by Brian Mahany
In recent months we have run several stories about the sloppy auditing practices of several accounting firms. From David Friehling, the solo practitioner who served as Bernie Madoff’s auditor, to Arthur Andersen LLP, once one of the “big 5” accounting firms and auditors of Enron, sloppy auditing is nothing new. Investors and bankers alike rely on having accurate financial information. Without that, commerce is severely limited. Today’s story discusses auditors who cross the line from merely negligent to intentionally deceitful.
The Public Company Accounting Oversight Board (PCOAB) has sanctioned two auditors from accounting powerhouse Ernst & Young for altering and backdating documents. (E&Y is one of the “big 4” accounting firms, since Enron scandal and the demise of Arthur Andersen, the “big 5” became the “big 4”.) Unfortunately, the PCOAB has no enforcement power beyond barring auditing professionals from the industry. In this case both auditors were barred by the Board and immediately fired by E&Y.
For its part, Ernst & Young says they acted decisively and had no prior knowledge of the pair’s misconduct. Unfortunately, in the competitive world of corporate audits, the competition among firms is so intense and the inherent conflicts of interest so deep that this situation is bound to happen again. The losers, of course, are investors who rely on the financial information.
Businesses want a clean bill of financial health. Auditing companies want the lucrative auditing contracts. Although the law requires accurate financials, unfortunately there is an incentive for companies with questionable books to hire an auditing firm that won’t look to deeply. The accounting firms have an incentive to cast the client in the best possible light, especially if they want the business again in future years. Investors and shareholders are the usual losers in this equation.
Accounting firms have been hit hard in recent years with lawsuits from investors and stockholders. If an investor loses money because of reliance on an inaccurate financial statement, the accountants and auditors who prepared the shoddy statements can be held liable for damages.
Auditing malpractice cases aren’t easy to prove but they can reap millions when successful. These suits, often called “gatekeeper suits”, have been growing in number since 2008.
If you have lost money in an investment fraud, because of doctored financial records or because of accounting malpractice, call the fraud lawyers at Mahany & Ertl. We have helped many people all across the U.S. get back their hard earned money . For a confidential consultation, contact attorney Brian Mahany at (direct) or by email at
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