FT.com / Companies / Financial Services - Lehman report casts auditors in poor light.
As the FT notes:
Claims about Ernst & Young’s part in the collapse of Lehman Brothers look set to open a wider debate on what has until now been one of the least dissected aspects of the financial crisis — the role played by auditors.
Anton Valukas’s report on the biggest bankruptcy in US history has sent shockwaves through the accounting fraternity in its heavy criticism of Lehman’s auditor E&Y, one of the Big Four firms.
It goes on to say:
The claims against E&Y, although exceptional, give grist to a growing lobby questioning the purpose of auditors in providing investors with a true picture of the financial health of a company.
This is where I part company with the report. What's exceptional about E & Y's performance. They:
- alloweed window dressing
- put fornm over substance
- ignore the true and fair over-ride
- box ticked to confirm compliance with an accounting framework they helped create and which is itself misleading
That's what auditors do. There's nothing exceptional about this. The only odd thing is no one has appreciated it - bar the likes of Prem Sikka, Dennis Howlett, Francine McKenna and me.
This is not chance. This has been the collective turning of a blind eye.
Of course that could carry on. But society will pay the price.
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The additional ‘e’?
@Tim J
Thanks
Edited
As some may have noted – I’m not the world’s greatest copy editor!
Richard
As I think you have alluded to in your posts on this, one of the issues in the failure of the auditing process is the clear conflict of interest that exists within it.
If my understanding is correct, auditors are appointed by the board and paid by the company. So where is the incentive for them to bite the hand that feeds them?
There is though a second conflict of interest that I think goes largely unreported. I suspect that a significant number of the accountants that are part of audit teams eventually get headhunted for senior management positions in FTSE quoted companies that they have previously audited. It is all part of the “natural” career progression for many junior accountants from the big four. So again, who is going to rock the boat and put their future career at risk by being the bearer of bad news to, or a thorn in the side of, a potential future employer?
It seems to me that even giving shareholders more control over the tendering of the audit contract won’t completely solve this problem. Only greater financial liability for auditors will. It would also be interesting to know how far it would be possible to make public all the financial data for PLCs that the auditors have access to, so that all shareholders can also come to their own independent conclusions.