March 28, 2008

New Century: Deja Enron?

Have you had a chance to read about the 580-page examiners report about what happened at New Century Financial, a sub-prime lender in bankruptcy, leading up to its collapse? It eerily has some similarities with the audit of Enron. Here is a WSJ article on the report.

In the report, the bankruptcy examiner strongly condems the role of the independent auditor – KPMG – and its work performed in connection with the 2005 and 2006 audits of New Century, including the firm’s judgments, independence and objectivity. It discusses potential disputes among the professionals – just as it occurred at Enron – as well as notes a lack of adequate experience among some of the staff and a lack of documentation that would provide a basis for their judgments and conclusions, and rationalization of materiality. The report also heavily criticizes the company’s audit committee and internal auditors.

Remember that KPMG – until recently – had a court-appointed monitor as a part of their tax shelter sanctions (and subsequent deferred plea agreement with the DOJ). It appears the alleged problems with the New Century audit may have occurred during the time period when the monitor was in place, albeit his role was primarily focused on the firm’s tax practice. Here is the first complaint filed against New Century…

Notably, the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR) is looking at recommendations that could further relax regulation with respect to some of these matters. Also notable is that this report comes at a time when auditors are pressing hard to limit the ability of bankruptcy trustees to bring litigation against them.

Nasdaq Revises Its SPAC Listing Proposal

Last week, the Nasdaq revised its proposed rule change regarding SPACs that it originally filed a few weeks ago. Under the revised proposal, SPACs would not be required to use cash in completing a qualifying business combination as was originally required in Nasdaq’s proposal.

Speaking of SPACs, Goldman Sachs made news this week for jumping on the SPACs bandwagon with a new breed of them – see this DealBook blog and the Liberty Lane Acquisition Form S-1 filed by Goldman.

American Greed: The TV Show

I guess it was just a matter of time before the people that run television would come up with a reality-based show solely about greed. “American Greed” is in its second season on CNBC and has run episodes already on quite a few situations that you likely are familiar with (eg. WorldCom).

– Broc Romanek