YOU may recall that Bernard (Bernie) Madoff ran the US$50 billion ($75b) Madoff fund which, in his words, 'was one big Ponzi scheme'.

ILLUSTRATION: LARRY HAVERKAMP/CHNG CHOON HIONG

He never invested $1 of the US$50 billion. He simply took money from new investors to pay the old ones.

He attributed the high returns to his brilliant investments which, of course, was untrue.

Bernie's US$50b scam set a new record for fraud. He will be sentenced on 29 Jun and since he is 71years old, he will likely spend the rest of his life in prison.

The story got me thinking: Why not drop the court-appointed judge? Let Bernie pick his own judge and put him on a multi-year contract.

I'm not talking about hiring your own lawyer. Everyone does that. This is hiring your own judge.

Bernie Madoff will also pay the judge to consult on - get this - how Bernie can persuade the judge to give him a more lenient sentence.

The judge will promise not to disclose anything about the case without his employer's - Bernie's - permission.

In a final touch of irony, the judge will also set up a consulting business to advise on how to avoid conflicts of interest.

Is this incredible? Yes.

Is it impossible? No, not in the auditing business.

I recently told this Bernie Madoff story to auditors from the big four accounting firms: (i) Ernst & Young, (ii) KPMG, (iii) Deloitte and (iv) Pricewaterhouse Coopers (PwC).

They audit 29 of the 30 companies on the Straits Times Index and most other companies in Singapore.

They saw immediately where I was going and didn't like it one bit.

You see, auditing firms face the same conflicts as Bernie's judge.

A client pays them to inspect the firm's accounts.

They also receive consulting fees for extra work, including helping their clients to pass their audit inspections.

Auditors are loyal to clients and reply to inquiries with: 'We are unable to comment due to client confidentiality.'

The wording rarely changes.

They also advise on corporate governance and avoiding conflicts of interest.

I asked each of the big-four auditing firms to name one industry with more conflicts than auditing.

None did.

Especially in a recession, companies may be tempted to cook the books. Auditors are supposed to sniff that out and warn us.

Do they? Or do auditors go soft on clients because of these conflicts? Do they hesitate to bite the hand that feeds them?

Not appointed by independent body

AUDITING is a recession-proof business. Most firms are required to hire an auditor each year to certify there is no hanky-panky in the books. It is a worthy goal. But audits are not impartial.

No auditor is appointed by an independent body. All are employed by the companies they audit.

It is common to give clients the 'benefit of the doubt', like certifying the accounts are correct before completing the audit. Auditors here also sell consultancy to clients. That practice has so many conflicts that the US banned it in 2002.

When I asked the big-four auditing firms about their conflicts of interest, Deloitte told me: 'Thanks for your questions, Larry. We will give this a miss though.'

It's not much but still better than KPMG and Ernst & Young who said nothing. PwC replied and said it had no conflicts. It also commented on a recent scandal in India, where PwC is known as PW India.

Its client - India software giant Satyam - shocked the world on 7 Jan when the company admitted its accounts were fraudulent and had been for years.

It admitted the US$1.5 billion ($2.1b) it claimed to have in the bank wasn't really there. The auditors - PW India - had somehow failed to notice it was missing.

How that happened is a mystery since confirming cash balances is one of the most straightforward auditing tasks.

PW India says it stands behind its two auditors who have been arrested, and told me in an e-mail that it is a victim of the previous management's fraud.

The company - Satyam - has hired auditing firms Deloitte and KPMG to help straighten things out.

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