Who audits the auditor? The White House wants to redraw oversight for the Big Four and other accounting firms, and some critics fear that could lead to more fraud.

0
115


This story requires our BI Prime membership. To read the full article,

simply click here to claim your deal and get access to all exclusive Business Insider PRIME content.

  • The Trump administration wants to eliminate a panel that regulates accounting firms which vet the books of public companies. The White House says its aim is to eliminate duplication of effort. But critics say that would get rid of oversight that the industry needs.
  • The Big Four firms — PricewaterhouseCoopers, KPMG, Deloitte & Touche, and Ernst & Young — audit almost all large U.S. companies, and have recently had a spate of scandals, deficient audits, and other problems, critics of the Trump administration’s plan note.
  • Companies from General Electric to Under Armour to Mattel are facing accounting questions. PCAOB inspections have found nearly a third of the Big Four audits they review have some sort of deficiency.
  • And even if the White House’s proposal isn’t enacted now, the question of whether to keep the PCAOB isn’t going away. It may be an indication of where the administration would like to head if President Trump is re-elected and Republicans get full control of Congress.
  • Click here for more BI Prime stories.

If the White House has its way, soon fewer people might be watching the watchmen – and some observers fear that could lead to more corporate fraud.

The Trump administration wants to eliminate a panel that regulates accounting firms which vet the books of public companies. But critics say that would get rid of oversight that the industry needs. The Big Four firms, who audit almost all large U.S. companies, have recently had a spate of scandals, deficient audits, and other problems, the critics note — and they need to be pushed to do better.

The administration wants to fold the accounting-regulatory panel, the Public Company Accounting Oversight Board, into the Securities and Exchange Commission. The White House says its aim is to eliminate duplication of effort, since the two agencies both oversee audit firms.

But that would mean a return to the bad old days, many accounting-industry observers say. After all, they note, the reason the PCAOB was created, nearly two decades ago, was that the industry needed a tough, independent watchdog after slipshod, lightly regulated audits failed to prevent the Enron scandal and other big accounting blowups.

Independent audits help ensure that the information investors get about companies is accurate and reliable. But many fear that if the PCAOB goes away, there won’t be enough pressure on auditors to make sure their audits are strong and rigorous. The inspections of audit firms in which the PCAOB currently sniffs out problems won’t be as stringent, or might not be done at all, they say, and the quality of audits won’t get enough emphasis at the SEC.

And if companies know their audits are less likely to be tough and reviewed by regulators, the critics say, they might feel more leeway to massage their numbers. Potential fraudsters could be emboldened.

“If you know there’s not an independent regulator looking over your audit, and it’s going to be a lot more lax, then you’re going to be a lot more lax,” said James D. Cox, a Duke University law professor specializing in corporate and securities law.

The SEC, the PCAOB, and representatives of major accounting firms all declined to comment.

Companies from General Electric to Under Armour to Mattel are facing accounting questions

The White House floated the idea earlier in February in its annual budget proposal, saying it wanted to “consolidate the functions and responsibilities” of the PCAOB into the SEC starting in 2022. It cites a desire to reduce “ambiguity” and duplicative authority – the PCAOB is a non-profit corporation established by Congress that reports to the SEC, and both have jurisdiction over audit firms.

The proposal puzzled many observers. It’s unlikely to be enacted anytime soon — it would likely require congressional action outside the budget process, to amend the Sarbanes-Oxley Act that created the PCAOB, and that action probably isn’t forthcoming as long as Democrats control the House of Representatives.

The Big Four accounting firms — PricewaterhouseCoopers, KPMG, Deloitte & Touche, and Ernst & Young — have sometimes chafed at the PCAOB’s oversight, but they aren’t known to have been pushing to scrap it. 

And it seems like an odd time to eliminate an independent regulator of auditing. Companies from General Electric to Under Armour to Mattel are facing accounting questions. PCAOB inspections have found nearly a third of the Big Four audits they review have some sort of deficiency. In September, PwC paid $7.9 million to settle allegations from the SEC that it had gotten too close to some of its clients to perform tough, arm’s-length audits.

“It addresses a non-problem. I’m not sure this helps anyone,” said Daniel Goelzer, a former PCAOB member and former acting chairman.

But the proposal illustrates the degree to which the Trump administration has been pushing broadly to roll back financial regulation. “There’s a mood in Washington right now of trying to make sure everybody in the administration is putting their shoulder to the wheel — less regulation, less accountability, more leeway for market players,” Cox said.

A spate of negative news about the PCAOB may also have played a role – notably a high-profile scandal in which PCAOB employees and KPMG partners stole confidential PCAOB information to give KPMG a leg up in preparing for the board’s inspections. After that, all five members of the PCAOB were replaced.

The move could scale back inspections of auditors, critics fear

Questions have already arisen about how independent and free from outside influence the PCAOB is. 

Last fall, SEC Chairman Jay Clayton replaced a PCAOB member with a Trump administration staffer, and put an SEC commissioner who’s often critical of regulatory efforts in charge of coordinating SEC and PCAOB activities. That led former SEC Chairman Arthur Levitt to publicly criticize Clayton, saying he was weakening the PCAOB’s independence and credibility.

It’s unclear just what might happen to the PCAOB’s activities if it were folded into the SEC — a lot would depend on how it’s structured, funded, and staffed. One area the critics are concerned could be curtailed: the PCAOB’s inspections, which scrutinize audit firms’ audits to gauge their performance and see if they’re following auditing rules.

The inspections are the PCAOB’s biggest activity, and the SEC doesn’t have any equivalent. Observers are worried that if the PCAOB is folded into the SEC, inspections might be fewer, or not as stringent, or might have more of a compliance, check-the-box orientation.

“You won’t have the manpower to do real inspections,” said John Coffee, a Columbia University law professor. “That was what was new about the PCAOB, you audited the auditor.”

More broadly, critics question whether the PCAOB’s mission of overseeing audits and auditors might get lost inside the SEC, which is much larger and has much broader concerns. “Even if you were able to maintain the same level of staff, it just wouldn’t be the same level of priority,” Goelzer said.

And, in turn, that could mean corporate executives might feel freer to manipulate their numbers, knowing that their audits and the auditors who perform them might not be getting the same level of regulatory scrutiny.

If regulation eases up, “they will go right back to what they were doing in the first place,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

PCAOB has its own critics, but observers say the oversight it provides is better than what existed before

To be sure, the PCAOB has had something of a checkered history when it comes to tough regulation. In September, the Project on Government Oversight, a nonpartisan independent watchdog, said in a report that the PCAOB has done “a feeble job” in key respects, filing only 18 enforcement cases against the Big Four in its entire history despite hundreds of deficient audits found during its inspections.

Still, observers said, whatever the problems, the oversight the PCAOB has provided is better than before the board was created, when the accounting industry essentially regulated itself.

The PCAOB’s work has led to “vastly improved” audits, said Jeanette Franzel, a former PCAOB member. “We cannot let down our guard when it comes to audit quality.”

And even if the White House’s proposal isn’t enacted now, the question of whether to keep the PCAOB isn’t going away. It may be an indication of where the administration would like to head if President Trump is re-elected and Republicans get full control of Congress.

“Once you tee something up, it doesn’t go away in the conversation,” Cox said.


More:

BI Prime
Accounting
Finance

Read More

LEAVE A REPLY

Please enter your comment!
Please enter your name here