On the Limited Ability of Auditors to Find Fraud

The New York Times’ brilliant Floyd Norris write in a column today on the curious case of forest assets claimed by the now-in-bankruptcy Sino-Forest Corp. It is a fabulous reminder that auditors miss things, and in some instances it may seem they weren’t looking all that hard to begin with.

With foreign listings on the rise at U.S. stock exchanges – PetroChina (PTR); China Petroleum & Chemical, known as Sinopec (SNP); China Life Insurance (LFC); and CNOOC (CEO) all rank in the top-100 market cap companies on U.S. exchanges – there is legitimate worry that our auditing values aren’t those adhered to in other countries.

PTR Market Cap Chart

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But before we go all xenophobic, we should remember spectacular corporate messes in our own backyard that eluded the watchful eye of auditors: Enron and the old Waste Management (WM).

Norris quotes some delicious Ernst & Young emails wondering how the heck the auditors could know whether forest land they were shown actually belonged to Sino-Forest. “I believe they could show us trees anywhere and we would not know the difference,” an E&Y worker wrote, as quoted by Norris.

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