Accounting and Auditing Ethics

"Six months ago the accounting firm...
said MF... and its units “maintained, in all material respects,
effective internal control over financial reporting
as of March 31, 2011.”

MF...filed for bankruptcy on Oct. 31.

This week the trustee ...said as much as $1.2 billion
of customer money is missing, maybe more.

Those deposits should have been kept segregated
from the company’s funds.

By all indications, they weren’t.

What’s the point of having auditors do reports like this?

And are they worth the cost?

...When an auditor certifies
that a client’s internal controls are effective,
that’s supposed to mean the company can do basic functions
like maintain accurate financial records,
detect unauthorized transactions
and keep track of its receipts and expenditures.

...“Their books are a disaster,” Scott O’Malia,
a commissioner at the Commodity Futures Trading Commission,
told ...an interview two weeks ago.

...to believe...got it right
when it blessed MF’s controls in May,
you would have to accept the notion that MF’s controls
were effective in March
-- and didn’t start going bad until sometime later.

...this scenario seems implausible.

...whenever a financial institution fails,
it’s almost always true that its internal controls were poor
-- and had been that way for a long time.

Otherwise it wouldn’t have failed.

...other companies that use...’s New York office as their auditor
include...and...

Both ...presumably are too big to fail,
meaning taxpayers would be on the hook if they ever blew up.

A Pricewaterhouse spokesman, Caroline Nolan, declined to comment on the firm’s work for MF.

If...can’t spot control weaknesses
at a relatively small shop like MF
...it’s a bit much to expect that the firm
would catch anything materially amiss at...
which has $949 billion of assets,
or at ...with $2.3 trillion...

The reason MF had to get an outside audit report
on its internal controls
was that the Sarbanes-Oxley Act required it.

That law was enacted in 2002
in response to a wave of audit failures
at big companies such as WorldCom Inc. and Enron Corp.

...For a while, it looked like the new rules were working.

Then a backlash hit.

Corporate executives, lawmakers
and even Securities and Exchange Commission officials
complained that the auditors were being too strict.

The number of restatements plunged.

...Many companies’ audit fees plunged,
suggesting that the auditors there were doing less work.

For fiscal 2007, MF Global paid...$17.1 million in audit fees.

By fiscal 2011, that had fallen to $10.9 million,
even as warning signs about MF’s internal controls
were surfacing publicly.

On top of that...’s main regulator,
the Public Company Accounting Oversight Board,
released a nasty report this week
on the firm’s audit performance.

The agency cited deficiencies in 28 audits,
out of 75 that it inspected last year.

The tally included 13 clients where the board
said the firm had botched its internal-control audits.

...The point of having a report by an independent auditor
is to assure the public that what a company says is true.

Yet if the reports aren’t reliable,
they’re worse than worthless,
because they sucker the public with false promises."

Jonathan