March 12 (Bloomberg) -- What's the shelf life for a Big Four audit report these days? At Thornburg Mortgage Inc., it was six days.

That's how long it took the accounting firm KPMG LLP to change its mind about the accuracy of Thornburg's year-end financial statements for 2007. It took Thornburg another three days last week to disclose that KPMG had said its prior audit reports ``should no longer be relied upon.'' Today, Thornburg is struggling to stay afloat.

When a major accounting firm's audit-opinion letter goes bad so quickly, it cries out for an explanation. Even fresh milk lasts longer than this. And there are many lessons to take away from the debacle.

Foremost, the credit meltdown is moving so rapidly that it's rendering some companies' financial statements obsolete almost as soon as they are filed. Even where they aren't outdated, you may need to be expert in accounting loopholes to decipher how much money companies really earned or lost. And when auditors do spot problems, it's often too late to help investors.

There is good news for KPMG. At least the firm withdrew its audit opinion before Thornburg went out of business, which is where the Santa Fe, New Mexico-based home lender says it may be headed now.

In its Feb. 27 audit report, KPMG said Thornburg's accounts for 2007 and 2006 were presented ``fairly, in all material respects.'' KPMG retracted that statement in a March 4 letter to Thornburg's audit committee, which Thornburg disclosed March 7.

Bank Run

What changed during that brief span of time? Thornburg's bankers staged a run on the company, following sharp declines in the assets it had pledged as collateral.

In a March 3 filing, Thornburg said it had incurred more than $270 million in margin calls from lenders since Feb. 28, most of which it couldn't meet. On March 4, Goldman Sachs Group Inc. notified the company of a default on its $550 million lending agreement, after Thornburg failed to meet a $54 million margin call.

All told, Thornburg said it had about $610 million in outstanding calls as of March 6, which was far more than it could satisfy. The company already had covered about $1.2 billion in calls since Dec. 31.

In the March 4 letter withdrawing its prior audit reports, KPMG cited ``material misstatements'' in the company's financial statements. The firm also said its report ``should have contained an explanatory paragraph indicating that substantial doubt exists'' about Thornburg's ``ability to continue as a going concern for a reasonable period of time.''

Net Loss

KPMG said it reached those conclusions after considering ``conditions and events that were known or should have been known to the company as of the date of our auditors' report.'' KPMG didn't say whether it, too, knew of those same conditions when the firm signed its Feb. 27 opinion letter.

Thornburg, which filed its restatement yesterday, now says its net loss for 2007 was $1.55 billion, rather than the $874.9 million loss it previously reported. The difference relates directly to the company's future prospects.

During 2007, Thornburg reduced the value of certain mortgage securities and loans on its balance sheet by hundreds of millions of dollars. However, the company initially was allowed to avoid recognizing these losses on its income statement, based on its stated intention to hold the assets until maturity.

After KPMG issued the going-concern warning, Thornburg concluded it may no longer be able to hold those assets long- term, because they may have to be sold to meet margin calls. Under the accounting rules, this meant the company had to recognize the losses immediately, resulting in a $676.6 million charge to net income.

By the Rules

The problem here is with the rules as much as anything else. An asset's real-life value doesn't stop falling just because of its owner's intentions. Yet the rules let companies keep such volatility off their income statements anyway, based on arbitrary distinctions between asset classes. Investors would be better informed if such exceptions did not exist.

Perhaps KPMG should have reached the right conclusions a week sooner. Yet the firm was in a tough spot, and it should be commended for correcting its mistake.

As for Thornburg, Chief Executive Officer Larry Goldstone blamed others for his company's problems.

``The mortgage financing market's complete inability to differentiate and appropriately value superior AAA-/AA-rated mortgage securities from all other mortgage assets is as unprecedented as it is frustrating,'' Goldstone said in a March 7 press release. ``Quite simply, the panic that has gripped the mortgage financing market is irrational and has no basis in investment reality.''

The reality for Thornburg investors is that the company's stock now trades for $1.56. That's down 86 percent since Feb. 27, although the shares more than doubled yesterday on news of a Federal Reserve plan to bolster debt markets.

As the economist John Maynard Keynes famously observed, the market can stay irrational longer than any one investor can stay solvent. Goldstone must have known this before accepting the kind of financing that exposed Thornburg to the risk of huge margin calls. Thornburg's shareholders surely get it now.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at jweil6@bloomberg.net

Last Updated: March 12, 2008 00:01 EDT