Re:Balance -- Jim Peterson

A Case for Mandatory Auditor Rotation? Sharp-Eyed Students Have a Look

With comments due next month, the concept release on mandatory auditor rotation, issued by the Public Company Accounting Oversight Board on August 16 (here), provided an irresistible mid-term assignment for my class in Risk Management. 

It’s been stimulating this fall, to be with a group of students from the law and policy schools of the University of Chicago. We examine the sources of bias, misperception and flawed analysis in the behavior of those charged with governance and leadership – in business, politics and regulation. PCAOB chairman James Doty’s promotion and affection for auditor rotation was a natural.

Ask a group of inquisitive students to find the three central themes in an assignment, and collectively they will find all six – but in this exercise, their insights are on target.

First, in the venerable economics-oriented tradition of the U of C, where the words “opportunity cost” could be etched on a microchip installed in the frontal lobes of new arrivals, it’s no surprise that the PCAOB’s sketchy attitude toward the costs of rotation caught their attention. An example:

“The PCAOB’s proposed new rule and request for commentary seems to be based on a paucity of actual hard evidence and numbers.  (T)he trigger is …“financial scandals at Enron, WorldCom, and elsewhere,”… (but) the PCAOB does not attempt to estimate (even roughly) the costs of those failures, but they acknowledge that any increases in regulation will impose added cost to the financial system.  It might have been helpful for PCAOB to try to offer some way to balance the likely costs and benefits from alternative approaches.”

Going far beyond their skepticism about the doubtful extent of the PCAOB’s economic savvy, however, these samples of the observations of a classroom of curious students show their shared grasp of the agency’s pursuit of a preconceived agenda:

“By framing the issue as a problem with professional skepticism and objectivity, the release seems to ignore other possible explanations for auditing failures, even in the absence of any empirical evidence linking audit failures to the influences it believes is responsible.”

“It appears the conclusion has already been reached that errors and failures are a result of the relationship between the auditing firms and their clients, where relationships and failures are positively associated. This anchoring or early commitment to the source of the problem changes the entire frame of the argument…. The induction that because clients and auditors have long relationships, and there are issues, does not mean that there are issues because of the length of their relationship.”

“Failures of auditing accountability have not been decisively linked to auditing tenure.  There is something of a problem of absent evidence here—though the linkage might seem intuitive, there have not been reliable studies performed to examine alternate explanations.  Thus, the agency is reasoning from a lack of disconfirming evidence.”

“The primary flaw made in the Concept Release is an assumption of causality between audit company tenure and audit failure … likely induced by availability bias, confirmation bias and shortsighted shortcuts… Investigators see numerous longstanding relationships—this has led to an availability bias and confirmation bias—since longer relationships are a norm in this industry.”

“The WorldCom and Enron scandals are the “black swans” that … should be considered when creating policy decisions. However, it would be a mistake to believe that all swans are black because you have seen a black swan.” 

The well-observed “absence of evidence” is only the beginning, however, as put this way:

“The flaws of the Concept Release are not only limited to frame blindness; … the fact on which they relied are biased with the more common traps: anchoring, availability, representativeness, lack of evidence and confirmation bias.”

And the unproven issues of relating to competition and auditor choice were flagged:

“If the market for auditing services is not “competitive” in the economic sense, this should diminish the expectation that a policy of forced rotation would leave businesses with adequate substitutes available for each “round” of auditing.”

One student even got to a nuance on incentives that the PCAOB itself has breezed right on by – the flawed assumption that “Rotating auditors is preferred because an auditor would be incentivized to ‘clean up’ the books knowing another company would look at them when they took over.” Instead, “knowing they will be leaving…the auditing firm could be less incentivized to ‘clean up’ the books, as it would no longer be their responsibility.”

This last insight wanted only the next step, that a successor auditor under a rotation mandate would have no more incentive to raise issues with its predecessor than the other way around, since it will have inherited the obligation to resolve the issue and be responsible for it – the classic deterrent to quality that “If you raise a problem, then you become the problem.”

I could not conclude any better than as one student most pungently put it:

“The remedy (of mandatory rotation) comes not from informed research about the problem but from a formulaic dealing with problems of integrity and a Band-Aid based in biases.”

 

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The "Independent" Auditor's Real Client? Time to Re-Assess, I Kid You Not

 "Ahh, but the strawberries -- that's where I had them. They laughed at me and made jokes, but I proved beyond the shadow of a doubt and with geometric logic that a duplicate key to the wardroom icebox did exist, and I'd have produced that key if they hadn't pulled the Caine out of action"

    --Capt. Philip Francis Queeg, 1954

Comprehensive review of the scope and language of the standard auditors’ report has been long overdue. So with measured enthusiasm (here and here), the initiatives of both the Public Company Accounting Oversight Board and the International Auditing and Assurance Standards Board are welcome.

High on the list of barriers to clear thinking and potentially constructive evolution, however, is the persistent canard, renewed by PCAOB member Steven Harris at its June 21 public meeting (here), that auditors “must fully embrace the concept that the company paying their fee is not their client.”

This proposition is confusing in logic, wrong in history, and malign in its influence. Until snuffed out once for all, it will continue to deflect and distract from the achievable task of re-engineering a role for outside auditors that brings real value to the community of financial statement users.

Since the middle of the 19^th century, when Mr. Deloitte and his pioneering colleagues were first engaged to assist the “auditors” of Victorian-era public companies – themselves selected from among the body of corporate shareholders, to advise their fellows in their shared financial interests – the auditor/client relationship has been contractual, consensual and private.

The appliqué of “public interest” has been allowed not only to stick, but to become an incrustation on the auditors’ appropriate functions. Fostered since its infancy by the newly-invented profession itself, to its discredit and lately to its mortal threat, the label did fend off – if only temporarily – the prospect of government-provided assurance – but at high cost and under the now-realized hazard of exaggeration and misapprehension of its capacities.

The shaky structure on which Harris bases his claim, that “the ultimate client of an auditor of any publicly traded company must be investors” is the 1984 case of United States v. Arthur Young. There, perpetuating the unfortunately long tradition of judicial malappreciation of the auditors’ role, Chief Justice Burger invoked the inapposite image of the “public watchdog” -- that “the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.”

As a matter of jurisprudence, Burger’s gratuitous dictum was unnecessary to the Court’s holding that tax accrual working papers could be reached by IRS subpoena.

And as a matter of unexamined rhetoric, Burger defied the logic of canine behavior, by expecting even the most vigilant watchdog to bite the very hand that feeds it.  

Events have now shown that on such a tenuous rationale, the bulky but fragile edifice of constrained client service and “appearance of independence” cannot stand. 

Critics such as Harris of the “pass/fail” audit report model have much to complain of – but there will be no solutions in shooting at the messengers, for continuing to deliver this outdated and devalued commodity product. 

Instead, history provides many examples of the dangers that lurk in broadening the distance that separates the payor of fees or benefits from the subsidized interests ostensibly served:

• Raising the limits on depositors’ insurance incentivized the reckless behavior of the American savings and loan institutions in the 1980’s, underlying their ruinous boom-and-bust.

• Lodging the management of health care cost reimbursement decisions with self-interested insurers has opened the doors to the waste, abuse and mis-allocations in the pricing and delivery of medical services.

• And most recently, requiring an issuer-paid rating agency’s report as a “green light” to sell complex derivatives was a central element in the inflation of the subprime-mortgage driven crisis that has plagued the financial markets for four years and counting.

None of which is to say that the “agency problem” of close auditor relationships with corporate boards and managements can be addressed successfully by the further intrusion of government. The prospect that an audit regulator could take on and satisfy the task of providing even today’s out-dated “pass/fail” assurance is beyond Panglossian fantasy or imagination. 

Rather, hope for progress lies in a realistic re-framing of the results that can reasonably be expected from the auditors, in an environment where legitimate and valuable new forms of assurance can be designed and delivered.

Which requires putting aside inflated language, moderating unrealistic expectations, and nurturing the profession’s acknowledged and considerable expertise.

 

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Mandatory Auditor Rotation -- PCAOB Chairman Doty Takes an Old Idea Out for Another Spin

Say this for Jim Doty, the new chairman of the American audit regulator – he is willing to pack his bags and go on the speaking circuit. Following his May 5 gig in New York (here), where he flagged the prospect of a re-visited approach to the standard auditor’s report (my thoughts here), the PCAOB head was off to California on June 2 (here).

There he promised “a holistic approach to addressing the cultural challenges inherent in auditing” – a notion whose meaning will emerge in time, out from behind the sloganeering of “addressing relevance, credibility, and transparency of the audit by all available and effective means”(emphasis his).  

His one specific is to drag back out, yet again, the question, “whether mandatory audit firm rotation would help address the inherent conflict created because the auditor is paid by the client.”

As Doty at least has the candor to concede, “the idea of a regulatory limit on auditor tenure is not new.” It was not new when examined in 1977, as Doty cites – back when audit choices included eight large firms and a real middle tier – nor yet again in the post-Andersen era of the Sarbanes-Oxley law of 2002.

But – unlike fine wines or monumental architecture, which will mellow and improve with age – a bad idea does not acquire respectability with the passage of time.

Since the proponents of rotation are undeterred by the only available evidence -- namely the experience of Italy, where both mandatory rotation and divided responsibility between two audit firms were part of the context of the debacle of Parmalat – two other arguments should bear:

First, the feasibility of rotation clashes with the reality of global concentration. The Big Four now have a virtual lock on large-company assurance; as the risk management leaders of the surviving mid-tier firms would admit (if only off the record, and despite the public posturing of their leaders), the smaller firms could not take over the audit of a global-scale bank or airline or manufacturer or service enterprise, if handed the job on a no-bid silver platter.

The consequence – again with focus on the world’s largest companies where both the risks and the concentration are greatest – is the absence of auditor choice imposed by the constraints of service delivery under the shibboleth of independence.

That is, a large company, engaging one Big Four firm for its audit, will disqualify another that is used for consulting services, and a third that provides financial and transactional advice.

Then comes into play the factor usually omitted from discussion, namely the uneven distribution of expertise around the large world economies. Consider the varied market-leading significance of KPMG in Germany, Ernst & Young in France, Deloitte in Spain or PwC in the UK or Switzerland. A global-scale company requires audit services in all of those countries, and US rotation requirements would be viral in application -- but shortcomings in available industry competence and geographic coverage would constrain alternative choices. Enforced rotation would confront severe dislocations, amounting in effect to unachievable demands.

The second branch of the two-fold parochialism seemingly behind the recurring advocacy for rotation is that it somehow favors an improved mind-set of auditor skepticism.

As if the assurance function had ever reflected the kind of innocent, pre-lapsarian virtue ascribed by the proponents of “independence.”

History is to the contrary. Since its invention in the Victorian 1850’s by Mr. Deloitte and his counter-parts, professional assurance has been under the direct engagement – and payment – by the owner-managers, who until then had selected “auditors” from among their own, surely-interested ranks.

The nascent profession, together with its clients, saw off the proposal of nationalized government audit in the 1860’s in England, and did so again in the US in the 1930’s. Over an unmodified 160-year history of “client pays,” the full-service firms’ economic incentives to satisfy those paying clients’ audit needs have been at least arguably no more than for a firm deriving no revenue at all from ancillary services.

So the intellectual stability of the entire structure of appearance-based independence restrictions and limitations on the scope of permissible services resembles nothing else than an elaborate edifice built on the shifting fragility of a sandbar.

I’m therefore obliged to take issue with the enthusiasm of the commentators on Doty’s speech – not least, my blogging colleague the usually insightful Tom Selling, who in the Accounting Onion proffers applause and pride at Doty’s tone and plan of action.

In the park around the corner from my house is a decades-old carousel – beloved by hordes of small children who for one euro can circle in safety astride old-fashioned wooden horses, stabbing and grasping at the rings held out by the grizzled operator of the ancient apparatus.

The metaphor extends. There is no more adult substance to Doty’s spin on mandatory auditor rotation than there is to the revolving fantasy of an antique and anachronistic merry-go-round.

 

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The Role and Relevance of Audits: PCAOB Chairman Doty Creates His Own Expectations Gap

 There are at least two positive reasons for attention to the New York speech delivered on May 5 by the PCAOB’s newbie chairman James Doty – here.

Although no rhetorical threat to the real wordsmiths of the Beltway, Doty has the ability to turn an adult phrase -- finally re-writing the agency’s longstanding pattern of turgid language and opaque vision.

As can be seen, first, in his readiness to reject the “structural alternatives such as a third-party payor or insurance-based system,” or to see the trial balloons floated in the UK or in Brussels to break up the Big Four – properly “the bailiwick of competition authorities” – as having a “negative effect on audit quality.”

Modest applause – these diversionary detours being long since exposed as dead ends (see here and here). 

Second, Doty offers relief at last – although perhaps inadvertently -- from the otherwise reluctant but compelling conclusion that since passage of the Sarbanes-Oxley law in 2002, the PCAOB has managed to pass from immature ineffectiveness directly to self-perpetuating inertia without ever achieving a record of real accomplishment.

Namely, a healthy admission of the agency's inward focus is at least implicit in Doty’s acknowledgement that auditor oversight and quality enforcement are shrouded in PCAOB confidentiality and concealed from public transparency and deterrent impact. The same inference is recognizable in Doty’s reference to recently commenced “joint inspections with U.K. and Swiss authorities” – surely two of the lowest-hanging fruits dangling from the limbs of cross-border enforcement – only showing the glacial pace of progress over nine years.

Meanwhile for candor and completeness, his concession of an inability “to inspect a registered firm’s work” in context of the “growth in the number and size of Chinese companies seeking access to capital in U.S. securities markets” requires acknowledgement of this year’s outbreak of litigation claims against Chinese issuers – catalogued by the ever-informative Kevin LaCroix’s D&O Diary, and the risk-based subtext of the PCAOB’s own March-dated research note.  

Credit as due for these positions, but the Chairman ventures onto even riskier ground.

To start, his cheerleading that the auditors’ “lofty status” as “guardian of a cultural value” is akin in importance to electricity or water, presumes to invoke the name and record of the late chief accountant of the SEC. But the legacy of Sandy Burton’s 1980’s advocacy for greater auditor responsibility only highlights the absence of substantive change over the span of an entire generation. 

Likewise, Doty’s critique of the payment model by which “the auditor is hired and paid by the company itself” is devoid of vision for change in a structure embraced since the emergence of independent assurance to assist shareholders in the Victorian era of the 1850’s.

The market's vote for persistence of “client pays” does not fault the limited influence of audit committees on economic relationships having 150 years of history, pace Doty’s slap at their lack of impact. The durability of that model and the absence of viable alternatives only expose, instead, the intellectual fragility of the entire cosmetic attempt to regulate “appearances of independence” and the richly-deserving consignment of that sacred cow to a decent burial (as I have written for years – see here and here). 

Rather, it is the narrow and anachronistic language of the current compliance-oriented audit report itself – a document having value in today’s environment not by the free choice of issuers or users but only because required by the fraternity of regulators to which Doty himself belongs – that operates as a shackle on innovation.

Here Doty stands exposed. Correctly recognizing that “auditors don’t have a natural incentive to evolve their reports to what investors want” – a position long argued (e.g., here, here and here) – Doty has put down a major marker: He promises a “concept release” for early summer, to consider “how the auditor’s report can be changed to provide more useful, relevant and timely information.”

Can the Chairman really mean it? And how, without conceding that his own agency (along with the SEC) holds the keys to the lock?

He avows that “there is no silver bullet to address these challenges.”

But in this he is wrong. That bullet today is loaded in the deadly weapon of litigation roulette, which aims existential exposure at the large firms for their issuance of the very reports Doty purports to recognize as failing to deliver value to users.

To disarm that weapon – to create and nourish an environment in which real innovation in assurance and investor value can be brought forth – will require a leader's brave step, up to now unimaginable: scrap as worn-out and useless the obsolete one-page compliance report, along with the devastating machinery of liability that has grown to encage it, and start with fresh and creative authorship, written on an entirely blank page.

The first PCAOB chairman left office with the admission that regulators “don’t have a clue”(here). Today's occupant not only has the opportunity to show otherwise. Doty's speech makes hostage to fortune and accountability in office his own readiness to act.

 

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Will the Auditors' Real Clients Please Stand Up? You're Lost Among the Mixed Messages

I try to raise the sense of my students in Risk Management for trends, patterns and common themes – early awareness being an opportunity for effective strategy.

So when the muddied state of auditor-clients relations was twice and separately further obscured in recent days, attention should be paid.

First, a reader sent me a lament overheard at a Thanksgiving table -- a second-year audit staffer at a Big Four firm, who had been trying without success to persuade his 38-year-old supervisor that there was a defect in the results of their engagement performance. The futility of his efforts was leaving him with the dispirited feeling, as he put it, that he had become in effect an employee of the client.

The second, at the AICPA’s Washington conference on SEC and PCAOB developments, was SEC Chief Accountant James Kroeker (here) – advocating “a change to our collective vocabulary…. (D)on’t use the word ‘client’ to refer to the management of companies under audit…. (I)t is time to give serious consideration to changing the perceived ‘client’ in audit relationships.” 

The uneasy dilemma of the beleaguered young staffer is no surprise, because among the many pernicious effects of Sarbanes-Oxley has been a three-fold degrading of the auditor/client relationship. From an advisory role to one of adversity and compliance – and so forms-and-process based that young professionals lack the environment in which to learn and absorb actual client business -- under on-going stress on revenues and profitability, the firms’ clear imperative to their staff is to complete the work needed to issue another commodity report, “on time, within budget, and without making waves.”

The dynamic for an eager but career-sensitive young professional is no better put than by my senior-level friend: “When you raise a problem, then by definition you become the problem.” No wonder, then, when “client satisfaction” – the long-popular mantra across the spectrum of commercial activity – readily elides to “client capture.”

While back in Washington, the vagueness of Kroeker’s musings became truly misleading as picked up and re-broadcast under the 140-bit limits of the profession’s twittering critics – mutated to the direct question “who is the client?” as if the auditor’s “primary responsibility was to investors, not the companies they audit.” 

Kroeker and his agency are of course entitled to advocate for a nationalized audit function carried out by civil servants. If so, let them say so with candor, and let the debate be engaged – it will be revealed quickly enough how the community of financial information users would compare the value of today’s archaic and obsolete report with an equivalent document delivered by federal agencies distinguished by their inaction during the tumultuous events of the last three years.

Until then, it requires recalling that it has been a basic premise since the 1930’s passage of the American securities laws, when the profession lobbied successfully for private control of the assurance franchise, that the company under audit does the hiring and pays the bills.

Indeed, the disregarded consequences of that plain election in favor of an unambiguous definition of “client” are amply shown in the vast amount of time and energy wasted in the intellectually ineffective attempt to define with precision what constitutes an “appearance of independence,” in light of the contractual and economic linkage of direct auditor engagement.   

It is also readily recognized that important rights and obligations arise outside the strict confines of a provider-client relationship. Concepts based in agency, trust and fiduciary duty are familiar – as is legislative authority to create duties based on extra-contractual reliance and expectations, whether for investors, consumers or even innocent by-standers.

But it does no favors to the complex challenges to evolve a valuable and sustainable audit function, to blur the lines of accountability with careless invocation of an ill-defined shift in client identity.

Or as I also try to instill in my MBA students, the guidance is still relevant as laid down by 18^th century lexicographer Samuel Johnson, that “sloppy language is a mark of sloppy thinking.”

As the poor staff auditor is learning under career-threatening pressure, the issues facing the role of auditors are already sufficiently profound. From the senior regulators in Washington, they deserve clearer articulation than they now receive.

 

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Disintegration of the Big Four Audit Firms? As They Tell the House of Lords, "We Don't See That on the Horizon"

The epitaph for the private delivery of audit services to the world’s large global companies was written in London on November 23.

During its generally amiable ninety-minute stumbling around the topic of auditor concentration – available here and observed on here and here -- the House of Lords Economic Affairs Committee queried the invited heads of the Big Four, “You do share the general unease about the fact that it could be Four coming down to Three?”

For the quartet’s response, the senior partner of Deloitte’s UK firm, John Connolly, contributed this entry to the lexicon of the self-deluded: “I don’t see that on the horizon at all.”

Which will go down next to the grim valedictory of Citigroup’s Chuck Prince in July 2007, that “as long as the music is playing . . .we’re still dancing,” only months before his forced departure, or – closer to home – PCAOB chairman William McDonough’s concession in September 2005 that among the regulators, “None of us has a clue what to do if one of the Big Four failed.”

Although memorable language would not be expected from a “numbers guy,” Mr. Connolly’s invocation of an empty horizon has real resonance.

Military comparisons are inevitable – and instructive. General Custer did not foresee danger from the invisible Indians. The American forces at Pearl Harbor were heedless of the approaching Japanese. And to Hitler, the beaches of Normandy were both well-defended and bare of Allied threat.

While in this decade’s uniquely impactful if unforeseen event, nineteen Saudi thugs with box cutters in their backpacks begat a world-wide season of terror, destruction and disruption, the effects of which have altered history.

As with these examples, and the grievous lessons that emerge only in the hindsight of the short-sighted, Mr. Connolly’s handicap is the limit on his vision – because a clear view of a blank horizon is of little value if the surveyed circumference extends no farther than arm’s-length.

I am indebted to my friend Shyam Sunder at the Yale School of Management for the Sanskrit folk tale of koopa mandooka – the “frog in the well”, which lives in blinkered comfort so long as confined within the boundaries of his closed little world.

But should he venture forth, the perils of the world outside are unknown. It may indeed be a paradise, full of succulent insects and comfortable lily pads and luscious companions with which the frog can disport and sire entire populations of little tadpoles.

Or, it may be a hell of deadly predators – voracious snakes and hawks and sharp-toothed fish. Or a searing desert beyond the fringes of the oasis, where a clueless frog will be pan-seared in minutes.

Unless informed and prepared, the frog in the well has no way to differentiate a prosperous future from one of mortal danger.

And the consequences of his ignorance are just as fatal as those of being wrong.

Here’s what the Big Four leaders might have said, in answer to the Lords’ call:

“We not only share your unease. We are terrified for the survival of our firms – not so much for our generation, who if fortunate may hope to ease soon into retirement, but for the future of a profession that depends for its sustainability on the talent and commitment of our younger personnel.

“Our ability to provide valuable assurance remains important to the capital markets. But it must evolve beyond the binary choice, whether or not to pronounce “true and fair” -- a choice exposed in the banking crisis by our delivery of unqualified audit reports on soon-to-fail institutions as not only unresponsive but affirmatively dangerous.

“Yet we are shackled to obsolete reporting by regulatory requirements confining us to an unhelpful commodity product. What is needed is no less than a fundamental re-structuring, under which:

• “Supplanting the current report form which no longer serves a useful purpose, we could tailor our reports to the real needs of particular users.

• “Our ability to deploy a full range of services would include access to the expertise of non-audit personnel to achieve more sophisticated performance and improved quality.

• “The interests of investors would be reasonably supported by government oversight, enforcement and protection such that our reporting would not create liability exposure of a magnitude that would destroy us.”

They might have said that. But they didn’t. For want of a vision extending to that far but visible horizon, a golden opportunity was allowed to pass. 

 

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The European Commission's Green Paper on Audit: After the Posturing, an EC Agenda for Real Progress

Say this for EC Internal Markets and Services Commissioner Michel Barnier’s call for public comments on his October 13 green paper, “Audit Policy: Lessons from the Crisis”:

No sooner had I sent in my own ill-tempered two euros worth – here – than my readership statistics showed a serious spike from addresses across the European Union. There’s real interest out there!

Having taken M Barnier to task, I was rightly challenged by readers to stop complaining and be constructive. So with a response deadline of December 8, this is to invite all those concurring that more is required from Brussels than a feckless and ill-informed exercise in redundancy, to register their views at the EU site – here.

The message is this:

All that needs be known is already at hand, to build the agenda for a really effective discussion on the re-engineering of a sustainable audit function to serve the world’s global-scale companies.

It would have these three components:

• Certain basic truths would be taken as established.

• Any further reference to the over-debated but impractical or unachievable “non-starters” would be barred.

• Focus would be on the handful of truly difficult, challenging questions – on which views would differ profoundly, but which are inescapably important to any progress.

In the first category, there may not be consensus on all details, but these propositions are basically beyond debate:

• Other than for purposes of statutory compliance, the standard one-page audit report no longer serves a function that justifies its cost to issuers or the exposure it imposes on auditors. Evolution to new forms of assurance is essential.

• The concentration of large-company audits among the Big Four is down to a critical minimum. A three-firm model is unworkable; failure of any one will disintegrate the entire structure.

• The organizational and capital structure of the Big Four leaves each one exposed to an unsustainable shock, from regulatory or law enforcement proceedings, or a civil litigation outcome in the $ 1 to $2 billion range.

• Regulators and politicians lack the vision, authority or means – separately or collectively – to rescue and sustain a large accounting firm once a shock tips it into a downward spiral.

In the second category, the catalog of “non-starters” includes:

• Liability “caps”, whether monetary limits or allocated percentages of responsibility.

• “Break-up” of the Big Four firms – an act of aggression having neither a rationale nor a basis in law. 

• The emergence of new global-scale entrants to the Big Four’s audit market, whether by merger, subsidy or organic growth. 

• The injection of outside investment into the Big Four’s capital structure, or alteration of existing ownership restraints.

• Mandatory auditor rotation or replacement.

• Contingency plans to replace the management of a firm under existential threat.

• Re-introduction of genuine forms of private insurance, by way of “catastrophe bonds” or otherwise.

Finally, to table a selection of the hard but unavoidable questions:

• What are the forms of assurance that issuers and users would actually value and pay for, and what structural changes are required – competitive, organizational, legislative and regulatory – to enable the evolution of a profession capable of meeting those needs?

• What form of regulatory oversight, inspection, enforcement and discipline would achieve a sustainable balance between investor support and protection and an audit function that is both disciplined and robust? In particular, what is the necessary form and amount of financial involvement of government – whether an investor protection fund, insurance of last resort or otherwise?

• Under a newly-structured audit delivery model, and with a comprehensively refreshed legislative mandate, what are the proper limits and guidelines on the scope of services deliverable to audit clients, and what re-visiting of concepts of auditor independence and conduct are indicated?

The envisioning of a symposium devoted to such an agenda – much less its convening – has yet to occur. Until it does, and the process moves on to real substance, the stability of the current audit model and the four firms providing most of its delivery are both at risk.

 

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Which Large Accounting Firm Will Be "Next to Fail"? It's the Wrong Question

When was there ever so concentrated a burst of public speculation on “which Big 4 audit firm is the next to fail”?

Within a single week, Accountancy Age predicted it would be Ernst & Young; in the blogosphere, Francine McKenna’s wager with Dennis Howlett fingered her ex-employer and bête noire, PwC; and ProPublica reached into the remains of the second tier to round on McGladrey and BDO.

All for very serious reasons, ample to cause sleepless nights among the profession’s leaders. But the voyeuristic speculation as to “which one” is a pointless and mis-directed exercise, because each of these firms – but also Deloitte and KPMG, and Grants too, for good measure – faces multiple overhanging threats on a mortal scale.

All the chambers are loaded in this losers’ game of Russian roulette. So it is an unanswerable question, where the weapon may be pointing when the hammer falls next. It’s also an irrelevant query, too – because it depends entirely on the judges’ docket management on Parmalat, Satyam, New Century, AIG, Bankest, Refco, Sentinel, the Madoff feeders and all the other ticking time bombs.

Instead, the real question should be, “What next?”

On this, for grown-up dialog to occur, two fundamental misconceptions – both lurking in the Accountancy Age article – have to be killed off, once-for-all:

The first is that the large firms’ survival will somehow be assured by government, on the assertion that global-scale companies “will invariably have a legal requirement for an audit.”

If there is any logic here, it is seriously inverted. The regulators long ago conceded that they would be powerless to stop the disintegration of a large firm that reached a tipping point – here and here. Further, when that next step takes down the other three, and unravels the entire suppliers’ market, legislative mandates that there be audits would be as futile as a requirement that all trains be hauled by steam locomotives. No more suppliers: no delivery. Period.

The second fallacy, conspicuous even in an article that displays a truly stunning lack of comprehension of the profession’s structural issues, is that a Big Three would survive the loss of a fourth.

Won’t happen. The uneven concentrations of industry expertise around the world’s large economies, the politically-imposed constraints on auditor choice, and the post-Andersen fragility of the international networks are alone sufficient to show that the Big Four are already down to an irreducible tipping point. One more, and they all go.

While no insider will say so in public, senior risk managers acknowledge that in the coming turmoil of another Big Four failure, the prospect that three survivors would stay in today’s business by accepting further concentration of exposure and liability will be untenable.

That a fundamental re-structuring of the profession will occur is beyond debate – and is nothing new – although answers will only lie in the readiness of all interested parties to get past the posturing to offer constructive, achievable solutions.

Trouble is, none of the critics have either the vision or the authority to lead. There is no available government intervention, to “save” a privately-capitalized Big Four partnership once slipped into a death spiral – here. Nor can the large firms’ collective survival be enabled by statutory requirements that there be audits; if a firm goes down and takes the others, it is as futile as King Canute’s attempt to order the tides, to require delivery of an audit report when the providers are all out of business.

The only alternative to a highly-disruptive disintegration of the large firm networks – and a long shot wager indeed, requiring the most wild optimism to imagine – would be the emergence of Big Four leadership prepared to engage, for the sake of their future, in the “creative destruction” brought forward in 1942 by economist Joseph Schumpeter:

•    To forswear the currently outmoded auditors’ report, which provides no value to the market and is toxic to the sustainability of the firms’ business model.

•    To cut to the heart of the critics’ animosity, by the deep finesse of voluntarily turning the task of issuing low-value “compliance assurance” over to nationalized agencies.

•    To allow the capital and investor markets to ascribe to “compliance audits,” performed by huge cadres of conscripted civil servants, the nominal value they would deserve.

•    To empower the surviving firms to invent, sell and deliver new forms of assurance that companies will buy, and the markets will pay for, under sustainable limits on liability and free of the life-threatening legal exposures as wielded by the class action plaintiffs.

•    To break the antiquated shackles of the compliance-driven limitations of “independence,” so as to build or acquire whatever professional services capabilities may be congruent with the new forms of assurance – whether in systems or technology consulting, finance, law or otherwise.

Starting down such a road would require envisioning an entirely new set of directions for the profession – beginning with the acknowledgment that the current race is going around a one-way track to a dead end. 

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Another Blow to Limited Auditor Liability -- A Non-Surprise from the SEC

As reported in the on-line Financial Times for March 10 – here – the Securities and Exchange Commission has declared that financial statements are unacceptable for US purposes, where UK companies have followed that country’s recent rules permitting negotiated agreements for the proportionate liability of their auditors.

The only surprise about the SEC’s position – which effectively slams the door on the world’s only remotely influential action affecting the large auditors’ deadly litigation exposure – is that it took so long to arrive.

The British initiative was uncertain enough from the outset, but was bound to be dead on arrival. It is not just that Washington’s attitude toward British rule has been revolting since 1776. London had every reason to see the SEC’s hostility right out in broad daylight.

For as I wrote last July – here – the new UK rules were “hostage to the unremitting hostility of the SEC to any attempts to reduce unlimited auditor liability exposure, as well as the uncertain application by US judges of limits contracted under foreign laws.”

Since the 1860’s, when Mr. Deloitte himself led the Victorian-era pioneers of independent audit in fighting off potential government take-over of their newly defined function, the principle has been established that auditor engagement and payment directly by clients were acceptable.

Despite endless futile debates since, no intellectually certain or solid basis has emerged upon which to measure the elusive and ever-shifting “appearance” of impaired independence (see here). So the SEC’s passionate history of opposition to auditor liability limits is matched only by its irrationality.

Which should be a signal to the stiff upper lips in London, whose fallback proposal is to seek the same package via British legislation: Forget it. Fold the hand.

Because the SEC is not about to accept limitation agreements, even in the doubtful case that the UK profession might succeed in shepherding an enabling law through Parliament, it is an immovable opponent. So move on to something productive.

Trans-Atlantic struggles over conflicting regulatory schemes are the common stuff of impasse. Look only at the state of extra-territorial examinations by the Public Company Accounting Oversight Board, still close to immobilized, nearly seven years after the passage of Sarbanes/Oxley, by cross-border conflicts over secrecy laws and client confidentiality. Or listen to the inflamed rhetoric with which UBS is opposing the identity disclosure of 25,000 of its clients – banking secrecy being one of the few topics to arouse observable dudgeon among the phlegmatic Swiss, even with the early signs of reluctant easing.

More importantly, even a UK “success” would be hollow. Proportionate auditor liability – along with its companion, monetary liability caps – are both politically unachievable in the US and, in any event, are ineffectual to solve the fundamental problem, namely the crying fragility of the auditors’ financial capacity to answer litigation claims of death-blow magnitude.

The capital structure of the Big Four partners can be calculated to have upper limits on a worst big case of under $2 billion – here. Yet the size of the recent failures that embroil the auditors extend from the Lehman Brothers bankruptcy, where with $635 billion of assets there is an estimated quarter-trillion dollar recovery shortfall, to the ever-shifting $50 or $67 billion involving the feeder funds to now-jailed Bernard Madoff – and lists of other claims, complex to maintain but readily accessible (here). 

With those numbers over-hanging, no reasonable Big Four chief executive could with confidence send a team of trial lawyers into court, with the life of his firm in their hands, but depending for survival on achieving a jury’s fault allocation at a percentage in the low single digits.

So – taking note of the dictionary definition of a chimera as “an impossible or foolish fancy” – the SEC’s entrenched if churlish animosity should inspire the large audit firms to re-deploy the well intentioned but misdirected resources they have devoted to this futile exercise.

For the large firms, “liability caps” is a losing position – whether as skirmish, battle or campaign. Better to select a ground for change on which there is some non-zero possibility for success.  

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If the Banks are Nationalized -- Why not the Auditors?

I’ve been in a lively exchange with Francine McKenna (Re: The Auditors) – she of the stiletto heels and equally sharp tongue – especially about her tart message last week to Senate banking committee chairman Christopher Dodd (D-Conn.):

“Demand PwC be fired as AIG’s auditors, and get rid of Fannie Mae and Freddie Mac auditors (Deloitte and PWC, respectively). Have the PCAOB audit them directly.”

Take Francine’s position (elaborated here) for discussion, without necessarily agreeing, that the Big Four should be stripped of their engagements for the large financial institutions subject to government rescue or take-over. At the heart of the concern: with all the Big Four carrying death-penalty litigation into the current mess, and all being targets of new mega-claims, there are no available private alternatives.

Her interesting view is that with Fannie and Freddie taken over – and with the government’s controlling interest in AIG and about to invest in nine of the country’s largest banks -- its interests and those of taxpayers are best looked after by a government-run audit function as well.

Expand the PCAOB’s current remit, she says, or create a new form of inspector general.

Despite a skeptical first reaction, this may be the plausible path to the re-engineering of the model of private assurance -- which I’ve been arguing (for example, here) is inevitable with a litigation-driven collapse of the Big Four themselves.

Here’s why:

First, Francine sees no problem in building a federal audit agency. Currently the PCAOB has 500 staff. To build a remotely credible capability, it would have to grow by orders of magnitude, at all experience levels and in world-wide locations. But personnel will be available: The wave of bank failures, bail-outs and mergers is drastically reducing the population of surviving institutions, so the net loss of clients among the Big Four is about to put small armies of bean-counters on the streets.

While it is depressing to think of the creation of yet another vast bureaucracy, the civil service manpower needed through the years of the trillion-dollar bailout reduces opposition to a quibble. It does require noting, however, that the hiring will be of those unable to migrate their stature and compensation in the private sector – namely, the superannuated and the second-rate – not exactly a recipe for staying ahead of a sector of mind-bending complexity.

It bears asking, also, how the concepts of independence and avoidance of conflicts could be squared with the appearance of one agency auditing another. But since the intellectually sound argument for “independence in fact” gave way decades ago with the rationalized acceptability of “client pays,” it would be an easy step to condone a cross-Washington audit function.

As for the questionable value in the market place of an report both by and for the government, the current one-page “pass-fail” audit report is already a no-value anachronism (see here), useful only for statutory compliance but of no useful purpose to investors. So it could as well be done by a collection of civil servants, with the diminished level of attention and respect it would deserve.

Government assumption of audit responsibility opens this tempting door:

Even under state ownership, the huge and complex financial institutions will have undiminished future needs for sophisticated and specialized assurance – in such areas as financial product design and evaluation, process execution and operational soundness – which the Big Four should be both able and enthusiastic to design and deliver.

Freed from delivery of low-value but litigation-laden audits, they should in reason be evolving their services -- only under contractual terms unburdened by the threat of investor claims.

To be sure, for the sake of transparency and accountability of public funds, the banks themselves might well choose to offer to the outside world the reports they would obtain from the Big Four (or the niche providers who would no doubt arise by spin-off or new growth) – but this would be under strict limitations of warranty and liability. 

Tasting both the potential stream of new revenue and the liability relief offered under such a model could be heady for the Big Four, who might well see the potential to extend the model across the entire spectrum of public companies.

In practice, they could tender to a new audit agency the keys to their now-outmoded franchise – thereby finally unshackling themselves from its unsustainable burden. By evolving into sources of real user value, they would escape the looming fate of catastrophic collapse.

Senator Dodd has not given Francine the courtesy of a response – which seems a little ungracious, for a politician savvy enough about the new media to run his own blog and subscribe to an instant message platform.

Especially when she has lit the fuse on an issue ripe for political leadership. By taking up this opportunity, under Dodd’s sponsorship, the large firms could be enabled to survive --- to re-design their assurance products, to re-discover relationships with their clients, and to restore their purpose. 

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The Future of Auditors as Gate-Keepers -- A Glossary of The Non-Solutions

Do investors get real value from their gate-keepers? It was a main question at a conference of international investment managers where I spoke last week.

This group -- who sit over funds across the spectrum from public employee and union pensions to hedge funds and private equity – had common concerns: corporate governance, ethics, compensation and performance, and the quality and reliability of the third-parties – the analysts, rating agencies and outside auditors.

On the subject of the auditors, I had a brief opportunity to offer this three-fold view – familiar enough to regular readers here, but beyond orthodoxy to many in the audience (and with thanks to Mark Cobley at Financial News Online for the uptake):

•    That the traditional form of auditor’s report is obsolete and provides no investor value, especially compared to the possible forms of assurance that are impossible under the current model -- here;

•    That the overwhelming pressures on the Big Four firms render their current business model unsustainable, and their litigation-based exposure makes disintegration inevitable, absent a radical and comprehensive re-engineering – here;

•    That the current dialog on achievable solutions is vapid and sterile, due to denial, blame-shifting and the limited vision of all of the interested constituencies -- here and here.

In the ensuing barrage of panelists’ skepticism, audience questions and post-session follow-up, I was challenged to answer in single sentences to all the standard one-dimensional “solutions” to the fragility of the current Big Four structure.

Bringing those exchanges together here, with links to their more extensive treatment elsewhere, seems worthwhile – even if only in sound-bite form: 

•    Q: Why isn’t the litigation threat to the Big Four well handled by insurance?

A: Having learned from the savings & loans in the 1980’s the expensive lesson that auditor liability fails the basic criteria for insurability – diversification, predictability and quantification – the insurance industry has voted with its feet -- here.  

•    Q: If lack of auditor choice is the issue, how about creating competitors by splitting up the Big Four?

A: For starters there’s no workable legal theory. Either industry and geographic expertise would stay concentrated, in which case nothing is achieved, or they would be so split up that today’s talent level would be severely diluted.

•    Q: Can’t the issue of Big Four concentration be solved by built-up competition from the smaller firms?

A: The size gap is just too large to bridge – see here – and the smaller firms are if anything even more at litigation risk – see here. Anyway, smart risk managers in those firms would avoid global-scale engagements for which they lack either the skills or the risk appetite.

•    Q: If the rules on audit firm ownership were relaxed, wouldn’t outside capital both strengthen the Big Four firms and support new competitors?

A: The Big Four don’t want or need extra capital to run as they do – here. And the bankers have shown they are smart enough not to sacrifice new money that would only fuel the litigation fires.

•    Q: How about improving audit quality by requiring the rotation of auditors?

A: Italy being the only large country to mandate changes in auditors, experience provides a one-word rebuttal: “Parmalat.”

•    Q: Doesn’t a system of joint or dual audit promote higher quality of performance?

A: Proponents in France, which has almost no history of auditor liability litigation, would quickly change their tune when joint auditors became subject to 100% joint and several liability in the courts of other countries.

•    Q: Isn’t the problem of impaired audit independence the fact that it’s the clients who pay the bills?

A: Consider the alternative: funding audits through an agency or regulator amounts to nationalization – and no one makes the case for audits by government civil servants. 

•    Q: How about caps on litigation liability – either money limits or percentage allocation of fault?

A: Because the size of claims arising out of large corporate failures so completely dwarfs the limited financial capability of the Big Four – here – the political process cannot set a survival bar so low as to ensure the stability of a large firm under serious litigation threat.  

•    Q: Wouldn’t performance standards based on principles rather than rules recognize the judgmental nature of auditing?

A: Standard-setters cannot reduce the liability threat, so long as it is courts and juries who assess auditor fault and liability, unless there is the readiness – so far unseen – to enact “safe harbors” to protect the auditors’ judgments.  

•    Q: If another Big Four firm were failing, couldn’t regulators waive the scope of service limitations so that another firm could step in?

A: Even if the large firms weren’t so ostracized already that this solution is politically untenable, they are already fully-stretched and without resource capacity, so that when another firm crashes, the three survivors could not possibly pick up the pieces out of the wreckage. 

•    Q: If another firm is threatened with disintegration, how about replacing its tainted management with a credible outsider?

Q: As shown by the failure of Arthur Andersen despite Paul Volcker’s well-meaning initiative, the speed and complexity of a disintegration would out-strip any outsider’s powers or resources – see here.   

•    Q: In the end, won’t the regulators act to prevent the collapse of another global audit firm?

A: There is no more candid response than the concession of William McDonough as he neared the end of his term as chairman of the Public Company Accounting Oversight Board: as to what the regulators would do about another disintegration threat, “they don’t have a clue.”

These are sound-bites only, as I said, and I may have missed a point or two. Either way this compilation should be a good reference point. Please don’t hesitate to write with your reactions and suggestions.

Independent Auditors' Reports -- If They're Obsolete, What's the Alternative?

On March 27 I posted an earlier column from the IHT -- here -- which suggested that the concept of auditor independence is providing no value to either auditors or users of financial information, but is worthy only to be scrapped. The follow-up column summarized broad reader concurrence, and opened the question what should replace the now-obsolete one page report.

Auditing on the Brink

Originally published in the International Herald Tribune on April 8, 2006

I recently put forth the argument that, because of the doubtful prospects for survival of the global accounting firms, the rules of auditor independence should be scrapped and the auditors freed to solicit whatever business they liked.

I expected to be treated as if I had impugned the combined athletic divinity of Pelé, Joe DiMaggio and Tiger Woods. But no, the responses were both positive and supportive. From a reader in Belgium, "Auditor independence is not only killing knowledge, it is killing business." From France, "Leaving ethics to the auditors' conscience should suffice."

To go the next step, a comment from Britain - "the key issues are the integrity of the auditor and the transparency and completeness of the audit conclusions" - pairs up with the poignant view of a retired partner in a Big Four global accounting firm that the code, rules and constraints of independence are worth preserving as "the very essence of what the auditors are selling."

But these views lie at the heart of the problem, which is the dirty little secret of the auditing game: The auditors' core product - the one- page report with its opinion that financial statements are fairly stated and free of material error - is providing no value to investors or other users. No one reads it or pays attention to it. If not for the deeply embedded compliance requirements of the securities regulators, no rational chief financial officer would engage outside auditors to produce it.

The presumptive value of the independent audit report, which has come down to us from the Victorian era, has been one of those Jeffersonian verities - manifest, unexamined and immune from critical challenge. But the evidence of its irrelevance is compelling.

The most sophisticated investors have long since stopped relying on audit reports. This is shown by the fact that, in the past 20 years, no lawsuits against auditors have been brought by the really smart guys - the venture capitalists, the managers of private equity or the financiers of leveraged recapitalizations. These users look at the cover of an annual report, yawn, and go about their real diligence.

Less sophisticated investors also ignore auditor reports, as shown by the complete disconnection, during the bubble years of the 1990s, between share values and audited financial results. Soaring share prices were supported by neither assets nor earnings under generally accepted accounting principles - nor, in time, even by revenue. The analysts herded their clients, and each other, down roads paved with airy business plans, empty promises and inflated expectations. At the point of collapse, the audit report provided only a ticket to the courthouse.

That audit work of real value could be delivered to users who would be prepared to pay handsomely is a proposition that deserves to be tested.

Here, off the top of my head, are examples of special audit reports that a savvy post-Enron chief financial officer would commission:

Focused attention, after Shell, on the procedures for evaluating petroleum reserves and the results of that evaluation.

Line-by-line scrutiny, after Parmalat and Bawag PSK, on the operations of Cayman Islands subsidiaries and Caribbean trading partners.

Detailed portfolio scrutiny, after Fannie Mae and American International Group, on complex financial instruments like derivatives and finite insurance.

Investment banks and investors in search of best-in-class assurance would line up for such information, and on contract terms that would eliminate ruinous auditor liability. And they would not give a tinker's damn for auditor independence. Their focus, and expectation, would be top qualifications and good-faith performance.

But not today. The combination of ossified compliance requirements, obsolete practice restrictions and runaway liability mean that auditors today could not sell such products even if they wanted to.

Those who pine for the days when an auditor earned broad professional respect by detailed examinations of the distinct items in corporate accounts are entitled to mourn. What they cannot avoid, however, even through the best-intentioned sentimental wishes, is the inevitable evolution that has taken the profession to the brink.

Valuable forms of financial statement assurance remain to be created and brought to market. What form the profession will take that will do so remains a vital question. The only certainty is that the structure will be different from the one that exists today.

Auditor Independence -- If There's No Value, What's the Point?

The latest example of finger-pointing in the credit market turmoil is the examiner’s report placing blame for the bankruptcy of subprime mortgage lender New Century Financial upon its auditor, KPMG. Released yesterday, and available here, the report echoes the drubbing that fell upon Andersen over Enron – a no-win subject for the auditors: “By which are you more corrupted – your breadth of client relationships, or your fee levels in general?”      

Public discussion is finally beginning to focus on the reality that the familiar model for auditor assurance on large-company financial statements is flawed to the point of requiring fundamental re-structuring. Especially in the absence of coherent and achievable solutions, however, one element deserving attention is the obsolete and over-valued concept of auditor independence.

So this column, originally published in the International Herald Tribune on March 24, 2006, retains its relevance.

Setting Free the Auditors

The American writer Dorothy Parker, who never shied from afflicting the comfortable, put it this way: "If you can't say something nice, come over and sit by me."

Parker would have been aghast at the self-congratulatory atmosphere among the regulators of the world's securities markets. According to them, the problem of dubious corporate accounting has been solved by strictly limiting the kinds of services the auditors can provide to clients.

There is nothing more sacred in auditor-client literature than the notion of auditor independence, which dates from the founding of the profession in the 19th century.

Yet with auditors today stumbling under the weight of litigation - each of the surviving Big Four accounting firms having a list of cases large enough to be fatal - this unexamined burden has become yet another millstone. And a proposed solution circulating in the halls of Washington - involving a waiver of the Sarbanes- Oxley rules limiting the scope of auditor services to clients - is a political nonstarter.

So I say it is time to stop making nice and to discard a 150-year-old piece of conventional wisdom. The concept of auditor independence does not serve the interests of investors.

Audit performance - and more immediately, the survival of the large firms to serve their global clients and the capital markets - would be better achieved if the current independence requirements and constraints were scrapped altogether.

Auditors should be free to provide their clients with any services within their skills. The only thing that should be required is comprehensive disclosure of all relationships, to be evaluated and decided by the voting power of the marketplace.

Some will be scandalized by the suggestion that the sacred cow of auditor independence should be led off and humanely put out of its misery. But there's a reason it should be done.

Regulators confess to being clueless about what will happen when the next of the Big Four accounting networks disintegrates under the combined pressures of hostile law enforcement and overwhelming shareholder litigation. (Think it can't happen? After Enron and Arthur Andersen - and the $456 million fine over questionable tax shelters paid by KPMG to escape indictment? It's Russian roulette out there, and the gun is full of bullets.)

The purest argument for driving the profession back to audit-only basics has always been that as clients pay the fees, for services of any type, auditor independence is inevitably subject to compromise.

But to finish that thought, in a system so inherently subject to corruption, auditors should never take any fees from their clients. So who will pay? Inserting a government-run fee and license structure amounts to nationalizing the audit function - an idea that figures nowhere in rational dialogue. And there are no other volunteers around.

Likewise, the argument that consulting fees corrupted auditor behavior was always a bit stretched. Heady as that stream of revenue was, it was the money itself, not the source. It could be said, in fact, that auditors who depend on audit fees alone are under even more pressure to accommodate client wishes. And whenever that accommodation has turned ugly - Andersen's travails with Enron being only the most egregious example - it's the firms that pay. As recent history shows, they have neither the reputation nor the capital to bear the terrible cost.

Clearly, the accountants garner neither respect nor liability protection by complying with these enforced codes of independence. They, and their clients, would deliver better value if audits were based on a comprehensive understanding of and involvement with the business. In other words, auditors need to be closer to their clients, not farther away.

Who better to ensure that financial statements are free of error than a professional who designs, installs, operates and maintains the system that accounts for the transactions of an enterprise - the very services from which today's auditors are barred?

This does not dismiss the importance of accountability or of oversight. Regulators have their place - but only under systems of liability that address the reality of today's deadly threats.