MF Global, PricewaterhouseCoopers, and video tapes...

Six months ago the accounting firm PricewaterhouseCoopers LLP said MF Global Holdings Ltd. and its units “maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011.” A lot of people who relied on that opinion lost a ton of money.


MF Global filed for bankruptcy on Oct. 31. This week the trustee for the liquidation of its U.S. brokerage unit said as much as $1.2 billion of customer money is missing, maybe more. Those deposits should have been kept segregated from the company’s funds. By all indications, they weren’t.

What’s the point of having auditors do reports like this? And are they worth the cost? It’s getting harder to answer those questions in a way the accounting profession would favor.

When an auditor certifies that a client’s internal controls are effective, that’s supposed to mean the company can do basic functions like maintain accurate financial records, detect unauthorized transactions and keep track of its receipts and expenditures. We know MF couldn’t do these things during the final days before its bankruptcy filing, when former New Jersey Governor Jon Corzine was still its chief executive officer.

“Their books are a disaster,” Scott O’Malia, a commissioner at the Commodity Futures Trading Commission, told the Wall Street Journal in an interview two weeks ago. The newspaper also quoted Thomas Peterffy, CEO of Interactive Brokers Group Inc., saying: “I always knew the records were in shambles, but I didn’t know to what extent.” Interactive Brokers backed out of a potential deal to buy MF last month after finding discrepancies in its financial reports.

If Pricewaterhouse can’t spot control weaknesses at a relatively small shop like MF, which had $41 billion of assets, it’s a bit much to expect that the firm would catch anything materially amiss at Goldman, which has $949 billion of assets, or at a serial acquirer such as JPMorgan, with $2.3 trillion of assets.