Is EY and Lehman a Red Flag for the Auditing Industry?

An article in the Wall Street Journal discusses Cuomo's EY-Lehman fraud case and quotes some very prominent observers of the auditing profession as saying that this is a sign that auditors are not holding the line. To be fair, the article quotes others as saying the profession has been vigilant; I'm hoping they are right! Here are a few key quotes by Lynn Turner and others who believe the profession has let down their guard:

"We have to take this as a very serious red flag that there really may be something that has changed in the audit industry," said Lynn Stout, a professor of corporate and securities law at the University of California, Los Angeles.

That's particularly the case with the valuation methods for companies' assets, she said. "Companies rely on auditors to bless their valuation methods and there's so much subjectivity," Ms. Stout said. "There's a real problem if we can't rely on the valuations."

Lynn Turner, a former Securities and Exchange Commission chief accountant, said auditors did perform better after the Sarbanes-Oxley Act, which took effect in 2002. But around 2006, faced with a slowing economy, they "stepped back from that, reversing course, heading back down the same old road they've been on before the corporate scandals."

If these observers are right, we could see Congress and others getting involved to increase regulation of auditing in the next few years. I'm not sure what the next step is but if the current administration has it's say it may be a government run auditing agency... If they are willing to take on the health care industry then why not auditing too?!

In any case, SOX was a response to an economic crisis where auditors had let their guard down and were doing less than vigilant auditing. I am still hopeful that this past economic crisis will show that auditors learned their lesson and are being reasonably vigilant in their work. I know they have not let it down as far as they did in the 1990's but I also know that all it takes is one or two David Duncan's and we can end up with some serious political fallout against auditors and accountants...