Auditing firms, besides failing to warn of accounting irregularities, have given clean audit opinions to 42% of the public companies that ended up filing for bankruptcy, a study released by Weiss Ratings Inc. found.
In its report, “The Worsening Crisis of Confidence on Wall Street: The Role of Auditing Firms,” the Palm Beach Gardens, Fla.-based rating agency reported that auditing firms gave a clean bill of health to 94% of the public companies that were subsequently cited for accounting irregularities.
Among key items in the report is an assessment of the staggering loss that the bankruptcies inflicted on stockholders and figures showing individual audit firms ability to spot troubled companies.
In addition to analyzing 33 firms with accounting irregularities, Weiss Ratings also studies the audit opinions issued to 228 companies that later filed for bankruptcy between Jan. 1, 2001, and June 30, 2002. In this group, Weiss finds that auditors gave a clean bill of health to 96 of the bankrupt companies.
Weiss notes that an auditor has a responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern for a reasonable period of time.
While the Weiss analysis finds that “going concern” warnings were issued on the majority of the companies that subsequently filed for bankruptcy during their regular audits, or 58%, the study finds that audit firms varied in their ability to detect potential problems.
Weiss found, for example, that while KPMG performed the audits of the least number of the companies that filed for bankruptcy (28 of the 228), the firm gave warnings on 43% of the firms it looked at. On the other hand, PricewatehouseCoopers, which reviewed 38 of the 228 now-bankrupt companies, correctly issued warnings on 63%. Arthur Andersen scored about average, identifying problems among 27, or 56%, of the 48 companies they audited that subsequently filed for bankruptcy.