An independent report commissioned by the Justice Department concluded that the "improper and imprudent practices" of now-bankrupt subprime lender New Century Financial were condoned and enabled by the company's independent auditor, KPMG.The accounting firm allowed New Century to change its accounting to report strong profits during the housing boom, when a more conservative treatment would have shown losses. The company lowered its reserves for bad loans that investors were forcing it to buy back, even as the number of bad loans increased.
The New York Times reports that this may pave the way for New Century to sue KPMG. Seven years after the collapse of Enron, conflicts of interest involving "independent" auditors and their clients who pay them are still costing shareholders billions. Back in October, I posed 2 ideas for ways that issues of auditor independence might be fixed:
- Shouldn't companies be required to change accounting firms (rather than just employees within the same firm) every few years to avoid entrenchment and cozy relationships. When accountants see colleagues leaving for lucrative gigs at the company they once audited, can that lead to a conflict of interest?
- Should companies be allowed to choose their own auditors, or should the SEC consider implementing a system where auditors are appointed by a third-party? Allowing companies to hire and fire their own independent auditing firms raises questions about whether they are really independent.
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