Is FTX the biggest audit disaster ever?by
When billions are flowing between companies without anybody noticing, something is seriously wrong in the world of auditing. Philip Fisher looks at the demise of cryptocurrency exchange FTX through the eyes of author Michael Lewis.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”
It would be nice to think that we live in a world where every accountant would instantly recognise the unique situation that gave rise to this damning quote.
Even better, if you discovered that it related to the demise of Enron 15 years ago, which duly finished off dear old Arthur Andersen, that might be quite comforting. We could then regard it as a historical event with all involved put out of their misery and the profession older but wiser, having learned the mistakes that will never be repeated.
Disaster to disaster
Instead, in Britain, the United States and presumably most of the rest of the world, our industry seems to lurch from audit disaster to audit disaster.
No sooner do we recover from the embarrassment of Patisserie Valerie than along comes Carillion, which has just elicited the largest Financial Reporting Council (FRC) fine in audit history, a hefty £21m. It also brought the sorrowful response from auditor KPMG’s UK chief executive Jon Holt: “It is clear to me that our audit work on Carillion was very bad, over an extended period. In many areas, some of our former partners and employees simply didn’t do their job properly.”
In fact, when you look at the losses engendered by the company’s questionable behaviour and the auditors’ failure to do their job properly, the partners at KPMG must be mighty relieved, since the fine pales into insignificance against the amount they have reputedly paid to settle the legal claim from the liquidators.
Once again, the FRC looks weak, although it should not look anything, since the government determined that it was not up to the job and would imminently be replaced by the new all-powerful Audit, Reporting and Governance Authority (ARGA), a body that inexplicably has still not seen the light of day around five years later.
In fact, the opening to this piece is a quote from Going Infinite, the new blockbuster from Michael Lewis, the author noted for such incisive works as Moneyball, Liar’s Poker and The Big Short. It was drawn from a report filed with the US Bankruptcy Court for the District of Delaware by John Ray, the man appointed as interim CEO with responsibility for liquidating the assets.
His latest magnum opus is almost certainly not what Lewis expected when he decided to follow the fortunes of (former) FTX supremo Sam Bankman-Fried. Originally, he probably anticipated an opportunity to glorify the achievements of an unconventional genius at the same time as explaining the underlying subtleties of trading in cryptocurrencies.
Instead, for anyone who has been avoiding the news lately, the financial whiz kid became the richest ever person under the age of 30 – without even needing an inheritance – then did a Humpty Dumpty and is currently facing numerous criminal charges.
By setting up a cryptocurrency exchange and using a separate company to dabble in crypto investments, Sam B-F became the kind of person who worked in dollar amounts stretching into billions, tens of billions and was only a few pieces of good fortune from accumulating an unbelievable trillion.
Behind the scenes
The nature of cryptocurrency gambling is such that very few people really understand what is going on behind the scenes, apparently including almost everybody working for the Bankman-Fried empire.
Michael Lewis asserts that even Ray struggled to understand the beast, even though he had been appointed for his renowned expertise in running down and selling off liquidated companies.
His bafflement was best summed up when he said: “There was no structure, no list of employees. No org chart.”
There were also no financial controls to the point where money flowed between the two companies untrammelled by legislation or accounting requirements and hundreds of millions of dollars of company assets were allegedly sitting around in bank and crypto accounts across the world, of which nobody in the company was aware, or at least, remembered.
This is not intended to be a review of Going Infinite, but suffice to say that it is probably not Michael Lewis’s best book. He does however offer some helpful insights into the mentality of the villain of the piece, together with many of his closest colleagues.
He also does his best to explain the dark arts of crypto trading, although we innocent accountants may struggle to get to grips with the concepts. So very clearly did the auditors – for once not the scions of the Big Four but, if you’ll pardon the expression, relative minnows, drowning far out of their depth.
What can we, the FRC, the SEC in the States and others learn from this latest fiasco?
Perhaps it is time that organisations dealing in billions are exclusively audited by those with the skill sets and inclinations to do a thorough job. The skill set obligation requires expertise, experience and training, the inclinations might be encouraged by much bigger fines, disqualifications (perhaps even imprisonment in extreme cases) and a greater sense of responsibility across the global profession.