My column today at American Banker is about the PCAOB’s auditor rotation and auditor independence concept release and its impact on banks. My favorite lines that made it in are probably these:
Audit firm CEOs say mandatory rotation would distract them from audit quality assurance and force the partners to focus on responding to constant requests for proposals and marketing activities. The auditor firms would rather collect oligopolistic fees from a government-mandated franchise without having to compete or justify those fees.
I have opposed mandatory auditor rotation proposals, here and in the UK, for a reason that goes deeper than whether it’s the right thing in an ideal world. It is. But we are not living in an ideal world. I wrote a more lengthy post on the subject in Forbes last August when the subject first came up again. Earlier last summer, in July, I wrote here about audit reform proposals, in general, and I was quoted in the FT’s Agenda on the subject.
Auditor rotation is a suggestion that comes up over and over with no resolution.The Financial Times’ Agenda (subscription only) explored the pros and cons of the issue. I was quoted and so were a few other notables such as Denny Beresford, who currently chairs the Audit Committees at Fannie Mae and Legg Mason.
I get the last word with this quote:
But even Francine McKenna, an outspoken critic of the industry, does not advocate mandatory term limits. “In a perfect world, if we had enough firms and if we had enough capacity and ability to go around, then it would be a wonderful idea,” she says. “But I think, practically speaking, it would make things worse. Trading one potentially corruptible firm for another potentially corruptible firm doesn’t really help.”
Instead, McKenna advocates radically changing the industry structure. “My personal feeling is we’re not going to get a good audit until we take it out of the companies’ hands and put it into the hands of an agency that controls the fees and controls who does the work,” she says. “You can’t have companies paying for audit firms directly.”
Here are some additional anecdotes that did not make it to the American Banker column due to space:
This past Thursday, New York federal judge Lewis Kaplan sent the New York Attorney General’s case against Ernst & Young back to state court where it was originally filed. New York prosecutors claim Ernst & Young violated the Martin Act, an ancient state law used effective by former New York attorney general and governor Eliot Spitzer to prosecute securities fraud. The Attorney General seeks return of the $150 million in fees that Ernst & Young earned as Lehman’s auditor from 2001 until its bankruptcy filing in 2008.
GE has used KPMG as their auditor since 1909. That longstanding relationship meant no one blinked when KPMG started providing prohibited non-audit services to GE’s tax department. After I wrote about this lapse, the engagement ended. Fannie Mae fired auditor KPMG in 2006, then sued the firm after a $9 billion financial statement fraud. KPMG was Fannie Mae’s auditor for 36 years.
PwC is still the auditor of AIG, the insurance company that was taken over by the US government after AIGs dispute with another PwC auditee, Goldman Sachs, boiled over. AIG shareholders have sued PwC more than once over the years including most recently for its role in AIG’s issues during the financial crisis. PwC paid $97.5 million for a case related to AIG’s 2005 era accounting problems. PwC’s relationship with AIG started more than thirty years ago. PwC has been Goldman Sachs’ auditor since at least 1996, three years before its IPO in 1999. PwC’s former CEO, Jim Schiro, chairs Goldman Sachs’ audit committee.