The credit crunch has tarnished the reputations of many executives and directors, who are regularly castigated by employees, shareholders and politicians. Surprisingly, auditors have attracted little criticism.  

But Patrick Richard, head of litigation at Nossaman LLP--which has represented the FDIC in the past--is calling out the industry. In a recent column he writes that "in some cases they collect a large fee and provide little more than a clean bill of health to an unhealthy client." He specifically noted that Fannie Mae, which heads the rogue's list of bad-acting financial players, was forced to fire--and later sue--KPMG for failing to report lapses in accounting until a government report found lots of weaknesses. Ernst & Young was also singled out for the clean bill of health it gave Lehman Brothers, just two months before it collapsed. And let's not forget the shocking collapse of New Century, once a large subprime mortgage purveyor. Recall that a court-appointed examiner alleged negligence by the company's auditor KPMG.  

This raises the issue of Sarbanes-Oxley--wasn't it supposed to prevent these sorts of disasters? Wasn't it supposed to ensure that auditors were doing their job? Well, the issues are complex. We can argue fair value both ways all day and night. And we can argue that there simply wasn't a good way of analyzing the risk of all those subprime-backed mortgages. No doubt the auditors were relying on the credit ratings agencies, which had so many of these things rated AAA. It's fair to wonder if, perhaps, the agencies' models should have included some what-if mechanism to try to model a spike in defaults.

No matter how you see these issues, most would agree that the system needs work. The Public Company Oversight Accounting Board has recently issued seven new proposals that would hopefully lead to tightened risk management practices in the future. Unfortunately, some will argue that the move is a bit late. - Jim