"We've gotta do something, They"re serious this time.
"You know what we gotta do. Toga party.
"We're on double secret probation, whatever that is. We can't afford to have a toga party.
"You guys up for a toga party?"
-- "Animal House" -- 1978
As the October 13 release of the European Commission’s Green Paper, “Audit Policy: Lessons from the Crisis” – here -- by rookie Internal Market and Services Commissioner Michel Barnier, illustrates:
Any newly-arrived bureaucrat, tempted to launch the machinery of inquiry, should first demonstrate the need for further admiration of an already tediously-explored agenda, and the vision and will to do more than re-plow the same sterile ground.
The naïve tone in which the Green Paper articulates the role of auditors, and the clueless innocence of its “questions,” make evident another major exercise in resource-wasting.
The vacuity of leadership vision and reasoning on the grave issue of the viability of global-scale audit has been on view for years -- here -- and continues in Brussels:
The Green Paper starts with the customarily limp and tedious observations – e.g., that audit “provides assurance on the veracity of the financial health of all companies,” and that “continuity in the provision of audit services to large companies is critical to financial stability.”
But this exercise in self-congratulatory amour-propre is empty. Its adherents have never known a world in which public company financial statements have not borne the commodity appliqué of the one-page standard auditor’s report. The alternative proposition, of life without the legal requirement of an audit – an obligation that survives only by force of law, not by market choice – has never been tested.
No less, the last of the weak and aging dinosaurs on their terminal descent into the tar pits no doubt had themselves persuaded of the vital centrality of their role and influence in their ecosystem -- just as the tidal wave of unstoppable evolution was gathering to wash them to oblivion.
Consider a few examples of the Green Paper’s tiresome re-cycling of old material (question numbers are kept; some wordings are streamlined):
Can smaller firms emerge to become viable participants in the large-company market segment (# 27):
Would someone please do the arithmetic? Assume the impossible – that all the small firms doing any public company audits were merged into a single practice. That unmanageable monstrosity would still be smaller than the smallest of the Big Four.
Just as the case has never been made that smaller firms can deliver competitively superior quality of service, their limitations of geographic scope, breadth of expertise and capacity for risk tolerance are disabling to the notion that a Big Fifth can be either grown or built. And their leaders willing to be candid will admit it.
Should alternative structures be explored to allow audit firms to raise capital from external sources (# 23):
A better question: did anyone with business literacy vet the Green Paper? The Big Four capital structures, with their modest partner investments and operations financed by their client receivables, do not need and could not deploy major outside capital if handed over on a platter (here). Rather, such funds would only be a honey pot to attract the further attention of potential litigants.
Would contingency plans, including “living wills,” address the systemic risk of a large-firm failure (# 31):
First advanced in 2008 as part of the cringe-worthy output of Treasury Secretary Paulson’s Advisory Committee on the Audit Profession, this trial balloon deflated without lift-off (here) – for the obvious reason as shown by Arthur Andersen’s rapid disintegration in 2002, that the death spiral of client and personnel flight, once started, is irreversible.
Should audit mandates be limited in time (# 18), or should rotation be mandatory (#29):
To this, the complete one-word answer has always been, “Italy.” The only country of any significance with mandatory auditor rotation – a land capable of producing neither enough children to sustain its population nor enough honest politicians to sustain functional government – did manage to produce the scandal of Parmalat – world-class malfeasance enabled by the rotation-inflicted division of audit responsibility between two firms. Enough said.
Are there benefits to joint audits or consortia including smaller firms (# 28):
The French structure of joint audits is argued for, but is profoundly unsatisfactory as a persuasive example – perpetrated as it is by the lobbying of the small firms’ nationalistic appeals to preserve a miniscule local slice of the world market.
The fanciful notion that minor rump-end participation in an otherwise global-scale audit engagement could give a small firm the muscle to supplant a failed Big Four firm is belied by the record: at present, every audit of the CAC 40 is led by a Big Four firm. If small-firm consortia were credible, there would already be at least one example in practice.
Finally, should audit appointments and remuneration be managed by government (## 16-17):
Consider this long step down the short road to nationalized audit agencies. Nowhere else are markets for commodity products, other than audit reports, subject to such artificial constraints – whether auto manufacturers, retail bankers or espresso vendors.
Yet if viewed as a legitimate target for government take-over, audits performed by low-grade civil servants -- the only ones to find appeal in such a career post -- would descend in value and repute even further to the level of nationally-administered postal delivery, rail service and health care.
It’s all too depressing, to belabor these points yet again. But since Commissioner Barnier looks as green as his paper, the only hope is to administer sunlight and fertilizer and pray he ripens quickly.
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