Excellence Is Not An Act But A Habit

“Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. We are what we repeatedly do. Excellence, then, is not an act but a habit.”
-Aristotle

Although I usually agree wholeheartedly with Jonathan Weil, I take exception to his position on the wisdom and the significance of C.V. Starr’s petitioning of the SEC to remove PwC as AIG’s auditor.

As for PwC and the remaining defendants, AIG’s special litigation committee decided to take no position. When asked if the committee had “authorized” the plaintiffs to proceed against PwC — as C.V. Starr told the SEC — AIG spokesman Chris Winans said it hadn’t. Still, the practical effect is the derivative plaintiffs can sue PwC if they wish.

“AIG has made it abundantly clear that they’ve taken no position with regard to PwC,” said Stuart Grant, whose law firm, Grant & Eisenhofer PA, filed the derivative suit. He said the firm’s lawyers are drafting an amended derivative complaint and “have not decided” whether it will name PwC as a defendant.

According to the SEC’s rules, a derivative complaint against a company’s auditor doesn’t presumably cause an independence violation, unless the company adopts the suit as its own. Technically, AIG hasn’t done that.

Jonathan: Don’t shoot the messenger!

The essence of acting as an auditor of a public company is to instill confidence and a high level of comfort in the fair representation of the company’s financial condition for the investors. It is as much about the appearance of objectivity and integrity in performing these duties as it is in the actual fact of objectivity and integrity.

A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on certified public accountants. The public interest is defined as the collective well-being of the community of people and institutions the profession serves.

In discharging their professional responsibilities, members may encounter conflicting pressures from among each of those groups. In resolving those conflicts, members should act with integrity, guided by the precept that when members fulfill their responsibility to the public, clients’ and employers’ interests are best served.
Those who rely on certified public accountants expect them to discharge their responsibilities with integrity, objectivity, due professional care, and a genuine interest in serving the public.

As the AICPA Standards, under Other Considerations, say:
It is impossible to enumerate all circumstances in which the appearance of independence might be questioned. In the absence of an independence interpretation or ruling under rule 101 [ET section 101.01] that addresses a particular circumstance, a member should evaluate whether that circumstance would lead a reasonable person aware of all the relevant facts to conclude that there is an unacceptable threat to the member’s and the firm’s independence.

Specifically with regard to litigation, the standards plainly say that independence can be impaired by both the effect of actual litigation between the firm and its client as well as, and this is the title of the section, the effect of threatened litigation..

The Standards also do address stockholder’s derivative suits.

A covered member may also become involved in litigation (“primary litigation”) in which the covered member and the client or its management are defendants. Such litigation may arise, for example, when one or more stockholders bring a stockholders’ derivative action or a so-called “class action” against the client or its management, its officers, directors, underwriters and covered members under the securities laws. Such primary litigation in itself would not alter fundamental relationships between the client or its management and the covered member and therefore would not be deemed to have an adverse impact on independence. These situations should be examined carefully, however, since the potential for adverse interests may exist if cross-claims are filed against the covered member alleging that the covered member is responsible for any deficiencies or if the covered member alleges fraud or deceit by the present management as a defense.

So when PwC gets sued over AIG, and it’s definitely when, not if, they will probably bring the, “We were duped!” defense. That defense, which is the only one these days that the firms seems to be using, since it’s the defense of last resort, will put them in direct conflict with their client. The potential for litigation where their position is contrary to their current client, should be enough to cause them to resign, without anyone having to force them to do so.