The Financial Times (July 31, 2023) just released an article on the fight that U.K. auditing firms want to give the United States. It concerns the new rules our government wants to impose on British publicly-traded companies. As a business ethics keynote speaker, business ethics consultant and book author. The push-back over this business ethics issue is fascinating to me.
The Public Company Accounting Oversight Board
The push-back is not coming from random businesses, here and there but from the Public Company Accounting Oversight Board (PCAOB) and within the membership of that board, some of the world’s largest accounting firms. The firms in opposition include Deloitte, PwC, EY and KPMG.
Interestingly, the U.S. wants to shift more of the onus on the accounting firms themselves. According to the Times:
“The world’s largest accounting firms are fighting to block new rules in the US that would force them to take more responsibility for rooting out fraud at the companies they audit.”
The opposition to the increased scrutiny and the demand that auditing firms “scrutinize whether a company is complying with laws and regulations, and to communicate more of their concerns to a company’s board of directors,” is troubling. It comes out of an alleged sentiment that auditing firms have failed to protect investors.
Indeed, the whole call for greater oversight has been ultimately based on corporate neglect of companies to be more ethical as a function of failures of governance, social responsibility and environment issues.
Audit is expensive. So is unethical behavior
As a business ethics keynote speaker, business ethics consultant and book author I understand that increased scrutiny is expensive and will ultimately put pressure on fees. The
Center for Audit Quality, recently stated:
“Auditors are not lawyers and as a result the proposed amendments would expand the auditor’s role to include knowledge and expertise outside their core competencies.” Is that the real reason or could it be that the major accounting firms I listed above are afraid of what it will do to their fee structures? While I realize, asking audit firms to expand their scrutiny may dramatically increase fees, my question is one of, “What choices do we have?”
My blog has consistently posted articles on publicly-traded companies who have been neglecting their responsibilities. This is particularly true when the firms are foreign-based multinationals. I am not alone in this assessment.
The chief accountant of the SEC has stated that the PCAOB, “provided too much ‘wriggle room’ for auditors to avoid confrontation with management when they see potentially illegal behavior.”
The current standards (or lack thereof) are about to create a PCAOB-SEC showdown. However, it is interesting to me as well that relatively smaller accounting and auditing firms are not really having a say in this matter. Do the major firms fear losing business to smaller organizations all too willing to do the required scrutiny?
No one is asking, it seems, to demand that auditing firms become criminal prosecutors. This is essentially the contention of the PCAOB, which is understandable but a bit on the disingenuous side. Unfortunately, examples also abound (and I have heard this confidentially when I deliver business ethics keynote speeches) where there are uncomfortable, long-term relationships between publicly-traded firms and accounting teams.
Audit must apply a neutral wedge into such relationships. If the auditor loses objectivity, the result could be an unethical catastrophe. If the major accounting firms that by-and-large control the PCAOB are fearful of expanded audit, to me, at least it signals more than just concern over the potential for increased billing.
Unethical corporate behaviors may initially be cheaper, for example substandard pollution controls or hidden bribery expenses, they are ultimately much more expensive in terms of fines, negative publicity, shareholder comfort and stock price.
The Public Company Accounting Oversight Board may be “strawmen” for the major accounting firms. In the soon-to-be PCAOB-SEC showdown, many are posturing this as a war of wills. I maintain as a business ethics consultant that it is more appropriately a war of ethics. I cannot see how any publicly-traded company will benefit from taking a low-road. If questions aren’t raised at audit, who will raise them?
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