Accounting industry watchdogs point to widespread problems, and 2 whistleblowers say nothing gets fixed because insiders have good reason to fear speaking out (MAT)

March 07, 2020 at 09:00 AM EST

Brett Whitaker

The accounting industry is doing a poor job of auditing public companies, according to watchdog groups, a problem that threatens to undermine public confidence in the stock market and could cause a financial crisis.
The problems persist in part because few in the know are willing to speak out.
There's a reason for that, two former whistleblowers say — those who raise alarms about accounting problems face a personal toll, including to their careers and their family lives.
Both Brett Whitaker and Maura Botta say their superiors tried to play down or cover up the errors they found, and each ended up losing his job after he blew the whistle.
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To Brett Whitaker and Mauro Botta the failings of the accounting industry aren't just a matter of alarming statistics or fears about a potential financial crisis.

They're personal.

Both tried to raise the alarm about accounting problems at public companies. Both say their warnings were ignored. Worse, both lost their jobs, and Botta's been going through a contentious years-long court battle to try to vindicate himself.

Their experiences as whistleblowers are prime examples of why few in the industry speak up about its problems — and why the industry's failings persist, they say.

"Insiders certainly are very familiar [with] how the system works, but nobody talks," Botta told Business Insider in a recent interview.

The accounting industry is putting the economy at risk

Botta, previously an accountant with PricewaterhouseCoopers, or PwC, and Whitaker, the former director of tax reporting at Mattel, last month joined with a collection of watchdog groups to urge the House Financial Services Committee to hold a hearing on the accounting industry.

The coalition was following up on research from the Project On Government Oversight, or POGO, that indicated the four largest accounting firms are doing a sub-par job of auditing public companies and that the industry's quasi-governmental overseer was doing a poor job of watching over them. POGO's research found that in 20% to 50% of cases, the Big Four's audits of public company's financial statements had critical flaws that should have invalidated them, meaning that investors shouldn't have relied on the accounting firm's assertion that the statements were accurate and free of errors or fraud.

POGO also found that while the accounting industry's overseer, the Public Company Accounting Oversight Board, had discovered 808 cases of bad audits done by the Big Four firms since it was formed in 2003, it had only brought 18 enforcement actions against them and had only assessed them a small fraction of the potential fines it could have hit them with.

The accuracy and veracity of financial statements is crucial to the functioning of public markets. Investors determine how much they will pay for companies' stock based in large part on what's in those statements, including the companies' sales, earnings, and cash flow. Lack of trust in financial statements can lead to sharp sell-offs in individual companies' stocks and financial calamity for those companies. If the accounting problems are wide enough in scale, they can lead to financial crises, such as the savings-and-loan crisis of the 1980s.

Both Botta and Whitaker have seen accounting problems up close

Botta and Whitaker say they know about the accounting industry's shortcomings first-hand. Starting in 2012, while he was working out of PwC's San Jose office, Botta says the firm signed off on the financial statements and audits at three different Silicon Valley tech companies despite his warnings that those documents contained critical errors or shortcomings. In an official whistleblower complaint he filed with the Securities and Exchange Commission, Botta reported hearing from his colleagues about accounting problems at other companies PwC audited and about conflicts of interest between the auditor and its clients.

Meanwhile, Whitaker told The Wall Street Journal last fall he discovered an accounting error at Mattel in early 2018 that should have led it to immediately restate its earnings. Instead, company finance officials, in cahoots with their PwC auditors, allegedly covered up the error. Mattel later was forced to restate its earnings anyway after another, anonymous whistleblower alerted company management to the error and sparked an official investigation.

PwC has largely denied Botta's allegations and is fighting a lawsuit, scheduled to go to trial in November, that he filed against it. The firm declined to comment on Whitaker's allegations that its auditors helped cover up the error he found. Mattel also declined to comment on Whitaker's charges.

Both Botta and Whitaker said they suffered from speaking out. Botta said he was repeatedly pressured by his colleagues and superiors to not raise a fuss about the accounting problems he found, according to his whistleblower complaint and the lawsuit he filed against PwC.

The firm removed him from the auditing teams for both of the companies at which he found accounting problems, he said in his complaint. Eventually it fired him. But even after that, PwC told his next employer that he was incompetent and should be removed from the project he was working on, according to his lawsuit.

"I escalated these [accounting] issues internally, and PwC, in my view, retaliated," Botta said.

PwC told Business Insider it fired him for "misconduct."

For Whitaker, what happened at Mattel was "personal"

Whitaker had a similarly difficult time after alerting Mattel to the accounting error there. After his superiors, in conjunction with PwC, allegedly decided to cover up the error instead of reporting it, he felt he had no choice but to resign from what he considered his dream job. The whole experience strained his marriage and his relationship with his child, he told Business Insider. Others on his team experienced similar strains or worse, he said.

Such consequences provide ample disincentives for people not to speak up about accounting problems, he said.

"I have a lot of good friends and colleagues that were there with me that are still biting their tongue and for a valid reason — because they don't want to lose their job. They can't lose their job," he said. "They can't go home and take that with them, to the extent that they can avoid it."

In fact a big part of the reason why he signed the letter to the Financial Services Committee and told his story to The Journal was because he wanted to call attention to the personal toll the accounting failures can take both on those who blow the whistle and those who don't.

"To me," he added, "that's really my motivation. It's a personal story. It's not an investor story to me."

Got a tip about accounting issues? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

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Accounting industry watchdogs point to widespread problems, and 2 whistleblowers say nothing gets fixed because insiders have good reason to fear speaking out (MAT)