Three of the Big Four in Hot Water

Wow! PricwaterhouseCoopers (PWC) is fined $182.9 million in connection with audits performed for Ambassador Insurance Co. more than twenty years ago! The article is in today’s Wall Street Journal and states that PWC did know or should have known to raise the issue of ‘going concern’ after its 1981 audit of the company, by which time Ambassador “was near the point of insolvency.” The suit alleged that the insolvency was brought about by “gross mismanagement and fraudulent financial reports.” The $182.9 million fine is one of the largest “ever awarded in an accounting malpractice lawsuit,” the largest being $335 million, which was paid by Ernst & Young in 2000 in the Cendant Corp. accounting scandal. The fine is to be paid to the receiver for Ambassador Insurance Co. PWC intends to appeal the judgment.

Two Deloitte & Touche Auditors have been charged by the SEC in connection with audits of Adelphia Communications Corp, which is now operating under bankruptcy protection, awaiting its sale to Time Warner Inc. and Comcast Corp. The auditors are charged with “numerous violations,” which include allowing Adelphia to keep $1.6 billion in debt off its balance sheet. Deloitte has agreed to pay $50 million to settle with the SEC, which, as the article states, is “the most ever levied by the agency on an accounting firm.” The SEC will hold a hearing to determine whether the allegations against the two auditors are true and to impose sanctions, as necessary.

And then there’s KPMG. They are in the midst of settling a class action lawsuit related to providing clients with fraudulent tax shelters. This comes after settling a similar lawsuit back in August, but probably won’t be the end of their troubles since some of the approximately “600 wealthy Americans” that KPMG sold the shelters to are proceeding with individual lawsuits against the firm. To avoid criminal prosecution, KPMG paid out $456 million back in August. Eight KPMG tax professionals were indicted in the proceeding along with an attorney from an unrelated company. KPMG will pay about another $225 million in the current proceeding.

The KPMG article states, “The administrative charges reflect an SEC effort to crack down on ‘gatekeepers - auditors, lawyers and directors who are supposed to be the first line of defense against fraud.” Come on, guys. Where’s your 'character and competence?'