Feedback Matters

In one respect the legal system has ceased working.  It takes too long.  It is like running in molasses.  People cannot wait forever for either validation or dismissal of their actions.  Feedback matters.

Feedback shapes future, presumably better, action.

In April 2014, an Ontario court decided that auditor Deloitte must pay $85 million to creditors of Livent Entertainment Corporation.  Apparently they negligently failed to find a fraud that the company was operating.  In respect to the 1997 financial statements!  How is that result even possible.

You will recall the history of Livent and its founders, Garth Drabinsky and Myron Gottleib.  Livent was the producer of “Phantom of the Opera” and redid Toronto’s Pantages theater to present it.  Spectacular on all counts.

But spectacular is often difficult to repeat, so fabrication of financial results became the new fabulous.  That did not end well.

Livent declared bankruptcy in 1998 and in 1999 both founders were charged with fraud.  So far a reasonable narrative.

But what of since?   By 2009 the miscreants were finally convicted.  Ten years later!  Be serious!  The shelf life of a Michelin tire is less than that.

And now the final ignominy.  17 years after auditing the Livent financial statements for 1997, Deloitte is held responsible for $85 million of the loss.

It has been said by wise man William Gladstone, that justice delayed is justice denied.  Livent is in a different context than Gladstone supposed, but nonetheless Livent is still a travesty of a case.  Not because Drabinsky and Gottlieb should have avoided jail and probably not because Deloitte should have avoided accountability for their involvement but because of the time.  The participants are not the only ones with an interest in the cases.  All of us would like to know what rules we play by.

In the interim no one knew what the rules might be.   If the feedback takes 17 years to become apparent, the lesson will not be well-learned.

The purpose of mistakes is to learn.  Mistake -lesson -revised actions in future, should be the evolution of decision making.  When the time scale is so elongated as this, by the time the lesson is explained, the original mistake makers are not involved and there rest of us are confused.

Of course, Deloitte will appeal and it will be three or four more years before the lesson is complete.

It is little wonder that so many people don’t get it any more.  Experience is hard to come by in a timely manner.  In the 17 years from 1997 to now, how have auditors governed themselves in similar situations?  Unresolved uncertainty is a problem in any business.  Especially an unresolved uncertainty that is beyond the control of the business.  Courts fit that description.

Outcomes influence future choices so the lessons cannot be delayed for 20 years.  The court system should not allow this sort of time frame to be possible.  A little adult supervision seems in order.

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Contact: don@moneyfyi.com  |  Follow Twitter   @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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