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Lynn Tilton vs. SALY

During my first year, the firm sent me on a solo engagement to audit a bundle of Collateralized Loan Obligations (CLOs) that a client was preparing to sell.

I’d never worked on that client or in that industry, and I’d never heard of a CLO before. The manager gave me a crash course on CLOs over lunch and told me, “Just follow what they did last year.”

He spent about a half hour reviewing my crappy SALY spreadsheet before emailing the file to the partner for a signoff. I literally copied and pasted the spreadsheet from the previous year. I had no idea what I was looking at. I played fast and loose with tick marks. The manager continuously assured me, “Just follow what we did last year, and we’ll be fine.” Capital market protection at its finest. Now imagine if those SALY’d CLOs had belonged to the Wild Woman of Wall Street, Lynn Tilton. 

This week, the SEC charged Lynn Tilton, CEO of Patriarch Partners, with breaching her fiduciary duty regarding CLOs and defrauding investors of over $200 million. She is a self-proclaimed billionaire, telling Forbes that, “Most women feel they need to be more like men to be successful.” Tilton is fond of low-cut designer tops, miniskirts, spiky heels, bleach-blond hair worn to the waist and heavy makeup. “I believe that women should be women.” 

Lynn Tilton’s known for her business prowess, but she’s also known for that one time in the eighties when she sent her investors Christmas card pics of herself dressed as a lingerie-clad Mrs. Claus. (It was the eighties, though –- who can really blame her?) Insiders also claim that she threw herself a fiftieth birthday party where employees took jello shots off her chest and stomach. She later starred in her own reality TV show (although it never aired) called “The Diva of Distressed.”

Despite her notoriety, Lynn Tilton is an exceptional businesswoman. As a single mom, Tilton worked 100 hours a week at Goldman Sachs and Morgan Stanley. She founded the ironically named Patriarch Partners in 2000. According to its website, Patriarch Partners aims to “rescue, restructure, and breathe new life into companies left for dead.” Patriarch owns a portfolio of struggling companies, loans investor capital to those struggling companies, helps them restructure, and then turns a profit when the companies’ equity rebounds. 

Here’s the accounting problem — the loans Patriarch made to the struggling businesses are investor assets; Patriarch is required to report asset value to its investors. The struggling companies often failed to make interest payments on Patriarch’s loans. According to the methodology Patriarch set forth for its investors, Patriarch should have impaired the loans when the borrower failed to make interest payments. Rather than follow this methodology, however, Tilton used her own “discretion” to decide whether the loans were impaired. Conveniently, she decided that the loans were not impaired. Because the loans were neither properly impaired nor appropriately recategorized, they were considered “higher value,” which allowed Tilton to fraudulently collect more than $200 million in management fees from investors. 

See the problem? Not only did Tilton’s “discretion” mislead investors regarding the value of the loans, Tilton also collected millions of dollars in management fees based on that misstated value. 
So –- this fraud involved “sophisticated investors” with unaudited, non-GAAP financial statements.

What does this particular story have to do with auditors and SALY? Plenty. When Forbes asked Charlie Sweet, Patriarch’s managing director, about Patriarch’s financing in a 2011 interview, he responded, “Only Lynn knows.” 
If these investments had been GAAP-based and audited, would an auditor have caught the missing impairment? If a company’s managing director cannot explain his company’s accounting intricacies, an auditor like me probably couldn’t either. After all, I’d never even heard of a CLO until the day I SALY’d one.
A CPA license + a top tier accounting education + a chug and plug approach to auditing will not stop a brilliant, self-made Wall Street billionaire like Lynn Tilton from applying her own “discretion” to financial statements for personal gain. It just won’t. We, as capital market protectors and accounting professionals, need to do better. We need to be better. We need to ask questions. We need to stop brushing off the annoying first years who don’t know a v-lookup from a pivot table. We owe it to ourselves, to our profession, and to the investing public.
Lynn Tilton vs. SALY? Poor SALY never had a chance.