Embedded financial journalism at its worst?

December 21st, 2010

Today’s biggest financial news story was that the New York attorney-general is suing the accountancy firm Ernst & Young for fraud following its alleged role in the cooking the Lehman Brothers books in the years prior to the investment bank’s September 2008 demise.

I’d like to focus here on the way in which the Financial Times covered this momentous story. A Lex column on the fraud suit against E&Y opened by saying:-

Accountants, just about the only people not yet blamed for the banking crisis, are about to feel the heat.

My initial reactions on reading this sentence were to this were to think “Hello…?!” and “What planet are these guys living on?” It made me wonder whether whoever writes the Lex column gets out much, or even reads much.

Presumably they’re unaware that the ‘Big Four’ accountancy firms — Deloitte, PWC, KPMG and dear old E&Y — have already been widely blamed for the crisis, given that they are seen as having aided and abetted widespread fraud and deceit across the financial sector in the years before the crisis?

Presumably the Lex writer is unaware of the dire performance of ‘Big Four’ audit firm partners when challenged about this by various UK parliamentary committees (read my take on their performance in front of the House of Lords Economic Affairs committee and the HoC Treasury Select Committee)?

Presumably they have never bothered to read this blog, Francine McKenna’s Re: The Auditors, or the probing work of Professor Prem Sikka. They also presumably never watched a video interview in which Charlie Munger, vice-chairman of Berkshire Hathaway, lays the much of the blame for the crisis at the accountants’ and auditors’ doors. In the interview, Munger said:-

“I would argue that a majority of the horrors we faced would not have happened if the accounting profession were organized properly. [The accountants] have sold out and they do not even realise that they’ve sold out.”

The Lex writer may also have neglected to look at Bloomsbury Publishing’s Qfinance or the Financial Services Authority’s July 2010 discussion paper (jointly prepared with the Financial Reporting Council).

In the latter the FSA talked of auditors’ “worrying lack of scepticism” about the valuations, provisions for impairment and related disclosures they are given by corporate managements. The report also implied that audit firms were, for the most part, so close to their clients they had failed in their statutory duty to highlight fraud. The report said:-

In some cases that the FSA has seen, the auditor’s approach seems to focus too much on gathering and accepting evidence to support management’s assertions, and whether management’s valuations meet the specific requirements of accounting standards.

Cocooned in One Southwark Bridge, the Lex writer must also have been oblivious to the fact that all four of the ‘Big Four’ firms are legally on the hook in numerous jurisdictions for sharp practice and allegedly assiting banks and other financial institutions to manipulate their financial accounts and deceive investors ahead of the 2007-09 global financial crisis? Did the Lex journalist not read the recent FT report accusing PWC of “negligence” in failing to spot financial misstatements by Landsbanki and Glitnir (both PWC audit clients) which should have led to the two Icelandic banks losing their operating licences?

They presumably don’t know that I have been banging this particular drum, off and on, for three years. In Creative Accounting, published on December 4th, 2007, I wrote:-

Essentially [the auditors] tolerated (or perhaps even promoted?) accounting methodologies that permitted the banks to deceive their shareholders about the true state of their balance sheets – for example through widespread abuse of off-balance-sheet vehicles including SIVs and conduits, and by valuing structured credit according to mark-to-model fantasies.

The beancounters’ ethical lapses mean that the financial statements of many banks may be as full of holes as Tony Blair’s “dodgy dossier”. The credibility of auditors – including PriceWaterhouseCoopers, Deloitte, KPMG and Ernst & Young – could end up being irrevocably damaged as a result.

And presumably Lex has not read John Barker’s Sticky Fingers article published in Variant’s Winter 2009 issue or at Allan Littman’s book The Fraud Triangle: Fraudulent Executives, Complicit Auditors and Intolerable Public Injury? Littman’s book:-

tells the compelling story of how the auditing profession suppressed for 75 years its original, primary, and vital duties to detect and expose frauds, particularly those committed by executives of major economic entities.

Whatever else it does, the opening sentence of this Lex column confirms my worst fears about the FT: that its journalists are “embedded”.

With a few honourable exceptions (including Andrew Hill and everyone at FT Alphaville), they seem blind to the flaws of the  sector they purport to cover — a tendency epitomised by the FT’s astonishing decision to name Goldman Sachs boss Lloyd Blanfein as its “person of the year” last December.

It seems many of the newspaper’s journalists and editors are no less embedded to the gangrenous mess of the financial world than are embedded war reporters to a particular troop or platoon during a war. If the FT doesn’t disengage, it’ll risk losing its franchise.

Note: Hat tip to @creditplumber for alerting me to the Lex column

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Posted by Ian Fraser on Dec 21 2010. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry