Noble Group Limited, the Asian commodity trader -- based in Hong Kong, listed in Singapore and sporting a US$ 15 billion balance sheet -- has a large problem. Under serious pressure since early this year, from short-sellers and critics of its mark-to-market accounting practices, it has seen an unrelieved decline in its share price, from S$ 1.43 last September to S$ 0.41 today, with no bottom in sight.
The company took a less-than-usual step this summer. In an attempt to stop the bleeding, it reached for outside accounting expertise – going not to EY, its regular auditor whose Hong Kong firm issued its standard “pass-fail” opinion dated February 26, 2015, on Noble’s 2014 financial statements (see page 64 of Noble's annual report), but to the Singapore firm of PwC.
Whether or not Noble's maneuver can restore investor confidence, the jury is out – figuratively -- and eventually, as a fair prediction, literally as well. Either way, its enlistment of PwC illustrates two major themes:
- First, an auditor’s brief, traditional and long-familiar opinion is ineffective for credibility when issued on financial statements having the complexity, opacity and level of management estimates and judgments used by Noble.
- Second, focused accounting expertise and tailored reporting on the issues that drive investor agita can have great potential value -- only if deployed in a timely and credible fashion.
Looking at the latter – the skepticism that met PwC’s report was altogether understandable, for several reasons:
First, PwC was able to conclude, as its report dated August 10, 2015, put it, only that Noble’s practices comported with criteria “based on the relevant requirements of (the international financial reporting standards) and standard practices in the industry.”
That might have been persuasive, in an anodyne environment. The guidance in the United Kingdom from the Financial Reporting Council on expanded detail in auditors’ reports – such as that of KPMG on the 2013 financial statements of Rolls Royce -- may show promise, although further experience and study will be needed and are called for. But once public support is eroded, a claim of virtue because “everybody does it” lacks force.
That is, the assertion of compliance with standards is of doubtful effect under stressed conditions. On April 15, 1912, it should be recalled, RMS Titanic was carrying the full number of lifeboats strictly required by the applicable maritime regulations. And in 1973, facing the public outcry that would lead to his expulsion from office, President Richard Nixon persuaded nobody at all with his claim, “I am not a crook.”
Nor does it avail much for the accountants themselves. PwC’s report is addressed strictly to the Board and management of Noble; it rigorously disavows duty, responsibility or liability to the public, and lays out strict limitations on any rights of third parties to rely.
None of these disclaimers would have been available had PwC’s work been done as part of a statutory report. Put another way, valuable as it may yet prove to be, this type of customization would have fallen outside EY's permissible scope as part of its function as the company’s regular auditor.
Nor can PwC’s report be expected to help either Noble or EY defend against claims waiting to be asserted by shareholders – in the United States at least, where compliance with professional accounting standards has been rejected by the courts as a “safe harbor” since the 1960’s.
In any event, the confidence reposed in overly-complex accounting standards was measured by the withering criticism of one of the giants among the fraternity of white-collar courtroom lawyers, the late Peter Fleming: “Forget all the verbiage. Unless your story can persuade a jury with an average tenth-grade education, it’s worthless.”
Little wonder Noble’s share price continues to erode – dropping a further eleven percent on the day following release of PwC’s report, and still sliding.
Noble may survive this onslaught. I would not be betting on it – the portents are to the contrary – but for purposes of a “learning moment,” it doesn’t matter.
What it does drive home is a third theme – that the current model of Big Audit is antagonistic and ill-suited to the problems on display at Noble – because traditional reporting by EY observably supplied no value, while the late-arriving efforts of PwC were only in a context “too little, too late.”
The still-evolving Noble story is a good way to return this space toward a regular schedule. My thanks here for readers' widespread and generous reactions to my recent announcement that, scheduled for late October, Emerald Publishing will release my book, “Count Down – the Past, Present and Uncertain Future of the Big Four Accounting Firms.”
There will be interruptions, mainly for red-pencil efforts when the proofs come over from the type-setters, and to spread the word on pre-publication ordering that can now be done through either Emerald or Amazon. But I look forward to getting back on pace.
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