Antagonisms Among the Audit Regulators -- A Warning Bell, or a Final Toll for the Profession?

There’s a gaping disconnect between the pieties on coordinated regulation of the global financial markets, espoused at last week’s G20 conference in London, and the contrary behavior of the national-level minions on the ground.

Recall Aesop’s simple little tales, where the Greek storyteller often leaves a hanging question. For today, it’s the conundrum that ends the debate among the mice -- just who is to bell the cat?

It is unremarked in fabulist scholarship that from the perspective of the large and dangerous cat, the rodents’ vacillations are inconsequential. Whereas, a seriously threatened interest goes unrecognized – namely, who is looking out for the cheese?

The same dissonance continues in the trans-Atlantic mouse-tussling among the various national agencies that claim to oversee the global accounting firms.

I wrote recently about the Securities and Exchange Commission as international spoilsport, for its hostile declaration that financial statements of a United Kingdom company would be unacceptable for American compliance, if using the legitimate UK rules permitting negotiated limits of auditor liability (here).

In so doing, I had missed an earlier shot aimed the other way. On February 19, EC Internal Markets and Services Commissioner Charlie McCreevy shut down further discussion about mutual recognition and reliance by the various national accountancy oversight bodies – here -- until the Commission receives the Obama administration’s views as to the attitude of the US regulators.

McCreevy may have a long wait.

Back in 2002 when the unfortunate coupling of Senator Paul Sarbanes and Representative Mike Oxley begat the Public Company Accounting Oversight Board, the world of regulatory oversight was not really crying out for the birth of a hegemonic American agency. But it got one anyway, under the “go it alone” attitude of the Bush era.

The resistance made it unsurprising that long-outstanding proposals on cross-border relations – here – have languished unapproved by the Americans:

•    From the passage of Sarbox down to date, as recently as PCAOB Chairman Mark Olson’s platitudinous speech to the Fédération des Experts Comptables Européens in December 2008 – here -- there has been no more than cosmetic attention to the unresolved issues of competing legal systems in such compelling areas as client confidentiality and personal data privacy.

•    Meanwhile the PCAOB has been obliged, faute de mieux, to adopt rules deferring its inspections of a roster of non-US audit firms, in the face of unfinished dialog to resolve the very outstanding issues that have been pending since 2002 -- here.

To an observer interested in the nourishment of international comity, the compound adjective “mickey mouse” is appropriate to characterize nearly seven years of murine antagonism.

While the regulatory mice play cross-border tit-for-tat, unfortunately, the world is not sitting still:

•    Last week’s billion-dollar lawsuit against KPMG by the liquidating trustee of New Century Financial (here) is not the first of the new wave of auditor mega-claims, but it does show that the predatory plaintiffs’ bar continues its aggressive prowling for appetizing targets.

•    And although troubling questions about the role of the accounting profession in the tumult of the global credit and financial markets have largely gone unasked, the question “where were the auditors?” is increasingly heard. There’s the business press – here. The always-trenchant Tom Selling (The Accounting Onion) is as skeptical on the dysfunctionality of accounting standards as I am about assurance. The idea of some form of nationalization is even floated, by both bloggers and academics -- here and here.

The American regulators cannot progress global auditor oversight on their own, beyond and despite all the threat and saber-rattling -- among other places, the PCAOB faces unsolved inspection impasses in China and Hong Kong. For his part, Commissioner McCreevy has put down the marker that continued American bluster means nothing more than further stalemate. But whether Mary Schapiro as President Obama’s new SEC head can cut a path out of the diplomatic swamp – or even wants to – remains to be shown.

This period of uneasy quiet is not a sign of stability – quite the opposite. Nothing has happened since the collapse of Arthur Andersen in 2002 to address, much less to reduce, the potential for a systemic shock to the franchise of privately-provided large company assurance. Yet the continued squabbling among the regulators makes plain their lack of vision or authority by which to collar the many challenges to auditor survivability.

All the while the deliverability of ostensibly valuable audit services to global-scale companies – the block of cheese in this little folktale – sits unprotected and exposed – nibbled away by hostile forces and showing signs of the furry mold of neglect.

Parenthetically, I plead no contest to the several weeks passed in sniffing out McCreevy’s statement, among the emanations from the bilge-pump of the European Commission’s publicity machinery. Oscar Wilde observed that when good American die, they go to Paris – while the city of Brussels, modest as its other virtues may be, must surely be the graveyard of effective regulators’ press.  

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