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September 26, 2010

Comments

Francine McKenna

Jim,

What you don't mention when you ask, "Can any scarred survivor of the last three years of Bear-Lehman-Fannie-Freddie-AIG-Merrill – the most disruptive economic period since the Great Depression – argue seriously that auditors’ reports on the “out-of-controls” of those fallen industry giants actually made any positive contribution to systemic safety, stability or credibility? " is that in none of these cases did auditors cite a going concern opinion in the year before their failure. In addition, in only one of those cases was a material weakness cited in internal controls over financial reporting (AIG). I considered that move too little too late and basically a CYA activity on PwC's part. All the while they let the elephant in the room - the ongoing dispute over valuation of CDS insurance contracts sold by AIG and purchased by Goldman, both PwC clients, go unresolved until AIG fell apart and GS eventually got their money.

So I contend that it was not the lack of efficacy of Sarbanes-Oxley but the limp application of it by the auditors and the absence of enforcement of this discipline on the part of auditors' regulators that is to blame. SOx is a good law but not worth the paper it is printed on if no one weilds it on a timely and sincere basis.

Jim Peterson

Thanks Francine. As is often the case, we appear to be on the same page. It could be said that "going concern" and SOX 404 were, during the recent turbulence, related elephants -- cousins perhaps -- going unrecognized in the same room, and for related reasons.
At the top level where this discourse should be taking place is, I urge, the fundamental issue of what type of financial assurance our society is prepared to demand, and to pay for -- and how can a sustainable audit function be designed and regulated to make that delivery -- the present system being so demonstrably ill-suited to the task.

Francine McKenna

@Jim

We are, as you say, in agreement on the main point - the lack of value delivered by the current audit product under the existing business model.

William Brighenti

Perhaps if there were not just four large public accounting firms (nearly three) controlling the marketplace, then maybe quality would improve and cost decrease.

Thanks you, Jim and Francine.

Jim Peterson

William -- Thanks for the thought -- an understandable but unfortunate example of the "nirvana fallacy" -- that is, wishing as if that could only make it so. For well-discussed reasons, limitations of scale, expertise, resources and risk tolerance mean there will be no additions to the Big Four -- and regulators concede that they have no effective policies to enable new entrants.The problems facing tomorrow will have to be addressed with today's roster of players.

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  • © 2007-2018 James R Peterson Special thanks: Francine McKenna. Always with love: Kat and Julie. In memory: Bob White, Stuart Kadison