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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