"More cases of insolvency are to be attributed
to Frauds than shrewd business men are aware of, and though the advice is almost universally unpopular, it is urged on merchants
to overcome their disinclination for this species of labor, and give a little time to a thorough investigation of their accounts....Newspapers
daily chronicle the detection of new cases of embezzlement, and still our merchants shut their eyes and believe all servants
dishonest but their own. While they admit the shrewdness of their accountants
in other matters, they blindly imagine them too trustworthy, or too fearful of consequences to deceive them in regard to the
manipulation of their finances; yet in case of the death of an old favorite bookkeeper, or even of a partner, who has had
the management of the cash, how often do we find that their apparently beautifully balanced accounts are teeming with a succession
of fraudulent entries that had been continued through years.
J. Mettenheimer in his book:
AUDITOR's GUIDE, Being a Complete Exposition of
Bookkeepers' Frauds, published in1869, the United
America's first known book on auditing.
Nature of the Crisis/Crises
Right now there are number of concurrent crises underway. Some are global, others are regional and many are national. Among others these involve terrorism, “global warming” (environmental), official corruption
considered inevitable, or even “normal,” public deficits and debt, economic instability, organized crime and gangs,
family instability, “wars” (Iraq, Afghanistan) and pending wars (Palestine, Israel, Iran, North Korea), authoritarianism
(dictatorships), “21st century socialism,” loss of credibility before the citizenry of Legislative
and Judicial branches of governments, the prostitution of democracy, religious extremism and other fanaticisms, cultural and
ethical decline and many others. This leads one to worry, “Where does crisis end and chaos begin?”
Many crises have certainly become globalized and from one day
to another the spotlight of worldwide public and media attention focuses upon the “fashionable” crisis of the
day. At present major focus is upon what is usually called the “global financial crisis” or the “current
economic crisis.” This has been the most fashionable crisis
in the media for the past several months across the planet.
For millennia mankind has built walls around forts, cities
and even entire countries. Hadrian’s Wall
no longer exists. The scarce remains of the Wailing Wall of Jerusalem barely provide its welcome solace to the prayerful.
But the Great Wall of China still stands
During the past two decades two other famous walls fell. First the Berlin Wall was torn down, much to the joy of most of the earth’s
inhabitants; however, the second fall of a wall has caused much pain…the collapse of the Street named Wall...Wall Street!
That same wall fell before in 1929 causing a serious depression
in the United States that spread to much
of the world and set the stage for World War II. The second Wall Street fall
may do the same…only worse, because 80 years later in a new century we live in a quite different world from that of
current “global financial crisis” is one of a series
of similar crises that have occurred since 1929 and many believe that it too will pass.
There were also similar crises over many centuries before 1929 but the “Great Depression” of the decade
of the 1930’s lives especially in our memories because we heard so much about its trials and tribulations from our forebears.
The charts at the beginning
of the above PowerPoints were furnished by my good friend and colleague from World Bank days, David C, Jones a British
accountant who has been making presentations on this same subject. He also furnished
the following market place myths” that should be discounted at this time of crisis:
Government is, always and everywhere: wasteful, spendthrift, incompetent, inefficient, uneconomical
Business is, always and everywhere: ethical, frugal, thrifty,
efficient, economical and effective
Private enterprise can, always and everywhere operate more
efficiently and effectively than a public enterprise.
The commercial market-place can, always and everywhere: allocate resources more efficiently
There is no market failure. Always and everywhere, there is only governmental interference,
together with policy and regulatory failure.
The nature of the current crisis does not differ greatly from
those before…but the times differ greatly, the scope and size differ greatly, the technology in use differs greatly,
the interlinkage of the world financial systems differs greatly, and the people involved differ very greatly.
No one on Earth who reads the press or watches TV news needs
a detailed description of the current crisis. It most certainly is the most publicized crisis in history. While there may
be disagreement about the time it will take to recover and the means necessary to do it, just about everyone agrees that if
the present world crisis is not thwarted by coordinated government action in many countries the oncoming depression will be
much worse than the depression of the 1930’s.
One important conclusion that I have personally arrived at
is that we are not only in the midst of a financial crisis, but also an ethical, cultural and moral crisis that foments corruption
as well and these two crises are interdependent, interactive and inseparable. If a major depression does arrive it will be much more complex to handle than that of
the 1930’s due to the fact that a much greater degree of selfishness, unethical conduct, crime and corruption will arrive
Furthermore, the entire of some basic American concepts like
free enterprise, limited government, the right of privacy and even democracy itself will be in the balance. George W. Bush,
the immediate past President of the United States,
says that he was forced to give up some of his principles about free enterprise in order to accept the partial “nationalization”
of certain businesses once he was told the seriousness of the crisis. The new
President says that it will get a lot worse before it gets better.
Why are we so interested
can buy a house, but not a home,
can buy a bed,
but not sleep,
can buy a watch,
but not time,
can buy a book, but not knowledge
can buy a high position, but not respect,
can pay a doctor, but not buy health,
Crisis, Change and Corruption
The present world crisis is not only financial, it is also
ethical. We are in the midst of a global crisis of ethical behavior that is undermining
our civilization. The multicrises of official corruption and ethical and cultural decline curse the new administration in
the United States with an almost impossible
mission. Here is a summary of our paradoxical moral and cultural situation on Planet Earth, year 2009, 21st Century,
· We have tall skyscrapers but they rapidly
fall to pieces;
· we have supersonic
airplanes but they can be converted into flying bombs;
· we ended a world war,
but we continue to wage regional, territorial and national wars;
· we ended the cold
war, but we have hot terrorism;
· we have great multinational
enterprises, but they go bankrupt at the drop of a hat;
· we have global firms
of lawyers and auditors, but they lose sight of professionalism;
· we have outstanding
stockbrokers and bankers, but we cant trust them;
· we have all-powerful
governments, but they are deaf to the cry of poor children;
· we have promising
leaders, but they are duplicitous;
· we have dynamic executives,
but they are selfish;
· we have many job applicants, but
they do not want to serve the public;
· we have idealistic
men and women, but they become lost in the pursuit of elegant, promiscuous and dangerous
· we have tall buildings,
but short tempers;
· we have broad superhighways,
but narrow points of view;
· we have strong financial
institutions, but weak financial results;
· we spend more, but
· we buy more, but take
little pleasure in our belongings;
· we have bigger houses,
but smaller families;
· we have more electronic
and digital gadgets, but less time to use them;
· we have more university
degrees, but less common sense;
· we have greater knowledge,
but lesser good judgement;
· we have more specialists,
but also more problems;
· we have better medicines,
but poorer health;
· we drink too much,
· we smoke too much;
· we eat too much;
· we spend too much;
· we laugh little;
· we complain a lot;
· we drive fast in the
city and even faster out of it.
· we get mad like lighting;
· we are slow to forgive;
· we stay up too late;
· we awaken very tired;
· we read little;
· we match TV too much;
...and we pray ?…
ONLY WHEN WE ARE
Change we did not want
According to new United States President, Barack Obama:
“We start 2009 in the midst of a crisis unlike any we have seen in our lifetime
– a crisis that has only deepened over the last few weeks. Nearly two million jobs have now been .8
million Americans who want and need full-time work have had to settle for part-time jobs. Manufacturing has hit a twenty-eight
year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers
are watching their life savings disappear. And many, many Americans are both anxious and uncertain
of what the future will hold.”
“We arrived at this point due to an era of profound irresponsibility
that stretched from corporate boardrooms to the halls of power in Washington, DC. For years, too many Wall Street executives
made imprudent and dangerous decisions, seeking profits with too little regard for risk, too little regulatory scrutiny, and
too little accountability. Banks made loans without concern for whether borrowers could repay them, and some borrowers took
advantage of cheap credit to take on debt they couldn’t afford. Politicians spent taxpayer money without wisdom or discipline,
and too often focused on scoring political points instead of the problems they were sent here to solve.
The result has been a devastating loss of trust and confidence
in our economy, our financial markets, and our government.”
A summary of the Obama American Recovery
and Reinvestment Plan is described on the White House website as follows:
• Doubling the production of alternative
energy in the next three years.
• Modernizing more than 75% of federal
buildings and improve the energy efficiency
of two million American homes
• Making...immediate investments…(to)…
ensure…all…medical records are
• Equipping…schools, community colleges,
and public universities with 21st century
classrooms, labs, and libraries.
• Expanding broadband across America
• Investing in the science, research,
and entire new industries.
Not in the above summary are some
other plans the President has put forth in his speeches:
America…we’ll put people to work repairing crumbling roads, bridges, and schools by
eliminating the backlog of well-planned, worthy and needed infrastructure projects…
· …updating the way we get our electricity by starting to build a new smart grid
that will save us money, protect our power sources from blackout or attack, and deliver clean,
alternative forms of energy to every corner of our nation…
· …provide immediate relief to states, workers, and families who are bearing
the brunt of this recession. To get people spending again, 95% of working families will receive
a $1,000 tax cut…
· …continue the bipartisan extensions of unemployment insurance and health care coverage to help…(people)…through this crisis.
U.S. Losses May Reach $3.6 Trillion
By Henry Meyer and Ayesha Daya © Bloomberg
20 (Bloomberg) -- U.S. financial losses from the credit crisis may reach
$3.6 trillion, suggesting the banking system is “effectively insolvent,”
said New York University
Professor Nouriel Roubini, who predicted last year’s economic crisis.
found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at
a conference in Dubai today. “If
that’s true, it means the U.S.
banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”
¡ Losses and writedowns at financial companies
worldwide have risen to more than $1 trillion since the U.S.
subprime mortgage market collapsed in 2007, according to data compiled by Bloomberg…
Almost every large country and many small
ones have made, or are making or are planning bailouts and/or buyouts, especially for financial institutions as well as many
other types of businesses. There are too many to list but here are a few current bailouts:
Emergency Economic Stabilization
Act of 2008
American Recovery and
Reinvestment Plan $
Total USA $1,525,000,000,000
UK (Banks) $217,813,500,000
Denmark (Banks) $ 18,000,000,000
France (Banks) $
TTotal four countries $1,774,413,500,000
AICPA Risk Alert
Regarding the crisis the American Institute of CPA’s
in a special Audit Risk Alert says:
“The U.S. is experiencing great economic instability
and the U.S. government is taking unprecedented
actions in efforts to curtail the economic crisis…(that began)…in December 2007. The length of the recession and
if the U.S.
enters into a depression is yet to be determined. There is no doubt the U.S. has
taken unprecedented actions to prevent worsening economic conditions including facilitating sales of ailing financial
institutions, passing the Emergency Economic Stabilization Act of 2008, rescuing the U.S. automakers, and dramatically increasing
the monetary programs available from the Federal Reserve. These ever-changing economic times make accounting for transactions
and auditing entities more challenging. Few, if any, industries are immune to the affects
of the crisis so it is more critical than ever for auditors to understand the rapidly changing business, economic, and
regulatory environments in which your clients operate.” (emphasis added)
As to audit and accounting risks
“The recent economic conditions and regulatory actions may cause additional risk factors
that had not existed or did not have a material effect on audit clients in prior years. Some
risks may include: constraints on the availability of capital and credit, going concern and liquidity issues, marginally achieving
explicitly stated strategic objectives, use of off-balance-sheet financings, special-purpose entities, and other complex financing
arrangements, and volatile real estate markets and the credit crisis, which result in significant measurement uncertainty,
including accounting estimates and fair value measurements”
Regarding causes of the crisis The AICPA goes on:
“Among the causes that have been cited for the economic crisis...(is)… FASB Statement No. 157…(that)…defines
fair value and establishes a framework for measuring fair value; however it does not dictate when an entity must measure something
at fair value, nor does it expand the use of fair value in any way. The specific area…in the spotlight is the lack of guidance in applying fair value in an illiquid or distressed market, such as the current one...a study
of the effects of FASB Statement No. 157 on the current economic crisis…(was recently mandated by Congress)…
Another important topic…is determining when an investment is other-than-temporarily impaired. It is important
to note that other-than-temporary does not mean permanent. Determining whether an other-than-temporary impairment has occurred
requires significant judgment based upon numerous considerations and GAAP does not provide any “bright lines”
in making this conclusion.”
The Interamerican Accounting Association (IAA) has just issued a Declaration on the Global Financial Crisis and the Role of Accountants and Auditors (See Anexo A for the full
text n Spanish). After briefly describing the situation IAA emphasized problems with “derivatives” and “Fair
Value” accounting making, among others, the following recommendations:
a)“Comprehensive review of financial instruments themselves including their valuation, recording and presentation in
the financial statements.
to original historical value as an accounting principle in substitution for reasonable fair value as a means of properly presenting
financial condition. This means we recommend the complete elimination of fair value accounting as a source of accounting entry.
fair value as complementary information as financial material for circumstantial reference...”
Fair value accounting valuation is extremely controversial at this time with comments like the following being
“Fair Value Accounting is causing a large part of the problem at this moment…”
Steve Bartlett, President and CEO
Financial Services Roundtable
Testimony to: U.S.
House of Representatives
Financial Services Committee
18 November, 2008
Notwithstanding the strong criticism like that of the IAA it is vigorously defended by some and many feel that
the lack of adequate guidance has caused current problems as indicated by the AICPA Audit
Risk Alert discussed above.
Since the beginning of recognition of the crisis with the collapse of the mortgage
portfolios of major financial institutions our concept of it has worsened almost daily by bankruptcies, mergers to fend off
bankruptcies, the insufficiency of the first tranche of initial bailout efforts ($350b), the authorization of the release
of the second $350b and the plan of the new President to ask for $ 825b more…a total of one trillion, five hundred and twenty-five million dollars.
To physically count $1,525,000,000,000.00 in one dollar bills would take several lifetimes.
Placed end to end these bills would reach from the earth to the moon and back again more than 300 times. Flying at the speed of sound a military jet reeling out a roll of these bills would take over 20 years.
We are now talking about amounts of money that are completely incomprehensible to the average citizen. Senator Everett Dirksen years ago, talking about the entire budget, coined the phrase “a billion
here, a billion there and pretty soon we’re talking about real money” must be spinning in his grave.
Bailouts prior to 2008
Penn Central Railroad
Franklin National Bank
New York City
Continental Illinois National
Bank & Trust Co.
SSavings & Loan
TOTAL $ 347,200,000,000
US Government Bailouts – 2008
Mae / Freddie Mac
International Group (A.I.G.)
Asset Relief Program
At least $ 825,000,000,000 more expected in 2009
I am making several key points in this presentation that represent
my own personal opinion drawn upon the past 51 years as a Certified Public Accountant,
about 38 of which have involved working with and/or in Latin America, the last 10 principally heading anti-corruption programs
Many, if not
all, of the present crises are intimately related and they affect each other.
All the crises
regardless of scope are made extremely more complicated and unstable by the enormously advancing changes in technology at
the fastest rate in history.
Financial Crisis is directly and unequivocally linked to the crises of official corruption and ethical and cultural decline.
Therefore I have called it in the title of this presentation and shall hereinafter call it the “Global Financial and Ethical Crisis.” This linkage directly
affects Certified Public Accountants and their clients.
of this double-headed crisis is almost impossible to predict due to the interaction of all the various crises mentioned plus
the surging parallel impact of new technologies and other accelerating changes.
of the vast sum of money expected to (but not sure to) control the crisis will drastically affect the financial future of
the USA and its citizens unto many future
generations. In its present financial condition the country simply cannot afford it, but it cannot afford not to attempt it.
A severe devaluation of the dollar accompanied by extreme inflation would appear to be absolutely inevitable. We have, of
course, seen similar situations across Latin America.
We can only
guess at that impact using several possible alternative scenarios:
Return to “normalcy.” A significant recession that will pass fairly
quickly as have all the other recent ones with the world economy stabilizing within one or two years, the Dow Jones stabilizing
between 9,000 and 12,000 and eventually expanding again.
Long-Term Recovery. A much longer recession/depression that in the long run, perhaps four to
ten years, will be largely overcome by governmental measures taken to strengthen the economy and better regulate financial
markets, operations and transactions…or by mobilization for a new World War.
Crisis turns into chaos...a return to oppression. A collapse of the world economic system including
the decline and possible demise of the United States as a key global economic power resulting in chaos across the planet,
widespread panic, disease, wars and readjustments of national alliances and boundaries, including the possibility of the larger
nations breaking up into smaller more compatible groupings, some smaller nations merging and most nations finding it impossible
to govern without extremely authoritarian regimes. This could conclude the past three century era of experimentation with
democracy, capitalism, socialism and communism and result in a new era of powerful rulers like the old monarchies, the end
of privacy and the suppression of most dissent. Several larger powers could eventually control the world…or wage war
over it. (This is a worst case scenario. It could hopefully be somewhat less ominous).
Almost all those who comment on the situation seem to expect
that at least scenario b. will prevail. This seems to be the opinion of former
President Bush and new President Obama.
I personally see little hope for scenario a., diminishing hope
every day for scenario b., and increasing frightening possibilities of scenario c. coming to pass. I hope I am wrong. I abhor negativism and admire optimism. I
am ashamed to be so pessimistic. President Obama’s positive attitude and optimistic approach are his greatest assets
and should he be successful in curbing this overwhelming crisis he may become President for Life. Every citizen in the US
and throughout the world should support his and other presidents’ efforts to quell the crisis…even if they have
doubts about them. It would appear from the following section that I should not feel too lonely about my pessimistic outlook
but I would sure like to find a way to change it.
Deepening Economic Problems
According to a recent survey of chief financial officers and senior-level executive
Certified Public Accountants conducted by the American Institute of Certified Public Accountants and the University
of North Carolina’s Kenan-Flagler
Business School pessimism among financial
executives about the U.S. economy has
hit an all time high.
“Most CPAs working in business
and industry don’t expect any improvement in the U.S.
economy before the second half of 2009 or the first half of 2010,”
according to an AICPA Senior Vice President. Pessimists outnumbered optimists by 16 to 1. Eighty-two percent of respondents
indicated they were pessimistic or very pessimistic, up from 62 percent in a previous similar survey. In the latest survey,
18 percent of respondents said that they were “very pessimistic,” three times the number who felt that way in
the earlier survey.
A UNC Kenan-Flagler spokesman said, “Up to now, respondents have generally
been pessimistic about the economy as a whole but relatively optimistic about their own companies, More respondents now anticipate
decreases in revenues, profits and reduced hiring for their own organizations.” Forty-five percent of respondents now
expect their companies to contract, while 31 percent of respondents still expect some expansion in the next twelve months.
Primary drivers of the increased pessimism are the credit crisis and increasing
unemployment. The financial executive CPAs cited declines in consumer spending and consumer confidence along with increasing
economic instability and uncertainty as causes for pessimism. Respondents were divided about the impact of the presidential
election and Washington bailouts.
Financial executive CPAs see little prospect for near-term improvements. Only 9
percent expect the economy to begin to improve before the second half of 2009. Forty-two percent expect improvement in the
second half of 2009, and 49 percent see no improvement at all until 2010 or later.
The survey shows companies are increasingly taking actions to respond to deteriorating
economic conditions. So far, the top actions taken or contemplated by companies are capital spending cuts, hiring freezes,
layoffs and travel restrictions.
“The drop in optimism is affecting planned investment on research and development,
information technology and other capital improvements,” the UNC spokesman said. “As firms cut their own expenditures
in anticipation of reduced demand for their products, it will become a self-fulfilling prophecy rippling through the economy.”
A New Market?
Much has been written about the crisis in the past few months…too much
to read or summarize. In December of 2008 Robert Peston of BBC NEWS wrote an article titled: “After The Crash: We shall need a New Market!” Here are a few extracts from it with key points highlighted:
• ” There are reasons to believe that credit from taxpayers can’t and
won’t be repaid for many years, in that this credit is financing the correction of huge financial and trading
imbalances between the western and eastern economies.
witnessed a semi-permanent nationalization of the banking system and will soon see significant taxpayer support
for real companies in the real economy.
• Thus, our banks and private-sector
companies will have to work much harder to sustain the goodwill of those who are keeping them alive: millions and millions
The biggest lesson of all is that we are a million miles
from having created the political and regulatory institutions to help us contain the risks of globalization.
We and most of the world may well have been beneficiaries of the open global economy. But as millions lose their jobs in Europe
and the US in the coming year, the benefits
will be forgotten.
means that those running our biggest commercial businesses will have to be more visible. They’ll have to manifest a genuine understanding
not only of the anxieties of their employees but of all taxpayers. Those chief executives who succeed will be those who imbue
in their businesses very simple, commonsense standards of decency.
certainly be paid less for doing more, because the pricking of the debt bubble has undermined the institutions
– the private-equity firms, hedge funds and investment banks – that were ratcheting up the pay of all business
If the unfettered movement of capital, goods and services is going to survive, if there’s
not going to be a retreat into national fortresses that could impoverish all of us over the longer term, we’ll
have to find a far better way of monitoring global risks and of bringing governments together to deal with
- Some may see this as a threat to national
sovereignty, as the thin end of an anti-democratic wedge that’ll see the world ruled by unaccountable bureaucrats. Reconciling
our political traditions with the imperative of making safe the globalised world will be a challenge, to put it mildly.
But it’s not a challenge we can shirk. ”
“In November 2002, Federal Reserve Chairman Ben
Bernanke cracked wise in his now infamous ‘Helicopter Theory’ speech.
When it came time to pay our debts back, he said, we could simply fire up the printing press. The world would be forced to
accept our paper in lieu of those debts. If need be, the Fed “could drop dollars from helicopters” in order
to get the money into circulation. Unfortunately, traders around the globe didn’t react kindly to his comments: Since his speech, the dollar has declined over 40% against a basket of world currencies. It’s likely we’ll
continue to see a steady downward trend in the dollar, occasionally punctuated by rallies as traders take profits. And it’s
unlikely our government will be able to do anything soon to stop it…
Federal Reserve stopped reporting the M3 value, the U.S.
money supply, in 2006. Best guess is it’s increasing at about a 10% rate. But about
$1.5 trillion of additional ‘money’ in bank bailouts and credit will be put into the financial system in 2008
alone. When that much paper money is printed or electronically pumped into the credit markets you can bet your bottom
dollar (excuse the pun) inflation will follow.”
Extracted from Money Morning Dollar Report titled “Why the Federal Reserve Can’t Save
the Dollar” Copyright 2008–present, Monument Street Publishing, LLC 105W.Monument St., Baltimore,MD 21201
Is Globalization at Risk with the 2008 Financial Crisis?
Global Trends 2025: A Transformed World recently published by the National Intelligence Council seeks to stimulate strategic thinking about the future by identifying
key trends, the factors that drive them, where they seem to be headed, and how they might interact. Global Trends 2025
is the fourth installment in the National Intelligence Council-led effort to identify key drivers and developments
likely to shape world events a decade or more in the future. The study as a whole is described as more a description of the factors likely
to shape events than a prediction of what will actually happen. Here is what it says about the “financial crisis”:
“…the impacts from the financial crisis will depend heavily on government
leadership. Proactive fiscal and monetary policies probably will ensure the current panic and likely deep national recessions will not turn into an extended depression,
although reduced economic growth could slow globalization’s pace, increasing protectionist pressures and financial fragmentation.”
The crisis is accelerating the global economic rebalancing. Developing countries
have been hurt; several, such as Pakistan
with its large current account deficit, are at considerable risk. Even those with cash reserves—such as South Korea and Russia—have
been severely buffeted; steep rises in unemployment and inflation could trigger widespread political instability and throw
emerging powers off course. However, if China, Russia,
and Mideast oil exporters can avoid
internal crises, they will be in a position to leverage their likely still sizeable
reserves, buying foreign assets and providing direct financial assistance to still-struggling countries for political favors
or to seed new regional initiatives. In the
West, the biggest change—not anticipated before the crisis—is the increase in state power. Western governments
now own large swaths of their financial sectors and must manage them, potentially politicizing markets.
The crisis has increased calls for a new “Bretton Woods” to better
regulate the global economy. World leaders, however, will be challenged to renovate the IMF and devise a globally transparent
and effective set of rules that apply to differing capitalisms and levels of financial institutional development. Failure
to construct a new all-embracing architecture could lead countries to seek security through competitive monetary policies
and new investment barriers, increasing the potential for market segmentation.”
Tighter enforcement to
affect CPA’s clients
The Control Risks Groups recent White Paper titled
Anti-Corruption: Expect tighter enforcement
in hard times predicts increased enforcement activities:
“In the midst of the worst financial crisis in recent
history, lack of oversight and regulation is seen by many as one of the major causes for falling global markets. Increased
regulations and greater government scrutiny are certain to come. Even before the plunge began, the United States Department
of Justice (DOJ) had warned that anti-bribery and anti-corruption enforcement activity would increase – including seeking
more jail time for individuals found guilty…
There will be no leniency from regulators in a time of recession.
Despite apparent setbacks in the UK and
elsewhere, the international anti-corruption regime is gradually becoming tighter and more effective. What does this mean
for American companies working globally? If your company is found to be in violation of the Foreign Corrupt Practices Act
(FCPA), you may well find yourself under investigation by many more bodies than just the DOJ. Multinational businesses listed
in the US may find themselves investigated,
prosecuted and fined by the DOJ, the Securities and Exchange Commission (SEC), and by any government where the company’s
business and banking are done.”
In its beginnings auditing was intended to
detect and expose fraud, embezzlement and corruption in accounting records. It
was developed to serve the interests of absentee owners/investors who needed assurance they were not being robbed by their
own employees. During the 19th Century many auditors, in fact, are reported to
have carried arms. But the auditing profession's objectives evolved quickly to
focus upon the certification of accounts and financial statements. Fraud detection
was a risky business.
Twenty-three years after publication of Mettenheimer's
small Auditor's Guide audit objectives began to change as George Soule's Manual of Auditing, the second oldest known American book on auditing, states that "...the Auditor must not certify
Statements of Account as correct, of his own knowledge, until he has investigated them from the source to the final exhibit."
Not much more time passed until auditors found
that even "certifying" was risky and began to emit "opinions" on the "fairness" of presentation and the auditor's "certificate"
was abandoned in favor of language less vulnerable to getting the auditor into trouble.
But in the late 20th Century auditors began
getting into another kind of trouble. Stockholders, creditors and others began
to sue auditors alleging they had been misled after "fairly presented" financial statements were found with fraudulent content. Despite the auditors' contention that they were not responsible for detecting fraud,
many juries and courts began to suggest that in fact they did.
Emphasis on Preventing & Detecting Fraud & Corruption
Thus as we entered the 21st Century, auditors
again became more and more interested once again in the detection of fraud...and a new adjective is being used to describe
"Forensic" accounting and "forensic" auditing
are now frequently mentioned as fields of expertise offered by auditing firms.
In 1997 I spoke on the new concept being called
Forensic Auditing at the 4th Triennial Congress of the Caribbean Organization of Supreme Audit Institutions (CAROSAI) in Georgetown, Guyana.
In preparing my remarks I did an Internet search of the new term. I found 4,726 matches
for "forensic accounting" but only 1,212 matches for "forensic auditing." I repeated this search a few days ago. There
are now on Google about 786,000 matches for forensic
accounting and about 439,000 for forensic auditing. All
the large CPA firms and many smaller ones now have forensic groups or specialists. A number of firms only do this type work.
The AICPA has set up a Forensic and Valuation Services
(FVS) Center designed to provide CPAs a vast array of resources, tools, and information about Forensic and Valuation
Services (FVS), issues a monthly e-newsletter, Forensic & Valuation Reporter and approved a new credential: Certified in Financial Forensics (CFF), in
response to the rising demand for forensic accounting services.
In December as Bernard L. Madoff, former Chairman of the NASDAQ and
principal of Bernard L. Madoff Investment Securities was arrested by the Federal Bureau of Investigation after a tip-off from
his sons. With losses by high profile national and international clients estimated at nearly $50 billion, Madoff is charged
for running what is allegedly the largest Ponzi scheme in history by paying returns
to certain investors out of principal from other investors. As usually is the case, since the exposure of this alleged Ponzi
scheme, more schemes are beginning to surface. Because of these major frauds the AICPA is offering a special Web seminar on Feb. 12, 2 to 4 p.m. ET titled Ponzi Schemes,
Bernard Madoff and Beyond.
Four of the five largest
international accounting firms are indirectly involved and likely to be sued in the Madoff scandal as auditors of other funds
that invested with Madoff. A tiny three person firm that indicated its membership
in the AICPA on its letterhead audited Madoff, apparently simply selling him and unqualified opinion while performing little
if any audit work.
The Effect upon Certified Public Accountants
The Madoff case and other lesser ones of various types give us a preview
of our topic The Effect of the Global Financial and Ethical Crisis upon Certified Public
Accountants and their Clients. We can pretty well be sure that during the coming years there will be much litigation directed
at accountancy firms. Some more May go the way of Arthur Andersen. Others may merge or split up. There is definitely an opportunity,
in my opinion, for a group of smaller firms with “clean hands” to take advantage of the renewed discrediting of
some larger firms to replace them since there will be a growing need for accountants and auditors in the coming years, no
matter how bad the situation gets.
Around 1955 while I was with an older, well respected Atlanta CPA
firm a new older CPA joined us moving from Indiana to Georgia, I suppose for the better climate. We junior accountants enjoyed meeting
him and taking about the profession “up north,” hearing his experiences and learning from him. I will never forget what he told us about “the Great Depression’s” effect upon CPA’s. He was right in the middle of it as a young CPA.
He said, “CPA’s do not have to worry a bit about employment in a depression. Businesses always need accountants and my experience was that they always gave preference in hiring to
CPA’s as opposed to non-certified accountants. You guys have nothing to worry about, you have picked a profession where
there will always be work.”
Well it was encouraging to remember that observation over the years
as we passed through various recessions, but never another “Great Depression.”
Drawing upon it and others similar we may expect that while CPA’s are certain to have to work harder, longer
and perhaps for less money, there will always be a need for us.
CPA’s will not suffer as much as their clients in the coming
darkness. Bankrupcties, reorganizations, company saving mergers and othjer factos
will actually produce more work for CPA firms and individuals across the world. In
fact if we look back to the 1930’s, that was when our profession really took off and became prominent the industrialized
countries. Out of th “Great Depression” emerged the SEC, auditing
standards, improved internal controls and a groing CPA profession. It is not
unlikely that something similar will occur again.
We have seen the results of
the great scandals and accompanying recessions. I personally speculated with
a close colleague much older than I that it would take the profession at least a generation to recover from the poor image
that resulted from Enron, WorldCom and others. My friend agreed. We were both wrong. In fact as a result of the
Sarbanes-Oxley legislation the profession has grown and recent surveys indicate that it has not lost prestige. Internal control
practices and reporting on them, already in the spotlight due to COSO that grew out of the earlier Saving & Loan scandals,
has been greatly improved. There is now a scarcity of accounting graduates and a worser one for accounting professors. Some executives have complained about the reporting requirements
on internal control and the extra costs involved to com[ply with SOX, but we can probably expect those complaints to end as
a new Congress re-examines the situation.
On the other hand, we can expect monitoring
and regulation of just about everything. This will mean employment of many more
CPA’s by governments. I expect that the US General Accountancy Office, which was being reduced in size when I worked there
in the 1980’s, will have its staff at least doubled soon, so will the various Inspectors General. Why? Simply because the US
government is effectively nationalizing or at least quasi-nationalizing the banking, automotive and several other industries. The ardent conservatives are irate at this but as former President George W. Bush
admitted it has been necessary in view of the threatening chaos that could result from a “Greater Yet Depression.”
I wish I had time to discuss in more detail
the impact of hyper accelerated technological change upon the present situation. Ray Kurtzwell predicts that by 2019 a $1,000 personal computer will have as much power as a human brain,
that computer chips will be embedded into just about everything and computers and humans will communicate via two-way speech
and gestures...no more keyboards. He says that the 100 years of technological
progress in this 21st Century will be comparable to 20,000 years of progress at today’s rate. This effectively
will make obsolete planning anything as well as prognosticating future events and impacts.
Other say that soon nanobots will be everywhere
from inside human brains to circulating in the Earth’s atmosphere. “Criminal
Justice Scholar Gene Stephens says in an article in the July-August 2008 Futurist
that because nano-storage is almost limitless all activity and utterances by people will be recoded and recoverable. This would result in a great leap forward for evidence gathering. But he also said
some time ago that “Trillions will be stolen, most without detection, by the emerging master criminal of the 21st
Century – the cyberspace offender.” He concludes that “Unless a values revolution (whether spiritual, religious
or humanistic in origin) occurs and humans/transhumans choose to refrain from stealing, killing, and defiling one another,
you can bet creative malcontents will develop new methods to manipulate the system for their own ends.”
An Ancient Concept of Internal Control
“…encourage the young men to be self-controlled. In everything
set them an example by doing what is good. In your teaching show integrity, seriousness and
soundness of speech that cannot be condemned, so that those who oppose you may be ashamed because they have nothing bad to
say about us.” Titus 2:6-8
“With self discipline
Almost anything is possible.”
NEVER GIVE IN!
“The day may
dawn when fair play, love for one’s fellow man, respect for justice and freedom, will enable tormented generations to
march forth serene and triumphant from the hideous epoch in which we have to dwell. Meanwhile,
never flinch, never weary, never despair.”
Winston Churchill, Last Commons Speech,
Someone will have to monitor and attest
to many new occurrences in a future filled with great doubt. This looks like
a great job for our profession if we take advantage of it and we have already started.
On the other hand our present clients may have a darker future during trying times of financial collapse and the reengineering
of the world financial system.
Notwithstanding, there will always be new
entrepreneurs, visionaries and leaders. We seem to have one in the White House now.
There will always be new ideas, new products, new businesses and new opportunities. Our profession is perched on a
pinnacle to observe and assist as everything in our world changes. Yes we can! Si se puede!