Good, Maybe An Accounting Firm Or Two Should Die

Jim Peterson of Re:Balance was kind enough to fill in for Edith Orenstein on FEI blog while she went vacationing (necessary, I was just there myself to get in some quality time before the central bank asshats were unleashed from Jackson Hole) and he will not be crying when litigation kills accounting firms since everyone was warned well in advance.

Litigation? I think the firms did it to themselves if you ask me.


With the devilish details of the Dodd-Frank Act now to be worked out and many special interests weighing in, legislative activity in the American financial sector returns to a standstill – probably until after the elections of November 2012.

So what would bring to the forefront a topic that to most is sleep-inducing, although it keeps some few from sleep: namely, the very viability of the large accounting firms and their fragile franchise to audit the world’s global companies?

Nothing less, presumably, than an existential shock to the stability of one of the Big Four tetrapoly – an unresolvable criminal investigation or a “bad case” outcome in one of their nightmare civil cases.

The firms are on a fortunate streak: the credit-crisis cases resolved so far are within their pain tolerance – namely, KPMG’s Countrywide settlement of $ 24 million, and its $ 44.74 million shareholder settlement and reported trustee resolution in New Century (on which, don’t miss Francine McKenna last week). And the Seidman firm has at least a temporary reprieve from its adverse $ 521 million verdict in the Bankest litigation in Miami.

Read all about Seidman and the Bankest pass here. I'll just go ahead and say it, the PCAOB stands between large accounting firm auditors (ahem Big 87654) and liability instead of actually enforcing some kind of protection against the fraud of auditing. How? With the PCAOB busy harassing 98% of audit firms, the larger ones can put more money into battling litigation and cutting checks for "enforcements". Who cares? A person can't write a fake check without getting a felony but New Jersey can issue practically fraudulent bonds and simply be told the SEC does not like what they did. See how easy it is? So litigation isn't the problem, it's the way they built the system and the lengths they go to make it appear as though they have some sort of control over it.

Meanwhile the PCAOB runs around with the coloring books and issues 8 more "audit standards" while strong-arming small firms (who can't afford Big 87654 lawyers, obv) into compliance. Who can comply with these guys breathing down their necks and all the good lawyers over at the Big 87654?

Jim talks about pending apocalypse for the big firms in Washington Mutual and Lehman (someone is going to have to explain how they didn't catch that) but what about all the other crap the Big 87654 have blown lately? Colonial Bank and PwC? Or how about KPMG and Northern Trust?

Northern Trust is to face a class action filed in Illinois, USA on behalf of an institutional investor, the law firm behind the action has announced.

Robbins Geller Rudman & Dowd allege that Northern Trust was in violation of the Securities Exchange Act of 1934, specifically issuing “materially false and misleading statements” about the firm’s health and failing to disclose “the extent of its seriously delinquent commercial real estate loans and the true nature and risks associated with its once highly profitable securities lending [programme]”.

Robbins Geller claims that false statements from Northern Trust led to an “artificially inflated” share price, reaching a high of USD87.20 on 11th September 2008, with “certain top officers and directors” then selling more than 1.5 million shares for profits of over USD106.5 million.

When Northern Trust reported its third quarter 2009 results a year later, it said that results were below expectations due in part to a “serious decline” in its securities lending programme. Its share price subsequently dropped by almost 6% in one day.

Here's what I think... let's line up the iBanknet auditor list and make a drinking game out of it. Every time an audit firm fails in its responsibility (I guess we need to redefine what the auditors do in the first place then because this is the new normal, right?), take a shot. That means every SEC settlement, every slap on the wrist, every half-assed DoJ investigation, and let's throw in Fed cease and desists too just for kicks. We'd all be too fucked up all the time to notice how incredibly backwards this is. Woo, party!

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Jim Peterson said...

Thanks - but here's the persistent problem: after the ranting dies down, and the hang-over wears off -- what kind of financial information assurance are we prepared to value and pay for? What kind of professional services structure will provide it? And how do we get from here to there?
So far, it's still a blame-mongering exercise, which delivers no long-term benefits or relief. Although it does feel good for a while.
Cheers --

Absolutely! I couldn't have said it any better.
Citigroup has about $50 billion in deferred tax assets on its books and the PCAOB and SEC are nowhere to be seen.


profalbrecht said...

I don't think the Big 4 are close to flat lining.

I have purchased a black suit, just in case.