The White Collar Crime Blog alerts us to former Qwest CEO Joe Nacchio being hauled in on 42 charges of insider trading. In a handy addition, it also provides us with the indictment. Nacchio has now been added to the rogue's gallery of high profile corporate scandals for 2005.
You can add Dynegy to the list with prosecutors now recommending a 15-year sentence for Jamie Olis for his part in the scandal where a bogus transaction was used to inflate the Houston energy company's cash flow numbers.
Meanwhile, Tom Blumer's BizzyBlog has announced its We're Out of Control And Sarbanes Oxley Should Apply To Us Awards for 2005. The winner is the US Government for its sloppy financial reporting. The US Government Accountability Office (GAO) gets a mention for being clueless and not knowing what the hell's happening in some agencies. If the Government can't set the example, what are corporates going to do?
The BizzyBlog post raises the question of why this sort of stuff still happens years after new laws were introduced around the world to stop financial shenanigans. If you want some disturbing clues, check the latest report from the Canadian Public Accountability Board, On Quality Inspections of Public Accounting Firms.
The report says some audit firms denied CPAB full access to documents, claiming these were subject to legal privilege.
"In one firm, the documents removed by engagement teams from certain audit files on the basis of legal privilege included memos to file, Power Point presentations, inter office memos and other documents that clearly had not been written for the purpose of obtaining legal advice, which could have rendered them subject to legal privilege". Translation: the auditors were lying.
The report also noted that compliance audits of partners in all firms turned up poor results. In each of the four firms, more than half of the people subject to audit were found to be in breach of the firm's policies. That also includes cases where partners had investments in clients.
It also noted with some alarm the increasing use of engagement letters with "liability caps", little deals that stop clients from suing auditors when they run into accounting problems, something I have blogged on here and here.
There are all sorts of reasons why you can't banish corporate fraud. But while auditors continue to support clients interests over shareholders, the problem is not going to go away.
My point about the government is, given the fact that it represents about 20% of the economy, that it should get its house in order before having credibility lecturing businesses how to run themselves. Also, SarBox should apply to Federal, state, and major county/municipal governments so that tax dollars are better controlled and so the government types can see what companies have to endure.
The thing that bugs me about the treatment of the corporate crooks and SarBox is that SarBox seems to be getting retroactive credit for catching and prosecuting these guys, when Nacchio et al did their bad deeds pre-SarBox and are being prosecuted under pre-SarBox laws.
Whether SarBox can prevent or is preventing future occurrences is a legitimate debating point. Even if the fraud level goes down, will it be because the feds aggressively prosecuted the bad guys and put fear into the exec suite, or because of SarBox?
CPA firm conduct deteriorated badly during the mid- and late-1990s. I believe that the firms have righted their ships. I also think the liability-limiting engagement letters you describe are not legal in the US.
These corporate crooke never learn…But then again, I guess that many of these people are still out there. I hope they’ll stop messing around before karma gets them down.