July 17, 2012

Auditors All Fall Down; PFGBest and MF Global Frauds Reveal Weak Watchdogs

Without much comment, from Francine McKenna:

Auditors All Fall Down; PFGBest and MF Global Frauds Reveal Weak Watchdogs


The made-for-TV drama is instead unfolding in Cedar Falls, Iowa and Chicago where, in “truth is stranger than fiction” style, PFGBest’s Russell Wasendorf Sr. says he used his “blunt authority” as sole owner and CEO to falsify bank statements sent to regulators for twenty years using Photoshop, Excel, scanners and laser printers.

Instead of MF Global’s world-renowned auditor PwC, we’ve got a one-woman show, Jeannie Veraja-Snelling, signing the audit opinion accompanying the financial statements for PFGBest. Not that there’s much less apparent incompetence when a global firm like PwC misses increased risk and deteriorating controls at MF Global and signs off on a clean annual audit opinion as recently as March 31, 2011, seven months before MF Global was forced into bankruptcy. PwC also signed off on a 10-Q review at the end of June, and a bond issue in August of 2011.

Wasendorf’s suicide note said that he duped his first-response regulator, the National Futures Association, by intercepting its request for confirmation of his bank balances, including funds segregated and safeguarded for customers, by using a P.O. Box he set up in the name of US Bank. He simply wrote whatever he wanted on those confirmation requests and signed in the name of the bank. His doctored banks statements with matching figures were sent along with the confirmation request back to the regulator.

“I was forced into a difficult decision: Should I go out of business or cheat?” he wrote. “I guess my ego was too big to admit failure. So I cheated,” his suicide note said.

Regulators, auditors and internal controls can not prevent a psychopath from lying, cheating and stealing to perpetuate a myth and sustain a lavish lifestyle, but they can and should detect the fraud much sooner if not immediately.

Wasendorf’s admission does not explain how he also duped the independent auditor. One of the cornerstones of an independent audit is an independent confirmation of bank balances. PFGBest’s auditor was either duped for twenty years or complicit in the fraud. Neither conclusion is a good one for her. Auditors are forbidden to use company personnel to obtain or process bank balance confirmations. Of course, that hasn’t prevented auditors from falling down on this critical part of their job anyway, leading recently to some of the biggest and most notorious fraud cases in years.

Deloitte’s audit client Parmalat gave that firm falsified bank confirmations. Deloitte’s Milan firm and its international coordinating firm eventually settled the 2003 case with Parmalat bondholders and shareholders for almost $200 million total. Price Waterhouse India partners are still facing criminal charges and the firm is being sued by its former audit client Mahindra Satyam for the fraud revealed by Satyam’s CEO who admitted to falsifying $1 billion in bank balances. Price Waterhouse India paid fines to the SEC, PCAOB, and settled with shareholders. Regulators said Price Waterhouse India’s audits were negligent because they failed to obtain confirmations of bank balances directly from banks and instead accepted management’s representations without independent verification. Several of the current Chinese frauds allege bank confirmation fraud, including accusations of collusion with executives by bank officials and negligence by auditors Deloitte China and others.

What’s even more troubling to me is PFGBest’s auditor, and many others who audit only SEC-registered broker-dealers, may be breaking laws as well as being negligent in their public duty to the capital markets.

(Big Snip)

On that latter, read the article for detail...

Posted by iang at July 17, 2012 09:23 AM | TrackBack
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