Thursday, March 27, 2008

The Enron Crisis Had Arthur Anderson and the Mortgage Crisis Has KPMG

When I started working in the corporate world in the early-1980s, there was The Big Eight, consultancy and accounting firms that guided the world's largest corporations through the fog and into the dream world that would be Reaganomics. They were Ernst & Whinney, Price Waterhouse, Coopers & Lybrand, Arthur Young, Arthur Anderson, Peat Marwick, Kidder Peabody, and Deloitte Touche.

Over the coming decade, in the orgy of mergers sparked by Reganomics, they became The Big Five: Ernst & Young, PriceWaterhouseCoopers, Arthur Anderson, KPMG, and Deloitte Touche.

Then Arthur Anderson got caught with its hands in the cookie jar, or is that the cooking jar, as it cooked the books for Enron and watched the energy business fall into the hands of a few evil billionaires who have taken the nation hostage while millions of people lost. Arthur Anderson is no more and we are left with The Big Four: Ernst & Young, PriceWaterhouseCoopers, KPMG, and Deloitte Touche.

I was particularly disheartened by the closure of Arthur Anderson. As a child, my pediatrician told me that really smart people worked for Arthur Anderson and he thought I should work there some day. I failed to pursue an education that would have brought me to such a firm, but I always remembered that Dr. Levine said it and Arthur Anderson always held a mystique for me. Its closure was an odd disappointment. The other disheartening thing about Arthur Anderson closing was that two low-level executives from their New York office made their way into the organization where I was employed and they instituted the sort of re-engineered policies that make companies momentarily more profitable, a shitty place to work and eventually a failure. That company no longer exists as it had to be absorbed into a better-run company in order to survive on any level. I think there is a direct correlation between the arrival of the Arthur Anderson people and the demise of the firm. Even if their policies did not lead directly to the failure of that partnership, their shitty re-engineered philosophy made it a crap place to work and the loss of that company was actually no loss to the New York business community. (As I heard a local professional say about its closure: Company A merging with Company B -- two shitty firms getting together to form one big shitty firm.) But, enough about Arthur Anderson.

Come now, the mortgage crisis that is bringing-down Bear Stearns, the most successful (and most Jewish) investment bank in the history of investment banking, forcing Americans out of their homes, seeing investors go broke, and causing one of the nation's largest mortgage companies, New Century Financial, to dissolve. How did this happen? Well, KPMG (one of the remaining accounting firms that make up The Big Four) helped New Century Financial alter it's accounting practices so that losses actually appeared to be profits. Just like Arthur Anderson did with Enron!

A five-month investigation has produced a 580-page report documenting how New Century cooked its books (while KPMG was its accounting firm) in the second half of 2006. They admitted their accounting was wrong in February, 2007, and entered bankruptcy when its lenders shut off its cash supply. Showing a profit in 2006 meant that executives were paid huge (HUGE) bonuses.

KPMG denies the accusations, of course, as did Arthur Anderson during the advent of the Enron scandal. But, you don't need a weatherman to know which way the wind blows!

Investigator Michael Missal said in a telephone interview, "I saw e-mails from the engaged partner [at KPMG] saying 'we are at the risk of being replaced.' They acquiesced overly to the client which in the post-Enron era seems mind-boggling."

A partner at KPMG went along with (encouraged?) a plan by a nearly-bankrupt company to cook its books! And it's documented! Sounds like malfeasance, or fraud, to me!

So, will we be left with The Big Three: Ernst & Young, PriceWaterhouseCoopers, and Deloitte Touche? Let's hope so! I say we toast to the demise of KPMG. If you pray, perhaps you could pray for their demise.

If you own KPMG stock, I suggest you sell it now for any price you can get before it looks like Bear Stearns (or worse, Enron or Arthur Anderson) stock.***

Read an article at the New York Times.


I stand corrected. I did not realize that KPMG was a partnership. Had I known this I would not have recommended people sell their shares of stock.

Sorry to have mispelled the name of Arthur Andersen. I should have done my homework better.

Thank you to the readers who commented on these shortcomings.

Neither of these mistakes detract from the point that KPMG is complicit in the New Century collapse, debacle, scam (whatever you want to call it), and should be prosecuted for it.

Dick Mac Recommends:

Ethics for the New Millennium
Dalai Lama


Anonymous said...

1. It's spelled Andersen, not Anderson.
2. KPMG is a limited liability partnership ("LLP"), not a corporation, so there are no shareholders, or stock for that matter.

Anonymous said...

If your knowledge of business and finance is so limited you can't even understand partnership structures don't have shares, are you really in a position to comment on these issues? I don't think so.