MF Global: Accounting and Auditing Ethics

"Six months ago the accounting firm...said MF... and its units “maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2011.”

MF...filed for bankruptcy on Oct. 31.

This week the trustee ...said as much as $1.2 billion of customer money is missing, maybe more.

Those deposits should have been kept segregated from the company’s funds.

By all indications, they weren’t.

What’s the point of having auditors do reports like this?

And are they worth the cost?

...When an auditor certifies that a client’s internal controls are effective,
that’s supposed to mean the company can do basic functions like maintain accurate financial records,
detect unauthorized transactions and keep track of its receipts and expenditures.

...“Their books are a disaster,” Scott O’Malia, a commissioner at the Commodity Futures Trading Commission,
told ...an interview two weeks ago.

...to believe...got it right when it blessed MF’s controls in May,
you would have to accept the notion that MF’s controls were effective in March
-- and didn’t start going bad until sometime later.

...this scenario seems implausible.

...whenever a financial institution fails, it’s almost always true that its internal controls were poor
-- and had been that way for a long time.

Otherwise it wouldn’t have failed.

...other companies that use...’s New York office as their auditor include...and...

Both ...presumably are too big to fail,
meaning taxpayers would be on the hook if they ever blew up.

A Pricewaterhouse spokesman, Caroline Nolan, declined to comment on the firm’s work for MF.

If...can’t spot control weaknesses at a relatively small shop like MF
...it’s a bit much to expect that the firm would catch anything materially amiss at...
which has $949 billion of assets, or at ...with $2.3 trillion...

The reason MF had to get an outside audit report on its internal controls
was that the Sarbanes-Oxley Act required it.

That law was enacted in 2002 in response to a wave of audit failures
at big companies such as WorldCom Inc. and Enron Corp.

...For a while, it looked like the new rules were working.

Then a backlash hit.

Corporate executives, lawmakers and even Securities and Exchange Commission officials
complained that the auditors were being too strict.

The number of restatements plunged.

...Many companies’ audit fees plunged, suggesting that the auditors there were doing less work.

For fiscal 2007, MF Global paid...$17.1 million in audit fees.

By fiscal 2011, that had fallen to $10.9 million, ven is warning signs about MF’s internal controls
were surfacing publicly.

On top of that...’s main regulator, the Public Company Accounting Oversight Board,
released a nasty report this week on the firm’s audit performance.

The agency cited deficiencies in 28 audits, out of 75 that it inspected last year.

The tally included 13 clients where the board said the firm had botched its internal-control audits.

...The point of having a report by an independent auditor
is to assure the public that what a company says is true.

Yet if the reports aren’t reliable, they’re worse than worthless,
because they sucker the public with false promises."

Jonathan