They should have drilled into allowances for loan losses, and they should have been especially alert for signs that the banks were playing games when they sold loans. Auditors should have carefully reviewed how the banks were valuing their mortgage-backed securities and loans that they planned to sell.
It won’t surprise you to learn that in at least one case, the auditor seems to have done a pretty poor job.
What may be surprising is that the Public Company Accounting Oversight Board figured that out at the time, and was harshly critical of Deloitte Touche, one of the Big Four audit firms, for not doing the work to check assumptions in those areas and for being overly reliant on whatever the bank’s management said was proper.
Those comments were made after the board’s inspectors reviewed Deloitte’s audit of a bank’s 2006 results, as part of the annual inspection of the firm. The inspection of 61 Deloitte audits concluded in November 2007.
Had the auditor taken the criticism to heart, it might have gone back in and checked more thoroughly.
But it did not.
The bank was not named in the report, even in the previously confidential part released this week.
I thought it might have been Washington Mutual, a Deloitte client that collapsed in September 2008, but Deloitte says that was not the case.
Deloitte, in its response to the board, stated that at the bank, “the audit procedures performed, the conclusions reached and the related documentation were appropriate in the circumstances.”
In other words, Deloitte concluded the board simply did not understand what it was talking about.
All that became public in early 2008, when the censored version of the board’s report became public. But it was little remarked on at the time. Now we have seen the rest of the report, and it is even more critical.
The report said its inspections indicated “a firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations.”
Deloitte responded by denying almost everything. It did not like the “second guessing” shown by the regulators. It said “we strongly take exception” to the observation about its culture, which it said was simply wrong.
In any case, the firm concluded, “there were only a limited number of instances,” not nearly enough to justify questioning Deloitte’s quality controls.
The board inspectors found problems in 27 of the 61 Deloitte audits.
The Sarbanes-Oxley law that established the board included provisions to protect the public images of audit firms. If a board inspection found problems with the quality control systems, that was to be kept confidential unless the firm did not move to fix the problems over the following year. Then the release could be delayed while the firm tried to persuade the board to keep the information private. If that effort failed, the firm could appeal to the Securities and Exchange Commission.
Only then could the report be made public. So in this case, it took 41 months from the issuance of the report — more than three years — for Deloitte’s clients to learn of the problem.
The board also has the authority to file enforcement actions against auditors, but those, too, are private until the S.E.C. rules on an appeal. It is as if charges of robbery had to be kept confidential until all appeals had been completed. There is no way to know if the accounting board has taken action against anyone. An auditor that the board deems to be in violation of rules may keep working for years while secret proceedings continue.
Firms have every incentive to stall, and then to say that whatever is being criticized happened years ago.
Deloitte’s current chief executive, Joe Echevarria, tried to sound cooperative in his response this week, and was careful to point out he was new on the job. A Deloitte spokesman said that Barry Salzberg, the chief executive when Deloitte sent the response letter in 2008, was traveling in Asia and unavailable for comment.
Mr. Echevarria emphasized in an interview that the firm was investing in training, and spoke of a desire to be the leader in audit quality.
Article source: http://feeds.nytimes.com/click.phdo?i=7bb1461d1a2e028479956719f92f9d4f
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