Auditors

There are four major companies that audit the books for most big corporations and every year some big scandal erupts and the causes are two possible conflicts of interest. First the company being audited pays the auditor and second the auditor provides financial advice. In the US a good example is Enron and they and their auditors Anderson both went broke. I am not sure of the intricacies in this business but I do have knowledge of how this works with large insurance companies. A big life insurance companies has two accounts. The first is called separate accounts and it includes money that customers give them to invest. The second is called the general account and this is where the money to pay claims is invested. The general account is conservative in nature and is mostly triple A corporate bonds, government bonds and real estate. The real estate investments are large office building and shopping malls. Here is where the potential problems lie. The company invest $100 million in a new office building and it goes on the books at that price. The company may have hundreds of such investments. Some years later the building has increased in value and now goes on the books at the new value. Some properties increase in value and some decrease but the insurance company decides the new book value. There are three main auditors that determine the ratings of insurance companies and the best known is AM Best. The rating company cannot afford to appraise all of the real estate every year so they accept the values given to them by the insurance companies. Suppose the insurance company wants to increase its reserves. They appraise and any properties that increase in value go on the books at the new value but properties that decrease in value remain on the books at the old value. If Best challenges, the company can say that next year they will use a different auditor. In January of 1990 AM Best gave Executive Life Insurance Company it highest rating and a little over one year later the company went bust.