Clients' ties with auditors at issue
SEC puts focus on independence
chicagotribune.com
By Ameet Sachdev
Tribune staff reporter
Published January 22, 2004
They went water-skiing. They went to hockey and football games. They partied together.
Accountants at Grant Thornton LLP and Doeren Mayhew & Co. frequently socialized with executives of audit client MCA Financial Corp., a mortgage banking company. Two Doeren auditors even obtained mortgages through MCA.
The incidences are included in a complaint the Securities and Exchange Commission filed Tuesday, accusing the auditors of aiding and abetting securities-fraud violations by MCA, which filed for bankruptcy in 1999.
The social activities raise concerns that the auditors had a less-than-arm's-length relationship with MCA. Their inclusion in the complaint suggests the SEC may contend that the close ties affected the accountants' ability to objectively evaluate MCA's financial statements, accounting and legal experts said.
"One of the things the SEC wants to show is the auditor, because he developed a social relationship outside of business, somehow compromised his independence," said Dan Goldwasser, who heads the accounting-law practice at Vedder, Price, Kaufman & Kammholz. "But it's very hard to draw the line as to when social relationships impair independence."
Edward Nusbaum, chief executive of Chicago-based Grant Thornton LLP, the U.S. partnership, said the firm's independence is not an issue in the MCA case.
"I can assure our partners would not be influenced by invitation to a ballgame," he said.
Doeren's managing director, Mark Crawford, declined to comment on the ties between MCA and the firm raised by the SEC.
The close ties between the auditors and MCA officials remind industry observers of the friendly relations Andersen accountants had with audit client Enron Corp. Many of Andersen's and Enron's top number crunchers took golf vacations together, went on ski outings and slipped away from the office for baseball games. The closeness is said to have robbed the auditor of its good judgment.
Andersen collapsed in 2002, after the Enron scandal erupted and the Chicago firm was convicted of a criminal charge in that case.
In the aftermath, Congress enacted a law to enhance auditor independence that, among other things, restricts what outside services auditors can perform for companies and prohibits auditors from jumping to an executive role at the client for a year. But no rules were enacted to govern out-of-office socializing.
Nevertheless, accounting firms say they are warning employees to be more careful about fraternizing with audit clients. One management partner at a Chicago accounting firm said he sees no problem with the occasional lunch or golf outing.
"We've told them to be very careful about what they do that might impair the appearance of independence," he said. "But there's still a positive reason to do some of these things. They have to be cost-justifiable. They can't be extravagant."
The SEC said executives of MCA, which was based in suburban Detroit, provided its auditors with free tickets to Detroit Red Wings hockey games and University of Michigan football games. The football games included tailgate parties paid for by MCA.
The ties between officials at MCA and Doeren Mayhew, a small accounting firm in Troy, Mich., date to the 1980s. MCA's controller, Alexander Ajemian, worked with Doeren partner Benedict P. Rybicki in the Detroit office of accounting firm Pannell Kerr & Forster.
After Doeren became MCA's auditor in the early 1990s, Ajemian and Rybicki, who was lead manager on the joint audit, continued to socialize, going water-skiing and attending the Kentucky Derby, the SEC said.
Rybicki obtained a mortgage loan for about $59,000 through MCA in 1994. So did lead audit partner Marvin J. Morris, who has been employed by Doeren since 1991.
The two Doeren partners and a Grant Thornton partner in its Detroit office, Peter M. Behrens, were also named in the SEC complaint.
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