Auditors: The more values dropped, the more money made

Dear Readers:

                       The most disturbing business relationship in the world is one where one party compensates another party that is supposed to to be loyal to the society at large and uphold certain fiduciary principles.  You are paid by one party but, your allegiance is to a larger group that has not compensated you in cash and/or kind but expects your human values to trump monetary value.    

Auditors get paid by the client but, the general public is expected to believe the audited financial statements meet certain standards and do not serve the selfish interests of the paying client. Equity, fixed income and alternative investments analysts get paid by companies and the public is expected to believe the published reports reflect the honest, selfless view of the analysts and not the business and personal interests of his/her employer who pays the analysts' wages and bonus.  A boss of mine once upon a time called equity research a 'game.'  Lying to deceive readers is now labeled a game...      

The auditors and analysts almost all the time follow the idiom: "he who pays the piper, calls the tune."  When an analyst or auditor employee does not play the tune of their employer, all the rot of the system is now heaped on this non-conformist.  The punishment due to the employer is meted out to the employee who has not allowed the love of money to destroy their conscience or who got 'hung out to dry' as a scapegoat for regulatory infractions to save the employer's reputation and credibility.  I am going to focus on auditors for this article.  

Ernst & Young was very recently fined $9.3m for improper auditor relationships by the Securities & Exchange Commission (SEC) in the USA.  US regulators took enforcement action over relationships that became a little too close.  

Event 1: A senior EY partner involved in the audit of a NY based public company forged an improperly close friendship with the company's CFO and spent more than $100,000 on corporate entertainment for the executive.  Obviously, this partner will be highly sought out in the industry for his understanding of how the game is played.  He imbibes the right values and is not a rogue auditor.  

Event 2: Another EY partner who was auditing a different public company became romantically involved with its chief accounting officer.  

Ernest & Young failed to take appropriate action in both instances.  

Mr. Andrew Ceresney (Director of Enforcement at the SEC) said "EY did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors."  

I put 'compromising' in bold to reflect what the financial system is about nowadays; doing what needs to be done to get paid.  The system is bigger than all of us.  Open your mouth and swallow whatever it throws at you without batting an eyelid.  Pragmatism is in; Idealism is out.  No compromise on this one.  

Ernst & Young spokesman said the individuals involved "violated multiple EY policies, hid their conduct and behaved in a way that was antithetical to EY's global code of conduct, culture, values, policies and training.  All have been separated from our organization."     

When companies get sanctioned by regulators for infractions, its not them, its the employee that is bad.  Reminds of one trader in London that was on trial for rigging LIBOR and he said "my boss made me do it."  That boss was high, dry and in full denial.  The employee is thrown under the bus so that the rotten system can continue with its charade that it upholds high standards professionally and personally.  

It is interesting how the response of EY contradicts the comment from Mr. Ceresney.  He said "EY did not do enough to detect or prevent..."  EY's spokesman in his response said the individuals "hid their conduct..."  This is akin to waking up late for work in the morning (you purposely did not set your alarm) and saying your alarm failed if you get questioned in the office.  In my opinion, the EY employees did not hide their conduct, EY just feigned ignorance and reaped the monetary benefits until the SEC burst their bubble.  This is the same kind of language used by auditors for their clients when accounting scandals take place.  The 'board misled us.'  I have been saying it for years, auditors should seek what they need and not just accept what they are given!  Obviously, too much money is at stake to go through with this.  All major businesses will just blacklist the auditor for inconveniencing the client that is paying you.  We paid you to give us gain and not pain;be our frien and not foe.  The same excuses they offer when an accounting scandal was used by EY to attempt to rise above this latest scandal.  Our client fooled us, our employees fooled us.  No, you did not do enough to detect or prevent what has now come to the fore.  

Let us take a trip to Africa briefly along these same lines.  On July 20, 2009, Oceanic Bank released its FY 2008 earnings.  Pricewaterhouse Coopers (PwC) was the auditor.  Oceanic Bank declared with auditor approval, revenue of N188.2B and net income of N9.6B.  On June 22, 2010, Oceanic Bank restated its FY 2008 earnings; PwC was still the auditor.  The results were restated according to management to reflect "economic reality as at December 31, 2008."  Revenue for FY 2008 now became N118.3B from N188.2B and net income was a loss after tax of N234.6B from a profit of N9.6B.  Meanwhile, PwC is still held in the highest esteem with its reputation largely intact.  

PwC was recently sued in the USA and have decided to settle caims out of court that it failed to catch a multi-billion dollar conspiracy between executives at a defunct mortgage lender and counterparts at Colonial Bank, which also lost its going concern status.  PwC  was also hit with a fine in the UK for signing off on the 2007 audit of subprime lender Cattles, which later collapsed, just the way PwC signed off on Oceanic Bank's FY 2008 financials and Oceanic Bank collapsed and is still haunting Ecobank even after its collapse.   

The last year Deloitte (Akintola Williams Deloitte) audited UBA Nigeria before the change to PWC (2009), audited fees paid increased from 86 million naira in 2008 to N196 million naira in 2009.  The question that will forever linger is was this a payment to Deloitte for the 2009 15 month audit only or in addition a parting gift for a job well done over the years?  Of course PwC refused to take a "haircut" and charged N222 million in 2010.

When there is a widely acceptable rot in the financial system, those that are not willing to accept this rot, are made out to be the bad people, the rogues of the system.  The system refuses to surrender, so the few principled eggheads in the system are made out to be the bad people so that the real unprincipled people can keep on making money from the rotten system while pointing fingers at those trying to fix it.  

Auditors are necessary in our world of today; their lack of values in exchange for more money and deals is not necessary.  It is unfortunate how values have gone down the drain in our global financial system while monetary values and fines are on the rise.  Monetary values are rising in a geometric progression, while fines are rising in an arithmetic progression.  

I dedicate this article to Eric Ben-Artzi who was fired by Deutsche Bank for raising alarm over the bank’s inflated valuation of its portfolio of credit derivatives.   He refused his award because the SEC did not punish the culprits (he wanted to improve the system and not just get a pay day) and they happily walked away with multi-million dollar bonuses while Deutsche Bank gets a fine that is just a tap on the wrist.  Everything is about money; nobody is really interested in making our financial system better.  I share his disillusionment with the financial system.     

People do bad in companies and make money for their employers and get rewarded financially and labeled as cream of the crop and start walking with a sprightly gait.  People do good in companies by speaking out about the BAD, get fired and labeled as rogues that should be cast into the deepest parts of hell far away from the sane and principled  financial system they refused to conform to and almost everybody else is happily conforming to.     

If you do not STAND for something in life, then, you EXIST for nothing.  I stand for the TRUTH...

Tell others to tell others about this Africa Research Blog; the financial TRUTH is here.