Re:Balance -- Jim Peterson

Merci pour “Le Grande Thanksgiving” – As Art Buchwald Explained It To the French

Even with the many and perplexing challenges that seem out of control and continue to inflict deadly harm upon populations, economies, and social and political environments around the world, the American holiday of Thanksgiving presents much for which we should be grateful.

Vaccines are on their way – for which we appreciate the skill and dedication of their developers, give thanks to the medical and other care-givers and workers who have been tireless in their dedication and support since the onset of the pandemic, and offer prayers that the suffering and losses still to come may with activated and responsible leadership be at a minimum.

The arrival of a new political era cannot come soon enough – desirably with a recovery of the capacity to engage each other in dialog, strategies and actions for the common good in which we are all, for better or worse, responsible and accountable.

In the meantime, on a lighter note, it’s interesting to receive messages from friends in Paris, with whom we shared expatriates' versions of this special day during our years in residence there – suggesting that there may be a universality to the search for communal expressions of thanks.

We always found it difficult to explicate the legend of Thanksgiving to the Parisians – not least because they look down turkey as hopelessly déclassé and inferior to their better-regarded poulets and canards. We were grateful for the version supplied by Washington Post humor columnist Art Buchwald -- first appearing in the International Herald Tribune in 1953, and an annual staple for many years thereafter. It may serve as an invocation -- here -- whether your Thursday observation is by ZOOM, a local grab-and-go, or a traditional family gathering (in which case, for the sake of those you care about, please be properly masked and distanced).

As neither Buchwald himself nor the IHT remain available to be thanked, I can do no better than to wish for all a hearty chuckle; a safe, healthy and well-distanced holiday celebration; and the coming of better times.

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Audit Regulation After Wirecard – Germany Marches Backwards

In French it’s déjà vu -- adopted in English, for lack of an equivalent.

The same in German, and aptly describing the behavior of the German government, dazed and confused in the fall-out of last June’s crash of erstwhile market darling Wirecard.

Confronting the familiar question -- “Where were the auditors?” –- German officials are pursuing the imperative in the DNA of regulators under stress, hoping to be seen as “doing something.” That is, heedless of the ineffectiveness or unintended consequences, they are re-cycling proposals already attempted and no more effective in other countries.

I carry no water here for Wirecard auditor EY, as it defends the enforcement scrutiny and investor lawsuits that center on the hole in the company’s cash accounts of an apparently fictitious € 1.9 billion.

Rather, as aired out in the Financial Times of November 16, a menu of German proposals have the air of familiarity and futility displayed elsewhere over the last two decades: mandatory auditor rotation, further rules on services to audit clients, tinkering with the structure and authority of the regulator, and adjustments in the standards for auditor liability.

We’ve seen these movies before. They were weak in earlier screenings, and are unimproved in this latest re-run.

In the US, Enron and WorldCom brought forth the Sarbanes/Oxley law of 2002 – which influenced neither financial reporting throughout the crisis of 2007-2008 nor such later-exposed scandals as the Ponzi scheme of Bernard Madoff or the corporate fictions of Elizabeth Holmes at Theranos.

In the EU, neither the constraints on auditor’s ancillary services to clients, the infliction of mandatory rotation, nor the introduction of extended auditors’ reports avoided the money-laundering at Danske Bank or the goodwill puffery at Steinhoff.

Mandatory ten-year rotation in Germany might be a wrinkle on the existing EU timetable – although suffering no less the absence of any credible demonstration that extended auditor tenure is in any way associated with audit quality. And the challenges to engage replacement auditors in a supply-challenged market are already on display in the region – see the compliance difficulties of Sports Direct in the UK and the pending default of Plaza Centers NV in the Netherlands.

As for further constraints on services to audit clients, those are already effectively foreclosed by existing EU rules, and in any event do not address the nature or quality of performance of the basic assurance function itself.  

In the UK, the list of recent scandals is headed by the collapse of Carillion in January 2018, with additions including Patisserie Valerie, Thomas Cook, and NMC Health among others. But Brexit and the pandemic have tossed into the ditch the perfervidly critical reports on the Big Audit model, even as the cries for disruption of the Big Four’s structures and market dominance remain untested against the inexorable impracticalities of any alternative. [1]

Broader powers are mooted for the German financial regulator – itself well deserving the opprobrious characterizations of the UK’s shambolic Financial Reporting Council as “toothless” and “useless.” Well and good, but irrelevant to concerns for actual audit performance – because it is in the very nature of a government agency to be resource constrained, limited in vision and initiative, and consistently in reactive mode after-the-fact to the speed, agility and superior imagination of new generations of white-collar malefactors.

Finally, the proposal to raise or eliminate the current auditor liability cap under certain German legal theories raises for two reasons the problem of “be careful what you wish for.”

First, given the relatively immature body of auditor liability jurisprudence in Germany compared with the major Anglo jurisdictions, there is no reason to think that a German court, if convinced that auditor malfeasance in a multi-billion euro scandal was sufficiently grave, would not readily over-ride the damages cap currently set at a negligible four million euros.

Second, the possible consequences of a “worst case” judgment in a case on the scale of Wirecard include the disintegration of the audit firm itself – it being plain, even if not widely recognized, that the Big Four lack the financial resources and organizational stability to survive claims of the magnitude of the Enron collapse that brought down Arthur Andersen in 2002.[2]

Not that any of these observations mean that the German government will find a path out of the mire. To paraphrase baseball guru Yogi Berra on those fans reluctant to visit the ballpark of a loser, “if the audit regulators don’t want to apply good judgment, you can’t stop them."

 

[1] Please see my book of last spring, “DOA: Can Big Audit Survive the UK Regulators?” (Amazon 2019).

[2] For the particulars, please see my book, available on Amazon, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” (Emerald Books, 2d ed. 2017), pp. 56-60.

 

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Voting in America – Lessons at the Polls

 “You can observe a lot by watching.”

       -- Philosopher and baseball legend Yogi Berra

I have views on the still-airing resistance to the called outcome of our recent presidential election. For today I forbear – instead with some non-partisan thoughts on my Election Day opportunity to be an on-the-ground participant in our country’s massive suffrage exercise.

With the eventual result a certainty, it’s a relief to take a break from the chattering heads and their maps and charts. Rather, this is to recognize and give respect to the hundreds of thousands of workers in their recording, tabulating and reporting over 150 million individual preferences, during an on-going pandemic that is expanding out of control.

I volunteered as a “poll observer” -- as I’ve done often over the years. My assignment was in a working-class suburb of a small city, once heavily industrialized and now down-at-heels. The political leanings of the residents were doubtless predictable, but it wasn’t for me to ask, nor have I gone back post-election to inquire.

It was just sunrise as I reached my site – a large high-school gymnasium hosting the apparatus for three precincts. Some 25 county staff had already laid out sanitizers, marked waiting queues in colorful tape, and carefully separated check-in tables, voting stations, and tabulating machinery.

Well over a hundred citizens were on line before the 7.00 a.m. opening, to perform their civic ritual on the way to work – a backlog that held into mid-morning and foretold a record turnout.

The day turned out to be calm and orderly, defined by its lack of drama – belying all the outcries of chaos and conspiracy, before and since. Spacing and mask wearing were almost universal; the official position was that the right to vote over-rode mandated masking, so the handful of violators were tolerated with no more than dark looks.

A scattering who displayed partisan hats and sweatshirts were gently persuaded to remove or cover, and the candidate advocates beyond the doors kept their banners and literature at the required distance.

Not least, nobody pushed the policy, litigated in advance, that the state’s right-to-carry law permitted firearms inside the polling places.

One small encounter confirmed the wisdom of legendary Massachusetts legislator Tip O’Neill that “all politics is local”:

My prior experience was that diplomacy of observers is key, being basically interlopers on the fringes of the authorized workers’ demanding tasks. Well-prepared, I introduced myself to the crew chief with the offer of a large bag of donuts – it being conventional that copious quantities of coffee and sugar are the fuel for the energy demands of the entire operation.

Her initial reaction was bright and cheery. Not only did my offering fulfill the traditional protocol -- at the personal level also, her apple-cheeked profile confirmed her close and intimate familiarity with baked goods. But it was not to be. “I’m so sorry,” she said. “You’re generous to offer. But with the pandemic, we’re not allowed to take in any food from the outside.”

No harm done, and on to work. I checked back later in the morning as the rush eased, to observe turnout figures and ask about issues. “All good,” was her report, “and thanks again for the offer of donuts.”

“Actually,” she said, “the county clerk’s rule on food was that it could be brought in, if you had gone to their office in advance and registered your food and got their permission.”

Pre-registration and a permit requirement for a bag of donuts! Tip O’Neill’s maxim was on full display -- hometown political culture that no stranger could possibly have imagined.

Driving home after my eight-hour shift, and having scrolled the observers’ notes posted to our overseeing state-wide chat room, I pondered several take-aways:  

• Our country’s dispersed, diverse and locally-run voting structure is clunky and inefficient and – like any operation designed and run by fallible human beings – it is subject to a non-zero rate of low-impact errors.

• But the national operation in the aggregate – barely deserving the label of a “system” – is, in the lingo of the scholars of industrial process, “loosely connected.”

• That is, it contrasts with the tightly linked systems that are subject to catastrophic failure when a breakdown of one critical component triggers a cascade of failure – such as a fatal flaw in the launch sequence of a space shuttle, or an intelligence lapse that mistakenly aims a drone attack at a children’s hospital.

Our collective voting methodologies run separately in the individual states, operated locally and staffed by reasonably trained and well-intentioned citizens. The likelihood of widespread and pervasive corruption of that loosely linked aggregation, on a scale significant to affect the overall outcome, is on a pure systems basis so small as to give confidence in its basic integrity and reliability.

Or so I told myself, on my ride home, and as I keep repeating now while waiting for the noise levels to diminish.  

 

It’s not that my usual topics here are dormant -- involving large-company financial information. Concerns there remain widespread and threatening, but are of understandably lowered public priority under the pre-occupying concerns of the pandemic, economic distress and political unrest.

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