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The Effect of the Global Financial and Ethical Crisis upon Certified Public Accountants and their Clients

Russell Bedford International

Americas Conference 2009

Quito, Ecuador, January 24, 2009

   The Falling Darkness

A Presentation by Jim Wesberry

The following PowerPoints
accompany this presentation


            "More cases of insolvency are to be attributed to Frauds than shrewd business men are aware of, and though the advice is almost universally unpopular, it is urged on merchants to overcome their disinclination for this species of labor, and give a little time to a thorough investigation of their accounts....Newspapers daily chronicle the detection of new cases of embezzlement, and still our merchants shut their eyes and believe all servants dishonest but their own.  While they admit the shrewdness of their accountants in other matters, they blindly imagine them too trustworthy, or too fearful of consequences to deceive them in regard to the manipulation of their finances; yet in case of the death of an old favorite bookkeeper, or even of a partner, who has had the management of the cash, how often do we find that their apparently beautifully balanced accounts are teeming with a succession of fraudulent entries that had been continued through years.

                             H. J. Mettenheimer in his book:

AUDITOR's GUIDE, Being a Complete Exposition of

Bookkeepers' Frauds, published in1869, the United States of

America's first known book on auditing.


Nature of the Crisis/Crises


Right now there are number of concurrent crises underway.  Some are global, others are regional and many are national.  Among others these involve terrorism, “global warming” (environmental), official corruption considered inevitable, or even “normal,” public deficits and debt, economic instability, organized crime and gangs, family instability, “wars” (Iraq, Afghanistan) and pending wars (Palestine, Israel, Iran, North Korea), authoritarianism (dictatorships), “21st century socialism,” loss of credibility before the citizenry of Legislative and Judicial branches of governments, the prostitution of democracy, religious extremism and other fanaticisms, cultural and ethical decline and many others.  This leads one to worry, “Where does crisis end and chaos begin?”


Many crises have certainly become globalized and from one day to another the spotlight of worldwide public and media attention focuses upon the “fashionable” crisis of the day.  At present major focus is upon what is usually called the “global financial crisis” or the “current economic crisis.”  This has been the most fashionable crisis in the media for the past several months across the planet.


For millennia mankind has built walls around forts, cities and even entire countries.  Hadrian’s Wall no longer exists. The scarce remains of the Wailing Wall of Jerusalem barely provide its welcome solace to the prayerful. But the Great Wall of China still stands


During the past two decades two other famous walls fell.  First the Berlin Wall was torn down, much to the joy of most of the earth’s inhabitants; however, the second fall of a wall has caused much pain…the collapse of the Street named Wall...Wall Street!


That same wall fell before in 1929 causing a serious depression in the United States that spread to much of the world and set the stage for World War II.  The second Wall Street fall may do the same…only worse, because 80 years later in a new century we live in a quite different world from that of 1929.


The current “global financial crisis” is one of a series of similar crises that have occurred since 1929 and many believe that it too will pass.  There were also similar crises over many centuries before 1929 but the “Great Depression” of the decade of the 1930’s lives especially in our memories because we heard so much about its trials and tribulations from our forebears. 

The charts at the beginning of the above PowerPoints were furnished by my good friend and colleague from World Bank days, David C, Jones a British accountant who has been making presentations on this same subject.  He also furnished the following market place myths” that should be discounted at this time of crisis:


Government is, always and everywhere: wasteful, spendthrift, incompetent, inefficient, uneconomical and ineffective.

Business is, always and everywhere: ethical, frugal, thrifty, competent,

efficient, economical and effective


Private enterprise can, always and everywhere operate more efficiently and effectively than a public enterprise.


The commercial market-place can, always and everywhere: allocate resources more efficiently than governments.


There is no market failure. Always and everywhere, there is only governmental interference, together with policy and regulatory failure.


The nature of the current crisis does not differ greatly from those before…but the times differ greatly, the scope and size differ greatly, the technology in use differs greatly, the interlinkage of the world financial systems differs greatly, and the people involved differ very greatly.


No one on Earth who reads the press or watches TV news needs a detailed description of the current crisis. It most certainly is the most publicized crisis in history. While there may be disagreement about the time it will take to recover and the means necessary to do it, just about everyone agrees that if the present world crisis is not thwarted by coordinated government action in many countries the oncoming depression will be much worse than the depression of the 1930’s.

One important conclusion that I have personally arrived at is that we are not only in the midst of a financial crisis, but also an ethical, cultural and moral crisis that foments corruption as well and these two crises are interdependent, interactive and inseparable.  If a major depression does arrive it will be much more complex to handle than that of the 1930’s due to the fact that a much greater degree of selfishness, unethical conduct, crime and corruption will arrive with it.


Furthermore, the entire of some basic American concepts like free enterprise, limited government, the right of privacy and even democracy itself will be in the balance. George W. Bush, the immediate past President of the United States, says that he was forced to give up some of his principles about free enterprise in order to accept the partial “nationalization” of certain businesses once he was told the seriousness of the crisis.  The new President says that it will get a lot worse before it gets better.


Why are we so interested in Money?



  • can buy a house, but not a home,
  • can buy a bed, but not sleep,
  • can buy a watch, but not time,
  • can buy a book, but not knowledge
  • can buy a high position, but not respect,
  • can pay a doctor, but not buy health,
    • can buy blood, but not life
    • can buy sex, but not love


Crisis, Change and Corruption


The present world crisis is not only financial, it is also ethical.  We are in the midst of a global crisis of ethical behavior that is undermining our civilization. The multicrises of official corruption and ethical and cultural decline curse the new administration in the United States with an almost impossible mission. Here is a summary of our paradoxical moral and cultural situation on Planet Earth, year 2009, 21st Century, Third Millennium:

·        We have tall skyscrapers but they rapidly fall to pieces;

·        we have supersonic airplanes but they can be converted into flying bombs;

·        we ended a world war, but we continue to wage regional, territorial and national wars;

·        we ended the cold war, but we have hot terrorism;

·        we have great multinational enterprises, but they go bankrupt at the drop of a hat;

·        we have global firms of lawyers and auditors, but they lose sight of professionalism;

·        we have outstanding stockbrokers and bankers, but we cant trust them;

·        we have all-powerful governments, but they are deaf to the cry of poor children;

·        we have promising leaders, but they are duplicitous;

·        we have dynamic executives, but they are selfish;

·        we have many job applicants, but they do not want to serve the public;

·        we have idealistic men and women, but they become lost in the pursuit of elegant, promiscuous and dangerous  lifestyles;

·        we have tall buildings, but short tempers;

·        we have broad superhighways, but narrow points of view;

·        we have strong financial institutions, but weak financial results;

·        we spend more, but have less;

·        we buy more, but take little pleasure in our belongings;

·        we have bigger houses, but smaller families;

·        we have more electronic and digital gadgets, but less time to use them;

·        we have more university degrees, but less common sense;

·        we have greater knowledge, but lesser good judgement;

·        we have more specialists, but also more problems;

·        we have better medicines, but poorer health;

·        we drink too much,

·        we smoke too much;

·        we eat too much;

·        we spend too much;

·        we laugh little;

·        we complain a lot;

·        we drive fast in the city and even faster out of it.

·        we get mad like lighting;

·        we are slow to forgive;

·        we stay up too late;

·        we awaken very tired;

·        we read little;

·        we match TV too much;

              ...and we pray ?…


                                         ONLY WHEN WE ARE


Change we did not want


According to new United States President, Barack Obama:


“We start 2009 in the midst of a crisis unlike any we have seen in our lifetime – a crisis that has only deepened over the last few weeks. Nearly two million jobs have now been .8 million Americans who want and need full-time work have had to settle for part-time jobs. Manufacturing has hit a twenty-eight year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers are watching their life savings disappear. And many, many Americans are both anxious and uncertain of what the future will hold.”


“We arrived at this point due to an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, DC. For years, too many Wall Street executives made imprudent and dangerous decisions, seeking profits with too little regard for risk, too little regulatory scrutiny, and too little accountability. Banks made loans without concern for whether borrowers could repay them, and some borrowers took advantage of cheap credit to take on debt they couldn’t afford. Politicians spent taxpayer money without wisdom or discipline, and too often focused on scoring political points instead of the problems they were sent here to solve.


The result has been a devastating loss of trust and confidence in our economy, our financial markets, and our government.”

A summary of the Obama American Recovery and Reinvestment Plan is described on the White House website as follows:


        Doubling the production of alternative

    energy in the next three years.

        Modernizing more than 75% of federal

buildings and improve the energy efficiency

    of two million American homes

        Making...immediate investments…(to)…

    ensure…all…medical records are


        Equipping…schools, community colleges,

         and public universities with 21st century

     classrooms, labs, and libraries.

        Expanding broadband across America

        Investing in the science, research,

         and technology…(for)… new medical

         breakthroughs, new discoveries,

         and entire new industries.


Not in the above summary are some other plans the President has put forth in his speeches:

·        “…rebuild America…we’ll put people to work repairing crumbling roads, bridges, and schools by eliminating the backlog of well-planned, worthy and needed infrastructure projects…

·        …updating the way we get our electricity by starting to build a new smart grid that will save us money, protect our power sources from blackout or attack, and deliver clean, alternative forms of energy to every corner of our nation…

·        …provide immediate relief to states, workers, and families who are bearing the brunt of this recession. To get people spending again, 95% of working families will receive a $1,000 tax cut…

·        …continue the bipartisan extensions of unemployment insurance and health care coverage to help…(people)…through this crisis.


U.S. Losses May Reach $3.6 Trillion

By Henry Meyer and Ayesha Daya    © Bloomberg


¡    Jan. 20 (Bloomberg) -- U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

¡    “I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

¡    Losses and writedowns at financial companies worldwide have risen to more than $1 trillion since the U.S. subprime mortgage market collapsed in 2007, according to data compiled by Bloomberg…


Global Bailouts

Almost every large country and many small ones have made, or are making or are planning bailouts and/or buyouts, especially for financial institutions as well as many other types of businesses. There are too many to list but here are a few current bailouts:



Emergency Economic Stabilization

Act of 2008                       $ 700,000,000,000

American Recovery and

 Reinvestment Plan          $ 825,000,000,000

                  Total USA     $1,525,000,000,000


UK (Banks)                 $217,813,500,000

Denmark (Banks)        $ 18,000,000,000

France (Banks)            $ 13,600,000,000

TTotal four countries $1,774,413,500,000

AICPA Risk Alert


Regarding the crisis the American Institute of CPA’s in a special Audit Risk Alert says:

“The U.S. is experiencing great economic instability and the U.S. government is taking unprecedented actions in efforts to curtail the economic crisis…(that began)…in December 2007. The length of the recession and if the U.S. enters into a depression is yet to be determined. There is no doubt the U.S. has taken unprecedented actions to prevent worsening economic conditions including facilitating sales of ailing financial institutions, passing the Emergency Economic Stabilization Act of 2008, rescuing the U.S. automakers, and dramatically increasing the monetary programs available from the Federal Reserve. These ever-changing economic times make accounting for transactions and auditing entities more challenging. Few, if any, industries are immune to the affects of the crisis so it is more critical than ever for auditors to understand the rapidly changing business, economic, and regulatory environments in which your clients operate.” (emphasis added)

As to audit and accounting risks it continues:


“The recent economic conditions and regulatory actions may cause additional risk factors that had not existed or did not have a material effect on audit clients in prior years. Some risks may include: constraints on the availability of capital and credit, going concern and liquidity issues, marginally achieving explicitly stated strategic objectives, use of off-balance-sheet financings, special-purpose entities, and other complex financing arrangements, and volatile real estate markets and the credit crisis, which result in significant measurement uncertainty, including accounting estimates and fair value measurements”

Regarding causes of the crisis The AICPA goes on:

“Among the causes that have been cited for the economic crisis...(is)… FASB Statement No. 157…(that)…defines fair value and establishes a framework for measuring fair value; however it does not dictate when an entity must measure something at fair value, nor does it expand the use of fair value in any way. The specific area…in the spotlight is the lack of guidance in applying fair value in an illiquid or distressed market, such as the current one...a study of the effects of FASB Statement No. 157 on the current economic crisis…(was recently mandated by Congress)…

Another important topic…is determining when an investment is other-than-temporarily impaired. It is important to note that other-than-temporary does not mean permanent. Determining whether an other-than-temporary impairment has occurred requires significant judgment based upon numerous considerations and GAAP does not provide any “bright lines” in making this conclusion.”

The Interamerican Accounting Association (IAA) has just issued a Declaration on the Global Financial Crisis and the Role of Accountants and Auditors (See Anexo A for the full text n Spanish). After briefly describing the situation IAA emphasized problems with “derivatives” and “Fair Value” accounting making, among others, the following recommendations:


·        (Perform a)“Comprehensive review of financial instruments themselves including their valuation, recording and presentation in the financial statements.

·        The return to original historical value as an accounting principle in substitution for reasonable fair value as a means of properly presenting financial condition. This means we recommend the complete elimination of fair value accounting as a source of accounting entry.

·        Maintain fair value as complementary information as financial material for circumstantial reference...”


Fair value accounting valuation is extremely controversial at this time with comments like the following being made:


“Fair Value Accounting is causing a large part of the problem at this moment…”

Steve Bartlett, President and CEO

Financial Services Roundtable

Testimony to: U.S. House of Representatives

Financial Services Committee

18 November, 2008


Notwithstanding the strong criticism like that of the IAA it is vigorously defended by some and many feel that the lack of adequate guidance has caused current problems as indicated by the AICPA Audit Risk Alert discussed above.


Since the beginning of recognition of the crisis with the collapse of the mortgage portfolios of major financial institutions our concept of it has worsened almost daily by bankruptcies, mergers to fend off bankruptcies, the insufficiency of the first tranche of initial bailout efforts ($350b), the authorization of the release of the second $350b and the plan of the new President to ask for $ 825b more…a total of one trillion, five hundred and twenty-five million dollars.


To physically count $1,525,000,000,000.00 in one dollar bills would take several lifetimes. Placed end to end these bills would reach from the earth to the moon and back again more than 300 times.  Flying at the speed of sound a military jet reeling out a roll of these bills would take over 20 years. We are now talking about amounts of money that are completely incomprehensible to the average citizen.  Senator Everett Dirksen years ago, talking about the entire budget, coined the phrase “a billion here, a billion there and pretty soon we’re talking about real money” must be spinning in his grave.


US Government Bailouts prior to 2008

Penn Central Railroad


$3.2 billion



$1.4 billion

Franklin National Bank


$7.8 billion

New York City


$9.4 billion



$4.0 billion

Continental Illinois National

                         Bank & Trust Co.


$9.5 billion

SSavings & Loan


$293.3 billion

iAirline Industry


$18.6 billion

                                           TOTAL  $ 347,200,000,000



US Government Bailouts – 2008

Bear Stearns

$30 billion

Fannie Mae / Freddie Mac

$200 billion

American International Group (A.I.G.)

$150 billion

Auto Industry

$25 billion

Troubled Asset Relief Program

$700 billion


$247.5 billion


$17.4 billion

TOTAL $ 1,369,900,000,000


         At least $ 825,000,000,000 more expected in 2009

TOTAL CURRENT CRISIS $2,194,900,000,000


Key Points


I am making several key points in this presentation that represent my own personal opinion drawn upon the past 51 years as a Certified Public Accountant, about 38 of which have involved working with and/or in Latin America, the last 10 principally heading anti-corruption programs and projects.


1.     Many, if not all, of the present crises are intimately related and they affect each other.

2.     All the crises regardless of scope are made extremely more complicated and unstable by the enormously advancing changes in technology at the fastest rate in history.

3.     The Global Financial Crisis is directly and unequivocally linked to the crises of official corruption and ethical and cultural decline. Therefore I have called it in the title of this presentation and shall hereinafter call it the “Global Financial and Ethical Crisis.” This linkage directly affects Certified Public Accountants and their clients.

4.     The effect of this double-headed crisis is almost impossible to predict due to the interaction of all the various crises mentioned plus the surging parallel impact of new technologies and other accelerating changes.

5.     The expenditure of the vast sum of money expected to (but not sure to) control the crisis will drastically affect the financial future of the USA and its citizens unto many future generations. In its present financial condition the country simply cannot afford it, but it cannot afford not to attempt it. A severe devaluation of the dollar accompanied by extreme inflation would appear to be absolutely inevitable. We have, of course, seen similar situations across Latin America.

6.     We can only guess at that impact using several possible alternative scenarios:

a.      Return to “normalcy.” A significant recession that will pass fairly quickly as have all the other recent ones with the world economy stabilizing within one or two years, the Dow Jones stabilizing between 9,000 and 12,000 and eventually expanding again.  

b.     Long-Term Recovery. A much longer recession/depression that in the long run, perhaps four to ten years, will be largely overcome by governmental measures taken to strengthen the economy and better regulate financial markets, operations and transactions…or by mobilization for a new World War.

c.     Crisis turns into chaos...a return to oppression. A collapse of the world economic system including the decline and possible demise of the United States as a key global economic power resulting in chaos across the planet, widespread panic, disease, wars and readjustments of national alliances and boundaries, including the possibility of the larger nations breaking up into smaller more compatible groupings, some smaller nations merging and most nations finding it impossible to govern without extremely authoritarian regimes. This could conclude the past three century era of experimentation with democracy, capitalism, socialism and communism and result in a new era of powerful rulers like the old monarchies, the end of privacy and the suppression of most dissent. Several larger powers could eventually control the world…or wage war over it. (This is a worst case scenario. It could hopefully be somewhat less ominous).


Almost all those who comment on the situation seem to expect that at least scenario b. will prevail.  This seems to be the opinion of former President Bush and new President Obama.


I personally see little hope for scenario a., diminishing hope every day for scenario b., and increasing frightening possibilities of scenario c. coming to pass. I hope I am wrong.  I abhor negativism and admire optimism.  I am ashamed to be so pessimistic. President Obama’s positive attitude and optimistic approach are his greatest assets and should he be successful in curbing this overwhelming crisis he may become President for Life.  Every citizen in the US and throughout the world should support his and other presidents’ efforts to quell the crisis…even if they have doubts about them. It would appear from the following section that I should not feel too lonely about my pessimistic outlook but I would sure like to find a way to change it.


Deepening Economic Problems Foment Pessimism


According to a recent survey of chief financial officers and senior-level executive Certified Public Accountants conducted by the American Institute of Certified Public Accountants and the University of North Carolina’s Kenan-Flagler Business School pessimism among financial executives about the U.S. economy has hit an all time high.


 “Most CPAs working in business and industry don’t expect any improvement in the U.S. economy before the second half of 2009 or the first half of 2010,” according to an AICPA Senior Vice President. Pessimists outnumbered optimists by 16 to 1. Eighty-two percent of respondents indicated they were pessimistic or very pessimistic, up from 62 percent in a previous similar survey. In the latest survey, 18 percent of respondents said that they were “very pessimistic,” three times the number who felt that way in the earlier survey.


A UNC Kenan-Flagler spokesman said, “Up to now, respondents have generally been pessimistic about the economy as a whole but relatively optimistic about their own companies, More respondents now anticipate decreases in revenues, profits and reduced hiring for their own organizations.” Forty-five percent of respondents now expect their companies to contract, while 31 percent of respondents still expect some expansion in the next twelve months.


Primary drivers of the increased pessimism are the credit crisis and increasing unemployment. The financial executive CPAs cited declines in consumer spending and consumer confidence along with increasing economic instability and uncertainty as causes for pessimism. Respondents were divided about the impact of the presidential election and Washington bailouts.


Financial executive CPAs see little prospect for near-term improvements. Only 9 percent expect the economy to begin to improve before the second half of 2009. Forty-two percent expect improvement in the second half of 2009, and 49 percent see no improvement at all until 2010 or later.


The survey shows companies are increasingly taking actions to respond to deteriorating economic conditions. So far, the top actions taken or contemplated by companies are capital spending cuts, hiring freezes, layoffs and travel restrictions.


“The drop in optimism is affecting planned investment on research and development, information technology and other capital improvements,” the UNC spokesman said. “As firms cut their own expenditures in anticipation of reduced demand for their products, it will become a self-fulfilling prophecy rippling through the economy.”


A New Market?


Much has been written about the crisis in the past few months…too much to read or summarize. In December of 2008 Robert Peston of BBC NEWS wrote an article titled: “After The Crash: We shall need a New Market!”  Here are a few extracts from it with key points highlighted:


         ” There are reasons to believe that credit from taxpayers can’t and won’t be repaid for many years, in that this credit is financing the correction of huge financial and trading imbalances between the western and eastern economies.

           We’ve witnessed a semi-permanent nationalization of the banking system and will soon see significant taxpayer support for real companies in the real economy.

           Thus, our banks and private-sector companies will have to work much harder to sustain the goodwill of those who are keeping them alive: millions and millions of taxpayers.

           The biggest lesson of all is that we are a million miles from having created the political and regulatory institutions to help us contain the risks of globalization. We and most of the world may well have been beneficiaries of the open global economy. But as millions lose their jobs in Europe and the US in the coming year, the benefits will be forgotten.

           That means that those running our biggest commercial businesses will have to be more visible. They’ll have to manifest a genuine understanding not only of the anxieties of their employees but of all taxpayers. Those chief executives who succeed will be those who imbue in their businesses very simple, commonsense standards of decency.

            They’ll almost certainly be paid less for doing more, because the pricking of the debt bubble has undermined the institutions – the private-equity firms, hedge funds and investment banks – that were ratcheting up the pay of all business leaders.

             If the unfettered movement of capital, goods and services is going to survive, if there’s not going to be a retreat into national fortresses that could impoverish all of us over the longer term, we’ll have to find a far better way of monitoring global risks and of bringing governments together to deal with these risks.

  • Some may see this as a threat to national sovereignty, as the thin end of an anti-democratic wedge that’ll see the world ruled by unaccountable bureaucrats. Reconciling our political traditions with the imperative of making safe the globalised world will be a challenge, to put it mildly. But it’s not a challenge we can shirk. ”

“In November 2002, Federal Reserve Chairman Ben Bernanke cracked wise in his now infamous ‘Helicopter Theory’ speech. When it came time to pay our debts back, he said, we could simply fire up the printing press. The world would be forced to accept our paper in lieu of those debts. If need be, the Fed “could drop dollars from helicopters” in order to get the money into circulation. Unfortunately, traders around the globe didn’t react kindly to his comments: Since his speech, the dollar has declined over 40% against a basket of world currencies. It’s likely we’ll continue to see a steady downward trend in the dollar, occasionally punctuated by rallies as traders take profits. And it’s unlikely our government will be able to do anything soon to stop it…


 The Federal Reserve stopped reporting the M3 value, the U.S. money supply, in 2006. Best guess is it’s increasing at about a 10% rate. But about $1.5 trillion of additional ‘money’ in bank bailouts and credit will be put into the financial system in 2008 alone. When that much paper money is printed or electronically pumped into the credit markets you can bet your bottom dollar (excuse the pun) inflation will follow.”


Extracted from Money Morning Dollar Report titled “Why the Federal Reserve Can’t Save the Dollar” Copyright 2008–present, Monument Street Publishing, LLC 105W.Monument St., Baltimore,MD 21201


Is Globalization at Risk with the 2008 Financial Crisis?


Global Trends 2025: A Transformed World recently published by the National Intelligence Council seeks to stimulate strategic thinking about the future by identifying key trends, the factors that drive them, where they seem to be headed, and how they might interact. Global Trends 2025 is the fourth installment in the National Intelligence Council-led effort to identify key drivers and developments likely to shape world events a decade or more in the future. The study as a whole is described as more a description of the factors likely to shape events than a prediction of what will actually happen. Here is what it says about the “financial crisis”:

“…the impacts from the financial crisis will depend heavily on government leadership. Proactive fiscal and monetary policies probably will ensure the current panic and likely deep national recessions will not turn into an extended depression, although reduced economic growth could slow globalization’s pace, increasing protectionist pressures and financial fragmentation.”


The crisis is accelerating the global economic rebalancing. Developing countries have been hurt; several, such as Pakistan with its large current account deficit, are at considerable risk. Even those with cash reserves—such as South Korea and Russia—have been severely buffeted; steep rises in unemployment and inflation could trigger widespread political instability and throw emerging powers off course. However, if China, Russia, and Mideast oil exporters can avoid

internal crises, they will be in a position to leverage their likely still sizeable reserves, buying foreign assets and providing direct financial assistance to still-struggling countries for political favors or to seed new regional initiatives. In the West, the biggest change—not anticipated before the crisis—is the increase in state power. Western governments now own large swaths of their financial sectors and must manage them, potentially politicizing markets.


The crisis has increased calls for a new “Bretton Woods” to better regulate the global economy. World leaders, however, will be challenged to renovate the IMF and devise a globally transparent and effective set of rules that apply to differing capitalisms and levels of financial institutional development. Failure to construct a new all-embracing architecture could lead countries to seek security through competitive monetary policies and new investment barriers, increasing the potential for market segmentation.”



Tighter enforcement to affect CPA’s clients


The Control Risks Groups recent White Paper titled Anti-Corruption: Expect tighter enforcement in hard times predicts increased enforcement activities:


“In the midst of the worst financial crisis in recent history, lack of oversight and regulation is seen by many as one of the major causes for falling global markets. Increased regulations and greater government scrutiny are certain to come. Even before the plunge began, the United States Department of Justice (DOJ) had warned that anti-bribery and anti-corruption enforcement activity would increase – including seeking more jail time for individuals found guilty…


There will be no leniency from regulators in a time of recession. Despite apparent setbacks in the UK and elsewhere, the international anti-corruption regime is gradually becoming tighter and more effective. What does this mean for American companies working globally? If your company is found to be in violation of the Foreign Corrupt Practices Act (FCPA), you may well find yourself under investigation by many more bodies than just the DOJ. Multinational businesses listed in the US may find themselves investigated, prosecuted and fined by the DOJ, the Securities and Exchange Commission (SEC), and by any government where the company’s business and banking are done.”


In the Beginning...


In its beginnings auditing was intended to detect and expose fraud, embezzlement and corruption in accounting records.  It was developed to serve the interests of absentee owners/investors who needed assurance they were not being robbed by their own employees.  During the 19th Century many auditors, in fact, are reported to have carried arms.  But the auditing profession's objectives evolved quickly to focus upon the certification of accounts and financial statements.  Fraud detection was a risky business.

Twenty-three years after publication of Mettenheimer's small Auditor's Guide audit objectives began to change as George Soule's Manual of Auditing, the second oldest known American book on auditing, states that "...the Auditor must not certify Statements of Account as correct, of his own knowledge, until he has investigated them from the source to the final exhibit."


Not much more time passed until auditors found that even "certifying" was risky and began to emit "opinions" on the "fairness" of presentation and the auditor's "certificate" was abandoned in favor of language less vulnerable to getting the auditor into trouble.


But in the late 20th Century auditors began getting into another kind of trouble.  Stockholders, creditors and others began to sue auditors alleging they had been misled after "fairly presented" financial statements were found with fraudulent content.  Despite the auditors' contention that they were not responsible for detecting fraud, many juries and courts began to suggest that in fact they did.


More Emphasis on Preventing & Detecting Fraud & Corruption


Thus as we entered the 21st Century, auditors again became more and more interested once again in the detection of fraud...and a new adjective is being used to describe their work. 


"Forensic" accounting and "forensic" auditing are now frequently mentioned as fields of expertise offered by auditing firms.


In 1997 I spoke on the new concept being called Forensic Auditing at the 4th Triennial Congress of the Caribbean Organization of Supreme Audit Institutions (CAROSAI) in Georgetown, Guyana. In preparing my remarks I did an Internet search of the new term. I found 4,726 matches for "forensic accounting" but only 1,212 matches for "forensic auditing."  I repeated this search a few days ago.  There are now on Google about 786,000 matches for forensic accounting and about 439,000 for forensic auditing. All the large CPA firms and many smaller ones now have forensic groups or specialists. A number of firms only do this type work.  

 The AICPA has set up a Forensic and Valuation Services (FVS) Center designed to provide CPAs a vast array of resources, tools, and information about Forensic and Valuation Services (FVS), issues a monthly e-newsletter, Forensic & Valuation Reporter and approved a new credential: Certified in Financial Forensics (CFF), in response to the rising demand for forensic accounting services.


In December as Bernard L. Madoff, former Chairman of the NASDAQ and principal of Bernard L. Madoff Investment Securities was arrested by the Federal Bureau of Investigation after a tip-off from his sons. With losses by high profile national and international clients estimated at nearly $50 billion, Madoff is charged for running what is allegedly the largest Ponzi scheme in history by paying returns to certain investors out of principal from other investors. As usually is the case, since the exposure of this alleged Ponzi scheme, more schemes are beginning to surface. Because of these major frauds the AICPA is offering a special Web seminar on Feb. 12, 2 to 4 p.m. ET titled Ponzi Schemes, Bernard Madoff and Beyond.


Four of the five largest international accounting firms are indirectly involved and likely to be sued in the Madoff scandal as auditors of other funds that invested with Madoff.  A tiny three person firm that indicated its membership in the AICPA on its letterhead audited Madoff, apparently simply selling him and unqualified opinion while performing little if any audit work.


The Effect upon Certified Public Accountants


The Madoff case and other lesser ones of various types give us a preview of our topic The Effect of the Global Financial and Ethical Crisis upon Certified Public Accountants and their Clients. We can pretty well be sure that during the coming years there will be much litigation directed at accountancy firms.  Some more May go the way of Arthur Andersen.  Others may merge or split up.  There is definitely an opportunity, in my opinion, for a group of smaller firms with “clean hands” to take advantage of the renewed discrediting of some larger firms to replace them since there will be a growing need for accountants and auditors in the coming years, no matter how bad the situation gets.


Around 1955 while I was with an older, well respected Atlanta CPA firm a new older CPA joined us moving from Indiana to Georgia, I suppose for the better climate. We junior accountants enjoyed meeting him and taking about the profession “up north,” hearing his experiences and learning from him.  I will never forget what he told us about “the Great Depression’s” effect upon CPA’s.  He was right in the middle of it as a young CPA.  He said, “CPA’s do not have to worry a bit about employment in a depression.  Businesses always need accountants and my experience was that they always gave preference in hiring to CPA’s as opposed to non-certified accountants. You guys have nothing to worry about, you have picked a profession where there will always be work.”


Well it was encouraging to remember that observation over the years as we passed through various recessions, but never another “Great Depression.”  Drawing upon it and others similar we may expect that while CPA’s are certain to have to work harder, longer and perhaps for less money, there will always be a need for us.


CPA’s will not suffer as much as their clients in the coming darkness.  Bankrupcties, reorganizations, company saving mergers and othjer factos will actually produce more work for CPA firms and individuals across the world.  In fact if we look back to the 1930’s, that was when our profession really took off and became prominent the industrialized countries.  Out of th “Great Depression” emerged the SEC, auditing standards, improved internal controls and a groing CPA profession.  It is not unlikely that something similar will occur again.


We have seen the results of the great scandals and accompanying recessions.  I personally speculated with a close colleague much older than I that it would take the profession at least a generation to recover from the poor image that resulted from Enron, WorldCom and others.  My friend agreed.  We were both wrong.  In fact as a result of the Sarbanes-Oxley legislation the profession has grown and recent surveys indicate that it has not lost prestige. Internal control practices and reporting on them, already in the spotlight due to COSO that grew out of the earlier Saving & Loan scandals, has been greatly improved. There is now a scarcity of accounting graduates and a worser one for accounting professors.  Some executives have complained about the reporting requirements on internal control and the extra costs involved to com[ply with SOX, but we can probably expect those complaints to end as a new Congress re-examines the situation.


On the other hand, we can expect monitoring and regulation of just about everything.  This will mean employment of many more CPA’s by governments.  I expect that the US General Accountancy Office, which was being reduced in size when I worked there in the 1980’s, will have its staff at least doubled soon, so will the various Inspectors General. Why?  Simply because the US government is effectively nationalizing or at least quasi-nationalizing the banking, automotive and several other industries.  The ardent conservatives are irate at this but as former President George W. Bush admitted it has been necessary in view of the threatening chaos that could result from a “Greater Yet Depression.”


I wish I had time to discuss in more detail the impact of hyper accelerated technological change upon the present situation. Ray Kurtzwell predicts that by 2019 a $1,000 personal computer will have as much power as a human brain, that computer chips will be embedded into just about everything and computers and humans will communicate via two-way speech and gestures...no more keyboards.  He says that the 100 years of technological progress in this 21st Century will be comparable to 20,000 years of progress at today’s rate. This effectively will make obsolete planning anything as well as prognosticating future events and impacts.


Other say that soon nanobots will be everywhere from inside human brains to circulating in the Earth’s atmosphere.  “Criminal Justice Scholar Gene Stephens says in an article in the July-August 2008 Futurist that because nano-storage is almost limitless all activity and utterances by people will be recoded and recoverable.  This would result in a great leap forward for evidence gathering. But he also said some time ago that “Trillions will be stolen, most without detection, by the emerging master criminal of the 21st Century – the cyberspace offender.” He concludes that “Unless a values revolution (whether spiritual, religious or humanistic in origin) occurs and humans/transhumans choose to refrain from stealing, killing, and defiling one another, you can bet creative malcontents will develop new methods to manipulate the system for their own ends.”

An Ancient Concept of Internal Control

“…encourage the young men to be self-controlled. In everything set them an example by doing what is good. In your teaching show integrity, seriousness and soundness of speech that cannot be condemned, so that those who oppose you may be ashamed because they have nothing bad to say about us.” Titus 2:6-8


“With self discipline

Almost anything is possible.”

     Theodore Roosevelt


“The day may dawn when fair play, love for one’s fellow man, respect for justice and freedom, will enable tormented generations to march forth serene and triumphant from the hideous epoch in which we have to dwell. Meanwhile, never flinch, never weary, never despair.”                                          Winston Churchill, Last Commons Speech, 1955


Someone will have to monitor and attest to many new occurrences in a future filled with great doubt.  This looks like a great job for our profession if we take advantage of it and we have already started.  On the other hand our present clients may have a darker future during trying times of financial collapse and the reengineering of the world financial system.


Notwithstanding, there will always be new entrepreneurs, visionaries and leaders. We seem to have one in the White House now.  There will always be new ideas, new products, new businesses and new opportunities. Our profession is perched on a pinnacle to observe and assist as everything in our world changes. Yes we can! Si se puede!




 Anexo A

Declaración sobre la Crisis Financiera Global y el Rol de los Contadores y Auditores, Recomendaciones de la AIC a IASB e IFAC

Durante los últimos meses se ha acentuado la Crisis Financiera Global que viene afectando no solamente la economía en Estados Unidos en primera instancia, sino toda la economía mundial.


·         Se remontan a la burbuja de Internet y a la caída estrepitosa de Enron, Global Crossing, WorldCom, entre otros.

·         A pesar de la reestructuraciones de leyes y organismos reguladores, así como el personal de SEC y la creación mediante la Ley Sarbanes-Oxley de un organismo de supervigilancia para las compañías que cotizan en la bolsa, nuevamente la situación pone entre dicho a los Contadores y Auditores, y también con mucho fuerza a un método de valuación de registro poco convencional llamado valor razonable (Fair Value). Algunos titulares periodísticos sugieren que la aplicación de este método es el culpable de todo

·         El origen de la crisis actual se relaciona más con la avaricia de las entidades financieras que otorgaron préstamos a prestatarios que no podían pagarlos y encima de esto crearon instrumentos financieros basados en esos préstamos que fueron objeto de especulación, poniendo a mucha gente a ganar dinero en base a esa especulación y sin ninguna base real.

Situación Actual (... durante las semanas previas)

·         El Gobierno Norteamericano ha inyectado millones de dólares a las compañías de viviendas Fannie Mae y Freddie Mac.

·         Se da la bancarrota de Lehman

·         Merrill Lynch es vendida

·         El DJIA cae 504 puntos (Dow Jones)

·         La reserva federal rescata a la mayor compañía de seguros AIG

·         Paquete de ayuda va l Congreso para rescatar a los bancos. Luego de algunas reformas al paquete se aprueba para inyectar la economía directamente con más de 250 billones de dólares al sistema bancario

·         Por otro lado la reserva federal hace un movimiento de emergencia para prestar 1.3 trillones directamente a las compañías.

·         El crédito virtualmente paralizado

·         El pánico bancario, económico y la desconfianza sacuden al mundo entero.

Componentes Financieros y Contables

·         Si miramos al mercado de los productos financieros derivados, una de las grandes innovaciones recientes de la Ingeniería Financiera y un verdadero dolor de cabeza para los auditores, nos encontramos que los instrumentos derivados actuales y en vigencia sobrepasan del trillón, y su valor asciende a una suma mayor de los 100 trillones de dólares, de manera que, en caso de querer hacer efectivo dichos instrumentos, la suma de todas las monedas mundiales en circulación no serían suficientes para poder hacerlo. De nuevo vemos aquí una situación que significa un grande y verdadero reto para el trabajo y la responsabilidad de los auditores Para que se tenga una idea del monto de que estamos hablando, este representa el valor total y global de toda la producción manufacturera en el último milenio.

·         Otro factor no menos importante es el abuso del “Fair Value” o valor razonable. En un momento de alza nadie supone una burbuja y mucho menos en el campo inmobiliario (que se supone es una inversión firme). Por eso todos se resisten a reconocer la “baja” y “deprimir” el precio de los activos que muestran la supuesta solidez financiera y todo eso es un círculo vicioso.



·         Revisión integral de los instrumentos financieros per se, así como de su valuación registro y presentación en los Estados Financieros

·         El rescate del valor histórico original como principio contable que sustituya al valor razonable como una manera de sincerizar la situación financiera. Esto significa que recomendamos la eliminación de plano del valor razonable en la contabilidad, como fuente de registro.

·         Mantener el valor razonable como información complementaria, como material financiero referencial circunstancial.

·         Uno de los efectos más desagradables y capciosos del registro del valor razonable es su impacto en los dividendos de la compañía, logrando descapitalizarla sobre la base de “ganancias realizadas” este es uno de los componentes más visibles de la actual crisis financiera.

·         Como medida transitoria, la AIC recomienda que mientras se utilice el método de registro del valor razonable deberá incluirse o revelarse la determinación de las contribuciones sobre ingreso de la empresa.

·         La AIC quiere enfatizar que el aspecto ético, moral y de responsabilidad comunitaria que tanto los dirigentes y juntas de directores de las empresas han mostrado que carecen.

·         Las Universidades han hecho una labor muy pobre en educar a los graduados en cuanto a la responsabilidad que tiene en relación a los accionistas, clientes y público en general. No todo es hacerse rico pasando por encima del prójimo y a costa de terceros.


Whenever you find you are on the side of the majority, it is time to pause and reflect

                     --- Mark Twain

We have never observed a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience with advanced welfare states...Charles Murray

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