In February the White House made a proposal to have the Public Company Accounting Oversight Board (PCAOB) that was created by the Sarbanes-Oxley Act to be absorbed into the SEC to save on costs. Arthu

6/11/2020 Without an Independent W atchdog, Who Will Audit the Auditors? - WSJ

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The T ru m p a d m in is tr a tio n i s c a lli n g f o r t h e S ecu rit ie s a n d E xch an ge C om mis s io n t o

a b so rb t h e i n dep en den t P ubli c C om pan y A cc o u n tin g O vers ig h t Bo ard . T he p re sid en t’s

b u dget p ro p osa l s a y s t h is w ou ld r e d u ce d u pli c a tio n o f f u n ctio n a n d r e g u la to ry

a m big u it y .

Y et s o m etim es t h e g o vern m en t w e s e ek t o e ra se e x is ts f o r a v ery g o od r e a so n — we j u st

h av e t o r e ca ll w hy i t ’s t h ere .

T he P C A O B was e sta b li s h ed b y l a w t h ro u gh t h e S arb an es-O xle y A ct o f 2 0 02. S arb an es-

O xle y p ass e d t h e S en ate 9 9 -0 a n d t h e H ou se b y 4 23-3 i n t h e w ake o f a cc o u n tin g-r ela te d

sc a n dals , i n clu din g E nro n a n d W orld C om , t h at l e d to t r illi o n s o f d olla rs o f i n vesto r

lo ss e s a n d t h e b an kru ptc y o f a o n ce -v en era te d a u dit o r, A rth u r A nders e n L LP.

W it h t h e t r a u m a o f f r a u d a n d t h e b u rs t d ot-c o m b u bble f r e sh i n t h eir m in ds, l e g is la to rs

a n d t h e Bu sh a d m in is tr a tio n s o u gh t t o d ra w u p r e g u la tio n s f o r t h e p re v io u sly s e lf -

r e g u la tin g a u dit p ro fe ss io n . O ne r e su lt w as t h e P C A O B, a n on pro ﬁ t o rg an iz a tio n , w hic h

This c o py i s f o r y o u r p ers o n al, n on -c o m merc ia l u se o n ly . T o o rd er p re se n ta tio n -r e a d y c o p ie s f o r d is trib u tio n t o y o u r c o lle a g u es, c lie n ts o r c u sto m ers v is it

h tt p s:/ / w ww.d jr e p rin ts .c o m .

htt p s:/ / w ww.w sj.c o m /a rt ic le s/wi th ou t-a n -in dep en den t-w atc h dog -wh o-wi ll- a u dit -t h e-a u dit o rs -1 15 8 215 6537

OP IN ION | COM MEN TA RY

W it ho ut an I n d ep en d en t W atc hdo g,

W ho W ill A udi t t he A udi to rs ?

Con gre ss s h ou ld r e fu se T ru m p’s r e q u est t o a b olis h t h e o ve rs ig h t b oard S arb an es-O xle y c re a te d .

By A rt h u r L e vit t

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re p orts t o t h e S E C b u t i s o th erw is e i n dep en den t. I t c o n du cts r e g u la r o vers ig h t o f

au dit o rs , t h e o n es w ho a re s u ppose d t o c o n du ct o vers ig h t o f p u bli c c o m pan ie s. W hy d o

au dit o rs n eed a u dit in g? Be ca u se a u dit o rs m ake m is ta kes— so m e o f c o m mis s io n a n d

so m e o f o m is s io n . A udit o rs c a n b e s lo p py. A udit o rs c a n b e g u lli b le .

A udit o rs , i n s h ort, a re n ot a ll- k n ow in g. M ore c rit ic a lly , t h ey o ft e n w ork f o r l a rg er

o rg an iz a tio n s t h at s e ll o th er p ro fe ss io n al s e rv ic e s, s u ch a s a d vis o ry , t a x a n d

in fo rm atio n -t e ch n olo g y w ork . T he s o -c a lle d Bi g F ou r a u dit o rs — Delo it te ,

P ric e w ate rh ou se C oop ers , E rn st & Y ou n g, a n d K PM G— all b oast s ig n iﬁ ca n t n on -

au dit in g b u sin ess, w hic h a re g ro w in g s o u rc e s o f g ro w th a n d p ro ﬁ t, a n d a m ajo rit y o f

re v en ue .

By co m paris o n , a u dit in g i s a p ro sa ic , s lo w -g ro w in g b u sin ess. T he r e su lt i s a n

im bala n ce o f p ow er w it h in t h e ﬁ rm s: A udit s m ay b e h ow t h ey ’r e b est k n ow n, b u t o th er

se rv ic e s a re m ore i m porta n t t o t h eir b u sin ess. W hat, t h ere fo re , i s t o p re v en t a n a u dit o r

fr o m s o ft e n in g a j u dgm en t o n a c o m pan y’s q u estio n ab le a cc o u n tin g p ra ctic e s i f t h e

cli e n t i s d an gli n g n on -a u dit w ork ? T he i n ce n tiv es c re a te a c o n ﬂ ic t b etw ee n t h e

in te re sts o f t h e a u dit o r a n d t h ose o f i n vesto rs .

W hen I w as c h air m an o f t h e S E C i n t h e 1 9 90 s, I c a lle d a tte n tio n t o t h is p ro b le m .

Audit o rs , I a rg u ed b efo re t h e d ot-c o m b u bble b u rs t a n d t h e E nro n a n d W orld C om

sc a n dals e m erg ed , a re c rit ic a l t o t h e t r u st t h at i s a t t h e h ea rt o f o u r ﬁ nan cia l s y ste m .

“S ou n d a n d v eriﬁ ab le ﬁ nan cia l r e p ortin g i s t o ﬁ nan cia l m ark ets w hat o xy g en i s t o

b re a th in g,” I s a id i n a S en ate h ea rin g o n a u dit o r i n dep en den ce i n S ep te m ber 2 0 00.

T hat’s w hy C on gre ss h ad l o n g h eld p u bli c a cc o u n ta n ts r e sp on sib le f o r u phold in g t h eir

in dep en den ce — both i n r e a li t y a n d i n p erc e p tio n .

It ’s n ot e n ou gh t o b e i n dep en den t o f o th er c o n sid era tio n s i n p erfo rm in g t h e a u dit .

In vesto rs m ust a ls o h av e c o n ﬁ den ce i n t h at i n dep en den ce . T he a u dit in g p ro fe ss io n ’s

f a ilu re t o m eet t h at e x p ecta tio n i n t h e l a te 1 9 90 s i s w hy t h e P C A O B was c re a te d . 6/11/2020 Without an Independent W atchdog, Who Will Audit the Auditors? - WSJ

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That i s n ot t o s a y t h e

P C A O B’s w ork h as b een

sp otle ss. C rit ic s s a y, w it h

s o m e m erit , t h at t h e b oard

c o u ld b e f a r t o u gh er. F in es

a re r e la tiv ely m in or, a n d

au dit o rs r a re ly p ay t h e

m ost u n ple a sa n t p ric e —

b ad p u bli c it y — when t h ey

d o a s lo p py j o b. I n

a d dit io n , f r o m t h e

beg in nin g, t h e S E C ’s

n om in atio n s t o t h e P C A O B

an d s u perv is io n o f t h e

board ’s p erfo rm an ce u n der S arb an es-O xle y h as f a lle n s h ort w hen i t c o m es t o

o b je ctiv it y , i n dep en den ce a n d i m pro vin g a u dit q u ali t y .

Bu t t h e P C A O B is , o n b ala n ce , a v ery g o od t h in g. C on sid er t h e a tte n tio n a u dit o rs p ay t o

q u ali t y -c o n tr o l r e p orts i s s u ed r e g u la rly b y t h e P C A O B . W hen t h e b oard p eg s a n a u dit

ﬁ rm i n a q u ali t y r e p ort, i t ’s u su ally b eca u se o f s ig n iﬁ ca n t a n d s e rio u s c o n ce rn s a b ou t

acc u ra cy a n d e ﬀ ectiv en ess. T he r e su lt i s a t h oro u gh r e v ie w o f t h e e n gag em en t, t h e l e a d

p artn ers a n d w heth er a u dit p ro ce ss e s f o llo w ed s ta n dard s o r d ev ia te d f r o m t h em . A udit

ﬁ rm s t a ke t h ese m atte rs s e rio u sly , a s t h ey s h ou ld .

A ban don in g t h e P C A O B wou ld d is ru pt i n vesto rs a n d m ark ets . I t w ou ld l i k ely

u n derm in e c o n ﬁ den ce i n t h e a u dit p ro fe ss io n i t s e lf . A ft e r a ll, t h e P C A O B is p rim arily

f u n ded t h ro u gh a n “ a cc o u n tin g s u pp ort f e e” o n p u bli c c o m pan ie s a n d b ro kers , a n d

th ere h as n ot b een a n i n vesto r o rg an iz a tio n I k n ow o f t h at h as c a lle d f o r t h e P C A O B to

b e a b oli s h ed .

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Wou ld t h e S E C b e a b le t o c o m man d t h e s a m e r e sp ect a s t h e b oard ? N o. T he

co m mis s io n ’s m an date i s a lr e a d y f u ll, a n d t o m eet t h e e x p ecta tio n s s e t f o r t h e P C A O B

w ou ld r e q u ir e a n e x p an sio n o f s ta ﬀ a n d e x p ertis e n ot c u rre n tly f u n ded b y t h e T ru m p

ad m in is tr a tio n ’s b u dget p ro p osa l.

T his i s a n u n se rio u s p ro p osa l, a n d I u rg e C on gre ss t o r e je ct i t a n d t h ere b y a ﬃ rm t h at

th e P C A O B pla y s a v it a l r o le i n o u r ﬁ nan cia l-m ark et r e g u la to ry s tr u ctu re . W e k n ow

w hat h ap pen s w hen w e i g n ore t h e i m porta n ce o f a u dit o r i n dep en den ce b eca u se w e’v e

se en i t . N o o n e w an ts t o s e e i t a g ain .

M r. L evi tt w as c h a ir m an o f t h e S ecu rit ie s a n d E xch a n ge C om mis sio n , 1 9 93-2 0 01.

T his c o py i s f o r y o u r p ers o n al, n on -c o m merc ia l u se o n ly . T o o rd er p re se n ta tio n -r e a d y c o p ie s f o r d is trib u tio n t o y o u r c o lle a g u es, c lie n ts o r c u sto m ers v is it

h tt p s:/ / w ww.d jr e p rin ts .c o m .