Jonathan Reid Explains The Luma Group Fifth Annual Client Conference

This year the main theme is combating Financial Fraud in the modern era. Hosted by Jonathan Reid of Luma Group Hong Kong explains here why such subjects are important to the private and retail markets. "It's becoming ever more increasingly difficult as advisors to help clients distinguish the difference between good and bad companies."

In this new century, financial statement fraud has increasingly become a serious problem for business, government, and investors. Indeed, the issue threatens to undermine the confidence of capital markets, corporate leaders, and even the venerable audit profession.

Auditors in particular have been hit hard for their seeming inability to find fraud on a massive scale. Monetary judgments in the hundreds of millions of dollars against certified public accounting (CPA) firms have become commonplace, and one of the largest auditing firms, Arthur Andersen, has completely disappeared.

It's becoming ever more increasingly difficult as advisors to help clients distinguish the difference between good and bad companies.

Jonathan Reid, Head of Client Retention

Many who know say the audit process—as we have known it for generations—is doomed. But that may not be all bad. For if an audit fails to find these huge crimes, engineered at the very top of our public enterprises, what good is it?

The United States Supreme Court agreed with that premise in 1984 when it affirmed that the independent auditor was indeed the "public watchdog" But in the quarter-century since that pronouncement, we've continued to see too many situations where the watchdog was asleep, toothless, or too old to chase its quarry.

To learn history’s valuable lessons, we need to look at where we’ve been in order to know where we should be going. From recorded history until the beginning of the 1900s, the auditor's primary role was to detect end deter fraud. It was much easier to do back then: Businesses were small, financial transactions were fewer, transnational corporations and financial conglomerates were unheard of.

But as commerce picked up speed, the auditor had to do more with less; scrutinizing each and every transaction for fraud became a physical impossibility. From the time of the stock market crash of I929—due in no small part to rampant fraud—until the 1980s, the focus of the audit became different. During that period, the auditor spent most of his effort reporting on issues.

It didn't take financial scoundrels long to notice that the watchdog wasn't barking any more. In the 1970s, an enterprising insurance salesman named Stanley Goldblum made a mockery of the audit as it had been traditionally conducted. Right under the nose of his independent CPA firm, Goldblum’s company, Equity Funding, easily managed to add 65,000 phony policy holders to its rolls, along with $800 million in fake assets.

Goldblum's scam was only the beginning of a cascade of spectacular audit failures, from the savings and loans debate to Enron, WorldCom, and Madoff. And the refrain has only grown louder: "Where were the auditors?"

The answer, strangely enough, is that the auditors were too busy auditing to find fraud. But don't blame them, for they were doing only what they were taught. Or, more correctly, not taught.

As any accounting graduate in the last 30 years will tell you, the amount of antifraud training in college is not just inadequate; it has been practically non existent. Part of the reason has been the lack of authoritative texts in the field. Luckily, with companies like Luma Group, this is changing.

My work here at Luma Group is bound to make a real difference.  Every quarter we hold regular seminars to educate and inform clients and investors alike, of all of the recent news within the financial world. After all, education is the sword needed to strike a blow against white-collar crime. And in this war, Luma Group Hong Kong can be a powerful weapon.

This years conference takes place at

Luma Group Fraud Conference 14th July 2015
Pacific Place, Hong Kong

For more information contact Luma Group at info@lumagroup.com