Yesterday was the deadline for commenting on the PCAOB's concept proposal for disclosing the name of audit partners and "other participants in the audit." If this sounds familiar, it's because this was Plan C from the PCAOB (fourth round of comments) on this proposal and, miraculously, audit firms seem willing to live with disclosing partner […]
As you probably heard, the PCAOB officially put out a proposal earlier this week for audit partners to be named in the annual reports of public companies. It would also require “registered firms to disclose the name of the engagement partner for each audit report already requirethe form” and “disclosure in the audit report of other accounting firms and certain other participants that took part in the audit.”
While most Big 4 audit partners are probably feeling a little chapped by this whole proposal, there is at least one person going on record (by way of PCAOB comment letter) that feels that it doesn’t go far enough. That would be Carson Block, the CEO and founder of research firm Muddy Waters. In Block’s letter (in full on page 2) to the Board he writes that not only should the engagement partner be identified but that he or she should be putting their name on the audit opinion because “[it] will decrease investors’ future losses to fraud and gimmicky accounting by billions of dollars.”
That on it’s own is enough to get more than a few people riled up. But as we indicated, there are some conspiracy and fraud accusations as well:
Even the most reputable auditors in China seem to be in a race to the bottom. We believe that there are particularly egregious situations in which some Big Four partners in China offices have actually conspired with their clients to defraud investors. Further, it is a reasonable proposition that the conflict of interest inherent in the Chinese auditors’ business model also affects the quality of US company audits.
Now before your knickers in a twist, don’t forget that this is the guy who called Sino-Forest a “Ponzi Scheme for the 23rd Century” which more or less looks to be accurate. Further, if you consider all the trouble Big 4 firms have had with Chinese companies listed in the U.S. and elsewhere, it doesn’t seem to be that much of a stretch that some partners would just say fuck it and work with their clients to keep a lid on the shenanigans than go through the pain of actually doing their jobs.
Regardless, with these accusations the PCAOB may try to make another run at getting the Chinese to play ball.
But probably not in ways they would prefer:
In a recently updated standard-setting agenda, PCAOB Chief Auditor Marty Baumann says the board is working on the proposal to address concerns about audit transparency. The board published a concept release in July 2009 that asked for feedback on whether the engagement partner should be required to sign the audit report. Based on feedback to that release and subsequent discussions with the board’s advisory groups, the PCAOB is preparing a new requirement for audit firms to say in their audit reports which engagement partner at the firm supervised the audit and who from outside the audit firm participated in the audit.
Running late as usual. At least they aren’t using whiteboard markers. Since it’s Friday and we’ve got nothing better to do, we’ll be live-blogging below.
4:02: Starting in two minutes? You’re already 12 late Mr President. We realize you’re the President but some of us have holiday cheer to spread, get with it.
4:05: Filing in. Finally. Biden in the Hizzous. Cracks about a “big deal,” without the F-bomb, this time. Shout out to half-man, half-tortoise, Mitch McConnell. Bipartisanship lives!
4:08: The big guy is up. Applause. Biden is semi-beaming. BHO gives a shout out to the Veep. Biden grins like only Biden can. Love for McConnell and Dave Camp. Shot of Larry Summers is less than flattering. Did his mother teach him anything about sitting up straight? Yeesh. Bipartisanship, bipartisanship, bipartisanship. We get it. You managed to play nice, what do you want, reelection?
4:13: Al Sharpton? Golf clapping? Can someone explain why the Rev is at this thing?
More name-dropping. Nancy, T Geith, Boehner. Sigh.
4:17: John Hancock time. Hugs, handshakes, back slapping. OUT!
Let’s not jump to the conclusion that the PCAOB will scrap the whole auditor sign-off proposal just yet. They’ve been doing a hell of a job making auditors’ lives difficult lately ly wants to feel like it’s an important part of the bureaucracy. Especially since their lives are potentially at stake.
But the belly-aching on this one by the usual suspects is reaching fever pitch. They are saying enough is enough and that their partners’ names should not be written in blood for all to see.
It shouldn’t surprise anyone that the firms hate this idea since the owners of the firms are being given explicit instructions to put their names — and asses — on the line.
The PCAOB received a grant total of 23 comments on the concept release and all but two were negative. Not surprisingly, the two that weren’t negative came from “investor representatives”.
Francine McKenna gave you the lowdown on the firms responses in her GC post from September 30 and it sounds like it’s working.
Here’s a quote from PCAOB Deputy Chief Auditor Greg Scates:
“The board is going to discuss this and make some decisions in this fourth quarter on what to do and whether to move forward in this area. This is not uncommon in Europe. Partners do sign the report in other countries. In our country, of course, this is not the way we’ve been doing business, so it is a new concept. We’ll see what the board wants to do as they look through the comment letters and make a decision on what to do.”
A whopping 21 negative comments and the PCAOB is getting cold feet? Get better at spreading the word to people that will take your side, PCAOB. Were you just testing the waters with this or did you really want to make auditors accountable?
But maybe the firms got the Board members’ personal side:
Even more disturbing than the potential liability exposure is the specter of individual auditors coming under public attack by disgruntled investors and a “lynch mob” media mentality. “Engagement partners and their families could be subject to unwarranted and unwelcome communications from shareholders who are unhappy with a particular company’s performance in matters that are wholly unrelated to the completeness and accuracy of the financial statements,” Grant Thornton warned.
There are a lot of irrational people out there we’ll give you that, but a media circus outside an auditor’s house? Sort of like a bean counter paparazzi? That could be kind of fun, couldn’t it?
Oh, but what about the websites that would get put up?:
Groveland, Mass.-based CPA Frank Gorrell, for one, warned that identifying engagement partners by name could prompt irate investors to set up Internet sites to “vent their frustrations” by criticizing individual accountants and even publishing their home addresses online.
Sweet Jesus. Apparently accountants want to be invisible. No criticism for me, thankyouvermuch. And venting frustrations? On a website? Who ever heard of such a thing?
AUDIT FIRM REGULATION: No Autographs [Web CPA]
PCAOB May Scrap Auditor Sign-off Proposal [Web CPA]