Good Honest Dollar $$

It was a sad day for British justice in 2006 when Tony Blair intervened to halt investigations into allegations that BAE Systems, the UK’s largest defence contractor, had paid bribes to officials in Saudi Arabia in order to be awarded lucrative contracts in that country.

Britain should not make the same mistake twice, and assurances on the part of Gordon Brown that his government will not intervene with investigations into similar allegations against the company relating to its dealings with the governments of Tanzania, the Czech Republic, South Africa and Romania are more than welcome.

(After a six year investigation, Britain’s Serious Fraud Office (SFO) announced on October 1 that it had sought consent from the Attorney-General to have BAE prosecuted with respect to these latter allegations.

The case currently rests with the Attorney-General, who will decide whether or not the evidence against BAE is sufficient at this time so as to take the case to court)

 
Saudi saga was a disgrace – don’t repeat it
The Saudi debacle in 2006 revolved around an investigation into allegations that BAE had made illegal payments (bribes) to officials and members of the royal family in Saudi Arabia in exchange for a large arms contract.

That investigation was abruptly shelved following personal intervention on the part of Tony Blair. Although national security concerns were sighted as the primary reason, there is little doubt that that action was driven by concerns over complications with regards to Britain’s relationship with the Saudis, who had threatened: (a) to pull out of an agreement with BAE to provide for the provision of new fighter aircraft – at the cost of up to 50,000 British jobs; and (b) to withdraw its cooperation in respect of the war on terror in the event that the investigation continued to proceed (refer article).

(The sensitivity on the part of the Saudis with respect to that investigation revolved around what any probe into BAE in this regard may reveal and expose with regard to the Saudi government’s own practices)

 
Hold them to account this time
That decision represented a shocking mistake, one which Britain should not repeat with regard to the allegations at hand.

These allegations should be handled in the appropriate manner – on their merits through the proper legal process without any form of political interference whatsoever.

Yes, these matters are sensitive. Risks to military operations and national security in the event of leakage of sensitive information should not be treated lightly, and any embarrassment on the part of foreign governments with regard to practices which are exposed as a result of any trial will certainly complicate relationships with key allies from Britain’s point of view.

But this is no reason for interference with regard to legal proceedings against BAE. Surely there are ways from which to hold the company to account without divulging sensitive military information, for example, by conducting some aspects of any resulting trial in secret or by expunging trial documents containing sensitive information from public record.

Moreover, concern about upsetting foreign governments should never deter countries from due and proper investigation of their own resident companies. The day any nation allows bullying or intimidation from foreign governments to prevent it from holding its own citizens and organizations to account is a sad day for that nation – no foreign relationship is worth that price.

 
If they’re so innocent – let them prove it
BAE claims that it has never made illegal payments of any kind. To be fair, they may not turn out to be guilty.

If so, they have nothing to hide - nor the foreign governments with whom they deal. Thus they would have no problem proving their innocence through the proper legal process.

But innocence should be established by proper legal proceedings, not political intervention.

If BAE is to avoid facing court, it should be because of a genuine belief on the part of the Attorney-General that there is insufficient evidence to support the case against them – NOT because British politicians cower to intimidation from foreign governments.

Gordon Brown should keep to his word, and he and his ministers should stay right out of this affair and simply let justice run its proper course.

At the start of this year, I outlined my intention to devote more discussions toward positive and uplifting topics.

Furthermore, as a former member accountant, the integrity and reputation of the accounting profession is a matter which I feel strongly about.

For both of these reasons, I take absolutely no pleasure whatsoever in writing about yet another financial scandal, particularly one which involved a blatant breach of ethical duties from the world’s largest accounting firm.

 
Auditors receiving excess fees for looking the other way
The sorry scandal, which has been dubbed ‘India’s Enron’, involved Indian outsourcing services company, Satyam Computer Services, and their auditor, PricewaterhouseCoopers (PWC), the largest accounting firm in the world.

In short, a charge sheet filed in court last week by the Central Beareau of Investigation, the top investigation agency in India, alleges that:

(1) the accounts of Satyam were falsified over a period of several years, with both sales and profits being overstated as a result of the creation of forged sales invoices; and

(2) PWC certified the accounts of Satyam as being true and correct (in spite of the inflated sales figures), in return for which the firm recieved an exorbitant level of fees, which were well in excess of the standard rete for audit services.

(In total, the charge sheet alleges that 7,561 false invoices were generated. The result was an overstatement of sales figures by an average of eighteen per cent each quarter from the period spanning April 2004 until the fraud was discovered in January this year (refer article).

The scandal came to light in January, following an acknowledgement by company chairman Ramalinga Raju that company accounts had been falsified)

 
Just what the audit profession didn’t need
This is exactly what the audit profession did not need.
Still reeling from Enron and other accounting scandals earlier this decade, it was always going to take years for the profession to regain the trust and respect of the global investment community, let alone that of the general public.

In this regard, the profession is not doing particularly well right now. The Madoff scandal was damaging enough, but having the largest accounting firm in the world mixed up in a scandal like this is simply devastating.

(From an audit point of view, The Madoff affair involved a significant lack of professionalism on the part of the firm responsible for the audit of the fund. That firm employed only one qualified accountant and should never have accepted responsibility for a project well beyond its capacity to handle properly)

 
A few bad apples spoil it for the rest
From a personal perspective, I must say that when I previously worked in the accounting profession, the auditors with whom I dealt conducted themselves in a diligent and responsible manner at all times, and their manner reflected a very high level of professional integrity.

I am confident that the same could be said for the vast majority of those employed within the audit profession.

But an industry or profession is judged by the behavior of its leading firms. In this regard, the conduct of the ‘big four,’ accounting firms is particularly crucial, and any scandal which rocks one of these firms reflects badly upon the entire profession.

This is especially the case with PWC, the largest of the big four.

In years to come, I certainly hope that the audit profession is able to regain the trust and respect not only of the global investment community but also the broader general public as well. The same can be said with regards to the broader accounting profession.

The honest and diligent majority who work within the profession deserve nothing less.

Corporate defense lawyers have been known to make some ludicrous claims from time to time.

One example of such a claim was an assertion last week by defense lawyer Andrew. J Levander.

Mr. Levander claimed that his client, New York financier J. Ezra Merkin, conducted ‘extensive diligence,’ on the firm controlled by money manager Bernard L. Madoff (perpetrator of the infamous ponzi scheme in which investors lost billions of dollars) prior to and during the period where Merkin entrusted the disgraced money manager with more than $2billion of his clients funds (refer article).

This claim would appear to be utter rubbish, and I would think the prospect of such a claim standing up to scrutiny in court would be quite unlikely.

Nor should it – the practice of handing client funds over to scam artists can never be considered to represent appropriate diligence, particularly given the extent of the warning signs that something was amiss in the Madoff world.

(Lavendar’s client, Merkin, is the subject of a civil lawsuit being filed by the State of New York, for his role in handing more than $2billion of client funds to Mr. Madoff.

The complaint, which does not accuse Merkin of knowing about Madoff’s fraud, charges that he: (a) failed to carry out proper diligent research and investigation before investing with Madoff; (b) in some cases, purposely deceived clients about his investments with Madoff; and (c) had improperly collected more than $470 million worth of fees)

 
What ‘extensive diligence’ would not have missed
As I mentioned in an earlier discussion, there were numerous red flags and warning signals that something about Madoff and his firm was not right.

Frankly speaking, it is difficult to believe that any form of ‘extensive’ investigation on the part of fund managers would not have picked these up.

Investigations involving ‘extensive diligence,’ would not have failed to detect:

• a lack of accountability - including the practice of clearing his own trades, and the use of a firm which employed just one qualified accountant as an auditor;

• an unrealistic degree of consistency in reported investor returns;

• a lack of transparency, including refusal to allow clients online access to accounts, and ejecting from meetings investors who asked difficult questions; and

• Madoff’s claim to use hedging strategies in the S&P 100 options market, which at least one independent investment firm concluded was too small to handle a portfolio of his size.

 
Madoff’s credentials and fraud concealment no excuse
To be fair, Madoff did go to considerable lengths to conceal his scheme, and as a former chairman of the NASDAQ stock exchange, he had earned a great deal of credibility. Because of this, it is not difficult to understand why fund managers like Merkin entrusted client funds to his firm.

But this is no excuse. Despite his credentials, the warnings signs mentioned above should have sent off loud warning bells. Any fund manager who either ignored or failed to detect these signs cannot, in my view, claim to have exercised ‘extensive diligence’ in the performance of their duties.

I doubt that such a claim will stand up to scrutiny in court – is does not deserve to.