The auditing profession has confronted significant changes over the last several decades. The major CPA firms, considered capable of auditing the world’s largest publicly traded companies, have undergone consolidation or liquidation (Arthur Andersen). Major corporate scandals have rocked the financial markets.
Is this a sustainable activity – paying for audits that do not uncover the major frauds that are occurring? Why do the major auditing firms fail to find the frauds even though the auditing standards require the auditing firms to actively search for fraud? What would happen if the model for auditing required the insurance companies to hire the auditors before insurance for company, officer and director liability could be issued?
The issue of independence is so fundamental to an effective auditing system that brings accountability to stakeholders (creditors, shareholders, future shareholders, taxpayers, the public).
Unfortunately, independence is sacrificed far too often in the auditing profession.
Big 8 (until 1987)
4. Ernst & Whinney (until 1979 Ernst & Ernst in the US and Whinney Murray in the UK)
5. Deloitte Haskins & Sells (until 1978 Haskins & Sells in the US and Deloitte & Co. in the UK)
6. Peat Marwick Mitchell (later Peat Marwick, then KPMG)
8. Touche Ross
Big 6 (1989–1998)
3. Ernst & Young (1989 – Ernst & Whinney merged with Arthur Young)
4. Deloitte & Touche (1989 – Deloitte, Haskins & Sells merged with Touche Ross )
5. KPMG
Big 5 (1998–2001)
2. Ernst & Young
3. Deloitte & Touche
4. KPMG
5. PricewaterhouseCoopers (July 1998 when Price Waterhouse merged with Coopers & Lybrand)
Big 4 (2002–)
1. Ernst & Young
2. Deloitte & Touche
3. KPMG
4. PricewaterhouseCoopers
(Enron was audited by Arthur Andersen, which eventually was indicted for obstruction of justice for shredding documents related to its audit. The resulting conviction, since overturned, resulted in the demise of Arthur Andersen. )
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But, let’s look at the major accounting scandals over the last several decades. Everyone, except Paramalt and Bernard Madoff were audited by the one of the Big 4-8 firms.
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Company
|
Year
|
Audit Firm
|
Country
|
Notes
|
|
1996
|
United States
|
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|
1997
|
United States
|
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|
1998
|
United States
|
|||
|
1999
|
United States
|
Financial mistatements
|
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|
2000
|
United States
|
|||
|
2000
|
United States
|
|||
|
2000
|
Belgium
|
Fictitious transactions in Korea and improper accounting methodologies elsewhere
|
||
|
2000
|
United States
|
Falsifying financial results
|
||
|
2001
|
Australia
|
|||
|
2001
|
United States
|
|||
|
2002
|
United States
|
|||
|
2002
|
United States
|
Inflated sales
|
||
|
2002
|
United States
|
Inflated revenues
|
||
|
2002
|
United States
|
Round trip trades
|
||
|
2002
|
United tates
|
Round trip trades
|
||
|
2002
|
United States
|
Round trip trades
|
||
|
2002
|
United States
|
Round trip trades
|
||
|
2002
|
Bermuda
|
Network capacity swaps to inflate revenues
|
||
|
2002
|
United States
|
Improper booking of cost overruns
|
||
|
2002
|
United States
|
|||
|
2002
|
United States
|
Misleading accounting practices
|
||
|
2002
|
United States
|
Conflict of interest
|
||
|
2002
|
United States
|
Overstated assets, understated liabilities
|
||
|
2002
|
United States
|
Overstated sales
|
||
|
2002
|
United States
|
Round trip trades
|
||
|
2002
|
Bermuda
|
Improper accounting, Dennis Kozlowski
|
||
|
2002
|
United States
|
Overstated cash flows, Bernard Ebbers
|
||
|
2003
|
Netherlands
|
Inflating promotional allowances
|
||
|
2003
|
Grant Thornton SpA
|
Italy
|
Falsified accounting documents, Calisto Tanzi
|
|
|
2003
|
United States
|
|||
|
2003
|
Distributed ill advised corporate bonuses to top 43 managers
|
|||
|
2004
|
United States
|
Accounting of structured financial deals
|
||
|
2008
|
Massive Ponzi scheme.[39]
|
|||
|
2008
|
Ireland
|
|||
|
2009
|
India
|
Falsified accounts
|
||
|
2010
|
United States
|
Failure to disclose Repo 105 transactions to investors
|