Earlier this week, we learned about a couple of Grant Thornton audits that were less than perfect.
The partner on those engagements, Melissa Koeppel, had a poor track record with four restatements in two years, including the one that resulted from the infamous Koss Corporation fraud.
No one outside of Grant Thornton had knowledge of this until the SEC announced the settlement with GT, Koeppel and Jeffrey Robinson, the other partner involved.
At the end of my post, I mentioned that Koeppel's performance was relevant to investors. I'd go one step further now to say that it's also possible that a lot of ALC and Broadwind investors would've made different decisions if they had all the information.
That leads into the PCAOB's upcoming rule on partner disclosure and whether or not it would have prevented a situation like this one.
The answer is, of course not! Her name, and the name of any audit partner for that matter, is meaningless without context. Even if her name had been disclosed, I doubt many people would’ve picked up on her performance history. All this makes the PCAOB’s audit partner disclosure rule a hard pill to swallow. Don’t get me wrong, the rule will be better than the status quo, but the PCAOB’s bank of audit partner names will be starting from scratch. It will take years to build a database of names that can searched, filtered and made useful. But like I said, it's better that what we've got.
The other silver lining in the PCAOB’s proposed rule will be the disclosure of other accounting firms involved in the audit. For some engagements this won’t be an issue, but it could be an issue for multinationals whose audits are partially performed by firms that aren’t subject to PCAOB inspection. Think about it. If you’re a short-seller that looks for Chinese companies that might be up to funny business like, say, Muddy Waters, you probably know who the disreputable audit firms are. If those firms are popping up regularly on Form APs, maybe that’s a clue for you to look closer at those companies financial reporting that you previously overlooked. Granted, most investors aren't giving companies the fine-tooth comb treatment that Muddy Waters does, but, it will be useful to them and similar firms.
But really, that’s where the good stuff kinda ends. As the Grant Thornton situation demonstrates, simply the names of the key audit personnel would not have given investors enough meaningful information.
So that got me thinking about what should be in an audit partner disclosure; I’m spitballin’ a little here but an ideal set of disclosures for audit partners would, at the very least, include:
- All past and present SEC issuer clients for which the person served as lead engagement partner
- His or her tenure for each of those engagements
- The details of any restatements that were issued while (s)he was lead engagement partner
- Any SEC actions, if applicable
- PCAOB inspection results, if applicable
- Any other regulatory issues
And thanks to all the fancy-schmancy technology, all of this is possible and, dare I say, reasonable information for auditors to provide.
But I know, I know, it's not gonna happen any time soon. If we didn’t know any better, it might be puzzling why a profession that prides itself on objectivity and integrity would be so opposed to transparency, fighting everything tooth and nail, including putting a name on someone's work like grade school children are taught to do.
But we do know better. And barring a Festivus miracle, I'm afraid the PCAOB’s Form AP will be the best anyone can hope for until more audit partners with a bad track records end up in SEC Orders. See you for the next one.