If you have been following my Twitter feed, you know that I have been in Chicago since the end of March, as a Journalist in Residence at the Stigler Center at the University of Chicago Booth School of Business.
The George J. Stigler Center for the Study of the Economy and the State is dedicated to understanding the interaction between politics and the economy. It is an intellectual destination for research on regulatory capture, crony capitalism, and the various forms of subversion of competition by special interest groups.
To carry out its mission, the George J. Stigler Center supports research by faculty at the University of Chicago and visiting scholars from other academic institutions. The Stigler Center publishes working papers, and promotes the dissemination of this research to a wider audience via conferences and lectures.
I return to my job at MarketWatch on June 12, after two-and-a-half months of sabbatical.
While I have been in residence here, my fellow journalists—there are eight of us from all over the world—have been attending seminars, mini-courses, guest lectures, conferences, PhD working paper presentations and auditing classes in Booth’s full-time MBA program.
- Crony Capitalism taught by the Stigler Center leader —and consultant to the PCAOB—Luigi Zingales
- The Firm and the Non-Market Environment taught by Mariannne Bertrand
- Strategy and Structure of the Firm taught by Elizabeth Pontikes
Although I am not writing for MarketWatch during the sabbatical, I did teach International Business in the online MBA program at American University again this spring quarter.
I’ve also written for the Stigler Center blog, Pro-Market. My reported opinion piece, “How the Global Audit Firms, Led by Deloitte, Are Using Their Lobbying Clout to Dilute Sarbanes-Oxley Reforms,” is about the firms’ latest attempt to “modernize” auditor independence rules.
The column is the result of a tip from a source, later validated by the Big 4’s lobbying reports filed with the Congress.
While congressional Republicans, bank executives, and conservative Washington D.C. think tanks work to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Big Four global audit firms—Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers—are using their considerable clout to dilute the reform law that changed their business more: the Sarbanes-Oxley Act of 2002.
A look at the Big Four’s congressional lobbying activity during the first quarter of 2017 shows the auditors and the AICPA, their trade association, taking advantage of the “Trump” window to roll back Sarbanes-Oxley reforms. The industry is targeting the strict SOX auditor independence rules and the authority of the Public Company Accounting Oversight Board, the industry regulator established after Enron and its auditor, Arthur Andersen, collapsed.
The Big Four firms are now opportunistically lobbying to go back in time, before Enron, when the industry was self-regulated and mostly left alone.
In the column I specifically mention the lobbying expenditures of Deloitte, the firm that’s leading the charge on behalf of the largest firms, and KPMG, which was recently found to have accepted and used leaked PCAOB inspection information. Ironically, KPMG is specifically lobbying to defeat the perennial proposal to make PCAOB disciplinary proceedings public.
In addition to Deloitte and KPMG, the Association of International Certified Professional Accountants, the accounting industry trade association commonly known as the AICPA, spent $1,330,000 more on behalf of its members in the first quarter of 2017 and $1,320,000 last quarter to monitor “issues impacting the accounting and auditing profession” including “Reforms to Dodd-Frank Wall Street Reform and Consumer Protection Act. The AICPA also hired five more firms and spent $265,000 more to focus attention on “issues relating to the oversight of the Public Company Accounting Oversight Board (PCAOB)”, the Financial CHOICE Act, and the PCAOB Enforcement Transparency Act.
Ernst & Young LLP’s lobbying arm, Washington Council Ernst & Young, spent $500,000.00 first quarter 2017 and $260,000.00 last quarter on monitoring legislation regarding SOx 404(b) and the Financial CHOICE Act as well as any new auditor rotation initiatives.
PricewaterhouseCoopers LLP spent $880,000 in the first quarter of 2017 and $560,000 last quarter on noble sounding goals such as “support for globally consistent accounting standards” but is also watching the progress of the Senator Jack Reed, Senator Chuck Grassley jointly sponsored PCAOB Enforcement Transparency Act of 2017.
The last time anyone attempted to “modernize” auditor independence rules it was the Securities and Exchange Commission, in 2000, before the Enron failure and Arthur Andersen’s demise, as a result of the growing concern that firms increasing focus on consulting was distracting them for their core purpose, auditing.
Concerns about a potentially strong regulatory push back on auditors providing consulting services resulted in two of the four firms selling their consulting practices even before Arthur Andersen’s demise and the enactment of SOx.
In February 2000, Ernst & Young Consulting was sold to Cap Gemini. In February 2001, KPMG Consulting (later BearingPoint, Inc.) was floated with an IPO. This IPO was delayed and re-priced several times in order to wait until more favorable market conditions after the millennium change, but finally took place and then went nowhere. In July 2001, Accenture (known as Andersen Consulting before its split from Arthur Andersen) also went through an IPO. In October 2002, PricewaterhouseCoopers Consulting was sold to IBM. PwC had failed on its first attempt to sell to HP.
Only Deloitte Consulting did not, in the end, separate from Deloitte & Touche.
One thing to keep in mind is how the Big 4 work together, or cooperate, on legislative, regulatory, and litigation activities that affect them all.
For example, the auditors have never really gotten used to their new regulator, the Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act to replace their self-regulatory scheme under the AICPA. In December of 2015, a Reuters report described how the largest firms used their ability to meet together via the Center for Audit Quality, a lobbying effort created by the AICPA after SOX was passed, to plot to undermine the current PCAOB Chairman, James Doty.
Their scheme was the climax of a year-long campaign to oust Doty and quash his efforts to “implement rules that would increase auditors’ accountability to investors and their independence from the companies they audit. Doty’s proposals grew out of a broad consensus inside and outside government that the Big Four accounting firms had fallen down in the years leading up to the recent financial crisis,” according to Reuters’ Charles Levinson,
At a meeting of a PCAOB advisory group at the Center for Audit Quality representatives of several big firms criticized Doty. “He’s beating up on our profession, this has to stop,” complained one firm leader according to Levinson.
I have two more columns coming in the Pro-Market blog. The next one is about FIFA and its prior audit firm KPMG and its current audit firm PwC. That column explores the various alternatives the firms’ international coordinating firms and globally dominant firms have when a member firm’s leadership goes off the rails, breaking laws or breaching global accounting/audit standards.
In another column, I will expand on the issue of the Big 4 and concentration/competition.