Audit Lapdogs Keep Jobs at Cardinal and ConAgra

No, I didn’t write that headline. A reporter at Bloomberg did! Read it and weep, Big 4. Even mainstream media, the company owned by the Republican Mayor of New York, is using this kind of language and calling you out. Maybe he doesn’t need your lobbyists’ money. Your days are numbered.

Maybe the reporter read my article and mustered up the courage. Too bad others like the WSJ, who hides the true affiliation of the shuttered Japanese affiliate of PwC in a recent article, can’t get some huevos.

“Who is watching the books at Cardinal Health Inc. and ConAgra Foods Inc. now that both companies have agreed to pay fines to settle accounting-fraud claims? Mostly it’s the same folks who missed the frauds…

Audit-committee members need strong backbones and the know- how to ask the right questions. If major frauds have occurred on their watch, it raises serious doubts about their effectiveness. Likewise, common sense would hold that Cardinal and ConAgra should have cleaned out their audit committees years ago. They still haven’t.

Last month, the Securities and Exchange Commission announced that Cardinal and ConAgra would pay $35 million and $45 million, respectively, to settle the agency’s civil claims. ..On whose watch did these transgressions occur? At Cardinal, the chairman of the audit committee today is a director named John Finn. He was the audit committee’s chairman the entire time that the SEC says the fraud was occurring. Asked if he will stay on, Finn said that’s up to Cardinal’s board and referred further questions to a company spokesman.

The board’s chairman is Cardinal founder Robert Walter. In January, Cardinal disclosed that the SEC staff had notified Walter it may seek civil action against him. Walter declined to comment.

Two other audit-committee members, George Conrades and Michael O’Halleran, were there the whole time, too. Another member, David Raisbeck, joined in 2002, when the SEC says the fraud was in midstream. None of them returned phone calls seeking comment.

Meanwhile, Ernst & Young LLP, which replaced Arthur Andersen LLP as Cardinal’s outside auditor in 2002, remains Cardinal’s auditor, even though the SEC’s complaint said the firm knew some of Cardinal’s accounting was wrong and agreed to let it slide. An Ernst & Young spokesman declined to comment.

Cardinal spokesman Jim Mazzola says the company “significantly strengthened our reporting and disclosure practices” by hiring a new chief financial officer, a new chief accounting officer and a new controller, among other measures. He also says the audit committee recently added two new members, though he declined to discuss the committee’s performance or the SEC’s probe.

At ConAgra, two audit-committee members, Mogens Bay and Kenneth Stinson, are holdovers from years when the SEC says ConAgra’s accounting was fraudulent. Another member, Jerry Jurgensen, joined in 2002. The committee’s chairman, Stephen Butler, joined in 2003. (In 2005, ConAgra restated its financials for 2002 through 2004.) Butler, who also heads the audit committees at Cooper Industries Ltd. and Ford Motor Co., didn’t return phone calls. Bay and Stinson didn’t either. Jurgensen declined to comment.

New Auditor

ConAgra spokeswoman Teresa Paulsen says the company is “confident in the abilities and high standards of our board members, and we believe the quality of our financial controls is first-rate.” A Ford spokeswoman, Becky Sanch, says Butler “has been and remains an outstanding director.” (Ford, by the way, restated its financials last year.) Cooper officials declined to comment.

To its credit, ConAgra is under new management, and the company dismissed its former auditor, Deloitte & Touche LLP, in 2005. The new auditor it hired, however, was KPMG LLP, where Butler was chief executive officer from 1996 to 2002.

As if the revolving door weren’t tacky enough, Butler’s track record hardly inspires confidence. In 2005, as part of a $456 million settlement with the Justice Department that let the firm avoid criminal prosecution, KPMG admitted that it committed crimes by selling fraudulent tax shelters during the years when Butler was its CEO. Butler’s name also appeared in the SEC’s 2003 complaint against KPMG, when the agency accused the firm of aiding Xerox Corp.’s accounting fraud, though, as with the tax case, he wasn’t accused of violating any laws.
`Accounting Devices’

According to the SEC’s complaint, Xerox’s CEO and CFO in 1999 complained to Butler about the KPMG partner overseeing Xerox’s audit, who had questioned the company’s management about several of the “accounting devices that formed the fraudulent scheme.”

Butler responded by offering the partner a new assignment in Finland. After the partner declined, KPMG replaced him on the audit. KPMG paid $22.5 million in fines and disgorgement to settle the case in 2005. Both the ousted partner and his replacement paid fines to settle, too, as did Xerox, its former CEO, and its former CFO. KPMG spokeswoman Kathy Fitzgerald says “KPMG’s independence as ConAgra’s auditor is not impaired,” and that “KPMG’s appointment as auditor was totally consistent with SEC, Sarbanes-Oxley and NYSE guidelines for independence.” ConAgra says the same. And, under the rules, they’re right.

Again, though, common sense would tell you that Butler and KPMG probably shouldn’t even be allowed in the same room together. Meanwhile, at Cardinal’s audit committee, there has been even less change. While the companies’ shareholders were fooled once, they don’t seem to mind now. Should these directors ever fall down again, the shame will be on investors.”

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