There is a read-worthy op-ed dealing with the role of auditors in the financial institution crisis specifically, and as independent watchdogs guarding the public interest more generally. Prem Sikka, Accounting for the Auditors, Guardian.co.uk, September 18, 2008.
Put very generally and in my own terms, Sikka's point is this. We think of auditors as guardians at the gate, watching over firms with the public interest in mind. But in reality they are paid lackeys of the companies that hire them. To the tune of millions a year (in the case of Ernst & Young's audits of Lehman Bros, more than $30 million for 2007), auditors review company records and file clean bills of health. Yet those same companies go under for risks that should have been foreseeable by the auditors at the time of the audit.
Sikka describes the Lehman audits by Ernst & Young, and the fees E&Y collected for those audits, as follows:
"On January 28 2008, the firm gave a clean bill of health to Lehman accounts for the year to November 30 2007. ... Lehman Brothers filed quarterly accounts with the SEC for the period of May 31 2008 and on July 10 2008 and these ... too received a clean bill of health. Despite the deepening financial crisis, auditors did not express any reservations about the value of the derivatives or any scenarios under which company may be unable to honour its obligations. Just two months later, Lehman collapsed."
"During 2007, Ernst & Young collected fees … of $31,307,000 from Lehman Brothers, compared to $29,451,000 for 2006. The fees for 2005 and 2004 were $25,324,000 and $24,748,000 respectively."
Clearly, auditors earning such significant fees from auditing and tax services will find it difficult to provide bad news to companies and their investors and regulators. Sikka's suggestion is to return to truly independent audits conducted by the regulatory agency (the SEC).
Thanks to my colleague Mike Mcintyre for the tip to the article.