Yesterday’s appointment of Big 4 accounting firms PricewaterhouseCoopers and Ernst & Young to oversee the $700 billion Wall Street bailout program is a slap in the face to the American taxpayer. PricewaterhouseCoopers has been appointed auditor for the bailout program under which Treasury will buy billions of dollars worth of preferred stock in a move to help recapitalize struggling banks. Ernst & Young will provide general accounting support.
The appointment of these so-called “independent auditors” to ensure the integrity of the Wall Street bailout demonstrates the bankruptcy of imagination of current US regulatory leadership. It also shows the enormous sway the Big 4 firms still hold on Capitol Hill – through lobbying, campaign contributions, and their presence on the boards and advisory committees of the very regulatory agencies that are supposed to keep them in check.
Many of you sent me this press release immediately and urged me to write. You could predict my point of view: The US Treasury is conducting business as usual with these purported “guardians of shareholder interests,” rewarding the very firms who could have blown the whistle in the first place, preventing or at least mitigating the financial crisis, and protecting shareholders and the American taxpayer.
Instead of investigating and challenging the valuation presented by mortgage-backed securities and the swapping and sale of non-correlated assets, the Big 4 firms helped design and market such highly leveraged offerings of debt, themselves building consulting practices on financial securitization throughout the 1990s and well into the current decade.
1) Both PwC and Ernst & Young have performed disastrously before, during, and after the crisis. PricewaterhouseCoopers is the auditor of AIG and has been sued by AIG’s shareholders.
2) PwC is auditor of Freddie Mac and now the behemoth banks JP Morgan Chase and Bank of America, as well as Goldman Sachs and Northern Rock. PwC hasn’t either adequate or qualified staff for their current responsibilities let alone more of the same. Neither has it proven it has the moral right to take on more such work.
3) Ernst & Young was the auditor of Lehman Brothers and IndyMac Bank, both bankrupt and now taken over. Ernst & Young now currently audits Societe Generale and UBS, poster children for loose internal controls.
4) Ernst & Young was also recently fined by the SEC for independence violations relating to paying hundreds of thousands of dollars to someone who sat on the Board of Directors of three of their audit clients, including on an audit committee responsible for retaining Ernst & Young.
5) Both these firms, operating as part of what is essentially a government-sponsored oligopoly, clearly do not understand or uphold their responsibility to protect shareholders – and not the executives of the firms that are their clients.
If only the Big 4 audit firms had told us that some of the banks were technically insolvent or potentially illiquid under certain scenarios. If only they had warned us or stood up to their clients sooner. Instead, they are benefiting from their professional ineptitude.
The Treasury’s press release does not state who will monitor PricewaterhouseCoopers and Ernst & Young in performing their duties. It would be inappropriate for either firm to audit or advise on transactions for clients they also currently audit or advise in another capacity or where those parties/transactions are in litigation. Or has the Treasury suspended these safeguards, too, in this age of financial system martial law?
It is time for independent voices to articulate these concerns. It is time for regulators, Congress, and the rest of the Federal government to assume their oversight responsibilities. And it is time for some reasonable level of independence to be mandated for Big 4 firms that at present only stand to profit from this crisis, at the expense of businesses and investors the world over.