An accounting firm on the front page of a newspaper, rather than just on the business page, is no longer an anomaly. In the last week or so, I have seen a number of accounting firms making the headlines. One involved the financial problems involving Parmalat, the second was the shake-up of the tax leadership at KPMG, and the third, a SEC enforcement action against two firms. The last was the one I found the most interesting.

The SEC instituted a fraud action against Grant Thornton and Doeren Mayhew as well as a partner in Grant Thornton and two directors in Doeren Mayhew. This was in connection with a joint audit of MCA Financial Corporation, a mortgage banking company.

Consider if you will, how regulators would like the firms to be perceived. Stephen Cutler, Director of the Commission's Division of Enforcement said: "Today we sue not only the audit partners of Grant Thornton and Doeren Mayhew who contributed to MCA's accounting fraud, but the audit firms themselves. That is because the failures set forth in the administrative complaint are not just personal failures—they are institutional failures. In Grant Thornton's case, the firm 'rented' out its name and prestige to the audit work of a smaller firm without taking adequate care to ensure that the audit was properly staffed and performed. In Doeren Mayhew's case, the firm failed to ensure that the personnel assigned to the audit had the requisite expertise and acted with requisite care and skepticism in conducting the audit."

Though "innocent until proven guilty" still holds, the SEC's portrayal, published on its Web site, reads as a damning indictment of the audit.

The basic allegation in this administrative proceeding is that the auditors knew MCA failed to disclose several million dollars of material, related party transactions in its 1998 annual financial statements, and still issued an unqualified opinion. Another allegation is that there was a failure to inform MCA's board that the financial statements did not disclose those millions of dollars of material, related party transactions. Finally, the SEC stated that the auditors did not adequately plan the audit, did not act with sufficient skepticism in conducting it, and did not obtain enough evidence to support their conclusions. Therefore, they were engaged in improper professional conduct.

If you want to see how the SEC supports its allegations, read the order initiating the proceeding at www.sec.gov/litigation/admin/33-8355-o.htm.

There is a statement that the auditors had determined it was a high-risk audit. There is also an extensive discussion of the alleged inadequate audit procedures concerning disclosure of related party transactions, mortgages, and land contracts held for sale, as well as related party receivables.

I wonder that if with the increased scrutiny from regulators, the continuous newspaper stories about financial failures undetected by auditors, and the rise in so-called Monday-morning quarterbacking that very shortly every audit will be labeled in the auditor's mind as a high-risk one. The result will probably be more involved audits with increased costs. No matter how carefully an auditor dots that "i" an crosses that "t," there has to be the concern, "Can I be picked by a regulator as the next example?"

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