Re:Balance -- Jim Peterson

Fear and Loathing at the Airports – The Transportation Security Administration Brings Its Own

Which of these two scenarios at Chicago’s O’Hare Airport should be more distressing? The flight I missed by three minutes a week ago, in the midst of the nationwide chaos caused by the TSA’s managerial ineptitude and deliberate slowdown tactics, or my ten-minute breeze through their checkpoint yesterday, when a plethora of uniformed staffers were standing around giving attention so cursory as to make illusory the notion of “security.”

(A detour from my usual topics of attention? The TSA muddle offers at least a teaching moment for my graduate students in Risk Management, as well as useful “how not to” lessons in strategy, communications and client service for those in business and professional services.)

A full hour and a quarter in the TSA scrum last week gave me ample opportunity to observe the agency's clear strategy of dilatory “work to rule.” Just one lane was open, which used the wretched scanner model that forces the emptying of pockets down to a chapstick. The single burly and surly TSA staffer had no back-up to handle any extra pat-downs, but was stripping and re-scanning frustrated would-be passengers one at a time, literally down to their cufflinks, while the waiting line stretched long enough down the concourse to deserve frequent traveler points of its own.

Yesterday, by utter contrast and at the same hour of the day, processing was so expedited that there were as many TSA personnel lounging around as there were passengers in the fast-moving queue. Three lanes were open, using the walk-through machines. The announcement was “coats and shoes stay on, computers stay in their cases.” Responding to “step right on through,” we moved so fast that the supply of plastic bins had all piled up on the other side.

Along with the rest of the flying population, I had planned ample extra time – with my own prior mis-adventure and taking seriously the reports of thousands of missed flights and rows of cots broken out for airport sleep-overs. There was one visible result of TSA’s tactical shift – the early-arriving crowds simply shifted the bottlenecks to beyond the scanners, forming lengthy queues at the Starbucks and McDonalds, and putting seats in the lounges at a premium while they waited out their now-excess margins.

Transparently displayed as was this wild variability in TSA staffing and tactics from one week to the next, the agency’s rapid ability to shift gears completely deflates the credibility of its assertion that a long-gestating problem requires long-term (and doubtless costly) fixes. To the contrary, post-9/11 inflictions at the airports have never been more than agency optics and the political manipulation of popular anxiety. Requiring plastic bags for toothpaste and hair gel has no more detected or deterred determined aggressors than has the bare-footing of grandmothers. Effective profiling and incisive algorithmic analysis have real effect; not so, the costly, annoying and pernicious disruptions of the national transportation system for the sake of TSA hiring figures or overtime budgets.  

Perhaps worst of all – when my bilious exercise of my First Amendment rights should trigger a full-body search the next time I fly, my chances of identifying the responsible bureaucrat will be the same as the utility of the entire exercise – exactly zero.

 

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Gaudeamus Auditors? Instead, the Vatican Casts PwC from its Temple

Because profound issues of governance and institutional politics pervade large entities, of all types and in all locations, it’s worth noting the recent flurry of activity at the top of the Catholic Church.

To start, the news wires lit up with the May 12 announcement by Pope Francis of a commission to study the possibility of women as deacons. With this start from scratch -- while the debate on women’s participation in corporate boardrooms, legislative bodies and university faculties has long moved to questions of real progress -- optimism must be tempered. The opening of formal dialog suggests that while full clerical participation will not be available for women any time soon, a long forward step has been taken.

As for more mundane matters of Vatican governance and finance, the news was less up-beat.

That is -- since the year 313 AD, when Constantine bestowed his imperial favor and benevolence on the early Christians, the Church has managed to render successfully unto Caesar, uninhibited by the assistance of outside auditors.

So after seventeen centuries, it would have involved both a real cultural shift and considerable internal dislocation in December 2015, when the Vatican announced its engagement of PwC to perform history’s first independent audit of the Holy See.

Political reality soon intruded, however, with the unsurprising news in April 2016, that PwC’s audit was being “suspended.”

Only the most naïve and credulous would take as gospel the official Vatican version, that “issues have emerged regarding the meaning and scope of certain clauses of the contract and their methods of implementation,” or the suspiciously explicit spin that sought to disavow any “considerations linked to the integrity or quality of the work initiated by PwC, let alone the intention of one or more entities of the Holy See to block the reforms in process.”

Background first. As known to experienced auditors, “first-time-through” can make the Herculean project to hose out the stables of King Augeas look like a once-over with a handi-wipe. The international standards on auditing require in part (IAS 510(6)), in the start-up work on a client’s opening balances, that:

“The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain misstatements that materially affect the current period’s financial statement by:

(a) Determining whether the prior period’s closing balances have been correctly brought forward to the current period or, when appropriate, have been restated;

(b) Determining whether the opening balances reflect the application of appropriate accounting policies….”

That work would be especially daunting with no predecessor auditor on which to rely. In the Vatican’s case – where never done before – there would have been no telling what financial skeletons lay deep and restive in those ancient catacombs, only waiting to be discovered and released. Small wonder that those with incentives to avoid the process would resort to postponement, denial and evasion.

Consider the reticence and anxiety, on the part of the Vatican’s functionaries charged with the keys to its treasury, and now called upon to yield up their sacred confidences to a team of invasive outsiders.

In fact a full-blown turf battle has been revealed, since PwC’s “suspension,” between the reform-oriented Cardinal George Pell of the Vatican Secretariat for the Economy, who managed the mandate given to PwC, and the old-school leader of the Secretariat of State, Archbishop Angelo Becciu, who unilaterally and without notice to Pell informed the Vatican entities charged to cooperate in providing information that Pell’s authority was revoked.

(Developments will leak out, from day-to-day and highly managed, on these internal structural struggles; for now, see the Guardian, the Catholic News Agency, and the National Catholic Register.)

Briefly put, when he blessed PwC’s presence, Pope Francis mis-read his subordinate administrators’ readiness to cooperate -– that is, that the auditors’ archeological excavations in the Vatican’s books and records at least threatened to open ancient tombs and sarcophagi where had rested ledgers and records permeated with rot and decay.

Further at the level of actual job performance, a client so insecure and defensive as to pull the plug, at the earliest stages of the engagement, would pretty well meet an auditor’s definition of “an engagement from hell.”

To an outsider, the Vatican’s unseemly internal scrum at the foot of St. Peter's throne might not reach the scale of the Great Schism between Rome and Avignon in the Middle Ages -- perhaps more resembling the scene in Woody Allen’s 1971 “Bananas,” where rival teams of cross-bearing monks degenerate into a melee over a parking place.

In such a fragile environment, hostile factions within the client that could scupper the job at the outset would have ominous implications for PwC’s ability to report in any event. It is difficult enough to assess the veracity of client representations with the skepticism required by professional standards. More so, to raise questions of credibility when the client holds over an inquisitive auditor the potential invocation of celestial fury or the unleashing of eternal hellfire and damnation.

It would suggest no dishonor to PwC if the warfare inside the Vatican obliges them to cap their pens and close their bags and make a diplomatic retreat -- so long as their withdrawal can be sold to the waiting faithful as a professional matter, and not under the threat of excommunication or anathema.

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The PCAOB Hates Altered Documents – Stop Giggling, and Listen Up

 

“(W)hoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully—

(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact;

(2) makes any materially false, fictitious, or fraudulent statement or representation; or

(3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;

shall be fined under this title, imprisoned not more than 5 years….”

-- 18 US Code Section 1001

What part of this venerable provision of the American criminal code is hard to understand? When government agents come calling, they expect the whole truth. It will not go well – however irritating may be an authority’s intrusions -- to mess with a power that holds hostage your license, or your liberty.

So what could have been behind the Public Company Accounting Oversight Board, the American audit regulator, with its April 21, 2016, announcement of a Staff Alert, expressing “concerns about auditors improperly altering audit documentation in connection with a PCAOB inspection or investigation”?

Since its birth with the Sarbanes-Oxley law of 2002, the PCAOB has punched below its weight, with a history of small-bore initiatives of marginal credibility and nominal effect: after years of effort it finally caved on the foolish notion of mandatory auditor rotation; its requirement of a new form by which to identify lead audit partners satisfies nobody; it remains impotent and unable to function in China; and the scalpel it is taking to the basic language of the standard auditor’s report cuts not to the jugular but to the capillary.

What point is there, then, in another exercise in admonitory finger-pointing – unlikely to be of any more impact?

The practice quality and risk guidance of any accounting firm subject to PCAOB oversight should already be clear, beyond any possibility of ambiguity or misinterpretation, on the vital importance of the integrity of working papers – it demeans the expertise and the responsibility of the firms’ senior leaders to suggest otherwise.

History should teach, after all, that the cover-up is often worse than the crime. Gangster Al Capone went down not for his years of violent bootlegging, but for tax evasion; for Alger Hiss it was perjury, not espionage; Richard Nixon’s record of presidential malfeasance in office lay exposed by a bungled burglary in the Watergate apartments.

And right at home – it was the financial impact of Enron’s collapse that rendered Arthur Andersen a terminal patient on life support, but it was the shoddy exercise of document shredding in its Houston office by which the Justice Department pulled the plug.

And the Alert says the same:

The consequences of providing improperly altered audit documentation to PCAOB inspectors or investigators may in many cases be far more severe than would be the consequences of the PCAOB staff identifying the audit deficiency that the revisions to the documentation attempt to obscure.

Which said, fallible humans operating complex systems will suffer inevitable short-comings in performance. There is no perfect set of audit working papers, and the inspectors are well known as fine-screen fuss-budgets. So when the PCAOB comes calling, it’s as with Samuel Johnson’s observation that “when a man knows he is to be hanged, it concentrates his mind wonderfully” – the temptation is intense to buff up and polish the files. Especially for audit teams in subsidiary or foreign locations, who lack first-hand experience with the consequences of being caught out.

Properly advised, however, auditors under inspection pressure have an explicit avenue to both forgiveness and redemption. The Alert itself quotes the PCAOB’s standards (emphasis added and footnote omitted):

Audit documentation must not be deleted or discarded after the documentation completion date, however, information may be added. Any documentation added must indicate the date the information was added, the name of the person who prepared the additional documentation, and the reason for adding it.

With such an emollient invitation to transparency, recourse to file-fixing should be a non-issue.

Which does however go back to the PCAOB’s motives: has it so little respect for the auditors it inspects, or does it launch such an inflated warning signal for the sake of puffing its own modest enforcement authority?  

Either way, audit firms are well advised to treat the Alert with serious sincerity – because lurking behind the PCAOB’s evident self-regard, it has sanctions available that are far more emphatic than the disciplinary tools in its own Lilliputian kit – namely, the option to refer cases up to main Justice for criminal prosecution under the above-quoted provisions of 18/1001.

Put another way, Voltaire may have had it right back in 1759, when he mused that it would be good from time to time to kill the occasional malingering admiral, “pour encourager les autres” – and that’s a risk no auditor should run.

 

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