Boston Chicken, Arizona Baptist Foundation, Sunbeam, Waste Management, Global Crossing, Enron, and WorldCom have one auditor in common.
Who was it?
Unfortunately, a chronicler of accounting history could pull together a list of disastrous audits for all the large firms. Perhaps the Grumpy Old Accountants, Professors Catanach and Ketz, could put that on their to-be-blogged-about list.
At the moment, they have provided a superb summary of each of the above fiascos in their post, Enron’s tenth anniversary: Arthur Andersen’s audit failures at Enron and elsewhere.
Just a few comments from me.
Arizona Baptist Foundation – Lesson for auditors: When an accounting manager from your audit client comes to you with a detailed map of exactly how an intentional, massive, and structured fraud is being executed and provides you with a briefcase full of documents proving their claim, it might be worth your effort to pay attention.
You just might avoid having to write a check for $217,000,000 to settle the resulting litigation. Maybe your checkbook can handle that. Mine can’t.
Waste Management – Key info I missed first time around:
Managers at Waste Management understated depreciation charges, refused to write down losses at landfills, and used business combination accounting inappropriately. …
Arthur Andersen stumbled upon the accounting fraud, but did not reveal it to the board of directors or anybody else; instead, Arthur Andersen helped managers to cover it up. …
Specifically, Arthur Andersen and partners Robert E. Allgyer, Edward G. Maier, Walter Cercavschi, and Robert G. Kutsenda made a deal with Waste Management. Arthur Andersen would not publicize the fraud if mangers at Waste Management agreed to amortize its ill-gained profits over a ten-year period.
Andersen got a mere $7,000,000 fine from the SEC and a permanent injunction not to violate the securities laws. The 3 partners got personal fines ranging $30,000 to $50,000, permanent injunctions not to commit fraud in the future and bans from practicing before the SEC. (see SEC press release here.)
Lesson for auditors: When you trip over a massive fraud, don’t scheme with management to undo the fraud by amortizating it into earnings and negotiating the amortization term to use. Might avoid big fines, ending your career, and having the entire world know for the rest of history that you personally facilitated the coverup of a massive securities fraud. (see the link mentioned above which is still available 10 years later.)
Visit the Grumpy Profs post for more depressing details and other sundry lessons on how not to do auditing.
Oh, by the way, sorry for the awful alliteration above.