Friday, June 4, 2010

A Little Light Reading – accounting’s role in the banking scandals

I decided to do a little delving into the audits of the banks that folded during the first phase of the financial crisis of 2008/09. Let me tell you that I was not shocked to see not a single warning statement among the lot. Everyone passed the GAAP audit with flying colors. Not a single warning to consumers and investors that the whole house of cards was tilting towards catastrophe.

Should this come as a surprise? If you believe the nonsense about professionalism and integrity then it should. If like me, you simply observe their behavior – it should not. Going all the way back to the collapse of Penn Central Railroad in 1970 to the latest bank failures the accounting industry has failed to serve any purpose other than that required by the corporations who use accounting to cheat, deceive and misrepresent the very core of their business transactions.

After the Enron debacle the big five accounting firms became the bigger 4(sound familiar?) when Arthur Anderson was convicted and sold its assets to another huge firm – Deloitte etc. A new law was enacted (Sarbanes-Oxley Act of 2002) and everything was supposed to be fixed (again – sound familiar?)

Congress passed SOX overwhelmingly and Bush called it the greatest reform of business in US history. What impact did it have? - Apparently none other than to employ more bureaucrats. The same kind of off the books accounting tricks were used in some of the better financial scams recently played on the public.

What did the great accounting firms do? Did they report any trace of Maddoff’s games? Any hint of AIG’s 34 to 1 overstretch? A shadow of the debt dragging GM into bankruptcy? No, not one scintilla of warning or real useful accounting data was projected by the accounting giants. Not this time, not last time, not next time – not ever. The FASB regulations and GAAP rules have been twisted to the point where it is actually a breach of professional conduct to report fraud. Generally accepted accounting principles has become shorthand for give the client the audit he wants for the price he pays.

Accounting rules used to state that auditors HAD to alert the public to any threat of fraud. Then in 1996 the rules were changed to raise the trigger to $5,000 before the auditor COULD report fraud. Additional to the $5000 limit the new law required the incident to be “KNOWN” fraud before it could be reported. Now in today’s legal world nothing is “known” until a court has ruled it so. In other words we went from language requiring auditors to report any fraud to language making it a breach of professional conduct to report any fraud unless it was major and already proven. In non bullshit - fraud was off limits as long as the client paid his bills. The accounting profession has skated by untouched by this latest scandal as it usually does. But be assured there are more rascals in the business world than banks and CEOs. Next time you see an accountant remember you are looking at the essential enablers of all the business scandals for the last 40 years.