I spent most of last week in audit training classes. It’s no secret that the nuts and bolts of audit work are not exciting. Unfortunately, the relevance of the task at hand was in the news. I agree with Lynne Turner, former head accountant at the SEC, on the missing money at MF Global.
"It's like it just vanished into thin air and the fact that people today can't tell us where the $600 million went is not a good sign. The fact that they were held in custodial accounts that someone should have been on top of only further complicates the issue and makes it even more concerning."
Whether it was for meeting margin calls or going to a personal account in the Cayman Islands is still TBD, but that’s where the boring work that I was studying is really important. It may not be material for a new TV series, (CPA: Miami ??) but trained forensic accountants are the best chance for finding the needle in the haystack.
It’s important to note here that in a forensic engagement, where the task is finding the missing $600 million, the work is structured to find the needle. However, in an audit, that level of detail work would cost too much money. So the guys at PwC were just looking for potential misstatements that are material. In accounting, something is material if it would cause a user of the financial statements to make a different decision about the company.
In this case, MF Global had structured the sovereign debt deal so they could, in compliance with accounting rules, move the debt off their balance sheet. Would investors have made a different decision if the debt were sitting in the liabilities section of the financial statements? We’ll never know that, but FINRA regulators did find the accompanying disclosure of “off balance sheet arrangements and risk” inadequate. (My word, not theirs – I didn’t read the FINRA notice.) So with full disclosure it could have been just “caveat emptor” to investors. You have to wonder about the judgment call to do a deal of that size and expect no one would care about the detail of a massive increase in leverage.
Of course, the guiding light of that judgment was Jon Corzine. One thing that’s always discussed in audit classes is how the person who is least likely to commit fraud is the one the auditors should be most worried about. While Corzine doesn’t have the kind of financial motivation that say a bookkeeper has, clearly he sanctioned decisions that can only be described as rationalizing illegal behavior. The fraud triangle is motivation, rationalization and opportunity. Corzine had all three. Who knows, this could be material for the first episode of CPA & Order….