Audit Watchdog Seeks More Action On Misconduct

by San Antonio Attorney

The incoming chairman of the Public Company Accounting Oversight Board, Mr. James Doty has called on Congress to help pierce the veil over the investigations being conducted on the disciplinary hearing of accounting firms linked to the recent financial recession.

Last Wednesday, Doty called out for new laws that should make these hearings public to add more pressure and penalties on accounting firms that failed to prevent financial collapses or assisted in the concealment of risky financial schemes.

In his testimony before the Senate subcommittee on Securities, Insurance and Investment, he said that the secrecy has “unfortunate consequences”. He added that parties in interest, such as investors, audit committees, issuers and other auditors are not fully informed of the misconduct perpetrated, even after findings of fault have been made. His office, the PCAOB was created under the Sarbanes-Oxley Act of 2002. The law also stated that the board should keep its investigations and proceedings confidential.

For its part, Subcommittee Chair Jack Reed has expressed his concern about the use of accounting “gimmicks” during the current financial crisis to mislead others as to the true finances of the company. He further highlighted the fear that auditors who either failed or did not do their duty to ensure the accuracy of accounting books and records of companies would provide audit reports that were inaccurate, leading to collapse of the company. This would then need government rescue, thus further exacerbating the problem.

On the other side of the pond, UK solons have sought to probe auditing firms such as Price Waterhouse and Cooper, Deloitte, Ernst and Young and KPMG for their activities prior to the financial crash. A parliamentary report was filed saying that these auditing firms failed to perform their fiduciary duty to warn their clients of the risks being assumed.

Reed on the other hand has added that prosecutors and regulators should make announcements as to whether further enforcement actions would be undertaken against the firm of Lehman Brothers for the accounting practices conducted during the financial crisis. Currently, the Justice Department and the SEC are investigating Lehman Brother’s use of an accounting practice designed to misrepresent its financial status. This practice is called the “Repo 105” transaction allowing the bank to move, albeit temporarily, $50 billion from its balance sheets. This was discovered by the examiner for the bankruptcy proceedings of Lehman and reported that this was sufficient evidence to indicate Lehman misreported its net leverage. The named auditor for Lehman was Ernst and Young.

Lehman sought bankruptcy protection in September of 2008 which sent ripples across the US capital markets. Anton Valukas is the bankruptcy examiner for the case and lent his testimony on the matter to the subcommittee hearing conducted. After the testimony, he declined to make any further comments on his findings.

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