Reuters, A History of Audit Failures, by David Cay Johnston:
The admission by Olympus Corp that it falsified financial reports for more than a decade should not shock anyone. The shock is that, for years, auditors failed to detect such massive fraud.
The failures of auditors to uncover cooked books, which run the gamut from Adelphia to Waste Management Inc, are a cancer on the accounting industry.
The failures go back years. How about Al Dunlap’s manufactured numbers at Sunbeam in 1998? Or teenage con man Barry Minkow’s ZZZZ Best, which turned out to be a Ponzi scheme and collapsed in 1987? Or Equity Funding, with its computer program to fabricate life insurance policies, in 1973? Or the National Student Marketing “pooling of interests” fraud in 1970, which gave birth to the Financial Accounting Standards Board? Or the 1938 McKesson & Robbins scandal, which gave us the first American audit standards? Or Ivar Kreuger’s 20 percent dividends Ponzi scheme in 1932?
That is but a sampling of big frauds that auditors somehow failed to detect, sometimes over many years during which they were supposedly scrutinizing books and looking for verification of revenue and assets. …
Modern financial history is chock full of such stories, in which managements at brand name companies hide losses, fabricate revenues, report imaginary profits and claim to have assets that turn out to be nonexistent, all of which supposedly independent auditors either fail to detect or keep quiet.
How can this be? It’s not as if auditing is a nascent field, where the problems are uncertain. New York lawmakers created “Certified Public Accountant” as a licensed occupation in 1896. Britain’s parliament required companies to keep books and let shareholder committees audit them way back in 1845, though the United States would lag that reform by the better part of a century. And the development of internal controls to prevent fraud dates back at least to the era of the Babylonian king Hammurabi, roughly four millennia ago. …
Why do we let corporations pick their auditors? Why do we have only four big firms instead of a dozen, a score or more? Why doesn’t government do the audits, as the IRS does tax audits? Why is law enforcement handcuffed by inadequate budgets and rules that hinder investigations? Why are auditors allowed to quietly resign instead of being required to blow the whistle?
Auditing needs a shakeup, fundamental restructuring and the accounting firms need a serious debate about their failings, practical and moral.
