Jonathan Weil has a column today on the train wreck that is Sino-Forest, the Chinese-Canadian timber company. In case you need caught up, there have been some questions about the company’s ability to report accurate disclosures and accounting. This led the research firm Muddy Waters to issue a not-so-flattering analysis of the company. Things like “Ponzi scheme” and “investing for the 23rd Century” don’t exactly get people jumping up and down for your company. Ask John Paulson.
Of course Sino-Forest didn’t do this all by themselves. They had credit rating agencies and auditors telling them everything was hunky dory for years and that’s Weil’s point. He reports that Fitch pulled its rating on S-F back in July and S&P finally pulled their rating this week. That just leaves Moody’s but guess who else is still hanging in there? Ernst & Young, baby! They’re still standing behind their audit opinions and showing no sign of budging. And JW is really curious to know who’s going to jump out of this tree first.
One question lingers: Which of the company’s paid opinion merchants will be the last to step aside? Will it be a credit rater? Or will it be the company’s auditor, Ernst & Young LLP in Toronto, which has yet to rescind any of its reports on Sino-Forest’s finances?
So far Ernst looks like the favorite, with only one rating company left in the hunt. Think of it as a contest between giant tortoises to see which one is slower. This time-honored ritual — of market gatekeepers waiting to blow the whistle until long after a scam has been exposed — has become so familiar, we might as well revel in the spectacle.
So these “gatekeepers” Weil speaks of – obviously this includes the Big 4. And it’s true that we’re all used to them waving their arms, screaming “DANGER!” in front of the burning heap that everyone has been aware of for ages (I didn’t say Lehman Brothers. Did you say Lehman Brothers? Who said Lehman Brothers?).
ANYWAY, E&Y should know that they have choices:
Ernst does have options, aside from bracing for the inevitable years of litigation and investigations. It could resign, explain why it is doing so and face criticism for acting too late. It could withdraw its previous audit opinions. It could insist to Sino-Forest’s directors that it be permitted to answer questions from the public about the work it has performed, as a condition of remaining onboard. Or it could hang on in silence, as it’s doing now, and watch its reputation endure more damage.
Could be that this is just another part of E&Y’s strategy. Sit tight while things play out, wait until things get really serious (i.e. bankruptcy, severe economic turmoil, civil charges, etc. etc.) and then come out swinging.
Tree Falls on Sino-Forest, Auditor Can’t Hear It [Bloomberg]
I’ve called bullshit many times before on the supposed “talent shortage crisis” in accounting. Now would seem to be a good time to call bullshit again. I continue to contend that any company in America can fill any accounting position with a qualified candidate in a reasonable period of time if the company is willing to pay the market rate for said talent. The real crisis is the assholes who run businesses thinking that accountants aren’t worth the money.
I’ve also said before that the high turnover at public accounting firms (even if just a little lower than normal), is not a bad thing. It’s a good thing. It’s good for the firms because it allows them to continue to promote the people who stay and also bring in fresh talent. And its good for the staff because the high turnover is an indicator that their skills and experience are in high demand in private industry.
I’ve started emailing media contacts to ask for salary numbers if they aren’t readily available any time an entity claims they can’t find accounting talent.
screw the Big 4
They screw their staff
The industry model needs to change. The folks entering PA don’t see value in the hours they are forced to work vs. the pay. Consider an imputed hourly rate that equates with a job at Walmart! Not to mention, in an era of immediate gratification, why would associates and even managers aspire to be partners. Making partner doesn’t carry the prestige it once did. Its like winning a pie eating contest with the prize being more pie.