Whether it's Enron or Lehman or more recently the scandal at Olympus, somehow the auditors are always in the thick of financial scandals.
The audit firms like Ernst & Young are paid big money to audit the internal books of companies, large and small. In theory, they're supposed to be providing an outside look into the numbers and making sure that they're accurate. The workers tend to be very smart and meticulous people. The results of the audit are supposed to carry weight since they receive the official stamp of approval by one of the big firms. This means outside investors are counting on the books being accurate as well as outside business partners. When there's a mistake or they're inaccurate, the consequences can be severe as we discovered at Enron.
The inherent problem with the model is that the contracts for providing this outside audit are worth a lot. To cover a major corporate account such as Enron or Olympus, the annual cost can easily be worth millions of dollars. It doesn't take a rocket scientist to figure out that the loss of even one account can have a painful impact on the annual revenue of the auditor. Much like the conflict of interest between Wall Street and the ratings agencies, a similar conflict of interest exists in the auditing field. There's almost too much at risk for the auditors to find any significant problems because that will likely mean they will be replaced in the next cycle.
In the case of Andersen Consulting and Enron, Andersen was generating over $50 million per year with Enron before the collapse. That alone should have raised red flags but it didn't. Ernst & Young is now allegedly focused on auditing their audit at Olympus but one has to wonder what they were doing before. Again, these are clever people so it sounds hard to believe that they would somehow miss a nearly $2 billion accounting fraud. Mistakes happen, but when the mistakes are this large, one has to wonder. Should E&Y really be in business if they can't manage to locate an accounting scandal of this magnitude? How competent is any auditor who misses such an enormous amount of money? Bloomberg:
An Ernst & Young ShinNihon LLC committee said it’s still investigating whether the audit of Olympus Corp. (7733)’s accounting was appropriate after the Japanese camera maker admitted hiding investment losses. Olympus’s purchase of Gyrus Group Plc has complicated links to the company’s overall cover-up and will require more time to probe, the panel said today in a statement. ShinNihon, which signed off on Olympus’s 2010 results, formed the committee this month to verify an internal investigation that earlier found nothing wrong in its audit of the endoscope maker. Olympus, reeling from a $1.7 billion accounting fraud, restated more than five years of past earnings on Dec. 14, wiping out 70 percent of its net assets.E&Y auditors have of course found no problems in an audit of E&Y but is that really a surprise?
