MF Global: 99 Problems And PwC Warned About None of Them
Update October 31: I’m putting updates over at Forbes.
My latest column is up at American Banker, “Are Cozy Ties Muzzling S&P on MF Global Downgrade?”
You may recall the last time I wrote about MF Global. That story was about the “rogue” trader that cost them $141 million. In the meantime we’ve seen another “rogue” trader scandal and PwC has given MF Global clean opinions on their financial statements and internal controls over financial reporting since the firm went public in mid-2007.
I’m sure PwC thought everything was peachy as recently as this past May when the annual report came out for their year end March 30. Instead we’re seeing another sudden, unexpected, calamitous, black-swan event that no one could have predicted let alone warn investors about.
This video is NSFW. Many will find it offensive. I find it offensive – the dogfighting scene is antithetical to my love for my Rottweiler – but the phrase “99 problems” has entered the popular lexicon as a result of this video. You can’t pick your inspirations…
CNN money just said that PWC and KPMG owned debt in this company. How is this not an independence issue if PWC audited them? Is CNN wrong?
If PwC owned debt in MF Global that would be a big, big problem.
What this probably refers to is that MF Global owed PwC and KPMG fees for professional services. PwC’s audit fee was almost $12 million last year. Maybe KPMG does internal audit or other consulting services. MF Global must have outstanding balances with these firms.
Link to Forbes does not work.
@aflath Fixed. I updated the post there and the URL changed. Thanks.
Grasping for straws. This is not where the problem is.
Hello Ms. Mckenna,
Was going through the blogs on BIG 4 and auditing in general you had posted on this blog. This particular comment of mine might not be relevant to the current post, but is general in nature w.r.t all your other blogs on auditing.
Let me give you a brief about the State of Affairs in India with respect to the field of Auditing and BIG 4 audit firms.
Big 4 audit firms (through their affiliates) have cornered around 75% of the big audit and consulting assignments in India. The positive thing here is that there is 25% still left to mid size firms and independent practitioners like myself, don’t know for how long the same is going to be prevalent because the amount of undercutting for small assignments that the BIG 4 audit firms are doing has increased over the past few years. In a developing country like India, even small and medium sized Companies don’t mind paying the additional fees that a BIG 4 demand, because an attestation from a BIG 4 carries more weight when you go for credit rating, financing or VC funding.
The alarming trend here is that, when it is a small assignment it is the junior most of staff who are deputed to the assignment with time constraints. Such restrictions lead to a shoddy job, where the partners before signing look at time spent, cost of the assignment rather than the issues.
Satyam is one off case, where the authorities in your country have initiated action against a BIG 4 affiliate firm in India. It is sad to say but innumerable cases of Companies going bust in India after a clean report by BIG 4 have been ignored and no action taken against them (Ex: Global Trust Bank (GTB), Subiksha). It may surprise you that the authorities in India and the governing body for Chartered Accountants in India (ICAI) is yet to take any concrete action against PwC India in the Satyam or the GTB case.
I think as in your country the Committee of the oversight body of CA’s in India (ICAI) is predominantly dominated by partners of the BIG 4 audit firms, who are reluctant to take any concrete action against their own brethren.
Few small suggestions on what can be done to avoid such gross negligence on the part of auditors and equal distribution of work in all countries
– Have a process of selection of firms by devising certain eligibility criteria (experience, manpower, qualified manpower, support staff etc).
– All big companies (criteria based on Share Capital, Turnover, Market Cap etc) to come into a pool.
– The big companies to choose their auditors from the pool of firms;
– The big companies necessarily needs to have a set of two or more auditors doing a joint attestation of all financial statements;
– The joint auditors of the Company to shuffle different areas of work between themselves after a certain period of time;
– the firm/firms doing attestation services should not be doing any other consultancy work;
– limit to be set on number of big company audits that each of these firms can do attestation or joint attestation in a year (say 50 big companies, 100 medium sized companies etc);
– compulsory rotation of firms doing attestation services once every 8 to 10 years by the Company;
The above system of joint auditors with shuffling of areas of work will instill some amount of work discipline in each area being audited by the individual auditor. The fear of connivance of the auditor with the management in a fraud being found out or the fear of a shoddy job being noticed by the other joint auditor when they will be doing the particular area after a few years will instill a certain amount of discipline.
I know framing such a policy is a tedious task for the lawmakers and regulators in all countries. The same will be subject to a lot of opposition and lobbying from the BIG4, but I guess it is high time somebody belled the cat.
Thanks so much for your thorough and thoughtful comments.