by Brian Mahany
If we aren’t critical of big banks and mortgage lenders, then we are probably writing about the Big 4 audit firms. Everyday we read another lawsuit or complaint accusing these giants of fraud, negligence or worse. Some claim these big institutions are “too big to fail.” We simply think they have become too big to care.
Today we learned that a New York state court judge refused to throw out a suit against KPMG over an audit they prepared in connection with the financing of the Texas Rangers baseball franchise. KPMG has denied any responsibility and wrong doing.
Back in 2009, a company called GSP Finance loaned Hicks Sports Management millions of dollars. According to the complaint, GSP and others loaned Hicks over $500 million dollars. Hicks controlled both the Texas Rangers and the NHL franchise Dallas Stars.
No one advances that type of money without undertaking some significant financial due diligence. GSP claims it was relying on KPMG who performed an audit of Hicks. According to the complaint, “To ensure that the lenders received sufficient early warnings to take actions to protect themselves, GSP and other lenders relied heavily on KPMG’s exercise of due professional care. Conducted properly, KPMG’s audit should have uncovered the inaccuracies in Hicks Sports’ financial statements, doubts as to its ability to meet its obligations as they came due , and warning signs that it was carrying excessive debt or maintaining inadequate liquidity reserves.”
GSP claims that when faced with the choice of discharging its professional duties as an independent auditor or staying in the good graces of an important client, KPMG “cast its lot with Hicks Sports, working to misrepresent Hick Sports’ [poor financial position.]”
By now you know the rest of the story, Hicks went under and the lenders were left with tens of millions of uncollectible debt.
KPMG denied wrongdoing and asked the court to dismiss the suit. A New York State Supreme Court judge in Manhattan, however, refused to toss fraud and conspiracy charges against KPMG. That means the matter may soon be heard by a jury.
Obviously, not all auditors do a bad job. Unfortunately, in our opinion, the large accounting firms have lost their way, Whatever independence they may have once enjoyed seems to be gone. Because audit firms are not forced to rotate, the same firms frequently audit the same client year after year. The audit firm become reliant on the huge fees they receive and the companies they audit become reliant on a clean bill of financial health. No one is hurt unless there is a default. Then its usually creditors or investors who suffer the most.
This case is far from over. Unless settled, a jury will probably decide if KPMG was indeed asleep at the wheel, or worse, involved in a blatant fraud. Too many big audit firms have been guilty of negligence recently to ignore the bigger picture, however. That bigger picture is sloppy audits and a broken system.
The fraud recovery lawyers at Mahany & Ertl represent whistleblowers (former or present employees of audit firms, banks and mortgage companies) who have knowledge of fraud and negligence. We also represent victims hurt by accounting and audit malpractice. If you relied on an audited financial statement to your detriment, you may have a claim.
While no auditor can uncover every problem or fraud, auditors are required to act professionally and diligently. If you think you may have a claim or information, contact us. For more information, contact attorney Anthony Dietz at or the author, attorney Brian Mahany at (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence.
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. Services available in many jurisdictions.