Brits Show U.S. the Right Way to Come Clean
Here's a novel development, or least it would be if it happened in the U.S.: The U.K.'s accounting watchdog on May 9 said it had placed KPMG Audit Plc under two separate investigations in connection with its audits of a car seller and the conduct of one of the firm's partners.
The important takeaway: The public was told of the developments, and the markets took the news in stride.
The Financial Reporting Council said it is examining whether KPMG was independent when it audited Pendragon Plc's 2010 and 2011 financial statements. On the other matter, the council said it is looking into a KPMG partner's "non-timely disposal of a share-holding in a client entity." KPMG, which is one of the Big Four global accounting firms, said it would cooperate with the probes. The council posted news releases about both investigations on its website.
Compare that with the lack of transparency at the Public Company Accounting Oversight Board, the primary regulator for U.S. auditing firms. The board is prohibited by law from disclosing investigations -- but that's not all. It also is barred from disclosing the names of audit firms and accountants that it accused of wrongdoing, for as long as their disciplinary proceedings are ongoing.
The board was created by the Sarbanes-Oxley Act of 2002 in response to fraud scandals at Enron Corp., WorldCom Inc. and other companies. The accounting profession succeeded in getting all sorts of secrecy provisions inserted into the law, including requirements that the board stay mum about its enforcement division's caseload. Disclosure is allowed only after a case has been settled or otherwise resolved in the board's favor.
The whole set-up is ridiculous. If the Securities and Exchange Commission sues an accountant or audit firm for breaking the rules, that complaint is public information. But if the accounting oversight board does it, then the law says the process must be secret. This gives the targets of the board's actions an incentive to drag out their disciplinary proceedings so they can delay publicity.
Congress should change this. Last month, U.S. Senators Jack Reed, a Rhode Island Democrat, and Chuck Grassley, an Iowa Republican, re-introduced a bill to make the PCAOB's disciplinary hearings and all related documents open to the public, unless the board orders otherwise. "Investors and companies alike should be aware when the auditors and accountants they rely on have been charged or sanctioned for violating professional auditing standards," Reed said on April 26.
One example the senators pointed to was of a Florida firm, Gately & Associates LLC, which issued 29 additional audit reports on public companies while its case before the board was being litigated. Investors and the companies themselves were kept in the dark the whole time. The board revoked the firm's registration in a 2009 ruling, which the SEC upheld in 2010.
The last time the two senators proposed this legislation, it went nowhere. There's no good excuse for keeping the status quo. If the U.K. can do disclosure the right way, the U.S. can, too. Congress should pass the Reed-Grassley bill.
(Jonathan Weil is a columnist for Bloomberg View. Follow him on Twitter.)