Saturday, March 10, 2007

Big Four to Uncle Sam: "Protect us from the consequences of fraud" It's not enough that the Big Four accounting firms (PricewaterhouseCoopers, Deloitte & Touche, KPMG, and Ernst & Young) dominate the world auditing business and can pretty well dictate conditions to the corporations that must need them., now more than ever thanks to the dreaded Sarbanes-Oxley corporate accounting rules. Now, these dominant companies also want to be protected from liability when they screw up. That's according to a story in the Washington Post ("Accounting for the Future," 3/9/07), which start with the question "With only four major firms left in the business, are there too few to let any fail?" The firms say yes (no surprise) , and want Congress to pass a law shielding them from lawsuits for professional malfeasance brought by disgruntled shareholders of companies they have audited. The big Four are working hard on ways to "create safe harbors that would shield auditors from legal liability." The issue is that these companies are over and again caught involved in fraudulent practices, not unlike those that sank erstwhile Big Five member Arthur Andersen due to its Enron involvement. And most notoriously, KPMG nearly faced a similar threat in 2005, when it was found to be selling abusive tax shelters. In that case the US government decided the auditing firm was too important to fail, and gave the company a hefty fine, but no death sentence. Both EU and US securities regulators have started floating the idea of limiting liability, but consumer groups are up in arms, believe that the threat of a lawsuit, after all, is what keeps auditors honest. The Securities and Exchange Commission (SEC) is getting major pressure to lighten up on the accounting oligopoly. "The agency is the linchpin in the audit firms' effort because they think a Democratic Congress is unlikely to carve out special exemptions for the accounting industry, which has profited handsomely by charging higher audit fees for intense reviews of corporate books." The irony is that the companies seem to be making record profits (there is little transparency since these are private partnerships with no published balance statement). The lack of clarity about their financial position makes it impossible to judge the impact of those legal settlements that do occur. We are being asked to subsidize companies whose books are deliberately kept closed, companeis that are busy keeping out any other competitors. Even worse, the number of cases against accounting firms is on the decline over the past years. According to the article, there were only nine cases in 2005. The reason for this is that it's very hard to win such a case; the plaintiff has to prove that the auditor actively colluded in fraud, not an easy thing to do. All businesses want the government to protect them (and subsidize them, if possible). Oligopolies are best at this; they have the money and therefore the ability to persuade. They also, in this case, have the "too big to fail" argument. In other words, give us a pass on the only real risk in our business so we can maintain our dominance. There's no nead for there to be only four major accounting/auditing firms. There's good reason not to - these firms do not compete except at he margins; all of them have too much work to do and they are in a position to squeeze their clients without mercy. If it only weren't for that fear of being sued after actively helping an Enron, a WorldCom, or a Parmalat deceive their own shareholders and creditors. It's such a burden! In this way, wealthy oligopolies get protection from disruption by taxpayers. 1:27:44 PM

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