Post by unlawflcombatnt on Aug 15, 2007 17:32:34 GMT -6
Below are excerpts from a Bloomberg article describing how accounting
mis-statements have contributed to the subprime debacle.
At Mortgage Banks, `Going Concerns,' Going, Gone
By Jonathan Weil
"American Home Mortgage Investment....
Deloitte & Touche LLP....blessed the books at American Home Mortgage Investment Corp., mere months before it went belly up.
The Deloitte accountants faced a crucial decision as they finished their audit work in March. Deloitte could resign and walk away. The firm could qualify its audit opinion by saying there was ``substantial doubt'' about American Home's ability to continue as a ``going concern'' through the end of the year -- as many short sellers already had concluded. Or it could give the company a clean opinion, expressing no doubt, which is what Deloitte did.
Five months later, on Aug. 6, American Home filed for Chapter 11 bankruptcy-court protection, still brandishing the firm's clean audit-opinion letter....
every time an accounting firm renders an opinion on a client's financial statements, the auditing standards say it must evaluate the company's ability to continue as a going concern, and warn the public if it concludes there's ``substantial'' doubt, a term the rules don't define....
Deloitte accountants...were in a pickle....
Tucked inside American Home's credit-facility agreement was a clause that said the...company would be in default with lenders if its auditor tagged it with the dreaded going-concern language.
For the accountants....Had they made what proved to be the right call, they probably would have inflicted a mortal wound on American Home. Then again....(it) would have spared investors from the company's April 30 public offering of 4 million shares at $23.75 each, the prospectus for which incorporated Deloitte's audit opinion. American Home's shares closed yesterday at 22 cents...."
In other words, investors at the April 30 auction who still owned shares lost over 99% of their investment.
"The auditing standards stress that auditors are ``not responsible for predicting future conditions or events,'' and that a company's sudden failure without any going-concern warning ``does not, in itself, indicate inadequate performance by the auditor.''....
Even so, financial statements depend heavily on auditors' judgments about a company's forecasts. Look at almost any balance sheet, and the asset and liability values hinge on the company's ability to remain in business. Those numbers would look far different if the company were preparing for liquidation, with holdings listed at fire-sale prices....
That's why going-concern evaluations by outside auditors are a necessity. Auditors may not be particularly skilled at making them. When they do bark, though, you can bet shareholders will skedaddle, because then it's clear the problems lack plausible deniability.
Back in April 2002, after the dot-com bubble burst, a Bloomberg News study found that, in 54 percent of the largest 673 bankruptcies at public corporations since 1996, the outside auditors provided no going-concern warnings in their annual audit letters during the months preceding the bankruptcies....
The auditors at today's troubled mortgage companies are faring about as badly....
On Aug. 9, HomeBanc Corp., an Atlanta-based mortgage lender, filed for Chapter 11, still sporting a clean opinion from (accountant) Ernst & Young LLP. Like American Home, HomeBanc, too, would have been in default on its credit facilities if it ever received a going-concern warning from its auditor....
Free enterprise capitalism at its finest- where auditors are free to dishonestly report the financial status of failing companies, in order to keep unsuspecting investors from pulling their money. We can now add accounting firms to ratings firms as aiders & abettors of the current financial meltdown in the United States.
There is one thing we certainly can have confidence in-- the certainty that the Financial industry will continue deceiving investors and the public when it suits their purposes. And the certainty that only rarely will they be held responsible for such actions.
mis-statements have contributed to the subprime debacle.
At Mortgage Banks, `Going Concerns,' Going, Gone
By Jonathan Weil
"American Home Mortgage Investment....
Deloitte & Touche LLP....blessed the books at American Home Mortgage Investment Corp., mere months before it went belly up.
The Deloitte accountants faced a crucial decision as they finished their audit work in March. Deloitte could resign and walk away. The firm could qualify its audit opinion by saying there was ``substantial doubt'' about American Home's ability to continue as a ``going concern'' through the end of the year -- as many short sellers already had concluded. Or it could give the company a clean opinion, expressing no doubt, which is what Deloitte did.
Five months later, on Aug. 6, American Home filed for Chapter 11 bankruptcy-court protection, still brandishing the firm's clean audit-opinion letter....
every time an accounting firm renders an opinion on a client's financial statements, the auditing standards say it must evaluate the company's ability to continue as a going concern, and warn the public if it concludes there's ``substantial'' doubt, a term the rules don't define....
Deloitte accountants...were in a pickle....
Tucked inside American Home's credit-facility agreement was a clause that said the...company would be in default with lenders if its auditor tagged it with the dreaded going-concern language.
For the accountants....Had they made what proved to be the right call, they probably would have inflicted a mortal wound on American Home. Then again....(it) would have spared investors from the company's April 30 public offering of 4 million shares at $23.75 each, the prospectus for which incorporated Deloitte's audit opinion. American Home's shares closed yesterday at 22 cents...."
In other words, investors at the April 30 auction who still owned shares lost over 99% of their investment.
"The auditing standards stress that auditors are ``not responsible for predicting future conditions or events,'' and that a company's sudden failure without any going-concern warning ``does not, in itself, indicate inadequate performance by the auditor.''....
Even so, financial statements depend heavily on auditors' judgments about a company's forecasts. Look at almost any balance sheet, and the asset and liability values hinge on the company's ability to remain in business. Those numbers would look far different if the company were preparing for liquidation, with holdings listed at fire-sale prices....
That's why going-concern evaluations by outside auditors are a necessity. Auditors may not be particularly skilled at making them. When they do bark, though, you can bet shareholders will skedaddle, because then it's clear the problems lack plausible deniability.
Back in April 2002, after the dot-com bubble burst, a Bloomberg News study found that, in 54 percent of the largest 673 bankruptcies at public corporations since 1996, the outside auditors provided no going-concern warnings in their annual audit letters during the months preceding the bankruptcies....
The auditors at today's troubled mortgage companies are faring about as badly....
On Aug. 9, HomeBanc Corp., an Atlanta-based mortgage lender, filed for Chapter 11, still sporting a clean opinion from (accountant) Ernst & Young LLP. Like American Home, HomeBanc, too, would have been in default on its credit facilities if it ever received a going-concern warning from its auditor....
Free enterprise capitalism at its finest- where auditors are free to dishonestly report the financial status of failing companies, in order to keep unsuspecting investors from pulling their money. We can now add accounting firms to ratings firms as aiders & abettors of the current financial meltdown in the United States.
There is one thing we certainly can have confidence in-- the certainty that the Financial industry will continue deceiving investors and the public when it suits their purposes. And the certainty that only rarely will they be held responsible for such actions.