Rating Agency Initiates Report Cards on Auditors
Weiss Ratings, a rating agency whose revenues come from consumers rather than the companies it rates, prepared a report on the role of auditors in the worsening crisis of confidence on Wall Street and sent it to the Senate. The paper contains report cards on major audit firms, and it suggests that similar reports be prepared and disclosed to the public in the future. The report cards track each auditing firm's performance in warning of future difficulties, such as bankruptcies.
- The role of auditors. In a prior paper, Weiss showed that ratings from 94% of Wall Street firms continued to recommend that investors buy or hold shares in companies that went bankrupt in 2002, right up to the day these companies filed for Chapter 11. But lawmakers should keep in mind that Wall Street research analysts "are merely the second line of defense. The first line of defense is manned by public auditors..." Weiss says the Sarbanes bill should be passed because "the neglect and abuse are too widespread, too deeply ingrained, and too dangerous to be resolved by [other] recent regulatory proposals." As proof, it cites auditors' track records to date.
- Auditors' track records on accounting irregularities. Weiss studied 33 companies with accounting problems. Their aggregate stock dropped from a total peak market value of $1.8 trillion to only $527 billion, implying a total loss to shareholders of almost $1.3 trillion. Of these 33 companies, Andersen audited 11, PricewaterhouseCoopers audited 7, Deloitte & Touche and KPMG each audited 5, Ernst & Young audited 4, and Tullis Taylor audited 1. Only 2 of these 33 companies received a "going concern" warning. Both warnings were issued by PricewaterhouseCoopers. The other companies all got clean bills of health.
- Auditors' track records on bankruptcies. Weiss also studied 228 companies that filed for bankruptcy between January 1, 2001 and June 30, 2002. In this group, Weiss found that 132 (57.9%) had received "going concern" warnings, while 96 (42.1% ) had been given a clean bill of health by their auditors. Ernst & Young scored highest when ranked by the percentage of companies given warnings. Starting with the lowest-ranked firm, the auditors and their percentages of correctly issued warnings were as follows: KPMG (42.9%), Deloitte & Touche (55.9%), Arthur Andersen (56.3%), smaller audit firms (58.8%), PricewaterhouseCoopers (63.2%), and Ernst & Young (65.2%).
Download the complete paper.