Aussies On The Audit Trial

I have always hated that expression, “hit the audit trail.” It sounded like we were a bunch of gerbils jumping on the wheel, ready to spin around in circles in search of truth and justice. A lot of auditors are excited by the process as an end game, but the best ones are excited by an interesting result.

I am excited when I see journalists tackling the machinery of the Big 4. I have cited Jonathan Weil more than a few times. But, then, he’s no ordinary journalist. He’s got a great new one about the KPMG/Thornburg audit report take back.

And now a tip from my “primo” in Cleveland to a story out of Sydney. He can’t believe they’re reading my blog in Australia. The article below is our kind of investigative reporting. And PwC is not cooperating. Un-enlightened self interest? It will come back to bite them in the ass, eventually.

Who’s guarding the guards?
Quis custodiet ipsos custodes? Who is guarding the guards?

While the regulators are grasping at shadowy hedge funds and despicable rumour-mongers, the accountants remain as always unaccountable. What is the point of an auditor if not to audit? Allco, ABC, Centro, MFS, City Pacific: dogs’ breakfasts all. Billions of dollars blown, millions of dollars clipped in audit and advisory fees for the big accountancy practices: chiefly PWC and KPMG.

Not a word about accountability.

Let’s quickly deal with the auditors’ defence. It runs like this: ”It’s not our fault. We can only sign-off on what directors give us”.

Now to the inherent conflict of interest: apart from human considerations – namely clientship and mateship – audit firms earn gargantuan fees from non-audit work.

Let’s get to the numbers.

Allco, auditor KPMG, although PWC has involvement with the satellites such as Allco HIT and the three Rubicon Trusts.

KPMG picked up $2.36 million in audit fees last year from the parent alone. For ”other” work it banked $2.96 million for a total chit of $6 million. PWC picked up $1.3 million from the Allco head stock the year before.

It was the media and the market, however, which picked up on the $1.9 billion mistake in classifying short-term liabilities as long-term liabilities. And when stock relisted from suspension a few weeks ago, and was slammed, another $900 million in debt was exposed as subject to a market capitalisation clause. Not even a footnote in the accounts.

The first listed victim of the sub-prime debacle was of course RAMS – auditor PWC – but the icon of the times soon became Centro whose inscrutable accounts were perhaps only understood by one external party, PWC.

Disclosure took some digging here. PWC, which has declined to answer questions on any matter of substance for three days (we append the unanswered questions below), could not provide a number on fees, there was no release to the ASX of the full accounts and the full accounts were not visible on the Centro website.

We did find them eventually, though, and they are dazzling.

…To balance the equation in favour of the big audit firms, they reckon you can’t appreciate the work that gets done behind the scenes. Was it worth these millions in fees? In the least it ought to be pro bono this year.

Auditors have a responsibility to members, not to the managers of capital who give the big firms audit gigs along with all the “other” work.

Clearly the regulators have failed at prevention and are now trying their hand at a cure by blaming hedge funds. Cure is far more costly than prevention and if there is to be fundamental reform then governance and professional services should be the focus rather than a bunch of funds finding trading opportunities because the system and its safeguards have failed.

Don’t hold your breath for any action on this front, though.

These big firms are too big. For this story, we endeavoured to interview PWC as the biggest player.

We didn’t get past the bulging ”communications” division. Requests to interview chairman Bruce Morgan and CEO Tony Harrington were ignored.

The story began with a few written questions on the Rubicon accounts. We list them below for those who are interested.

The line from PWC was “we are not able to comment on client matters”. This was despite it being pointed out that firstly, PWC’s duty was to members, not clients, and secondly, that the questions were about publicly available information.

The amended questions follow:

As auditor for Rubicon (and others), does PWC accept one scintilla of responsibility for these disasters – given its professional input and given the media has managed to find problems in the accounts which had apparently been overlooked by the audit and advisory teams?…