Last week, the SEC continued its “Bustin’ Up Fraud” tour by charging Memphis-based Morgan Keegan & Company, Morgan Asset Management, and two employees, James C. Kelsoe, Jr. and Joseph Thompson Weller with “fraudulently overstating the value of securities backed by subprime mortgages.”
The long/short of it is that SEC’s Enforcement Divish alleges that Kelsoe “arbitrarily instructed the firm’s Fund Accounting department to make ‘price adjustments’ that increased the fair values of certain portfolio securities.” Weller didn’t do a damn thing to remedy this, Morgan published fraudulent net asset values (NAVs) based on these valuations and investors ended up losing something like $2 billion. Typical stuff in this day and age.
While Khuzhami and Co. gave the usual spiel about “lies” and whatnot, Jonathan Weil over at Bloomberg is wondering why PricewaterhouseCoopers is being totally left out of this ordeal (our emphasis):
Now that the Securities and Exchange Commission has accused Morgan Keegan & Co. of fraudulently overvaluing subprime-mortgage bonds in several of its mutual funds, there’s still one major player in this saga that hasn’t uttered a peep.
That would be PricewaterhouseCoopers LLP, the Big Four auditor that blessed the funds’ year-end financial statements for fiscal 2007. Funny thing is, officially at least, PwC is still clinging to its position that there wasn’t anything wrong with the funds’ numbers. That’s a lot harder to believe now than it might have been before last week.
Not to take issue with Jonathan Weil (who we think is great, btw) but we aren’t surprised at all that PwC is standing by their audited numbers. “Deny ’til you die” is Big 4 101, even if that denial is through complete and utter silence. They’re better at holding out on guilt than Pete Rose.
JW ends up addressing his own inquiry saying, “Perhaps PwC is awaiting the final outcome of the SEC’s case, which might take years to litigate. While the SEC didn’t name PwC as a defendant, the firm is being sued in court by fund investors. So PwC has a clear incentive to avoid acknowledging that any of its audit conclusions may have been wrong.” Jackpot! And if there’s one advantage that PwC and the rest of the Big 4 have on the road to failure, it’s time.
Ultimately, this detecting fraud. The public want auditors to find it. Auditors claim that’s not their job. The “expectations gap” as the leadership likes to say. And while Big 4 leaders cling to this “gap” like a security blanket, Weil brings up the question that more people have been asking lately, “if auditors can’t detect fraud, what good are they?”
Bond-Fund Fraud Suits Leave Auditor Speechless [Bloomberg/Jonathan Weil]
SEC Charges Morgan Keegan and Two Employees With Fraud Related to Subprime Mortgages [SEC Press Release]
SEC Complaint
ACCA is the worst company I have ever worked at. My line manager, Abdul, knew absolutely nothing and just had unrealistic expectations. He notoriously didn’t reply to my emails, didn’t provide the requested ACCA documentation and for months didn’t manage to ensure access to the basic tools I had to work with in ACCA. At the same time he gave me “to do” list with nearly 30 points on it.
The first task he gave me was to write a document that had to be complementary to ACCA global plan – a document which, contrary to what was stated in my objectives and what was explained to me by my line manager, hadn’t been created. In the end I had to write twenty pages document without essential documentation.
When I asked about the possibility of shadowing a colleague holding the same position, I was informed by my line manager that another employee on the same position doesn’t hold the same duties and responsibilities as I do although the position is the same. What is more, I didn’t receive my payslips on payday while working in ACCA and had no insight to the way in which my salary was calculated. As ACCA didn’t reply to my payslip request, the company had to be aware that ACCA is not acting within the law.