by Brian Mahany
Government economists have declared that the recession is over. Slowly the nation begins to dig out from the mess. Although the stock market has largely recovered, many huge and venerable institutions are either gone or restructured. Bear Stearns, Madoff Investments Securities and Lehman Brothers all were given high marks by auditors shortly before they collapsed, leaving thousands of stunned investors in their wake.
Investors depend on auditors to provide accurate and complete information about the companies they review. Unfortunately that often didn’t happen in recent years. The auditors were either asleep at the switch or complicit in the fraud.
David Friehling, the auditor for Bernie Madoff, was arrested and charged with fraud for his involvement with the Madoff funds. For a mere $14,500 per month, Friehling signed off on Madoff’s books every year from 1991 through 2008. At his plea hearing, Friehlng admitted that he never checked to see if Madoff really had the billions of assets he claimed. He simply took Madoff’s word “at face value.”
Few auditors are criminally charged, although the SEC, investors and even the companies being audited are turning up the heat and heading to court.
Why would a company being audited be upset at a poor audit? Just ask the folks at Milwaukee’s Koss Corp. Koss, a manufacturer of headphones, was shocked when its vice president of finance was caught embezzling $34 million dollars from the company. That’s a lot of money for any company, but especially for a small manufacturing business that has net sales of approximately $42 million per year. Koss’ VP, Sujata Sachdeva, stole just about everything there was to steal before being caught.
Koss says that they paid accounting giant Grant Thornton to audit their books. They say had their auditors done their job properly, Sachdeva would have been caught long before she left the company nearly broke. According to Koss, Grant Thornton failed and has now filed suit against them.
New York’s former attorney general, Andrew Cuomo, charged another auditing giant, Ernst & Young, for its failure in connection with the collapse of Lehman Brothers. That action, filed several months ago, claims Ernst & Young quietly looked the other way as the company issued glowing earnings reports, reports that were grossly inaccurate.
A recent article in gurufocus.com suggests that auditors have simply become irrelevant. I disagree. A wave of gatekeeper litigation from investors suggests that auditors will not be allowed to slip quietly into the night. The public has the right to rely on audit reports and the auditing firms that provide them and has recently shown its willingness to hold auditors responsible for their slipshod work.
The SEC recently filed an action in the Southern District of Florida against members of a company’s audit committee (SEC v Krantz). The complaint suggests that regulators will not let company insiders simply close their eyes to the work of outside auditors, either.
What does it all mean? Investors have the right to expect auditing firms will do a proper job. If they don’t, they can and will be sued. Auditors may be asleep at the wheel but investors are not.
Mahany & Ertl is a full service boutique law firm that helps victims of fraud recovery their money. Our Wisconsin, Michigan and Maine asset recovery lawyers have helped people and businesses across the U.S. If you lost money in an investment scam, a phony welfare benefit plan or through the negligence of a auditor, stockbroker, accountant or lawyer, call us. Brian Mahany can be contacted directly at (414) 704-6731. All inquiries are kept strictly confidential.