Who’s Auditing The Auditors?

Credit where it is due, Peter Hansen of NJPAC posted a link on the Performing Arts Administrator’s group on LinkedIn about the £2.3 million judgment entered against former London Philharmonic Orchestra (LPO) General Manager Cameron Poole for financially defrauding that organization.

Even though it was supposed to take 4 people to issue a check, Poole was able to take advantage of operational distractions to perform all the required functions himself, included forging countersignatures. The executive director, Tim Walker, admits some negligence on his part, but is amazed that not only did he and the board not catch it, but the auditors from Deloitte missed it on three separate audits. LPO is currently pursuing a negligence suit against Deloitte.

It raises the question of whether you can really be certain you have proper controls and diligence in place. Deloitte missed, or at least didn’t comment on something that became apparent to Poole’s successor in a couple weeks. Four of the biggest accounting firms in the country never made a sound about the suspicious nature manner in which Bernie Madoff financial reports were generated. (An entirely separate issue from the strangely superior returns his fund was generating.)

One would think that after Arthur Andersen’s accounting arm lost credibility following the Enron scandal, reducing the Big Five accounting firms to the Big Four, greater attention would be paid. But I think people may attribute more competence and honesty to organizations of great size and prestige than is warranted. Even on the non-profit front, I was aware of a number of scandals in the United Way, but I had no idea that there has been large scale mismanagement and embezzlement at four or five locations and alleged smaller scale fraud at over 20 others. One of the Spanish members of the LinkedIn group cited a case similar to LPO’s at Barcelona’s Orfeó-Palau de la Musica Catalana where the general manager embezzled millions of euros (some stories I have seen claim 23 million in over 30 years).

The piece I linked to above about the United Way claims “The nonprofit world has accepted that multi-million embezzlements are a cost of doing business.” As much as I am dismayed by the idea that making great efforts at due diligence may not guarantee security, I would hope no one hiring me would do so assuming there was a good chance I will make off with some of the money.

There is a price for lack of scrutiny when people begin to lose faith in you. About a year ago, there was a piece in the Washington Post about 21 Washington DC area non-profits withdrawing from the local United Way, which had been the subject of one of the larger scandals, in favor of another emerging charitable organization.

I am encouraged by the news that it didn’t take long for Poole’s replacement at the LPO to notice something was strange. It means that misappropriations can be spotted with a little healthy scrutiny that makes no personal judgments about the individual holding the books when you ask to see the raw data rather than the summary reports.

Still, most of us don’t have three weeks to pour over ledgers sorting through it all. So the real question becomes, how do you know you can trust your auditor to be meticulous enough on your behalf? I am sure I could find editorials about how the big firms are so big and so motivated to process as many audits in a year as possible, companies aren’t getting the competence and effort they deserve. I am also pretty sure that laziness and incompetence afflicts the small operations as well as the big ones.

There was an argument back during the Enron scandal that rotating accounting firms would help avoid the conflicts of interest that develop over a long term relationship and cause auditors to look the other way. That was countered by the idea that is wastes a lot of time and money when you have to get a new auditor up to speed about the way your business runs.

I am pretty much on the side of rotating. I don’t think most arts organizations and non-profits in general are so big that it will take too much longer to explain their operations to a new group every few years. That way you avoid any conflicts of interest and lack of rigor.