UPDATE 02-04-09 IT'S ABOUT TIME ...

The Nationa Law Journal is reporting ... 

"Minnesota accounting firm has been hit by lawsuits alleging that it failed to detect problems in two separate Ponzi schemes -- the purported $50 billion investment scam by New York financier Bernard Madoff and the $3.5 billion alleged "electronics" scheme by Thomas Petters."

"The suits against McGladrey & Pullen, a national 100-office auditing firm in Bloomington, Minn., and similar suits stemming from the Madoff scandal against accounting firms KPMG, Ernst & Young and BDO Seidman, point up the likely spread of litigation as financial victims attempt to recover massive losses."

Original blog entry:

The blame game …

Once again we are presented with politicians running off at the mouth about the systemic causes of today’s financial crisis. Partially to diffuse and depersonalize blame and partially to deflect their own complicity in the meltdown of financial markets and institutions. 

There are those who blame President Bush for encouraging a laissez-faire, hands off policy when it comes to regulatory policies and then need for stringent oversight.

There are those who blame the Administration’s politicalized Agencies for faithfully executing what they believed to be the President’s policies.

There are those who blame Congress for using financial legislation to reward some special interest friends and punish others. For urging a relaxation in loan documentation for a politically valuable class of voters consisting of ethnic, racial and social class minorities; all in the guise of providing affordable housing.

There are those who blame the Wall Street Wizards for creating and marketing derivative products with dubious values.

There are those who blame the mortgage industry for allowing uncreditworthy borrowers to obtain loans for properties that they could never afford. And for manipulated appraisals and documentation.

There are those who blame the Federal Reserve for artificially manipulating interest rates to encourage the ever-expanding global pool of capital to seek refuge in the mortgage market.

And there are those who blame the consumer and commercial credit ratings agencies whose models failed to protect against a trend of uncreditworthy borrowers and suspicious loans.

Who enabled those who participated in the financial crisis?

And while all of these parties are partially to blame, one group stands out as not being publically excoriated for enabling the massive failure of today’s financial and social institutions. A group at the heart of almost every singular and institutionalized fraud. A group which overlooked their implicit charter to the people of the United States and their profession.

ACCOUNTANTS!

Behind each and every fraudulent company and transaction stood a legion of accountants. Some representing well-known signature firms, others lesser known but regionally powerful.

So how does a practitioner of a profession who signs a statement that: in their learned opinion, the financial statements present fairly, in all material respects, the financial position of  the institution being audited; escape the consequences of their actions?

Escape, evasion and lawyer’s letters …

While we freely admit that it is possible for an organization to hide material facts from its auditors and that sampling may fail to reveal an ongoing fraud, what excuse can be made for the accounting profession?

A profession which wrote the rules that enabled the creation and accounting for derivatives?

A profession which wrote the rules regarding “off balance sheet” transactions which hide mounting risk and losses from the parties which rely on the accounting profession to protect the public, the shareholders and the counterparties involved with the enterprise?

A profession which stretched the limits of financial prudence and credulity in continuing to report on the ongoing activities of fatally flawed enterprises which they knew for certain were insolvent; that is that the losses had wiped out the shareholder’s equity and forced the firms into short-term borrowing to meet the costs of day-to-day operational expenses?

A profession which saw executive compensation bonuses and individual expenses that represented a significant impairment of the firm’s working capital and said nothing – not even a peep in the footnotes.

And a profession which now is working on loosening even the current standards as they implement European-style accounting which is even more subjective and compromising than the current United States accounting model.

How the hell can we trust our government and those firms who are receiving billions of the taxpayer’s hard earned dollars when we know the accounting system is flawed and its practitioner’s corrupted by those who reward them with audit and consulting business?

HOW DOES THE ACCOUNTING PROFESSION REDEEM ITS HONOR AFTER BEING COMPLICIT IN ONE OF THE WORST FINANCIAL DISASTERS IN AMERICA.

And, even worse, how does the government demonstrate to its constituency, the people of the United States, that the nation’s books are true, correct and accurate? That the taxpayer’s money is fully accounted for and that even the “black money” used in covert operations has not been stolen by some nefarious party?

The government knows its accounting systems and controls are deficient …

The government dictum, “as long as it is disclosed somewhere,” it provides us with political deniability has never been truer.

Consider this report by the Government Accountability Office (GAO) …

“WASHINGTON (December 15, 2008) - For the 12th year in a row, the U.S. Government Accountability Office (GAO) was prevented from expressing an opinion on the consolidated financial statements of the U.S. government—other than the Statement of Social Insurance—because of numerous material internal control weaknesses and other limitations.”

“While significant progress has been made in improving financial management since the federal government began preparing consolidated financial statements 12 years ago, three major impediments have continued to prevent us from rendering an opinion on the accrual basis consolidated financial statements over this period of time.” 

Let’s review: 12 years in a row after the program was implemented 12 years ago = the accounting has never been accurate and the government’s books have never been balanced!

“Those include serious financial management problems at the Department of Defense, the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and the federal government’s ineffective process for preparing the consolidated financial statements.”

“[Acting Comptroller General of the United States, Gene] Dodaro also noted three additional material weaknesses related to improper payments, information security, and tax collection activities.”

“Dodaro added that at least three major agencies did not get clean opinions – the Department of Defense, the Department of Homeland Security, and the National Aeronautics and Space Administration (NASA).”

No surprise here!

Who can we trust?

A country who can perform millions of computations per second to place a manned space vehicle on the moon certainly can design an accurate and effective accounting system. However, considering the national political priorities and the institutionalized political corruption, perhaps this accounting fail is by design rather than by accidental happenstance.  

If we are not able to trust the accounting profession to eliminate, isolate or disclose all of the sophisticated accounting dodges to provide the public with true and correct information, perhaps we should eliminate all restrictions to entering the accounting field and allow anyone to hold themselves out as a CPA – after seeing the results of this financial disaster, I am not so certain that the accounting profession’s stars function any better than lawyers who, as advocates, will shade and bend the truth to accommodate their client’s needs – even as they profess to be professionals and officers of the court.  

In the final analysis …

There is but one principal accounting principle that should be remembered:

Solvency represents the ability of an enterprise to pay its bills and service its debt without government intervention and accounting fictions.

And one warning to the accounting profession:

We need accountants who can cry “bullshit” when the public is being deceived – and if they are found complicit in enabling deceit; jail seems a nice place for them to remain while they study honest accounting techniques.

What can YOU do?

Perhaps we should ask our politicians to end the fiction of a fiscal year so as to enable ordinary people to understand the true expenditures and budgets on the same calendar basis the majority of citizens use for their accounting.

Perhaps we should demand that our politicians delay the implementation of IFRS (International Financial Reporting Standards) until they are proven to be better than the current United States GAAP (Generally Accepted Accounting Principles).

Considering the financial disaster brought about by the use of derivatives and other sophisticated financial instruments, perhaps we should demand that derivatives be outlawed until the government creates rules and regulation for their creation, use and marketing and that an exchange is established to add transparency to all derivative trades.

Likewise, we need the government to prohibit the use of credit default swaps by companies which do not create actuarially sound reserves and hold these instruments out as unregulated insurance. Especially considering that there may be 55 TRILLION dollars worth of CDS paper floating around the firmament – waiting to consume companies like a blast furnace consumes paper.

Bottom line: demand that our elected officials re-think the accounting profession, its rules and practitioners before we trust them with another trillion dollars of the taxpayer’s hard earned funds.

-- steve

Quote of the day: “Trust but verify!” – Ronald Wilson Reagan

A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

Fiscal Year 2008 Financial Report of the United States Government| Treasury Department and Office of Management and Budget