U.S. auditing firms almost universally failed to warn of accounting irregularities, according to a new study issued by Weiss Ratings, Inc.

The study, entitled The Worsening Crisis of Confidence on Wall Street: The Role of Auditing Firms, determined that auditing firms gave a clean bill of health to 93.9% of the public companies that were subsequently cited for accounting irregularities.

Due to various factors, including the accounting problems, the stock of the 33 companies studied dropped from a total peak market value of US$1.8 trillion to only US$527 billion, implying an aggregate loss to shareholders of almost US$1.3 trillion.

Only one auditing firm, PricewaterhouseCoopers, issued a “going concern” warning on any of the 33 companies involved in the accounting irregularities. All others failed to issue any warnings in their auditor reports.

Andersen was the biggest culprit, responsible for 11 of the 33 firms with accounting trouble; followed by PwC, with seven clients that had trouble, two of which it flagged. KPMG and Deloitte & Touche had five troubled clients each; Ernst & Young had four; and Tullis Taylor had one.

“The first and most important line of defense for investors is manned by the nation’s auditing firms,” commented Martin Weiss, Ph.D., chairman of Weiss Ratings, in news release. “Unfortunately, the accounting industry has overwhelmingly failed in its responsibility to deliver independent oversight to corporate financial statements.”

In addition to analyzing firms with accounting irregularities, Weiss Ratings also studied the audits issued to 228 companies that subsequently filed for bankruptcy between January 1, 2001 and June 30, 2002. In this group, Weiss found that 96, or 42.1%, of the bankrupt companies had been given a clean bill of health by their auditors, while “going concern” warnings were issued on 132, or 57.9%, of the companies.

The five largest auditing firms audited 194 of the 228 companies studied, while smaller accounting firms audited the remaining 34. Weiss found that KPMG had the worst track record, issuing warnings on only 12 of the 28 firms it audited.

PwC had the best track record overall among the Big Five, issuing warnings on 24 of the 38 companies it audited, despite the fact that its warnings were issued further in advance of the bankruptcy filings (an average of 245 days before failure, compared to a global average of 209 days).

The 96 companies that eventually filed bankruptcy despite receiving stamps of approval from their auditors had a peak market cap of US$226 billion, nearly all of which has now been lost by shareholders.