The Trump Administration has proposed putting the Public Company Accounting Oversight Board (or as we called it in the early days, “Peek-a-Boo”) under the SEC. Arthur Levitt, a former head of the SEC who was effective in exposing accounting mumbo jumbo in financial statements, believes it is a mistake to shuffle the function over to the SEC. Mr. Levitt says:
1. The SEC is slow
2. Elimination of PCAOB would undermine confidence in the audit profession
The Barometer concedes the first point to Mr. Levitt. The SEC is slow, except when it comes to Musk Tweets. That sounds like a treat for rodents, but it would be the SEC jumping on Elon Musk for his defiance of the agency. Not that a CEO trashing the SEC is a good thing, but it does seem to be a timeliness focus for the agency.
However, elimination of PCAOB would undermine confidence in the audit profession?
Let’s recap what the audit profession has been able to do all on its own, and all with the mighty PCAOB in place:
Audit quality has not improved much despite PCAOB’ ratings (its minimal sanctions have not helped the cause)
PwC got the wrong envelope for best picture in 2017 — somehow the firm mixed up the envelope — how are you going to do goodwill valuation and ACRS if you can’t see the difference between “La-La Land” and “Moonlight”?
PwC’s tax strategy at Caterpillar netted that company early-morning IRS raids at its facilities
A KPMG partner entered a guilty plea to feeding a friend insider information on clients so that the client could do some advance trading (but he got a Rolex in exchange)
PCAOB fed information to KPMG’s audit folks, turned state’s evidence, and one partner was convicted of collusion with PCAOB (and despite KPMG being given a heads-up on which companies’ audits PCAOB would be examining, KPMG’s audit quality was not affected — there some crackerjack work)
Ernst & Young is now under criminal investigation for allegedly being fed bid information by management so that the independent audit committee of the company board would pick EY for its auditor
KPMG was the auditor for collapsed New Century
PriceWaterhouseCoopers (PwC — and this acronym at least matches the letters in the words) settled for $41.9 million for overfilling federal agencies for its work
PwC, EY, and KPMG settled with the federal government for overbilling travel expenses to the government
The list could go on — and that it just the most recent stuff. What could possibly go wrong with this group handling audits of publicly traded companies?
The semi-private PCAOB has not proven itself to be a fierce watchdog. Perhaps its resources would be better used in an existing regulatory framework such as the SEC. The again the SEC missed both the Madoff and Stanford Securities Ponzi schemes. You can’t relate ethics. Fundamentally, the strength of audit firms is dependent on the ethics and backbones of auditors. From watching out for conflicts to refusing to back down when clients pressure them on issues, the critical juncture lies in auditors’ ability to call ’em as they see ’em, not as the client would like to have it. PCAOB was never ever to move the needle on that metric.