MARKET SCAMS

[thepennyking]

Auditors Are Getting Skittish

By Rich Smith
March 30, 2004

During the go-go years of the late 1990s, it often seemed that America's auditors were willing to rubber stamp any kind of accounting shenanigan rather than risk offending a client. But ever since the Enron scandal broke, taking former Big Five auditor Arthur Andersen down with it, the auditors' focus has shifted from keeping their clients happy at all costs to staying out of trouble with the Securities and Exchange Commission (SEC).

A few months ago, Grant Thornton quit its job auditing DHB Industries (AMEX: DHB). Not long after, KPMG had a falling out, with client Lancer (AMEX: LAN) over "likely illegal activities," that quickly developed into an SEC investigation. And a couple weeks back, The Wall Street Journal reported that antivirus software maker Network Associates (NYSE: NET) had fired PricewaterhouseCoopers (PwC) as its auditor, hiring Deloitte & Touche to replace the firm.

Network Associates fired PwC on the same day that it announced an earnings restatement for 2003. This was the latest in a string of such restatements; Network Associates had already restated its earnings for every year from 1998 through 2001. Moreover, PwC was making noises about problems with Network Associates' "internal controls." While the company said that PwC's firing was unrelated to PwC's suggestion that Network Associates practiced sloppy accounting, one has to wonder about that.

The situation was similar with DHB. Grant Thornton had pointed out that the company needed to disclose certain related-party transactions that had inexplicably been left out of its SEC filings, plus -- and here we go again -- Grant Thornton suggested that DHB's internal accounting controls were not up to snuff. While Grant Thornton left on its own instead of being fired, this could well have been a case of "You can't fire me; I quit!"

Likewise with KPMG. With the SEC already taking aim, this auditing firm did not stick around to risk getting impaled on the Lancer investigation. So KPMG, too, fired its client.

While their details vary, these three cases do suggest that a trend is forming. Auditors are more aggressively questioning their clients' accounting practices, even at the cost of losing the client. This trend may not bode well for auditors' finances, but the more aggressively our nation's auditors monitor their immediate clients, the safer investors -- the ultimate beneficiaries of the auditors' services -- can sleep.

http://www.fool.com/News/mft/2004/mft04033009.htm