What firm failed to find these fraudulent fiascos?

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.

3 thoughts on “What firm failed to find these fraudulent fiascos?”

  1. The Baptist Foundation of Arizona accounting manager who detailed the fraud to Andersen was Karen Pates (sp?). When the firm did nothing the Arizona Republic, the second largest paper in the state, did a series of 13 articles laying out the whole scheme. Apparently no one at Andersen reads. Because AA gave two more years of clean opinions after the fraud was in the newspaper. Third, Dee Greeble, a sole practitioner, figured out the fraud in about an hour by looking at related party ALO’s financial statements at the AZ Secretary of States office. Greeble left 3 mesages for AA. Two in Phoenix, one in Chicago, that ALO was bankrupt and couldn’t pay debt. The financial statements showed that ALO had a -$106 million net worth. So even though ALO had signed the confirmation they owed the money, AA failed to follow up on Greeble’s calls and issued clean opinions. We have 200 fraud and auditing videos on our web site http://www.TheProsAndTheCons.com. Click Videos, then Fraud. You can watch two videos on Baptist Foundation. One is under American Greed at “Baptist Foundation of Arizona Preying on Faith – 43:37”. The second “Baptist Foundation of Arizona – 14:30”, The 2nd one was on 60 Minutes and primarly focuses on Andersen. GREAT stuff for auditors and students.

    Gary Zeune CPA

  2. Thanks for the extra info. The 14 minute video from 60 minutes is superb. If you are a CPA, it would be well worth your time to watch it.

    Additional lessons for CPAs from the video: When the local paper runs 13 articles outlining how your client is committing fraud, it might be time to do some extra work. Also, when some unknown person tells you the client’s financials are bad, it might be worth returning their call. You might just find out the gadfly can explain to you that a related party, whose loan receivable is the biggest debit on the balance sheet, has a negative $106M net worth.

    Check out Mr. Zeune’s site, http://www.theProsAndTheCons.com. It is superb.

  3. Pingback: To what purpose did Arthur Andersen die? Part 2 « Attestation Update – A&A for CPAs

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