Monday, April 14, 2008

KPMG: is another auditor getting in trouble? Remember 2002?

Remember how Arthur Andersen went out of business after Enron collapsed in 2001? Now, questions arise from the trouble with New Century Financial about the performance of its auditor, KPMG.

Apparently KPMG knew about the issue with the calculation of loan reserves by January 2007. By spring 2007, New Century would go bankrupt, and that would trigger an avalanche of failures of mortgage lenders, leading to a crisis in the bond insurance market (discussed in this blog in December) and eventually the “Ides of March” (approximately) Fed bailout of Bear Stearns. KPMG, as I recall, created a stir in the late 90s by trying to place legal obstacles to other webmasters in providing simple “unauthorized” links to their corporate website.

There is a long story by Vikas Bajaj and Julie Creswell in the Sunday Business of the April 13, 2008 New York Times, “A Lender Failed. Did Its Auditor?”, link here. Bajaj has an earlier story from March 27, 2008 “Inquiry Assails Accounting Firm in Lender’s Fall,” here. (registration may be required). It doesn't look like this approaches the Arthur Andersen fiasco, yet.

A former partner at KPMG is also involved in a federal prosecution of a tax case, New York Times, story by Lynnley Browning, here.

Okay, after the fiascos in early 2002 over Enron and then WorldComm, you’d think auditors would learn their lesson. This seems to be a world of short memories. After my forced retirement, I never seriously though about applying at a big 8 firm (a number smaller than 8 now), although I could see them all along the Skyway in downtown Minneapolis.

It seems as though many concepts in accounting have gotten subjective. I worked on the general ledger system as an applications programmer for NBC in the 1970s, and never got the impression that there was any wiggle room in how entries on the Chart of Accounts were to be set up (users did that). The most complicated concept in those days was something like “retained earnings.” I remember those nights during accounting closings hoping I didn’t get a call to my cozy NYC apartment about a job going down. (They usually didn’t.) I do remember how tight the schedule was in getting “proofs” out. That was my perception of corporate finance then in my own “coming of age.” How times have changed.

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