Over 450 educators were in my audience this last weekend when I addressed the members of the American Accounting Association Auditors Section, the largest community of accountants and auditors in academia,
So what happened, I asked them? In the financial crisis, how was it possible that all of the large financial institutions that either failed or were bailed out had been given clean audit opinions?! Bear Sterns, Lehman Brothers, Washington Mutual, Fannie Mae, and Citigroup; each one went bust or had to be bailed out shortly thereafter, leaving their investors with billions and billions in losses.
I asked them, were the auditors asleep at the switch or just stupid? I asked these accountants and auditors in academia to take off their auditor’s hat and, for a moment, imagine themselves as bank employees. So, I asked, what would you do if you saw unethical or illegal behavior, or possibly fraud or the mishandling of monies? What would you do if you witnessed deliberate cover ups, or just mistakes that would take the bank down the wrong path?
The Association attracts scholars from academia as well as practitioners. With a well-respected reputation for shaping the future of accounting through teaching, research and a powerful network of professionals, they are truly thought leaders in their industry. Many in the audience had the responsibility of teaching and influencing the new generation of CPA’s and auditors.
I then asked them to put their auditor’s hat back on and I reminded them of their responsibility to make sure their students understood the ethics of their business, when to speak up and when to not cave in to the demands of their clients. We talked about internal auditing and my observations and personal experience when at Citi.
I told them of the many reports showing the breakdowns of internal controls which were not given to internal auditing as they should have been. And the out-of-policy risk conditions I’d repeatedly warned about which apparently were not passed on to corporate risk.
The list went on as I related the many instances where internal auditing, while performing their ’06 year-end audit, had stumbled over mortgage transactions resulting from senior management reversing, on a large scale, our underwriters turndowns and then, over my strong objections, purchasing hundred million dollar pools of defective mortgages. I told them how our internal auditors had accepted the lame excuses management gave them and did not investigate further. And, I explained how auditing would have discovered some of the fraudulent activity going on if only they had asked further questions and probed deeper.
I reminded them of their responsibility and their ability to see what went on in organizations; that they had an obligation to call out when rules were being bent and they saw actions that might lead to another financial meltdown because of malfeasance, a mistake or just plain stupidity.
What happened in 2008 did not happen in a vacuum. Yet if we don’t pay careful attention it could happen again. It may not be an auditing issue. Bending the rules happens in more than a few organizations. Are you taking the responsibility to speak up?
[tweetthis]What happened in 2008 did not happen in a vacuum. ~ @RichardMBowen #tbtf #wallstreet #financialcrisis [/tweetthis]