In theory there is no difference between theory and practice. In practice there is.
The days have been going by so fast these last couple of weeks. Actually, it’s been a blur ever since August 25, one month ago, when I first reported the layoffs at Deloitte. A subsequent statement from Deloitte and follow up reported on August 29th only added to the whirlwind here at re: The Auditors HQ.
I spent a lazy weekend at the lake for Labor Day and had no idea of the hurricanes (Gustav, Ike, Hanna) to come as well as the Super Large Hadron Collider about to crush the global financial system.
When I first started writing this blog, some people said my tales of collusion, complicity, and chronic carelessness in the audit industry were “black helicopter” stories. It’s just not possible, they told me. Smart people run the Big 4 firms, as well as the rest of the post-industrial capitalist complex fondly referred to as the “global capital markets”.
We have witnessed a clustershchmuck of gargantuan proportion with the failures of financial behemoths that anyone with a few ounces of sense could have told you was coming. And they did. The experts, appearing on the pages of some of my new favorite blogs like naked capitalism and Infectious Greed, were saying that the wealth and hubris exhibited by so many in the last several years was based on a house of cards.
Yesterday, I heard that the FBI is going to investigate possible fraud at Lehman, Fannie Mae, Freddie Mac and AIG, whose collapse in the recent days “precipitated” this “crisis.” Well, I say you should bring in the the whole army, if only they weren’t in Iraq. Anyone remember we have a war going on and soldiers and civilians are still dying??? That was another “crisis” that had to be decided in a short amount of time otherwise “calamity” would ensue.
Whatever you do, get involved in the political process! Call your Senator and Congressman. Tell them what you think of this mess. Make sure you can vote. Discuss, debate, read, and inform yourself. Then go out and vote. Vote.
During all of this hyper activity, I still receive mail. One letter came from a man I will call “Singing Solomon”.
Singing Solomon was reading my post about the takeover of Fannie Mae and Freddie Mac and reminiscing. He knows that the audit firms have been rolling over for their clients for the sake of the fees and their own professional futures, if not complicit in the problems we have now, for a long time.
I used to work in the tax department of a large public corporation.
There had been a fraud at one of our subsidiaries. The subsidiary was winding down its operations and I was working on a sales audit from Pennsylvania and a property audit from Maryland because the accounting staff of the subsidiary had left. In handling that audit, I had to perform an account analysis of fixed assets. In doing this account analysis, I noted the following:
(1) Most of the fixed assets were described in the fixed assets ledger as “various (Just great for doing a physical count);
(2) There were journal entries that transferred obvious expense items such as bags to the fixed asset accounts;
(3) The company had anticipated fixed asset acquisitions of 25K and instead had fixed asset acquisitions of 525K;
(4) Inquiries with the remaining staff at the subsidiary indicated that almost all of the items had a less than one year life.
Arthur Andersen, our auditors was in charge of reviewing the fraud at our subsidiary. They spent many weeks on their report which was needed to be presented to company counsel. Their report, which was included in an SEC filing, indicated that the fraud started in 1992 and included 2.2 million dollars in false revenue on jobs and 440K in fake inventory in 1992. They found no other discrepancies. They found nothing with respect to fixed assets.
We had made a large amount of state income tax payments for this subsidiary in 1992 and for prior years. Irrespective of what Andersen found, I thought we needed to look into the situation more because the fixed assets were greatly overstated. It took me maybe two to three days to find out that the fraud had basically started on Day One when the company was acquired in 1989 and it was massive.
I was able to look at the statements and say that the subsidiary was overstating its profit on the jobs in progress. All it took was to look at the end of year profits for one year to the profits when the jobs were completed. That took less than a day. Then I realized that because the company was billing in advance at the start of jobs, there should have been a liability and not an asset for jobs in progress. AA had acknowledged that there was an overstatement but never detailed it. Then I found a job where the subsidiary had split a job in two to take more than one million dollars of profit up front. I asked AA about it. The auditor said he didn’t notice that! (I just assumed he was covering up. Later, I suspected that AA was not only covering up their negligence, AA was likely the party that encouraged this split.)
Then I found prepaid insurance of more than 2 million. Somehow, this didn’t make any sense to me. Of course, they didn’t have prepaid insurance of 2 million. They were simply understating the expense. Furthermore, there were almost no accrued expenses on the books!
So, in two or three days, I was able to uncover much more for our legal department than AA did in its supposedly thorough investigation. AA’s failures allowed the subsidiary’s management to steal millions.
Anyway, I thought the auditors would have become more of watchman, a guardian, for the shareholders by this time. But they haven’t.