Study to Show Accountants Failed to Detect S&L; Fraud

The government will issue a report soon blaming some of the nation’s largest accounting firms for failing to uncover fraud and mismanagement at savings and loan institutions that will cost taxpayers tens of billions of dollars, according to industry sources.

The General Accounting Office, the auditing and investigative arm of Congress, is expected to issue the report perhaps as early as today, stating that accountants in many cases gave clean bills of health to S&Ls; in Texas shortly before the institutions failed and were seized by the government, the sources said.

The GAO examined the audits of a dozen failed S&Ls; that were given “clean audits”--meaning no problems were found--by nine firms shortly before the S&Ls; went under. Among the failed S&Ls; examined was Vernon Savings & Loan Assn. of Dallas, which accountants proclaimed healthy months before federal regulators declared it insolvent because 90% of its loans were bad.

At least three of the certified public accounting firms, or CPAs, are among the largest in the nation: Arthur Young, which audited Vernon; Deloitte Haskins & Sells, and Coopers & Lybrand, industry sources say. Medium-sized CPA firms also were included in the congressional investigation, the sources say.

“We believe we followed professional standards,” Arthur Young Chief Executive William Gladstone said Wednesday. He acknowledged that his firm gave Vernon “clean opinions” but said that problems in a company can be caused “by a lot of things, including fraudulent activity.”

“Skillful management can virtually always fool the auditor,” he said.

The GAO report will not recommend criminal referrals for the firms involved in the investigation because there is no evidence that the accountants purposely covered up abuses. But the report says that they would have spotted the problems if they had followed standard procedures, sources said.

Standards Held Not Followed

The report is titled “CPA Audit Quality--Failures by CPAs to Properly Audit and Report Savings and Loan Problems.” It will criticize the firms for not following existing industry standards when conducting audits from 1985 through the fall of 1987, and it will recommend changes in how accountants audit financial institutions, industry sources said.

The report was requested by the House Banking Committee a year ago out of concern that accountants were continuing to conduct audits that mask problems in the financial sector. According to industry sources, the accounting industry’s auditing rules have not changed since the time period involved in the GAO investigation.

The GAO refused to comment on the report, as did aides on the House Banking Committee.