Boone: “This is ridiculous.”
Pinto: “What are we going to do?”
Boone and Otter: “Road trip.”
-- Animal House, 1978
Of all the goofy reasons for government inaction, the Public Company Accounting Oversight Board’s new tactics on mandatory auditor rotation may take the prize.
A release on March 7 from Chairman James Doty announced the extension from last December to the end of this April, for still further comments – along with public meetings in Washington on March 21–22 and, according to his interview with “Accounting Today,” a roadshow of “meetings of similar importance in at least three or four cities around the country.”
Those searching for sense are left agape.
Doty continues to flog the idea of mandatory rotation, re-raised in the agency’s concept release of August 16, 2011, despite its lack of evidentiary support and its long prior history of rejection (here, here, here and here), and in the face of uniform opposition from those knowledgeable enough to be worthy of attention.
Exhaustively discussed for decades, and deservedly consigned to the dustbin of bad ideas, mandatory rotation cannot be revived with credibility through either of Doty’s attempts to troll for support.
First, the announced list for the Washington meetings reveals a pre-loaded attempt to pimp the agenda. Jamming a two-day program with 47 speakers, mainly old-timers well used to hearing their own pontifications on the panel-and-symposium circuit, guarantees that most of the time will be spent in chair shuffling, self-important CV recitations and bathroom breaks.
The positions of the panelists are all well known and require no further display: stale recycling of four former SEC chairman plus various agency alumni, predictable sanctimony from such “investor advocates” as ex-TIAA-CREF head John Biggs and Vanguard founder John Bogle, automatic resistance from the Chamber of Commerce, and sitting-duck defensiveness by the large accounting firms themselves.
Perhaps least credible is the callback of the leaders of the Treasury Department’s Advisory Committee on the Auditing Profession -- convened as a bearding exercise by Bush-era Secretary Paulson and, to its embarrassment, so riven by division that its 2008 valedictory could not even agree that there really was a grave challenge to the audit function (here and here) – and whose singularly brainless idea, advanced from aloft by Paul Volcker, was the implausible notion of management replacement contingency plans by the large private accounting partnerships if falling into Andersen-like distress (here).
As for Doty’s out-of-town tryouts – what else but a further source of delay and inaction?
That any wisdom will be garnered from beyond the Washington Beltway clashes with the record -- successful delivery of over 600 comment letters, from (as Doty seeks) “communities across and up and down the axis of the United States”– none indicating need of his outreach because all are evidently well-connected to the nation’s capital by e-mail and standard postal service.
Indeed, Doty concedes the can-kicking. As he put it, “We’ll be working on this at this time next year …. This is a protracted process, and should be for an issue that is this fundamental.”
Fundamental it may be – and protracted for certain. But not persuasive. Those like my friends Tom Selling, Dave Albrecht and Caleb Newquist, who support mandatory rotation if only because they recoil by instinct from the large firms and others who oppose it, are urged to consider:
- Weakness in an antagonist’s position, however apparent, is not affirmative support for the soundness of the opposite.
- Human nature consistently underestimates the cost, disruption and unintended consequences of acts taken for the politically motivated sake of “doing something.”
- Finally, the PCAOB still has no answer to this central question, which should be posed to all the panelists and should lead the agenda of all further dialogue:
Where is there any empirical evidence that the incidence of “audit failures”– however defined – correlates at all with the length of auditor tenure?
The same tired script of clichés, recited by the same dumbshow cast, will not answer.
Chairman Doty should recall that in the old days of Broadway theater, revival productions failing their previews in the provinces of New Haven or Philadelphia never made it to the big stage. The third-rate slapstick comedy, “Mandatory Auditor Rotation,” deserves the posting of its closing notice.
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What a great and sarcastic blog-report, once again...Prof. Peterson :-)!
Regarding empirical research: The problem lies in accessing data. Audit Analytics in the US has data from 2000 (but with a lot of variations), in France the only data set one can get is not sufficient enough and scattered, in Switzerland they (FINMA) only gives data from 2004-2008 etc. etc. etc There are just big obstacles to overcome.
Additionally, how do we assess quality? With misstatements, length of report, malpractices and settlements or even prices? Again, here the data doesn't give us coherent and comparable numbers across the countries. So empirical results would be difficult to justify...are not thorough.
More so, if we just compare single countries, we won't get the right answers. For example a study in Taiwan shows that experience is needed (approx. 5years) and then afterwards quality decreases. We should not extrapolate this result.
However, I totally agree with you, but to be fair, this is a task of several months, to get the data manually (Panel Data necessary across countries) and then develop a STATA Regression model on the basis on Two-Stage regression. I would have certainly done something like that already, but the first part, the Data-story, is really not a piece of cake.
Best,
A former student...
Posted by: A Former Student | March 13, 2012 at 06:33 PM