Last month’s shock news that Merrill Lynch had to more than double its provision against bad debt in subprime lending begged the question: where were the auditors in all this? CNN Money believes it has the answer. It points the accusing finger at external board members who sat on the audit and finance committees. I don’t think it’s as simple as that given what we now know about the extent of Merrill’s exposure. According to CNN:
The New York Times reported that management informed the board of the firm’s exposure to subprime mortgages business in April and CDOs in July.
Since CDOs typically contained subprime mortgages, a diligent board member would have understood that stress in subprime would immediately hurt the CDO market.
More importantly, for a long time before that April meeting, the board should have spotted that Merrill was becoming overexposed to CDOs. This summer, as the credit crunch began to bite, Merrill’s exposure to CDOs was $40 billion, up massively from just over $1 billion 18 months earlier.
That growth should have been an immediate red flag to the audit and finance committees, because it had the power to severely damage Merrill’s balance sheet.
At the time this story broke I asked about the role of the internal auditors. Now we find that 18 months had passed and investment in risky assets were up x40? What were the people on the ground who manage risk doing? Surely someone in finance must have said something? How is it the external auditors, our good friends at Deloitte & Touche had nothing to say? They’ve been in post since at least 2001 (the earliest year I could find) What are they being paid to do given they have been around since the first days of SOX?
What makes this worse is that board member Aulana Peters, who has served since 1994 has also held the following posts:
- Member, International Public Interest Oversight Board, an entity charged with overseeing the development of, and compliance with, international auditing, assurance and ethics standards issued by the International Federation of Accountants, since 2005
- Member, Public Oversight Board of AICPA, a professional association for Certified Public Accountants in the United States, from 2001 to 2002
There is only one word for this sorry state of affairs: disgraceful.
Doesn’t anyone care about this enough to start asking searching questions? CFO.com has started that process but there is a lot more to uncover I suspect.
