Ledgerdemain? Coopers & Lybrand Revised Notes of Audit A Year After the Fact
``We knew we were buying a dog, but we didn’t know we were getting a dead dog,″ says John Zorger, controller of Mitsubishi Motor Sales of America Inc.
Five years ago, the U.S. unit of Japan’s Mitsubishi Motors Corp. bought control of Value Rent-A-Car Inc. In the process, it says, it relied heavily on Value’s financial reports, which were audited by Coopers & Lybrand.
Mitsubishi says it soon learned that Value had far less value than it showed on paper _ a $10 million negative net worth, in contrast to the $5.9 million negative net worth given in a 1989 financial statement certified by Coopers. Mitsubishi and Value’s previous owners sued each other and settled out of court. But last year, Mitsubishi also sued Coopers, accusing it of letting the privately held car-rental company hide a great deal of bad news.
Pursuing its case, Mitsubishi made a jarring discovery: The auditor ``work papers″ that it obtained in discovery for the latest suit differed from those it had obtained earlier, soon after it took over the company. Mitsubishi now charges that the set obtained in its latest suit contain alterations made by Coopers auditors to make themselves look tougher on Value than they actually had been _ and hence to protect themselves and the firm against charges of negligence.
``If we’d only seen the changed work papers first, we might never have purchased Value,″ Mitsubishi’s Mr. Zorger says.
Coopers doesn’t deny there were work-paper changes but calls them inconsequential. Its general counsel, Harris Amhowitz, says Mitsubishi made the acquisition despite a Coopers audit report that ``questioned the viability and continuing value″ of the rent-a-car company. ``The fact is that Mitsubishi did not see or rely on these 1/8work 3/8 papers and ignored the financial statements″ of the target company, Mr. Amhowitz adds. He says it is ``scurrilous for Mitsubishi and its lawyers to use a red herring of alleged work-paper changes to try to breathe life into an irresponsible lawsuit.″
Whatever the outcome of its case, Mitsubishi’s experience suggests one more thing for cautious investors to be concerned about: altered work papers. For generations, most everyone has trusted all those scribblings on yellow paper that accountants make during an audit. They are the linchpin of an outside auditor’s integrity.
A Securities and Exchange Commission rule says it is ``imperative that auditors preserve their working papers in a complete and unaltered form.″ The American Institute of Certified Public Accountants says work papers should ``provide the principal support for the auditor’s report.″ Courts accept the papers as proof of an audit’s soundness and an auditor’s independence.
But the temptation to alter work papers is rising. Malpractice suits against auditors are multiplying. Settlements of such suits now devour an astonishing 12 percent of accounting and auditing revenue at the Big Six accounting firms. Work papers are the ``best defense against a malpractice suit,″ says Melvyn Weiss, managing partner of Milberg, Weiss, Bershad, Hynes & Lerach, a New York law firm that has won huge settlements from the Big Six in suits alleging audit negligence.
George Sorter, a professor of accounting and law at New York University, believes that with the sharp increase in malpractice litigation against auditors, alteration of work papers is on the rise. ``The motivation is greater and the will to resist is less,″ he says.
It is next to impossible to prove an accounting firm has gone back and revised its work papers unless the originals can be found. Mitsubishi’s case is unusual because the company obtained two conflicting sets of papers. Neither had been sealed by the courts.
Mitsubishi’s suit against Coopers, filed in state court in Palm Beach County, Fla., last year and amended earlier this year, contends three Coopers auditors erased words and figures and wrote other words and figures over erasures. It also says the auditors created some entirely new work-paper pages and inserted them ``at the end of sections so as to deceive anyone reading the papers into believing they were originals.″ The suit says the auditors did this ``to conceal and cover up their negligence and the negligence of Coopers.″
A Coopers partner says any changes were simply meant to clarify the work papers.
The papers involved _ a stack 24 inches thick, filling two boxes _ are those for Coopers’s audits of Value’s results for 1989 and for January through April 1990, just before Mitsubishi bought the closely held Boca Raton, Fla., car-rental firm. After the takeover, Mitsubishi hired a new auditor for Value, Price Waterhouse, which photocopied the original work papers.
In February 1991, Mitsubishi suspended Sidney H. Cohen and his three children _ former Value owners who had been kept on as employees _ from their jobs, alleging that they had misled Mitsubishi about their company’s assets and liabilities. The Cohens sued Mitsubishi. Mitsubishi countersued. The suits were settled in October 1993 with the Cohens accepting a total of $15.7 million for Value, far less than the $35 million originally agreed upon. But Mitsubishi’s suit against Coopers is still pending, and the auto maker considers the work papers a key part of its case.
Mitsubishi says the papers were altered to show a $300,000 reserve for a liability arising from charges by the Florida attorney general, who alleged that Value had charged its customers for car repairs already reimbursed by insurers. (The charges were settled.) The original work papers _ those Mitsubishi got near the time of its acquisition _ don’t mention the $300,000 reserve, Mitsubishi says.
Coopers’s audits for both 1989 and January-April 1990 cite ``uncertainties″ in checking the rent-a-car company’s receivables. But the work papers vary on this point. In the original set, the auditors say ``further work is waived″ in checking the receivables for six years of auto-insurance claims. This note _ the kind of thing that could raise questions about thoroughness _ is missing in the altered papers, Mitsubishi observes.