David Hilzenrath and Nicholas Trevino of the Project on Government Oversight have written a monumentally important investigative report on the failure of the agency set up following the Enron/WorldCom/MCI/HealthSouth and other accounting scandals to take exactly the actions it was designed for. There is a long Washington tradition of capture of regulatory agencies by industry, but this is notable for it speed and for the breadth and depth of its lack of performance. Shakespeare wrote (in “Measure for Measure”), “We must not make a scarecrow of the law; setting it up to fear the birds of prey and let it keep one shape till custom make it their perch and not their terror.” Let’s just say this is a very big scarecrow.
Since the audit cop opened for business in 2003, its inspection reports have cited 808 instances in which the U.S. Big Four performed audits that were so defective that the audit firms should not have vouched for a company’s financial statements, internal controls, or both.
Yet, despite those 808 alleged failures, the audit cop has brought only 18 enforcement cases against the U.S. Big Four or employees of those firms. Those cases involved a total of 21 audits.
If the 808 audits cited as fatally flawed in the inspection reports were as bad as the reports said, it appears that the audit cop could have fined the audit firms more than $1.6 billion—that’s billion, with a “b.”
Yet, since it began working the beat, the audit cop has fined the U.S. Big Four a total of just $6.5 million, POGO found. That’s million, with an “m.”
That’s less than one half of one percent of the potential fines.
We strongly recommend the entire report, which quotes VEA Vice Chair Nell Minow:
Nell Minow of ValueEdge Advisors, who advises investors on corporate governance and who served on a PCAOB advisory panel early in the board’s history, said, “The number one goal is not to bring enforcement actions and impose fines; the number one goal is to get better audits.” But Minow said the gap between the oversight board’s inspection findings and its enforcement record is “very disturbing.”
“The indications are that this is a very significant departure from what the board was set up to do,” Minow said.