Arthur Levitt – Looking Down From The Mountain
Arthur Levitt recently gave an interview in a Dutch publication de Accountant. Accountancy Age in the UK highlights some key quotes and provides a link to the full article in English.
Levitt comments about the potential need for “audit-only” firms and his encouragement of, “…greater transparency, to understand what condition a firm is in. We need the firms to provide fully documented audits of their own operation… “
This information is already available in the PCAOB’s inspection reports of the firms. However, per statute, the PCAOB does not have to make this information public unless the firm is seriously deficient in responding to any items cited. Given the delays on getting inspection reports completed, distributed, responded to, and finalized, it’s a wonder anyone fixes anything on a timely basis. Just let it spin through the cycle was the motto of one firm’s Risk and Quality guys when I was around that stuff…
And then there’s the common practice for the firms to tell the PCAOB, “Thanks for the info. But, we disagree.”
So Mr. Levitt’s contention that more transparency regarding how well firms are run is coming is just a bunch of hot air. The firms will not divulge this info voluntarily and the PCAOB does not have to per law. Like we’re going to get that kind of change to the Sarbanes-Oxley law… It will be a cold day in H*E* double-toothpicks.
It’s worth reading the whole article, since there are some other interesting observations thrown in.
However, this one in particular caught my eye:
As to the effects of the present credit crisis: have we had the worst?
“No, I think it will continue for a while. Real estate values will continue to decline. I think we will see some bank problems, clearly more corporate problems similar to AIG.”
Wow!
Levitt mentions AIG in a discussion of the general impact of the credit crisis?
If he feels so strongly, why doesn’t he get on the side of right and help get rid of the auditor who allowed the problems to occur, instead of rubber stamping their reappointment?
To back up further the case for firing PwC, we’ve now got the most recent news that the Department of Justice has asked the SEC to turn over evidence as part of a criminal investigation of whether the material weaknesses in internal control cited by PwC in February were part of a fraud, one that their auditors didn’t “detect” until the subprime crisis heat was on. Maybe Mr. Levitt should focus on the most obvious conflicts in his own backyard – the fact that PwC is being sued by its own client for its part in AIG’s repeated failures.
Maybe the shortsightedness has to do with Mr. Levitt’s own myopia regarding one of the most basic conflicts in the world – he’s being paid by AIG and so is PwC.
It’s always possible that changes in the economic environment changed which controls were tested at AIG. We shouldn’t jump to conclusions right away.
Also, an “audit only” firm sounds like a terrible idea. We already have tough independence rules as it is. Independence is not the weakest link when it comes to audit failures.
Lastly, audit firms letting the public look into the books? Not a chance without regulation being pushed down everyone’s throat. Maybe it’s a good idea, I don’t know. However, it’s a change that wont happen voluntarily.