Arbitrage (Nicholas Jarecki, 2012) review: role of audit firms

Today, I have watched the movie Arbitrage and it seemed interesting to me to make an analysis of it. I will first analyse its financial aspects, before comparing them with real situations that reflect a certain gap between fiction and reality, regarding to financial audit.

The movie therefore features Roger Miller (on the picture on the left), the manager of a company that will face several management difficulties. First of all, Miller manages an alternative fund, which is an investment fund that operates in many areas: speculation in the currency market, investment in promising start-ups, purchase of under-listed shares, etc. These are risky activities that can lead to large profits or losses. At the beginning of the movie, we learn that Miller is about to sell his fund to an investor at a good price, but the investor wants to get the opinion of an audit firm before making the purchase. The problem is that Miller tampered with the company's figures and removed a huge debt from his accounts. To fill this cash flow gap, he borrowed the sum ($412 million) from one of his friends for two weeks, the time to recover the money through the sale. However, the signing of the sale was slow and Miller's friend asked for his money. In addition, Miller's daughter, Brooke, is working with him on this hedge fund and is beginning to discover accounting irregularities (with half of the company's assets reportedly mysteriously “disappeared”). 

We are therefore in the scheme of a businessman who wishes to make profits fraudulently and without any ethics since this also involves his family, his friend and the potential buyer of the fund. At first glance, I found this situation rather unrealistic since a situation like this would have immediately raised suspicions. In real life, we could compare this fraudulent resale to a case published in France in December 2015: The Lady Fitness case. This is a sports club franchisor who sold his business after 2 years of consecutive losses to an investor by modifying the franchise accounts. Unlike the movie, the franchisee was sentenced to 8 months’ imprisonment and a fine of €25,000. I found this case particularly interesting because it reflects some weaknesses in the current transfer system, particularly in the case of franchises such as this one. In Arbitration, Miller manages to sell his company despite the disapproval of two successive audit firms. This leads us to the following question: what is the real usefulness of control bodies, are they always respected and how can such frauds be prevented?

By definition, the role of the audit firm is to certify the accounts of a company. This requires the inspection of accounting, finance and overall management to certify the “good health" of the company. The audit firm must also have no conflict of interest with the company in order to ensure an objective and critical view. However, in the world of finance, this is not always the case. I have chosen to take the Enron scandal as an example: it is one of the largest American companies in terms of market capitalization operating in the energy sector. It was revealed in 2001 that the latter had set up numerous financial arrangements to avoid taxation and improve its accounts. The point here is that the company has acted in collaboration with Andersen, an American company specialized in auditing. Andersen has thus concealed certain information and activities concerning Enron, allowing it to continue its illegal activities. Through this example, we see that audit firms can sometimes be involved in fraudulent manipulation when they are the representatives and guarantors of the law in the certification of companies' accounts.

In conclusion, we have seen that the movie Arbitragepresents a situation of fraud that partly reflects reality since many similar cases have occurred in recent years. However, in the movie, the audit firm expressed an unfavourable opinion on the sale and this did not prevent the transaction. We can hope that in real life, this would have led the potential buyer to take a closer look at the company's accounts. In order to prevent such situations from happening in the future, we could think about setting up specialised audit firms to supervise audit firms, but probably this would only displace the problem without solving it. This movie is therefore interesting because it raises questions about real problems that are still sometimes problematic in the current system. However, one of the criticisms that could be made is to limit oneself to asking the questions without informing about the answers that could be given.