KPMG is no more culpable than the other large accounting firms. Yeah, I’m sure they’ve cut corners and acquiesced to big clients. So has every other audit firm out there. It’s the nature of the business.
Here’s the problem that no one wants to admit: If a CFO (andor controller) is smart and wants to commit fraud, they’re going to get away with it for a while. There’s no way in hell that KPMG or any other audit firm is going to catch someone who’s really good committing fraud right off the bat. Likewise, they’re not going to catch more minor shenanigans – let’s call it “fraud lite” – that the banks and brokerages play because the senior execs at these firms tend to be smarter and know their products (and attendant accounting) better than their auditors. Again, it’s the nature of the relationship.
How to get around this problem? Simple. Don’t invest in companies that you can’t understand andor where the accounting is subject to an enormous amount of discretion on the part of management and auditors. If everyone – hedge funds, mutual funds, individuals, etc. – followed this simple precept, there’d be a lot fewer public companies, valuations would be lower, capital would be harder to come by, and we’d avoid a lot of the silliness that we’ve been witnessing for the last several years. Lots of companies don’t deserve to have access to capital. And most companies’ capital should be a lot more expensive than it is today. And sure, KPMG and the other large auditors (are we down to the Big 4 yet?) will often look the other way when a big client pushes them, but anyone who doesn’t understand that is naive in the extreme.
If you assume that every company run by someone you don’t know personally is lying to you (to some extent), you’ll become a much more discerning investor. If you place your trust in “auditors,” you’re asking for trouble. I know that’s an extreme view, but look at the world we live in.
I’m hoping that by the time this credit debacle (and recession/stock market debacle) winds down that people will realize that there’s a lot more risk in investing in publicly-traded companies than they ever realized… and that valuations reflect this re-discovered risk.
