke Energy |
2002 |
Deloitte & Touche |
United States |
AOL |
2002 |
Ernst & Young |
United States |
Peregrine Systems |
2002 |
KPMG |
United States |
Nicor |
2002 |
Arthur Andersen |
United States |
Mirant |
2002 |
KPMG |
United States |
Global Crossing |
2002 |
Arthur Andersen |
Bermuda |
Merck & Co.
|
2002 |
Pricewaterhouse Coopers
|
United States |
Halliburton |
2002 |
Arthur Andersen |
United States |
Bristol-Myers Squibb |
2002 |
PricewaterhouseCoopers |
United States |
CMS Energy |
2002 |
Arthur Andersen |
United States |
Homestore.com |
2002 |
PricewaterhouseCoopers
|
United States |
Kmart |
2002 |
PricewaterhouseCoopers |
United States |
Adelphia |
2002 |
Deloitte & Touche |
United States |
Freddie Mac |
2002 |
PricewaterhouseCoopers |
United States |
ImClone Systems |
2002 |
KPMG |
United States |
Merrill Lynch |
2002 |
Deloitte & Touche |
United States |
|
|
Sunbeam |
2002 |
Arthur Andersen |
United States |
Royal Ahold |
2003
|
Deloitte & Touche |
Netherlands |
Parmalat |
2003
|
Grant Thornton SpA |
Italy |
HealthSouth Corp. |
2003
|
Ernst & Young |
United States |
|
|
Nortel |
2003 |
Deloitte & Touche |
Canada
|
Chiquita Brands Inc. |
2004
|
Ernst & Young |
United States |
AIG |
2004
|
PricewaterhouseCoopers |
United States |
Bernard L. Madoff |
2008 |
Friehling & Horowitz |
United States |
Anglo Irish Bank |
2008
|
Ernst & Young |
Ireland |
Satyam Computer Services |
2009
|
PricewaterhouseCoopers |
India |
Lehman Brothers |
2010 |
Ernst & Young |
United States |
|
|
Sino-Forest Corporation |
2011
|
Ernst & Young |
Canada-China |
Olympus Corporation |
2011
|
Ernst & Young |
Japan
|
The most notable critic of the auditing profession is Abraham Briloff
(professor emeritus of CUNY Baruch) who for years wrote a column for
Barron's that constantly analyzed breaches of ethics and audit
professionalism among CPA firms. His most famous book is called “Unaccountable
Accounting”.
Despite decades of scandals, the multi-national audit companies are
still mired in scandal and their audits suspect. Here is an article
from the Wall Street Journal.
A Good Auditor is hard to find
Wall Street Journal
March 20, 2012
Emily Chasan—Senior Editor
The regulators who want to require companies to periodically switch
auditors may have the investing public’s best interests at heart, but
the practical reality of such a plan looks very difficult to pull off.
In the U.S., two out of the Big Four auditing firms handle at least 70%
of the audit work in several industries. As a result, companies in
those sectors argue they couldn’t consistently find new auditors with
the expertise they need.
Reader Comments
March 20, 2012
Paul Wendell wrote:
The large accounting firms never find a fraud. The companies are too
large and transactions too complicated. A look at all the computer
audit files has not uncovered any recent fraud.
It would be better to have management sign off that the financial
statements are reasonably accurate and fine them and possibly put them
in jail if wrong.
Management knows if they are manipulating the records so having them
sign the financial statements as reasonably accurate is better than an
audit that will never find a fraud until it becomes public knowledge
March 20, 2012
Insider Trading By CPAs wrote:
An honest unconflicted auditor at a global accounting firm is
impossible to find – it is not a SECret.
Ontario court approves
$117-million settlement with Sino-Forest auditors
Jeff Gray
The Globe and Mail
20 March 20 2013
An Ontario judge has approved a $117-million deal to settle allegations
levelled by investors in Sino-Forest Corp. against Ernst & Young
LLP for allegedly failing to properly scrutinize the books of the
scandal-plagued company.
The E&Y deal, first announced last year, would see Sino-Forest’s
primary auditors settle the allegations against them contained in a
$9.18-billion class-action lawsuit launched on behalf of Sino-Forest
investors against the company, its former executives, auditors and
underwriters. E&Y did not admit liability as part of the deal.
The accounting firm still faces serious allegations from the Ontario
Securities Commission that it showed a “lack of diligence” in reviewing
the documentation of Sino-Forest’s purported ownership of standing
timber reserves in China. E&Y has denied those allegations and says
its work met professional accounting standards.
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