Francine McKenna of re: The Auditors pinged me this morning. Her article: KPMG: Were They Threats or Desperate Pleas details a series of moves KPMG made during 2005 in regard to the now widely known tax fraud case that eventually cost them $456 million. I’m glad there is one more voice discussing the abuses of power and other egregious activities among the Big Four.
During the to and fro, we see KPMG playing the sympathy card and winning the day. At the time there was a genuine risk that KPMG might be forced out of business but the final decision not to indict the firm as a whole:
“…reflects the reality that the conviction of an organization can affect innocent workers and others associated with the organization, and can even have an impact on the national economy.”
My response: Do something about it.
While it is true there are many fine people working inside the Big Four, there are systemic problems. Jeremy Newman of BDO is unsure whether the competition plays fair. It doesn’t. The Big Four have effectively insulated themselves against competition, arguing global presence as their starting point. Even so, they want protection when their clients get upset and decide to sue. It’s almost impossible to have it both ways yet that’s exactly what they are seeking to achieve.
The PCAOB doesn’t help. Discussing events at the recent Compliance Week Conference, Francine asks:
The PCAOB is a regulator of the audit firms themselves, not just the audit process. Is there any hope that we’ll see more information about the firms’ business and operations quality and maybe voluntary disclosure of the private report segment of the firm inspection reports?
The response from Mark Olson might have been taken straight out of PR101:
The PCAOB will continue to add more information and commentary to the public report, when possible…yada yada yada
And all the while, audit and compliance fees continue their inevitable march north. Stephen Bainbridge reports (link courtesy of Jeff Nolan):
According to The Wall Street Journal, for example, publicly traded U.S. corporations routinely report that their audit costs have gone up as much as 30 percent, or even more, due to the tougher audit and accounting standards imposed by SOX.
It seems to me the only way to overcome these issues is by a fresh approach to audit compliance. While this might be unpalatable for some, I’d propose global provisions where:
- Mandatory audit rotation every five years. Effectively breaking the ‘old boys’ network.’
- A banning of executive officers from the audit committee.
- Mandatory, detailed reporting of audit failure in PCAOB inspections and details of restorative steps. It matters not that a firm has failed. It must be seen to reduce audit risk.
- Make audit appointment open to a transparent bidding process which is voted upon by the audit committee and reported back to the shareholders rather than the rubber stamp process we see today
- An absolute ban on tax engagements by the same firm acting as auditor to the company and its officers
Discuss…
