The other day I was listening to a podcast of the ABC Radio National show Background Briefing. The segment was titled Auditing the auditors. It was simply fascinating. Here is a transcript of the opening section. The ABC reporter’s name is Stan Correy.
Stan Correy: As the financial world tumbles all around us yet again, let’s pause to find out where the buck stops. Sure, the banks and big financial institutions played pass the parcel with other people’s money, but who was meant to stop their music? Is the answer the auditors, the people who sign off on the books and say they’re OK?
Remember ten years ago? Then it was Enron.
Congresswoman Stephanie Tubbs Jones [archival]: The reason we are here is because you audited Enron Corporation and the representations you made were not in fact a true financial picture of the corporation, such that a lot of people lost money and we’re in a public hearing trying to decide whether the auditing principles that have governed our nation for the past few years, are truly in the best interest of the public. Is that a fair statement, Sir?
Stan Correy: The ‘sir’ being questioned in congress then was the CEO of auditing firm Arthur Andersen, Joseph Beradino.
Joseph Beradino [archival]: And I’m here to give you some thoughts on how we might go forward with a much better…
Congresswoman Stephanie Tubbs Jones [archival]: Well then, why don’t you give me some thoughts? How is it that the public could see what was wrong with Enron based on your auditing practice?
Joseph Beradino [archival]: I don’t know how to answer that question.
[Excerpt from song: ‘Don’t Worry, buy Enron’]
Stan Correy: Arthur Andersen collapsed in a heap and no longer exists. Enron was thought to be a wakeup call to the world’s auditors. But just six years later, in 2007, the global financial crisis swamped the world. At the heart of the storm, dodgy accounts, signed off as OK by auditors from the big four audit firms.
Journalist [archival]: At more than 4 billion, the loss recorded by the Royal Bank of Scotland today is the biggest in British corporate history.
Commentator [archival]: Well, colossally big numbers we’re talking about for what used to be a global colossus. As you say, 4 billion of losses, 25 billion insured by the government, and if that goes sour that’s coming back to us, the British public.
Stan Correy: Auditors of the Royal Bank of Scotland were Deloitte Touche Tohmatsu. And then, across the Irish Sea there was the Anglo-Irish Bank.
Journalist [archival]: The soundtrack may have been upbeat on this video presentation to Anglo-Irish Bank staff, but the message it contained was anything but: one of the biggest losses ever for an Irish company and a colossal 4 billion government bailout.
Anglo Irish Chairman[archival]: From these figures it is clear that we made mistakes in some of the lending decisions taken in recent years, particularly in relation to property development here in Ireland.
Stan Correy: The auditors for Anglo-Irish Bank were Ernst & Young.
In Iceland, three of the biggest banks collapsed after Iceland was found to be in debt for $120 billion, ten times the entire economy. Auditors KPMG and PricewaterhouseCoopers were subsequently investigated over their role in the bank’s activities.
The giant American insurance company AIG was spectacularly bailed out by the United States government. AIG’s auditors: PricewaterhouseCoopers.
But strangely, it seems nothing much changed. In fact, it’s all really bad again. And if you thought there were problems in Europe and America, just wait till you hear about China. There-and it affects America and Australia, too-the auditors have for years been missing the fact that companies they were auditing had no business at all. They were empty shells doing nothing, listed on overseas exchanges but mere figments. No one home, but the auditors still signed off on them for years.
Tune into the next post for some highlights.