Dear CIGAs,

What happens if more auditors are forced out of business, how do we get comfort with the accuracy of statements? Audit fees will skyrocket for those firms left in the business. One of the USA’s few advantages is the honesty and efficiency of its auditors, and now that is being called into question. Of course the trial lawyers will have a field day. The highlights in the article have been added by my wise money manger friend Barry Sahgal.

Respectfully yours,
Monty Guild
www.GuildInvestment.com 

Global auditors tackle problems of local scandals
By Jennifer Hughes
Published: January 29 2009 02:00 | Last updated: January 29 2009 02:00

Flash! Pictures of the two PwC partners arrested as part of the police investigations into the alleged fraud at Satyam were beamed around the world this week.

The Satyam case is just the latest in a sequence of events which have begged the age-old question: "Where were the auditors?"

Yesterday in London, auditors were grilled by members of parliament about their role in the banking crisis, while in Miami lawyers are gearing up for a landmark case against BDO, the fifth- biggest accounting firm.

Small wonder that many senior partners put litigation at the top of their list of industry risks for this year.

In a downturn, frauds that are easy to cover up in the good times become more visible, while others are tempted to commit fraud to cover up bad news. There are two main sorts; misappropriation of assets, which should be fairly easy to spot, and management collusion, which is not. Auditors are at pains to point out that their audit offers only "reasonable" assurance, not absolute.

That, however, is unlikely to stop the litigation.

First, BDO. A case next month will determine whether BDO International, the umbrella organisation that links all the BDO firms, is responsible for BDO Seidman, the US arm of its network. This firm has had damages of $521m awarded against it for a negligent audit of ES Bankest, a factoring company owned by Banco Espírito Santo.

If BDOI is brought in, this could open the floodgates for all sorts of litigation against the big accounting firms which, because they face unlimited liability in most countries, have sought to present a single global brand but to distance themselves from each other when trouble looms.

"It makes sense that they want to have a brand just like IBM or Mercedes. But when they get sued, they say ‘that’s not us, it’s someone else’. No-one else gets to do that, why should accounting firms be able to?" says Steven Thomas, the lawyer leading the case against BDO.

He claims there is an agency relationship between the international unit and the local, meaning BDOI was responsible.

If this is proven, it could be bad news for PwC.

Satyam was registered in the US, meaning US investors are likely to look to sue there, not in India.

I put this to Mr Thomas, who pauses, then says carefully: "I believe that there will be direct liability in the US for PwC – and PwC International."

It is too soon to say what will happen with Satyam, although the limited facts we have look awful.

The police have alleged that up to a quarter of the payroll was fictional. That should have been easy enough to spot.

Management collusion at the very top of the firm is different. How the auditors may, or may not, have been linked with that is not yet clear.

We also know that the PCAOB, the US audit regulator, was in India last spring and, as part of its inspections of US registered firms, looked at the Satyam files at PwC and raised concerns about the file with the firm.

We know too that PwC extended the standards each firm must follow last year when it re-organised itself into three clusters around the world.

In an interview with the Financial Times last year, Sam DiPiazza, the global head of PwC, said: "We’ve done it [changed the standards] in a way that the consequences are very clear – all the way to the point of having the ability to actually change management around the world if we need to."

This might have come too late for PwC to have affected its Indian operations in this case, but it shows the tightening links between the partnerships in each firm.

It should give the lawyers plenty to chew over.

Link to article…