The Unaccountables

Scanalised by how Arthur Andersen could destroy thousands of e-mails and paper documents related to its audit of Enron and the energy major’s more than unconventional accounting methods? Don’t know whether to believe it was just a rogue partner acting on his own accord, or whether the lead partner on the Enron account, David Duncan, was just following instructions — a person close to Duncan told The Wall Street Journal that, on October 12, an Andersen lawyer advised the Enron auditors to follow company procedure that allows for the disposal of many documents.

Well, it’s true that past practices in themselves are no indication that they’re still being followed, but it would be instructive to go back, as I did, and read Mark Stevens’ The Big Six, which is one of the best ‘‘audits’’ of the shenanigans of the world’s top audit firms. Stevens’ book is replete with examples of how the Big Six have fudged, obfuscated and kept their eyes wide shut in order to please clients. Oh yes, as in the Andersen-Enron case, there’s even an example of shredding of possibly vital files. Perhaps that’s a good place to begin. It concerns Touche Ross (which merged with Deloitte Haskins to become Deloitte & Touche later), and its audit of the Beverly Hills Savings & Loan, BHSL — the sudden collapse of various S&Ls, certified as financially sound, was a big scandal in the US in the late ’80s.

Anyway, while reviewing the business of a former vice president of the BHSL, Touche was told all the files ‘‘were contained in eight cardboard boxes and were (BHSL told Touche)... the complete set of files... except for one box which was accidentally shredded.’’ Touche was initially sceptical about the shredding, but clearly got over these doubts quickly enough si-nce it gave BHSL the all-clear. Later, when Touche was examined by the US Congress, Congressman Wyden was scathingly sarcastic: ‘‘Is the shredding machine at Beverly Hills big enough to shred an entire box of documents all at once, or do they have to feed the documents page by page?’’

It gets better. When it became clear that BHSL was having a major problem disposing of high-cost property investments, Touche simply decided to change the book-keeping, and instead of showing the apartments as investments, decide to show them as ‘‘equity-participation loans’’. And once these were shown as loans, BHSL showed it was getting interest and fee income from them. Problem solved, except there was no interest or fee that was actually received. Congressman Dingell later quizzed Touche on the amount of ‘‘equity’’ in these ‘‘equity-participation loans’’. What was the amount of the equity, the Congressman asked. I don’t know, replied the Touche partner. And they were the auditors.

Stevens’ most evocative story, of course, is the one about ZZZZ Best, or the carpet-cleaning business begun by Barry J. Minkow. Having built up a respectable business, Minkow decided to go public and, in order to get people interested in buying into his equity, boasted that his firm was in the lucrative insurance-restoration business — that is, he got restoration contracts from insurance firms. Minkow hired Ernst & Whinney (that later merged with Arthur Young to become Ernst & Young) to audit his firm.

Naturally, one of the first things Ernst did was to audit the insurance business. Minkow, to be fair to Ernst, cheated them. He hired an office in Sacramento, bribed the security guard to pretend he was familiar with ZZZZ’s staff, and forced Ernst to do an inspection on a Sunday when other offices were closed. Duped by an impostor, Ernst said Minkow’s business was fine, and repeated the inspections in various other ‘‘facilities’’. In fact, when the House Committee on Oversight began investigations, Ernst argued they couldn’t be blamed for not being able to detect such an elaborate fraud.

Fair enough, but Ernst didn’t even do basic checks like going to the buildings department in various cities to find out if the buildings that ZZZZ was helping ‘‘restore’’ had ever had a fire or the kind of water leakages ZZZZ claimed they’d had. Ernst had also signed a confidentiality letter preventing it from disclosing the location of the buildings ZZZZ was restoring to any third party. But, and this is critical, it also said it would ‘‘not make any follow-up telephone calls to any contractors, insurance companies, the building owners... involved in the restor- ation project’’. Congressman Ron Wyden asked Ernst how it proposed to do an independent audit with such restrictions on it? Ernst’s behaviour gets curiouser. It appears someone told Ernst the ‘‘restoration’’ job it had inspected in Sacramento was a fake, but even then the audit firm didn’t feel the need to revisit the Sacramento site. The charge about the restoration being fake, it appears, was withdrawn, but Ernst itself found evidence that ZZZZ had made payments to the individual who made and then withdrew the complaint!

While you’re following every twist and riveting turn in the Andersen saga, be sure to compare them with those catalogued by Stevens. It promises to be both an interesting and frightening exercise.