Which Big 4 Firms Will Audit the Failing Banks?

Although the focus for this blog is the business of the Big 4, it's hard to ignore what's going on with the financial firms, the Fed, and the political environment.  I've been writing this blog for almost two years now, so I feel these past few days are a validation of what I've been saying all along about firms like AIG (AIG), Lehman (LEH), Fannie Mae and Freddie Mac, Merrill Lynch (MER), Goldman Sachs (GS) and Morgan Stanley (MS).

There have been a lot of false starts, last minute deals, and disappointments during the last few days. In many cases, the only mention of the Big 4 is related to their role in the bankruptcy proceedings. They may be involved in supporting the analysis that is taking place. They may be involved in helping develop the numbers for the potential acquirers. But they are most definitely involved in the problems that have caused so many of these firms since Bear Stearns to end up in a "crisis" mode.

Those of you who have been reading a while know that I don't believe crises, especially liquidity crises, happen overnight.  Many are discussing the "moral hazard" of the Fed bailing out so many firms and what this means for other struggling firms such as the Big 3 automakers.  Will the most recent bailouts smooth the way for beleaguered Big 3 automaker GM (GM) to ask for government support?  It's not like it's never happened before. Remember Chrysler making  a case for their significant role in the US economy?  Has the world changed so much?  If a company like GE (GE) "suddenly" found itself in trouble, would it be deemed "too important to fail?"

There are some very prestigious names decrying the use or, in their words, overuse, of the term "moral hazard." But I think we have already seen the global capital markets , the business community, and the regulators become numb to the ongoing pain being inflicted on the global financial systems and the withering of trust in the current model as a result of the repetitive settlements of large litigation claims against the Big 4 audit firms.  Larger and larger settlements cause nary a blink of an eye, much like loans and bailouts for the financial firms in the billions of dollars are passing before eyes that have now glazed over.

I have no news of an auditor assignment for the new Fannie Mae/Freddie Mac under conservatorship.  It may be that the new Boards required to be formed by the Fed will dump Deloitte and PwC and hire Ernst & Young, given the connection with one of the new non-Executive Chairmen, Laskawy, who is a retired head of EY.

I have heard no news of who will audit AIG, as it is now owned 80% by the Fed. Will the Fed allow PwC, so much a part of their problem and their problematic past to continue, or will they start fresh with someone else?  We don't know.  It was not on the list of big concerns for those making announcements, since PwC neither helped AIG avoid problems nor were they obviously instrumental in helping resolve them.

And Merrill will be audited by Bank of America's (BAC) PwC instead of Deloitte, as the acquirer is usually the one dictating those terms, much like Bear Stearns is now also under the thumb of JPM Chase's (JPM) auditor PwC.

Lehman, a long time EY client will have to say goodbye to its friends.  I say friends because EY did Lehman no favors in letting the company get away with so much for so long.  With some of Lehman disappearing or being sold off in pieces and much of it going to Barclays (BCS), there are any number of firms (well, really only four, the Big 4) that will end up as auditors of these businesses.

If you're seeing a pattern here it's no coincidence.  All of the Big 4 firms have been very much involved, complicit, aided and abetted and/or been AWOL when it comes to the problems these firms faced and will continue to face.  The Big 4 audit firms neither helped them avoid these "crises"  nor helped warn others of the severity of the issues in enough time.  We find out how bad things really are only once a year, only when pushed, or as a result of a lawsuit. Or in these cases, we only found out when the firms were pushed to the edge of the abyss. 

I wonder if their audit partner was there with them, looking over the edge, and apologizing.

Stock position: None.

Comments

[GeorgeSmith:]

Francine McKenna is clueless on the roles and responsibilities of the independent CPA's role. I would suggest she meet with any of the BIG 4 before expressing such uninformed opinions. I would challenge her to write on which firm, if any, she meets with so she can educate herself.

2008 Sep 22 04:57 PM

[Francine Mc...:]

@GeorgeSmith Don't need to meet with any Big 4. Worked for two in senior positions including as an auditor of PwC itself. What's so uninformed about wondering whether prior firms will keep auditing their clients that have failed? And what's so uninformed about wondering why so many banks financial services firms have failed after audit reports gave us no clues there were serious problems? Be more specific in your criticism and I can respond. Or not.

2008 Sep 27 10:17 AM

[CPA wannabe:]

Hey, the Big 4 consists more of just three firms...Along with PwC, Deliotte, and E&Y, you might want to do a little research into KPMG. If they're just as responsible, so be it, but you cannot say:

"All of the Big 4 firms have been very much involved, complicit, aided and abetted and/or been AWOL when it comes to the problems these firms faced and will continue to face. "

Face.

2008 Sep 27 12:51 PM

[RecruiterGail:]

Are either of you looking for work?
I'm a financial service recruiter.... looking for audit directors

2008 Sep 30 04:41 PM