Jim Peterson and I talk often. It was my lucky day when I found him writing for the International Herald Tribune about auditors and litigation and the future of the profession. There’s quite an archive there to draw from. Jim not only has the experience but the chops to write about the subjects that I feel strongly about. Albeit I’m a little more fun, but…I told a mutual admirer recently not to judge me more beautiful than Jim. He hasn’t seen Jim in stilettos nor me in a bow tie…
Jim opened a dialogue with me and the others who write frequently on this topic, like Dennis Howlett and Richard Murphy, via his post today at Re: Balance. The subject is, “If not, why not…” We’re talking about the auditors’ failure to be a force either before, during, or after the financial crisis.
“Here – in response to the always tart-tongued Francine — is why the auditors weren’t there:
The simple if depressing reason is that their core product has long since been judged irrelevant. The standard auditor’s report is an anachronism — having lost any value it may once have had, except for legally-required compliance (here).
If that single page disappeared from corporate annual reports, no honest user of financial information would admit to missing it. Nor, offered the choice, would any rational CFO pay the fees to obtain it.”
If no one but me asks, since no one cares, then what are we doing here? Only legally required compliance keeps us walking like dizzy children through this hall of mirrors, never reaching sunshine.
“…the fundamental issue of trustworthiness – on which the entire value of the auditors’ franchise perilously rests – is put under scrutiny when they are effectively sidelined for want of influence and capacity to persuade.”
The Securities Act of 1933, together with the Securities Exchange Act of 1934, created the government- sponsored franchise and oligopoly which is the public accounting industry in the United States. These laws also, by default, cover all securities listed on US exchanges (SROs), since the SEC “regulates” those, too.
The goals of the audit requirements in the Securities and Exchange Act of 1934 are pretty straightforward, if you ask me:
SEC. 10A. AUDIT REQUIREMENTS.
(a) IN GENERAL.—Each audit required pursuant to this title of the financial statements of an issuer by a registered public accounting firm shall include, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission—
(1) procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts;
(2) procedures designed to identify related party transactions that are material to the
financial statements or otherwise require disclosure therein; and
(3) an evaluation of whether there is substantial doubt about the ability of the issuer to
continue as a going concern during the ensuing fiscal year.
“Officers of Canopy allegedly forged audit documents, claiming they had been prepared by KPMG. The complaints also say that doctored bank statements were prepared for Northern Trust Bank account balances. Other significant financial and accounting improprieties were also discovered.
While KPMG was never appointed as Canopy’s auditor, the firm was hired to provide a SAS 70 (Statement of Auditing Standards No. 70) report. A SAS 70 is intended to provide information about the internal controls in place at an audited company.
During the process of communicating about engaging KPMG for services, it appears that Blackburn was provided sample documents by a KPMG advisory partner via another Canopy executive. Those documents, allegedly, were later used to prepare the bogus attestation. According to the SEC complaint, the fraud was uncovered when Canopy’s newly employed general counsel began searching for a new CFO and contacted an acquaintance at KPMG for potential candidates. The lawyer sent what he believed were legitimate KPMG audit reports and financial statements to the acquaintance.
According to the Blackburn criminal complaint, KPMG said it had never performed an audit of Canopy’s financial statements. Upon discovering the fraud and that someone at Canopy had used KPMG’s name to perpetrate it, the firm sent Canopy a Cease and Desist letter on 3 November for using KPMG’s name without its authorization or consent.”
Main page photo courtesy of the blog, Cassandra Does Tokyo.