When the Public Company Accounting Oversight Board finally votes on its long-pending requirement that auditors of US-registered public companies disclose the names of their client engagement partners, predicted for this fall – how will it come out?
In the debate on partner naming, I have been in steadfast opposition, over the years that this pointless idea has refused to die. But while I seldom make predictions, despite a successful record when I do, on this one I am expecting to lose.
That’s because, as the accountants themselves have taught over the decades, life is shaped by the accumulated impact of timing differences – frequently fortuitous.
Here, it could not have come worse for the US profession’s resistance to partner naming. On July 9, 2014, Ventas – the Chicago-based healthcare-oriented REIT – announced its replacement of EY by KPMG, and that EY's opinions on its 2011 and 2012 financial statements were withdrawn – not for any issue with their content, but because EY’s independence was impaired by what the Form 8-K ever-so-delicately called an “inappropriate personal relationship” between an EY partner and the company’s chief accounting officer and controller.
In America it’s all about the sex -- so EY’s unfortunately premature withdrawal will spill with public consequences. History suggests that snarky spasms of commentary will morph into insistence that the PCAOB now oblige lead audit partners to wear a big public “A” around their necks.
Such was the scandal impact a dozen years ago, for precedent, when Enron’s failure in the fall of 2001 and Arthur Andersen’s death spiral the following winter set in motion futile congressional efforts to legislate virtue, headed up by Senator Paul Sarbanes (D Md., ret.) and Representative Michael Oxley (R Ohio, ret.). Whether their early smolder of law-drafting might actually have ignited would have been anybody’s speculation – until later in the spring of 2002, when the spectacular flame-out that was WorldCom turned it into a conflagration of inevitability.
Reason and perspective went out the window. Sarbanes/Oxley was passed into law on July 30, 2002. And the world of financial reporting and assurance has suffered ever since -- even though as I wrote at the time, about the Senate’s unanimous vote of approval, “any legislation receiving the bipartisan margin of 97-0 is bound to be fundamentally defective.”
PCAOB chairman James Doty will be motivated to act -- the handle on his battle-axe lacking recent notches of success these days: His long-standing project on mandatory auditor rotation went limp last February; his efforts at meaningful re-writing of the standard auditor’s report are damply insubstantial; and on his renewed expectation of inspecting audit firms in China by the end of the year, he has been continuingly teased and titillated by the Chinese for years.
There are two aspects of Ventas that should not be submerged under the PCAOB’s grinding machinery. The first is that the EY partner involved – whose still-undisclosed name the voyeuristic must seek elsewhere, as for principle’s sake it will not appear here, but who was promptly reported to have been cashiered by the EY firm – was not the lead partner on the Ventas jobs for 2011 and 2012 – so that none of the supposedly salutary arguments in favor of naming would have been applicable.
The second is that the Ventas stock price has traded upward since EY’s departure -- $ 64.73 at this writing, compared with $ 63.91 going into the July 4th weekend. A fawning report on the company by Fitch and two by Motley Fool may have a bearing, but this uplift also confirms the indifference of the stock-buying public to an independence violation so flat-footed as to leave the company without reliable audited statements.
Which squarely poses the question – just what is the value of auditor independence?
Those prepared to argue against my standing proposition, that the entire anachronistic edifice of “appearance of independence” rests on shifting and unstable sands, and deserves to be washed away with the tides of modernized assurance performance, are invited to comment on these moves in the Ventas stock price.
Meanwhile, in a world governed by principles of robust intellectual coherence, l’affaire Ventas would be no more than a blemish on the flesh with which so much human sin is committed. Instead, if the PCAOB acts in character and imposes partner naming, it is going to fester into a nasty pustule on the body of auditor regulation, to be lanced only with the blunt and painful instrument of mis-guided agency righteousness.
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