Accounting Firms Under Fire For Role In Mortgage Mess
Wednesday, March 26th, 2008No one who has been paying attention to the mortgage implosion would be surprised by today’s New York Times article about KPMG. Accounting firms have clearly been complicit in allowing lenders and banks to mask the risks of mortgage packages and mortgage-backed securities. But, this is nothing new. As we saw with Enron, WorldCom, and myriad other examples of corporate malfeasance, accounting firms often act in the interest of the current management of a company, rather than in the interest of long-term shareholders, employees, or even common sense.
Here are some highlights:
KPMG, one of the Big Four accounting firms, endorsed a move by New Century Financial, a failed mortgage company, to change its accounting practices in a way that allowed the lender to report a profit, rather than a loss, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded.
The 580-page report documents how New Century lowered its reserves for loans that investors were forcing it to buy back even as such repurchases were surging. Had it not changed its accounting, the company would have reported a loss rather a profit in the second half of 2006. The company first acknowledged that its accounting was wrong in February 2007 and sought bankruptcy protection less than two months later as its lenders stopped doing business with it.
The profit was important because it allowed executives to earn bonuses and convince Wall Street that it was in fine shape financially when in fact its business was coming apart, the report contended. But the report stopped short of saying that the company “engaged in earnings management or manipulation, although its accounting irregularities almost always resulted in increased earnings.”
Read the whole story here.
