Jim Elliott writes an opinion column for the widely-distributed Missoula Current (that’s a joke) and in today’s column he decided to address the EY cheating scandal. His familiarity with the ethics exam EY auditors cheated on begins and ends with a quick Google search but as an outsider to accounting and a member of the public audit firms are meant to protect, his viewpoint is of interest. Why? Because when columnists at tiny Montana papers are writing about a lack of ethics on the part of huge firms it’s a major PR problem for the profession. And given the ongoing pipeline issue, this is a problem the profession can’t afford to have. Why is some random dude in Montana opining about accounting firm ethics? Why is this even on the radar of this guy? Wasn’t creating the PCAOB supposed to prevent middle America from hearing about accounting firm scandals once Enron faded from their minds?
Whenever I hear someone talk about how honest they are, I instinctively put my hands in my pockets to see that everything that should be there is still there. So, pardon me my skepticism when I read this blurb from a large accounting firm’s website: “Our Global Code of Conduct is a clear set of standards for our business conduct. It provides the ethical and behavioral framework on which we base our decisions every day.”
Or this one: “… we hold ourselves to the highest moral and ethical standards at all times.”
The first one is from giant accounting firm Ernst and Young, which has just been hit with a $100 million fine by the U.S. Securities and Exchange Commission for covering up employees who cheated on mandatory ethics tests. The second is from another giant accounting firm’s “Code of Conduct,” this one called KPMG. Last year KPMG was fined $50 million for doing the same thing as Ernst and Young.
Why is this kind of thing important? Because it seems indicative of an almost complete lack of ethical conduct in big business. A major function of these accounting firms is conducting audits of their clients’ finances
TL;DR: giant audit firms can’t be trusted.
They help businesses to follow best accounting practices and warn them when the audit finds something amiss. When auditing firms abuse their ethical responsibilities, bad things happen. [totally expected Enron reference here]
LOL bless his heart.
To demonstrate how boneheaded it was for anyone to cheat on the ethics exam, he lays it out for the uninitiated:
And how hard are these tests? Examples I have looked at range from 40 to 50 questions, multiple choice, open book, with generous time limits. In California it can be retaken 5 times in a year until the person passes the test.
Here’s a sample question from the California test:
“The Principles [of the organization] state that a member has responsibility to: (a) Colleagues. (b) Clients. (c) The public. (d) All of the above.”
The correct answer is “all of the above”.
Why are ethics important? Let’s reduce it to an understandable level. What would you feel if you found out that a teller at your bank told people how much you had in your account? Would you go to a doctor whose nurse told others about your health? Would you use a contractor who padded your bill?
The good people of Missoula may not understand PCAOB standards and audit quality but surely they understand the concept of ethics.
Anyway, he ends with a concerning observation when you consider that this is some random guy looking in at the profession and giving his opinion based on his own value system, a value system that I imagine most average Americans hold (or think they do, anyway).
To make sure that companies are on the up-and-up there are standards imposed on financial record keeping. The organizations responsible for reviewing those finances for accuracy are the auditing firms—the guards. When the guards themselves are corrupt, how can we trust their statements about the companies they audit, and then how can we trust those companies themselves?
YOU TELL EM, JIM.
This is far more scathing a review than the PCAOB ragging on audit firms for consistently poor auditing, it’s how regular people feel about hearing huge and illustrious accounting firms have screwed up. Again. These are the opinions that should really matter to firms; once you’ve shot your reputation with the average public, there’s little you can do to get that back. That’s a way bigger deal than a penalty that shakes out to only 0.25% of FY revenue.