VITESSE vs. KPMG?

Implications: Vitesse had previously attributed, without any further elaboration, its termination of KPMG to a “lack of independence” which certainly raised a few eyebrows given the extensive prohibitions of Sarbanes-Oxley. As addressed in this article, Vitesse has now clarified that such “lack of independence” is solely prospective in nature given that it is considering legal action against KPMG apparently for failing to detect the various improprieties underlying its now acknowledged “accounting train wreck.”

Analysis:  

Given what I witnessed during my nearly nine years with the SEC’s Division of Corporation Finance, I am nearly incapable of being shocked. However, I do find myself astonished at the gross inadequacies that seem to come to light daily in the audits of various public companies. While I acknowledge that an audit, as a consequence of balancing costs with benefits, is only intended to provide “reasonable assurance” that a company’s financial statements are “fairly stated, in all material respects,” I cannot reconcile to myself the utter lack of common sense applied in certain audits.

While I can find some sympathy for an auditor which did not detect stock option backdating given the overall complacent environment created as a result of APB 25’s not requiring any expense recognition for [otherwise seeming] “at-the-money” stock option grants, I am totally befuddled as to how any technology company can materially manipulate its revenue recognition right under the nose a competent audit firm. As historically the vast majority of SEC imposed financial statement restatements and related enforcement cases have had an element of revenue recognition manipulation to them, and a majority of those since the early 1990s have involved technology companies, an auditor of a technology company should get two things right if nothing else…cash and revenue!!!

In no way should this diatribe be misinterpreted as being supportive of Vitesse. A company’s financial statements are the responsibility of its management, period…no ifs, ands or buts. Therefore, as a self-appointed juror here, I would have to hold my nose while awarding Vitesse or any other company any compensatory and/or punitive damages from an auditor. However, any auditor that can’t even get the obvious stuff at least materially correct deserves to significantly share in any pain inflicted upon shareholders!