All the girls get prettier at closin’ time –
A recent discussion
The Auditors about the
governance of the large global accounting firms was triggered by the UK news that
the Big Four were appointing non-executive directors (here), as contemplated under the Audit Firm Governance Code
published in January by the Financial Reporting Council (here).
Francine McKenna’s blog post (here) included my own skeptical two cents worth, on the unlikely effect on the culture of global-scale private partnerships, and the limited impact of single-country endeavors. It also led to these further pessimistic reflections on the reasons why the FRC’s efforts – however noble and well-intentioned – will create no traction in favor of the firms.
A starting point is
with the process itself: a task force was assembled under the auspices of the
auditors’ own trade group, the Institute of Chartered Accountants in England
and Wales, comprising four members from the accounting firms, seven from large
clients and a single academic. So as to the question of “regulatory capture”:
Would you expect roast goose for Christmas dinner, if the flock got to vote on the menu?
More important is a
proper apprehension of the role of codes of conduct and ethical charters and
all the accompanying high-toned rhetoric. It’s the common confusion of cause
and effect, to view these as drivers
of responsible corporate governance.
The contrary is readily observed. Governance-challenged enterprises from Siemens to AIG to BP could claim the vigor and piety of their pre-lapse structures, and Enron was lauded for years as an American model of behavior.
The FRC’s code (here) rightly identifies the importance of executive “tone at the
top” – but its induction runs the wrong way. In truth, when company leadership really
does “walk the talk,” its employees are infused and its community is served in
praise-worthy fashion -- codes and charters follow
Not only can good governance not be inflicted or imposed, in other words, because resistant leaders will find ways to disturb or subvert the purpose, but a virtuous culture will display its legitimacy without the need for pietistic overlays.
So the FRC is on
the back foot in at least these ways:
First, the Code makes persistent reference to the non-executives’ presumed “independence,” but recitation and reality do not engage. As contemplated, newly-engaged worthies will be compensated under employment contracts, provided with staff and resources by the clients, and insured and indemnified for their conduct – putting them under far closer relationships than the large audit firms are permitted themselves.
Second, the FRC
proposes that non-executives might facilitate communications and reduce
exposures when the large firms face existential threats from litigation,
regulation or prosecution. As floated briefly at the US Treasury Committee on
the Audit Profession in 2008, the suggestion of stand-by management replacement
under similar conditions displayed a Panglossian naïveté that thoroughly deserved
its criticisms (here). But rebuttal need not go so far. If “tone at the top” is to
be successful in a crisis, it has to be engaged first-hand – not insulated or
protected by proxies, delegates or intermediaries.
Finally, the Big Four firms already have an agenda of opportunities to address the credibility gap with their critics, none of which involve the cost or distraction of bloating their boardrooms with outsiders drawn from the available ranks of the great and the good:
- Arguments about the
safety and soundness of the Big Four are going nowhere without their
publication of audited world-wide financial statements. Single-country
information, of the type now available in the UK, leaves unaddressed the
implications of strategic directions, personnel deployment and risk and quality
exposures that span the globe.
- No progress is possible toward a sustainable business model resistant to deadly litigation exposure, so long as the large firms limit their advocacy to summary data and hand-wringing by their messengers -- as witness the sterile paralysis of the Paulson Committee (here). If inflicted on a Big Four firm, the $ 3 billion cost-to-date of BP’s exposure to Deepwater Horizon would already have been fatal (here) – a message supportable only by an available public acknowledgement of the specifics of the large-firms’ list of death-threats.
- Relatedly, it is
past time to recognize that the energy devoted to narrow-focused “liability
reform” and “damage caps” is a wasted effort – not only as a political
non-starter in every major legislative venue, but as unsatisfactory to achieve
sustainability. Legitimate structures for investor protection cannot in the
long run be built on the narrow base of the accounting firms’ partner capital –
the resources are simply not there – but require instead the presence of
government as a resource of last resort.
To the extent any of these require more fundamental re-engineering than that offered by the FRC and the ICAEW – and they do – so be it.
Thanks for joining this dialog. Comments and reactions are welcome, and subscriptions are invited – both at the Main page.