Auditor failures fuel investors crisis of confidence

Auditing firms almost universally failed to warn of accounting irregularities in public companies, according to a new study issued by Weiss Ratings Inc. titled "The Worsening Crisis of Confidence on Wall Street: The Role of Auditing Firms."

The Weiss study was sent to the U.S. Senate just as it began debate over new rules and oversight for the accounting industry.

In the study Weiss determined that auditing firms gave a clean bill of health to 93.9 percent of the public companies that were subsequently cited for accounting irregularities.

Because of various factors, including the accounting problems, the stock of the 33 companies studied dropped from a total peak market value of $1.8 trillion to a value of $527 billion, implying an aggregate loss to shareholders of almost $1.3 trillion.

Only one auditing firm, Pricewater-houseCoopers, issued a "going concern" warning on any of the 33 companies involved in the accounting irregularities.

All other auditing firms failed to issue any warning in their auditor reports.

"The first and most important line of defense for investors is manned by the nation's auditing firms," said Martin D. Weiss, PhD, chairman of Weiss Ratings. "Unfortunately, the accounting industry has overwhelmingly failed in its responsibility to deliver independent oversight to corporate financial statements."

In addition to analyzing firms with accounting irregularities, Weiss Ratings also studied the audits issued to 228 companies that subsequently filed for bankruptcy between Jan. 1, 2002, and June 30, 2002.

In this group, Weiss found that 96, or 42.1 percent of the bankrupt companies, had been given a clean bill of health by their auditors while "going concerns" warnings were issued on 132, or 57.9 percent, of the companies.

The five largest auditing firms in the nation audited 194 or 228 companies studied, while smaller accounting firms audited the remaining 34.

However, there was a significant difference in performance by each of the auditing firms.

From this analysis, Weiss found that KPMG had the worst track record, issuing warnings on only 12, or 42.9 percent, of the 28 firms it audited.

On the other hand, Pricewater-houseCoopers had the best track record overall among big 5 accounting firms, issuing warnings on 24, or 63.2 percent, of the 38 companies it audited, despite the fact that its warnings were issued further in advance of the bankruptcy filings (an average of 245 days before failure, compared to a global average of 209 days).

The 96 companies that eventually filed bankruptcy despite receiving stamps of approval from their auditors had a peak market cap of $226 billion, nearly all of which has now been lost by shareholders.

"In order to help restore integrity to our accounting system and confidence to investors, we urge Congress to swiftly pass the Public Company Accounting Reform and Investor Protection Act of 2002, sponsored by Sen. Paul Sarbanes (D-Maryland), without weakening amendments," Weiss stated.

"In addition, we propose that corporate financial statements be audited quarterly and that the record of each auditing firm be tracked and disclosed to the public," Weiss added.

Weiss Ratings issues safety ratings on more than 15,000 financial institutions, including securities brokers, banks, insurers and HMOs.

Weiss Ratings receives no compensation from the companies it rates but derives its revenues strictly from sales of its products to consumers, businesses and libraries.

Martin Weiss' complete white paper on this issue can be viewed at www. WeissRatings.com/worsening_crisis.asp