If the people who audit the nation’s public companies are forced to reveal themselves, then the terrorists will win.
At least that’s one of the arguments coming from the U.S. accounting profession, now that its main regulator is thinking of requiring audit partners to sign their names when they vouch for companies’ financial statements.
Such a proposal by the regulator, the Public Company Accounting Oversight Board, is long overdue. For it to matter, though, the board also must survive a more existential challenge.
This week the Supreme Court heard arguments in a lawsuit that seeks to disband the quasi-governmental agency, on the grounds that the process for appointing its board members is unconstitutional. A ruling against the board, which was created in 2002 by the Sarbanes-Oxley Act, could mark a lost chance to bring needed transparency to a system shrouded in secrecy.
The way audit reports are done now in the U.S., only the accounting firm’s name appears on the signature line. Outsiders usually have no way of knowing which partners are in charge of auditing which companies’ books. That’s how the firms like it.
Consider this bit of hysteria from a Sept. 11 letter to the board by Paul Rohan, director of financial reporting and quality control at UHY LLP in New Haven, Connecticut, which audits 73 public companies.
“An audit engagement partner who is identified to all by a PCAOB-mandated signature on the audit report could become the target for those bent on domestic or international terrorism,” Rohan wrote. Risks could include “assassination or kidnapping to the engagement partner and that partner’s family.”
Question on Threat
His comments came in response to a question in the board’s July proposal asking if an exception is needed where disclosure “could lead to an imminent, significant threat” to personal security. Rohan told me, “There are a lot of people out there who would conduct violence for violence’s sake. This would be one way of providing them with a target for a grievance.”
Wacky arguments such as that underscore how right Sarbanes- Oxley was to strip the accounting profession of its authority to set standards for auditing public companies. Even the big firms have resorted to varying degrees of fear-mongering.
Deloitte & Touche LLP in its comment letter said disclosing partners’ names “could lead to significant security and privacy concerns.” Grant Thornton LLP said its best partners may refuse lead roles on “challenging audits because of real or perceived increased legal liability risks or personal security risks associated with particular clients.”
Gee, do they think officers and directors at the companies they audit should get to remain anonymous, too?
Matter of Record
Under the board’s proposal, the partner who has final responsibility for a company’s audit would be required to sign the audit report. This would make it possible for outsiders to check the person’s background. If the financial statements later turned out to be inaccurate -- or worse, fraudulent -- the partner’s name already would be a matter of public record.
While this requirement is the norm in Europe, the audit firms don’t want it in the U.S. They say such disclosures wouldn’t provide useful information to investors, and may lead to increased liability for individual partners in lawsuits.
KPMG LLP said disclosure “could impose additional stress, as well as personal security concerns, on the engagement partner.” For example, “media coverage of financial problems at a company might cite the audit firm and the individual engagement partner by name.” Heaven forbid someone like me should do that.
Arthur Andersen Partner
The board’s proposal brings to mind a former partner at Arthur Andersen LLP’s Phoenix office named Jay Ozer, who eventually lost his state licenses and was barred from practicing before the Securities and Exchange Commission.
Ozer was the lead audit partner at three Andersen clients that turned out to be frauds. One during the 1980s was Lincoln Savings & Loan, whose chief, Charles Keating, went to prison. Another was the Baptist Foundation of Arizona, a 1990s Ponzi scheme that cost investors more than $500 million. Finally, in 2004, Ozer paid a $50,000 fine to settle fraud accusations by the SEC over his audit work for Styling Technology Corp., a beauty-products maker that went bankrupt in 2000.
At least investors might have stood a chance at catching Ozer’s trail if he’d ever signed his name publicly.
There’s more at stake than this one proposal, of course. A ruling that the board is unconstitutional could invalidate all of Sarbanes-Oxley, including the requirement for separate audit reports on companies’ internal controls over financial reporting.
The main argument of the audit firm that sued the board, Beckstead & Watts LLP, is that an independent agency ultimately must be answerable to the president. At the oversight board, members are chosen by the SEC as a whole and can be removed only “for good cause” by the commission. Beckstead says this setup violates the separation of powers, as well as the Appointments Clause of the U.S. Constitution.
Congress could fix this. Board members could be appointed by the president, for example. Or the board’s power to inspect audit firms and set standards could be moved to the SEC.
What shouldn’t be an option is a return to the days when oversight of the accounting profession was mainly in the hands of trade groups such as the American Institute of Certified Public Accountants. Auditing standards are too important to be left to the auditors.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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