Wednesday, September 21, 2011

Tories $20 Million Auditors Are Serial Fraudsters

If you're the government and you want to find "gravy" - to pick a random metaphor - that you can eliminate in the provision of services in order to reduce the deficit, what do you do? Why, you hire an auditor of course. An auditor has specially trained staff and expertise in finding "savings" and "non-essential" line items that can be eliminated. Their word and reputation, built up over innumerable clients provide you with an objective measure of what is essential and what isn't. Stephen Harper's Tories are paying $20 million to Deloitte Inc (aka Deloitte Touche Tomatsu Ltd) to review government departments and programs and come up with $4 billion in savings from an $80 billion budget. Deloitte was one of just a few firms that were invited to submit proposals, presumably based upon their past record of impressive results. As Finance Minister Jim Flaherty put it:
“The fact is that we feel we need to have outside advice. It isn’t good, quite frankly, for a government to just look at itself. There’s a lot of expertise in Canada on the subject of public-sector productivity, for example, and we look forward to having the advice of, in this case, Deloitte,” he said.
Well, maybe not quite.

The trouble is, Deloitte has a long string of rather shabby auditing practices. In fact, as late as the end of August a Quebec judge ruled that a class action suit could go ahead in which Deloitte is one of the accounting firms being sued, along with the Mount Real investment company. Mount Real was a ponzi scheme that ripped off unsuspecting investors to the tune of $130 million, including many people's retirement savings. Don't get me wrong, I understand that everyone makes mistakes it just seems to me that for an auditing company to fail to notice and report on the fact that a large investment company is, in fact, a shell game, is a sign that they aren't very good at their job. You might even suggest that they aren't worth $90,000/day. On the other hand, perhaps the federal Tories are just following the example of Mayor Rob Ford, who hired KPMG to provide a similar audit of Toronto finances, even though KPMG's most notable success is its string of failures, frauds and lost law suits.

And if you think that it stops at the Canada-US border, you'd be wrong. In fact, just last week the Securities & Exchange Commission (SEC) in the US filed a subpoena against the recalcitrant auditor, which has refused to cough up important documents to the federal regulatory body.
DTT was the auditor of China's infamous alleged fraud Longtop Financial Technologies (LFT)-- a software firm that sells its product to firms in the banking and insurance sectors in China.
This refusal might lead one to suspect that Deloitte is worried about being exposed for fraudulent accounting practices on behalf of the company that contracted them. After all, Deloitte was forced to pony up $50 million in damages for their role in covering up the massive Adelphia scandal that saw the owners illegally and secretly loaning themselves money from company funds to the tune of billions. And in 2008 Deloitte also faced a $1 billion lawsuit by the liquidators of the Bear Stearns mortgage funds. Bear Stearns went belly up in March 2008, before Lehman Brothers followed suit in September, as a result of being loaded down with toxic debt from the subprime market, which it was also packaging and selling to anyone who would buy it.
The suit charges that the company, the fund managers, and Deloitte violated their fiduciary and professional duties. The suit said Deloitte's preparation of the funds' audits was "at a minimum negligent."
Back in Canada in the late 1990s and early 2000s, Deloitte was also called on the carpet for covering up the shabby state of finances at Livent, the entertainment company owned by Garth Drabinsky. Livent went belly up and the bankruptcy receiver launched a $450 million lawsuit against the auditors for reasons that will sound familiar.
The Post says the lawsuit alleges negligence, breach of duty, breach of fiduciary duty, and.or breach of contract on the part of Deloitte & Touche. Documents filed by the receiver reportedly claim Deloitte & Touche failed to uncover financial and accounting irregularities at Livent, and that Deloitte signed off on Livent financial statements that it knew were "materially false and misleading".
As shocking as this short list is, it isn't by any means exhaustive - there was Deloitte's role in AES, the electricity company that cooked its books with hidden loans a la Enron, or their role in helping to inflate the profit numbers at now-bankrupt telecom giant Nortel for which they also faced a lawsuit. All of which might lead you to ask yourself why the media has failed to pick up on any of this and, more importantly, why the federal government would hire an auditing firm with a record of aiding their clients in the commission of fraud, which sometimes - as in the Mount Real ponzi scheme - led to the loss of life savings by tens of thousands of ordinary people.

The media, of course, has their own reasons for perpetuating a memory hole, down which all history of past crimes disappears. But neither is it incompetence that the Tories would hire these crooks. Fraud and manipulation is exactly what they want from an auditing firm. As with the ratings agencies, auditors don't exist for the purpose of objective measurement of financial viability or good quality accounting practices. They are there to provide whatever their clients want. When the investment banks hired ratings agencies to look at their investment packages, they pronounced utterly worthless "collateralized debt obligations" as triple-A investments. When those same corrupt investors want governments to sell off state assets at fire sale prices - they downgrade state debt that has considerably more inherent value than the sub-prime crap or even the vastly larger private sector debt load. When failing companies want to cover up internal financial crises, auditors like Deloitte know how to cook the books. When governments want them to spin cuts as efficiencies, they know how to do that too. They are, in short, the most craven example of how math and business "science" are in fact nothing more than tools of the rich and powerful to screw the poor and powerless. And for that service - from the perspective of Tories and corporate CEOs - they are indeed worth $90,000 per day. From the perspective of the interests of the vast majority of the population they are crooks of a much greater magnitude than any bank robber. They ought to be shut down, their assets liquidated and their executives sent to the hoosegow for a very long time.


And, speaking of the role that auditors play on behalf of conservative governments which want to sell of assets, check out this video of Toronto Councillor Adam Vaughan grilling KPMG on their past record of recommending service privatizations:

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