Re:Balance -- Jim Peterson

The PCAOB Expresses Its Thanks – Mainly to Itself

A second thing strikes a viewer, about the meetings of the Public Company Accounting Oversight Board – after first making the downward calibration of expectations required to cut through the fog of vacuous platitudes that shroud the substance of any real issues. It’s the extraordinary amount of time devoted by the PCAOB members and staff in mutual thanks, back-patting, and general expressions of appreciation.

As a test, I watched a second time the webcast of the PCAOB’s meeting on December 4 -- an agenda led by the announced re-release of the 2009 proposal to require the naming of lead audit partners – not for its entertainment value, certainly, but to assess and compare the efficiency of the agency’s resource deployment against the costs it imposes on the capital markets.

On the dim idea of partner naming itself, my skeptical views are previously stated and well known.

On the PCAOB’s pervasive “thank-you” process, here’s a summary from my simple if tedious exercise in data gathering through the broadcast:

Including duplications, the five PCAOB members themselves thanked their staff by functional groups a total of thirteen times, and specifically recognized 16 of that staff by name – along with three individual staff members of the Securities and Exchange Commission and eight appreciations to various configurations of that agency’s personnel.

Chairman James Doty led the fulsome way, laying on hands of thanks upon all his fellow members as a group and giving an individual shout-out to member Lewis Ferguson.

At the other end of the spectrum, by contrast -- perhaps feeling unusually peckish that morning, or still suffering post-Thanksgiving dyspepsia, or just annoyed at it all -- member Jeanette Franzel managed only a single cursory and generic wave.

Meanwhile, on the staff side, hierarchy seemed to reign. A total of eight functional subordinates received individual expressions of thanks; fourteen were administered more or less laterally to those in other functions, and again, the SEC and its staff were recognized twice.

Total: 64 different mentions – all in only a two-hour meeting.

What goes on here? Neither private enterprise, professional services nor academia work this way. In these realms, egos are deemed assuaged, if at all, by a brusque clap on the shoulder or a passing “atta-girl.” Approval is inferred from silence and the absence of overt criticism. Truly outstanding work is rewarded in the paychecks, and real under-performance is handled with tactless and brutal precision.  

It seems that the PCAOB’s circular chorus of approbation for the heroic labor and stellar levels of accomplishment it ascribes to itself might indicate an institutionalized sense of insecurity and inferiority.

After a decade of regulatory presence-building, rewarded by compensation packages generously above and beyond those of the SEC, does this pervasive atmosphere of ritualized brown-nosing display a fundamental in-house anxiety that the entire exercise is somehow lacking in legitimacy?

At the least, think of the amount of staff and member time that could be saved, and devoted to more productive activities like the development of next year’s budget increase. The hours saved would be huge, if each public meeting could start with a single generic invocation of thanks.

It could be done in standard form, like the agency employees’ routine dinner-speech disclaimer that all staff views are personal only and not reflective of official doctrine. An acceptably ego-satisfying model might be this:

“Grateful appreciation is deemed extended to everyone whose individual brilliance, uniformly above-average performance and Herculean efforts under virtually war-time conditions have made this project such a roaring success. Now let’s go to work."

The partner naming idea was first tabled at the PCAOB in 2005. On that timetable, a “’thank you’ standards project” might, if pursued with the same diligent timeliness, be ready for its third re-exposure by, say, the summer of 2022.

 

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The PCAOB Still Wants Audit Firms to Name Lead Partners -- The Case for Indifference

The day after Thanksgiving is known in America as Black Friday – the opening of the pre-Christmas shopping season, when merchants launch midnight sales and dubious oddball discounts, and hordes of turkey-stuffed consumers storm the malls like barbarians at the gates.

This year the 4^th of December should go down in Washington as Dull Grey Wednesday – the day that Jim Doty, chairman of the Public Company Accounting Oversight Board, hosted a public meeting to release his long-announced and little-awaited plan to require the auditors of US public companies to identify their lead partners by individual name.

By contrast to the chaos in the malls, hordes of investors and other financial information users yawned with indifference and turned back to shopping and fantasy football.

Partner naming has been simmering on the PCAOB’s burners since 2005, well before its July 2009 concept release, but has not improved with age – instead it’s an issue on which neither side of the “discussion” has a persuasive case or advocacy to be proud of.

The profession’s ongoing opposition – here summarized – quakes at the fear of heightened criticism, individual partner harassment and increased litigation exposure. But years of personal partner identification in the European environment are to the contrary, illustrating only a complete absence of concern.

Even in the UK, where partner naming is relatively new, an illustrative example is Deloitte’s report dated May 21, 2013 on Vodaphone’s March 31 year-end financial statements. There the personal signature of its lead partner has attracted not one word of commentary for his selfless if coerced beau geste – even though that report is an important early adoption of the new British requirement for the quantification of audit and reporting materiality – a topic that is evolutionary and by rights worthy of serious attention and assessment, and happily discussed in the press by the head of Deloitte’s UK practice. 

If “who cares?” should be the profession’s reaction to partner name disclosure, then, the case in its favor is no better founded.

As predictable, chairman Doty and his staff cite an academic bibliography that purports to find virtue and benefit in partner naming. But a serious dose of skepticism is indicated.

If the triviality of the issue were not compelling, it would be important to call out the confirmation bias lurking in Doty’s invocation. That’s because the scales of academic persuasion are barely quivered, much less tipped, by such “research” examples as ostensibly erroneous failures to issue going-concern opinions in Sweden, supposedly “abnormal” accruals in the UK, or a sampling of individual partners in China which credits heightened conservatism to those with Big Four experience.

It would be so dispiriting, if it mattered. Not only does recent experience with the fictive nature of Chinese financial reporting support the proposition that “quality Chinese accounting” ranks as an oxymoron up with “Italian justice system” or “Holy Roman Empire.” As well, the validity of report qualifications as a measure of auditor aggression is surely overwhelmed by the requirements of the global regulatory regimes for the anodyne language of clean opinions; witness the unqualified pre-failure reporting of the likes of GM, Fannie Mae and Lehman Brothers.

While reporters such as Edith Orenstein posted pre-release place-holders, the profession’s unremitting critics were in high dudgeon – yet the search still continues for a defensible reason to isolate the leader of an entire audit team, when any engagement of more than minimal complexity must involve a cohort of supporting personnel with distributed expertise and responsibilities sufficient to the task.

Francine McKenna, for example – endorsed by the Grumpy Old Accountant --  urged the politically unfeasible disclosure of an entire partner cohort. But few of the Big Four partners on her villains’ list were actually lead partners, which means that her argument proves too much – since listing an entire partner team plays squarely into the profession’s argument that the audit firm itself is answerable for its performance quality.

To retail investors, it would be a challenge to name the audit firms that serve their portfolio companies – much less would they register the identity of a single partner. While for those charged with decisions that matter – boards of directors, their audit committees and corporate executive leadership – the lead partner is as personally close to hand as a speed dial or a Siri instruction, and public naming is laughably irrelevant.

It may be predicted that the American regulators will have their way, by the middle of 2014 -- perhaps on partner naming, if not on a list of issues of more legitimate substance -- such as the final burial of the miserable topic of mandatory auditor rotation, or the yet-further retreat from the convergence of international accounting standards, or the PCAOB’s inconsequential steps to address the unsatisfactory state of the scope and content of the audit report itself.

Only proving yet again, that in the public evaluation of a regulator, the concept of “first, do no harm” is probably the best to be hoped for.

 

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