Francine McKenna, author/editor of re: The Auditors and watchdog of the public accounting industry, has scored again with They Weren’t There: Auditors And The Financial Crisis. Thus she continues to add to her single season scoring record.
U.S. auditing has never been very good. The auditing of financial statements was voluntary in the U.S. until passage of the Securities Act of 1933 and the Exchange Act of 1934. The Exchange Act also gave us the Securities and Exchange Commission. Corporatations had a long history of disobeying accounting rules and publishing whatever. Auditors were so unsuccessful in getting companies to properly report, that in the 1960s the U.S. explored junking the AICPA’s Accounting Prinicples Board as standard setter and turning to a newsly formed IASC. Ultimately, it formed the FASB instead.
But companies had little concern for the rules because they could bully auditors. And bully they did. Auditor switching was pandemic by the 1970s, and the SEC passed regulation after regulation, hoping that shedding light on it would dry up the nefarious practice of marginalizing auditors. By the early 90s, auditor switching slowed a bit, but the irrelevance of auditors didn’t change. Arthur Andersen (AA) was able to keep its clients, but it did so by playing ball. After the 1990s bubble burst in the early 2000s, AA was driven out of business.
There was hope that SOX and its PCAOB would give auditors sufficient backbone to stand up to corporate bullies. There is anecdotal evidence that it worked in some industries. But it is obvious that auditors were ghosts for banks and other financial statements. Madoff–where where the auditors. Banks–where were the auditors. Frolicking in the wealth of their 404 audit fees.
So where where the auditors? I’ll close with Francine telling us:
And so when I ask, “Where were the auditors?” and decry the fact that “they weren’t there,” it’s not due to some unreasonable, unfair focus on the most milquetoast of potential culprits.
No.
I bang this drum because the auditors should have been there, as a last stop, where the buck should have stopped, as gatekeepers, watchdogs, advocates, and the last bastion of standards and expected values shareholders can look to.
But they weren’t. (Empahsis added)
You go, girl.
Debit and credit – – David Albrecht
The Summa 
Each of the debacle companies had CPA auditors who assured the public that the financial statements were all just fine. Consider the list:
AIG – PricewaterhouseCoopers LLP
Merrill Lynch – Deloitte & Touche LLP
Lehman Brothers – Ernst & Young LLP
Fannie Mae – Deloitte & Touche LLP
Freddie Mac – PricewaterhouseCoopers LLP
Washington Mutual – Deloitte & Touche LLP
Wachovia – KPMG LLP
Bear Stearns – Deloitte & Touche LLP
Countrywide – KPMG LLP
IndyMac Bank—Ernst & Young LLP
You can help reform this industry. Here are 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.
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 Big 4 for over a decade. For instance, the California Board of Accountancy has only 4 investigators for 76,000 CPA licensees.
Best regards,
Carl Olson
Chairman
Fund for Stockowners Rights
P. O. Box 56653
Washington, D. C. 20035
703-241-3700
West Coast Office
P. O. Box 6102
Woodland Hills, California 91365
818-223-8080
I’ve written a short bit on my take with ‘what’s wrong with audot’ and it seems (from my industry view) that what we have here is a massive pandemic of form over substance.
Auditing as either:
1) a giant game of CYA, or
2) a checklist derby
are ultimately ineffective.
My view is that we need a full tear-down and rebuild within audit regimes. There’s got to be a move to Operational-based audits that are separate (mostly) from components related, say, to fair value of derivatives.
Either that or auditors, as a group, are book-smart and life-dumb.