Several years ago, the Grumpies were pretty hard on the agencies tasked with enforcing audit quality and ethical accounting behavior in the United States (see Paper Tigers: The U.S. Accounting Oversight Regime). In that piece, we cited examples:
But my how times have changed…the “Paper Tiger” has become “Tony the Tiger,” and that is just grrrrreat!
What am I talking about? Well, it has been a really bad month for the global accounting firms (GAFS). First, Deloitte gained notoriety by receiving one of the largest civil penalties ever imposed by the Public Company Accounting Oversight Board (PCAOB). In addition to a $2 million civil penalty, the PCAOB also censured the firm for allowing former partner Christopher Anderson to continue to “practice” while he was suspended by the PCAOB. According to the PCAOB:
Remember, this is the guy who “violated PCAOB standards in auditing Navistar Financial Corporation’s FY 2003 financial statements” and authorized an unqualified opinion (page 3, PCAOB Release No. 105-2008-003).
And what makes this particularly interesting is that Mr. Anderson had his CPA license suspended by the Illinois Department of Financial & Professional Regulation (see https://www.idfpr.com/LicenseLookUp/disc.asp) beginning on June 30, 2009. The Wisconsin Department of Regulation & Licensing also suspended his license for one year until November 1, 2009 (license expired December 14, 2011). Michigan’s Department of Licensing and Regulatory Affairs was much kinder to Anderson, only fining him $500 (license expired December 31, 2011). Isn’t it amazing that none of these state regulatory agencies saw fit to actually revoke his CPA license outright? And despite all of this adverse regulatory action, Deloitte kept Mr. Anderson on the payroll doing “audit related work”…I wonder if they got $2 million worth of value?
Next, on November 6, 2013, the PCAOB took a bold and much needed step by creating a Center for Economic Analysis “to study the role and relevance of the audit in capital formation and investor protection.” This move suggests a failure by the Center for Audit Quality (CAQ) to provide meaningful or relevant research into improving audit quality. I am shocked…you mean the GAFS’ blatant attempt to use the CAQ to direct academic research away from real audit quality problems has failed? Do you really believe that CAQ- (i.e., GAFS) funded research performed by accounting academics can be unbiased? Not if you want to get more CAQ research funding in the future!
Think I am being too critical? Well, just take a look at the quality of the “unbiased research” coming out the CAQ, specifically the descriptive study titled An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998-2010. If one really wanted to analyze audit deficiencies with the goal of improving audit quality, why would one restrict the sample to 87 “old” cases of alleged fraudulent reporting reported by the Securities and Exchange Commission (SEC), and ignore more recent PCAOB disciplinary orders since 2005? And what significant insights does this “research” yield? According to a recent article by Tammy Whitehouse, the study suggests “that auditors faced SEC disciplinary actions primarily related to audits of smaller companies.” As for the study’s contribution, according to one of the authors:
The implications? If the multinationals aren’t the problem, then neither are the GAFS, right? So, was this real research or a CAQ promotion? Now you can see why the PCAOB’s new Center for Economic Analysis is a terrific development. And it just has to irritate the GAFS and CAQ. By the way, the CAQ’s Newsroom seems to have missed the PCAOB’s terrific news…I wonder why?
Then, on November 13th, PCAOB Chairman James Doty took another giant step toward GAFS’ transparency and audit quality when he announced at the PCAOB’s recent Standing Advisory Group meeting that it will propose a rule on December 4th requiring public companies to reveal the name of their lead engagement audit partner as part of the annual reporting process. Francine McKenna provides a compelling argument as to why “we deserve to know audit partner names.” As Francine seems to suggest, would things have been different had the GAFS’ partners been required to sign their audit opinions? Maybe we should ask Linda McGowan (PwC, MF Global), Chris Anderson (Deloitte, Navistar Financial Corporation), Scott London (KPMG, Sketchers), or Jeffrey S. Anderson (E&Y, Medicis)…
Finally, on Friday November 22nd, the PCAOB again publicly reprimanded Deloitte for its failure to adequately address quality control problems related to its audit practice by releasing the previously nonpublic portions of the PCAOB’s April 16, 2009 inspection report. And as usual, we see that this audit “emperor has no clothes.” Is an audit being done in name only? The PCAOB raised the following serious audit quality concerns in its report (PCAOB Release No. 104-2009-051A):
- Did Deloitte perform appropriate procedures to audit significant estimates, including evaluating the reasonableness of management's assumptions and testing the data supporting the estimates (page 10).
- How appropriate was Deloitte's approach in using the work of specialists and data provided by service organizations when auditing significant management estimates (page 11). Specifically, the PCAOB raised questions about Deloitte’s testing of controls and data, audit documentation, etc.
- Did Deloitte fail to obtain sufficient competent evidential matter, at the time it issued its audit report, to support its audit opinions, specifically as it related to the exercise of due care, professional skepticism, supervision and review (page 12).
What’s really depressing about the these audit quality problems, is that they were almost exactly the same as those noted in the PCAOB’s May 19, 2008 report (pages 12 through 16). Also, problematic is the waning interest of the popular press in these PCAOB report releases, suggesting that GAFS’ strategy to downplay and even ignore the PCAOB just may be working.
Clearly, the PCAOB needs a bigger stick to whip the GAFS into shape! Yet, to appreciate just how aggressive the PCAOB has been this past month, just consider how limited its enforcement powers actually are. According to the PCAOB:
So, the PCAOB does actually appear to be taking full advantage of its enforcement powers. But I do have one holiday season gift wish…please consider selective deregistration of the GAFS, and not just as it relates to Chinese audit firms. If the PCAOB finds that the GAFS are effectively ignoring their reports, then just deregister the offending practice offices. So, if a firm’s recurring audit quality problems are in the City X practice, then deregister that practice. And if City X includes the leadership of the firm, then all the better. I’m not going to hold my breath on this gift wish, and fully expect to get my lump of coal from the GAFS.
But with the holiday season upon us, I am very thankful for the superhuman efforts displayed recently by our resource constrained regulators who bravely battle declining audit quality at the GAFS. Not grumpy enough for you? Too bad, best wishes for terrific Thanksgiving Day holiday!