Francine McKenna’s excellent Re: The Auditors should be on every professional’s essential reading list. Her piece: The Auditor’s Excuse – ‘I Was Duped!’ exposes the increasing tendency among professional firms to operate what I prefer to call the Jackass Defence. In regard to the Peregrine Systems financial fraud case, she quotes from SignOnSanDiego.com:
“The attorney for former Arthur Andersen auditor Daniel F. Stulac built his closing argument around a recurring question yesterday as he addressed jurors in the Peregrine Systems financial fraud trial.
“If Stulac was in on the fraud,†defense lawyer Michael Attanasio asked, “then why did they lie to him? And why did they have to conceal so many things from the audit team?â€
Francine then goes on to observe that our good friends at KPMG are using the same defence in their lawsuit against Fannie Mae and argues other Big Four firms like PwC are picking up on this novel idea.
When you think about it, the Jackass Defence has a lot going for it – if you’re an auditor. On the one hand you can charge audit fees in the normal way, but when things go wrong you can point the finger elsewhere on the implied assumption that:
- Audits are not designed to detect fraud (first line of defence)
- The criminal party treated you like an idiot (which is probably true) and that
- You are indeed an idiot who is easily fooled (which seems to be increasingly the case)
In KPMGs case, they’ve let one of what I suspect will be many cats out the bag. According to the Washington Post‘s article on the Fannie Mae case:
“Fannie Mae repeatedly, deliberately, and recklessly provided misleading information to KPMG,” the lawsuit says.
The fees KPMG charged Fannie Mae were “significantly lower than the fees that would have been charged had Fannie Mae disclosed all material information,” KPMG added in the lawsuit.
In layman’s terms:
Fannie Mae fooled us but we wouldn’t have been fooled if they’d paid us enough to find out. Tsk, tsk. From where I’m sitting that’s what I call the Greedy Bastard counter argument which will be seen in some quarters as the equivalent of an intellectual bullet in the brain. Which of course brings us back to the ‘idiot’ argument. Neat but not entirely believable.
For the benefit of anyone who has doubts about what this means, KPMG is arguing that financial constraints prevented them from doing their job. That is no excuse.
- If you contract to do an audit, it is not the company’s management you are reporting to, it’s the shareholders. It’s worth reminding KPMG that shareholders have a right to expect a thorough and independent job.
- If the negotiated fee doesn’t cover the costs necessary to get the job done then KPMG should not have done it. That goes for anyone else as well.
The more serious point is that despite many years over which to develop refined audit testing procedures, the profession as a whole is pretty crap at automating the routine audit tasks and focusing on the exceptions. I know only too well how easy it is to get an auditor to accept what finance department staff say with little or no further checking or testing. Usually, that gets backed up with paper that proves the point the staff are trying to make. In audit terms: job done, another tick in the box.
Still – if all else fails and the audit turns out to be meaningless, then the Jackass Defence is always available. Somehow I don’t think this will pass muster with an intelligent jury.
