THE FRAUD TRIANGLE

A blistering indictment of auditors and their role in permitting corporate fraud.

Reading Littman’s well-researched, legitimately angry book will likely reinforce the already widely pessimistic perspective on both self-regulation and governmental oversight of the financial world. Littman attacks the “triangle” of “fraudulent executives, complicit auditors and intolerable public injury” in an impressive work that extends beyond analyzing just the latest financial debacle. In fact, the author demonstrates that the “era of low standards” that began with Enron in late 2001 “was a long one and is not over.” Littman assails fraudulent corporate executives, but as he documents in case after case, the fraud they perpetrate largely goes unchecked by auditing firms. Governmental regulation has proven to be less than effective as well, according to Littman. The SEC made a “drastic error in leaving auditing standard development to the care of the audit profession.” And beginning in 2006, the well-intentioned Sarbanes-Oxley Act, aimed at corporate reform, was subject to “a movement to dilute [it] and press for more restrictions on litigation against auditors or financial institutions by victims of fraud.” These are just two glaring examples in a sea awash with weak and contradictory rules. The most damaging assessment made by the author is his strong claim that the designers of derivative securities “based on platforms of bundled sub-prime mortgages and other sub-par platforms could not have been ignorant of the potential consequences of what they had constructed.” Littman writes that both public officials and private executives caused “severe public injury” and “all bear heavy burdens of responsibility for the crash of 2007-2009.” Littman concludes that auditors could have prevented the “major frauds” that occurred and “had they done so, the damages would have been very substantially less.” Littman offers a set of conclusions and suggestions for improvement, and their implications are significant. This is a sobering but much-needed exposé of the real culprits behind the country’s financial maladies. Unfortunately, it appears those in both the private and public sectors must share the blame.

A bold attack on a system that needs major overhaul.