| Today's Feature Trash Bill
Scheduled for Vote.
The City Council is scheduled
to vote on a Council bill this evening that would
change the way the City handles trash pickup. The
bill would authorize the Mayor to extend and
modify the contract for trash hauling with Allied
Waste Services. The extension would be for five
years.
The provisions of the
modifications would include an increased rate for
residential customers of about one dollar per
month. In addition, the service would be changed
to an automated system that would require the use
of a container supplied by the hauler. These will
be provided free of charge.
Due to the mechanism that would
pick up the containers, residential customers
will typically be required to roll the container
curb side. Few alleys will be wide enough to
accommodate the modern equipment.
Public Works Director Chad
Wampler says that he has seen the system
demonstrated and thinks it will work well for the
City and citizens.
The City Council meets on the
second and fourth Tuesday at 7:30 p.m. in City
Hall.
Auditing the
Audit Firms
by A.C. Thompson and Jake
Bernstein, www.ProPublica.org
This story was co-published
with Barrons.
Minnesota businessman Thomas J.
Petters is accused of masterminding a $3 billion
Ponzi scheme. Auditing firm McGladrey &
Pullen is being sued by investors who say the
firm was not diligent in auditing Petters’s
funds
Minnesota businessman Thomas J.
Petters is accused of masterminding a $3 billion
Ponzi scheme. Auditing firm McGladrey &
Pullen is being sued by investors who say the
firm was not diligent in auditing Petters’s
funds
The Big Four accounting firms
are used to embarrassing headlines about their
purported misdeeds. After all, the past decade
has seen one business catastrophe after another
at companies audited by the major firms. Witness
the scandals at Tyco, WorldCom and Xerox.
These days of Ponzimania have
put the glare on two smaller auditing firms. BDO
Seidman, the seventh-largest U.S. auditor in
terms of net revenue, has been linked to
disgraced financier J. Ezra Merkin and so,
indirectly, to the ubiquitous Bernard Madoff.
McGladrey & Pullen, the fifth-largest in the
field, is under fire for its connection to a $3
billion Ponzi scheme purportedly masterminded by
Minnesota entrepreneur Thomas J. Petters. [2]
In investor lawsuits filed [3]
in recent months, BDO Seidman [4] and McGladrey
& Pullen [5] stand accused of shoddy audits
and signing off on the books of fraud-ridden
businesses and investment funds. The cases,
together with a string of earlier ones involving
the two firms, raise unsettling questions about
the level of confidence investors can put in
financial audits.
The two audit firms say they
stand by their work, and there is, in fact, some
murkiness about auditors’ responsibilities
for detecting fraud. The firms are supposed to
"obtain reasonable assurance about whether
the financial statements are free from material
misstatement, including misstatements caused by
fraud," according to the Public Company
Accounting Oversight Board, the federal entity
that supervises auditors of public companies. The
gray area centers on what is reasonable, an issue
that often plays out in the courts because
accounting firms can be one of the only solvent
players left when a company goes down.
Before Madoff came along, there
was E.S. Bankest LLC. The Florida factoring
company went bust after its executives allegedly
carried out an elaborate nine-year scheme to
steal roughly $170 million from the business [6]
while fabricating false financial statements;
nine Bankest insiders were convicted of criminal
charges in a Florida federal court. BDO Seidman
had audited the company and concluded its books
were free from material error.
California attorney Steven
Thomas, who in 2007 won a $522 million jury award
against BDO Seidman stemming from its Bankest
audits, says the case reflects the kind of cozy
interdependence that helped sink Enron and Arthur
Andersen. "Auditors are supposed to have
professional skepticism, and that is just
inconsistent with the client relationships that
they try to preserve to keep the money
flowing," Thomas says.
BDO Seidman spokesman Jerry
Walsh says the firm is appealing the Bankest
verdict and remains "extremely confident
that this jury’s findings will be
overturned."
The firm also is contesting a
civil lawsuit from the collapse of
Le-Nature’s Inc., a Pennsylvania iced-tea
producer shuttered in 2006 after allegedly faking
$240 million in revenue, according to forensic
accounting undertaken by a bankruptcy court. BDO
Seidman auditors had certified that
Le-Nature’s financial statements were free
from material error.
"There is a difference
between being fooled and putting your head in the
sand so you don’t see things," says
Robert Loigman, a New York lawyer representing
Le-Nature’s investors who sued (PDF 1 [7],
PDF 2 [8]). A tour of the company’s Latrobe,
Pa., warehouse would have made clear
Le-Nature’s wasn’t selling $300 million
worth of bottled drinks a year as claimed, he
says.
Walsh says his firm "was
one of many victims of a collusive fraud at
Le-Nature’s."
For McGladrey & Pullen,
some tough questions have come from Frederick J.
Grede, a Chicago bankruptcy trustee who claims
the firm’s auditors actively participated in
the "looting" of Sentinel Management
Group, a $1.4 billion investment fund that failed
in August 2007.
A lawsuit filed by Grede
accuses McGladrey & Pullen auditors of
"preparing false footnotes to
Sentinel’s financial statements,"
certifying bogus financial statements to federal
regulators, "consciously ignoring"
serious problems "clearly shown" in the
firm’s work papers.
The Securities and Exchange
Commission and the Commodity Futures Trading
Commission are pursuing top Sentinel executives
in court, saying they siphoned hundreds of
millions of dollars. McGladrey & Pullen
declined to comment on the case.
The recent Ponzi schemes have
touched off another round of litigation. Take the
case of J. Ezra Merkin.
According to New York Attorney
General Andrew Cuomo, Merkin repeatedly lied to
his customers [9] about what he was doing with
the $2.4 billion they had given him. In a 54-page
civil fraud complaint [10], Cuomo accuses Merkin,
who ran a trio of investment funds, of giving his
investors "false" offering documents
and quarterly statements. Merkin, according to
the suit, consistently deceived investors about
the fact that he had entrusted Madoff with their
cash, which vanished. Merkin has denied any
wrongdoing.
The Merkin funds were audited
by BDO Seidman, which attested that the books
were free of material error. New York Law School,
which lost $3 million it placed with
Merkin’s Ascot fund, claims BDO Seidman
failed [11] to "maintain an appropriate
degree of skepticism" or collect sufficient
evidence to support its conclusions.
In a lawsuit, the school blames
BDO Seidman for not telling investors about
Merkin’s alleged sleights of hand. Exhibit
A: the 2007 audit of Ascot, which lists the
fund’s assets on a week-to-week basis, but
doesn’t mention that just one broker,
Madoff, held nearly all those assets.
Nancy Kaboolian, an attorney
for New York Law School, declined to comment. But
New Jersey lawyer Alan Wasserman, who is
preparing another case against BDO Seidman on
behalf of Merkin investors, says Merkin’s
heavy reliance on Madoff is a "red flag any
accounting firm should have seen" and noted.
Says Walsh: "It is
unfortunate that these investors would bring
legal action before all of the facts are known
and seek to blame others for their own investment
decisions."
McGladrey & Pullen,
meanwhile, has been targeted in the case
involving Petters, who once owned Polaroid.
Before his arrest by federal
agents in October 2008, Petters allegedly
convinced investment funds to pump billions into
a nonexistent TV-wholesaling business. McGladrey
& Pullen audited three of those funds, which
made a steady stream of high-interest loans to
the Petters Company. All three funds were wiped
out, and investors are suing McGladrey &
Pullen, saying the firm should have noticed that
the funds were shoveling vast sums into a
business with no real customers.
Petters pleaded not guilty in
December to charges of mail fraud, wire fraud,
money laundering and conspiracy.
"McGladrey & Pullen
stands by the quality of its audits, which are
conducted with due care while conforming to
professional standards," company spokeswoman
Betsy Weinberger says.
In the view of Richard L.
Kaplan, a law professor at the University of
Illinois, a diligent auditor should go to source
documents to verify the financial statements it
is scrutinizing. If a fund claims it has cash in
a bank account, auditors should get records
directly from the bank, he said.
Kaplan has advocated tougher
oversight of accounting firms. Still, he
acknowledged there are limits. "A very
determined crook," he said, "will
deceive virtually any auditor."
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