With Christmas nearly upon us, these two Grumpy Old Accountants have become a bit melancholy (not totally unexpected at this time of year given our advancing ages), and have decided to ask Santa for some help in restoring the glory of our beloved accounting profession. The result: our Christmas “wish” List for Santa.
Hello. We are writing you this letter to let you know exactly what we would like for Christmas. We are a bit different from other accountants who would be thrilled to receive a tablet computer, the latest edition of Quickbooks, and the like. We also recognize that some in the business community (mostly Big Four partners) believe we deserve a lump of coal for many of our blog postings this year. However, we trust your judgment to recognize that our hearts are in the right place. We have six requests, all of which bring gifts to investors and creditors and would improve the US economy:
1. Please bring the Big Four auditing firms a brand new audit model. The key characteristics of this new model should be that:
- It actually detects fraud and serves as an early warning indicator of financial distress.
- It eliminates the “expectation gap” by giving the investing public the verification process which it expects, not what the current auditors deliver.
- It provides investors with a comprehensive listing and detailed description of all accounting deficiencies found during the audit so investors can evaluate both the quality of an audited company’s financial statements and the adequacy of the audit conducted.
As you will recall, Santa, we first raised our concerns over the audit model in Big 4 Audits: A Thing of the Past? By the way, we think Francine McKenna and Michael Barnier also would appreciate this gift.
2. Please bring the United State Congress a bill that would amend Dodd-Frank and allow the SEC to keep all of the fines and penalties it obtains. It is silly to limit the funding to this agency as it is the most important structure in fighting securities fraud. The budget for the SEC must be increased if the investment community has a chance to read honest and reliable financial reports (James Steward, NYT, “As a Watchdog Starves, Wall Street is Tossed a Bone”).
3. Please bring the Public Company Accounting Oversight Board (PCAOB) more money to inspect and detect poor quality Big 4 audits. Given that these are fiscally constrained times, we suggest transferring monies promised to the Securities and Exchange Commission (SEC) to the PCAOB. Assuming the second wish is granted, the SEC can easily make up this shortfall by increasing their reliance on fines and penalties to fund its operations. Not only would this provide the SEC with a greater incentive to seek out, investigate, and punish those publicly traded companies committing financial reporting fraud, it would also promote higher penalties. After all, isn’t this what enforcement and oversight is supposed to be about?
Santa, we initially noted our worries about regulation in Paper Tigers: The U.S. Accounting Oversight Regime and The PCAOB is Too Soft on Auditors. While we have been critical of the SEC and the PCAOB, we really wish them both a lot of success in rooting out the evils in our financial system.
4. Please bring the United States Congress a bill that will pass with bi-partisan and Presidential approval that:
- Bans political action committees (PAC) for any organization that provides audit, accounting, and/or oversight duties for governmental agencies.
- Bans political contributions by any organization that provides audit, accounting, and/or oversight duties for governmental agencies.
Such legislation would mean that any accounting and auditing firm that provides accounting or auditing services for U.S. publicly traded firms, as well as any governmental agency, would be prohibited from membership in a PAC that lobbies the U.S. government, as well as contributing individually as a firm to a particular political cause. This would reduce the likelihood that Big 4 firms would lobby for rules that favor them, but actually weaken the accounting and auditing structure (i.e., international financial reporting standards (IFRS) and “too few to fail” policies), so critical to the investing public.
Santa, you may recall that we first expressed our concerns about the excessive political influence of the Big Four in Big 4 Audits: A Thing of the Past.
5. Please bring the accounting profession’s leading organizations (particularly the American Institute of CPAs (AICPA) and the American Accounting Association (AAA)) a backbone for Christmas. This spine should be strong enough such that:
- The AICPA reverses course from its current “business focus” to the “professional perspective.” For decades accountants understood that the public interest required them to perform their duties in such a way as to instill confidence in society in general and in the marketplace in particular. However, making money is more important to the AICPA today than the public interest ethic. See Enron’s Tenth Anniversary: Context for Andersen’s Auditing Failures.
- That the AAA reverses course from its current “Big Four and large firm focus” to an “independent academic focus.” Despite its wealth of creativity and talent, the AAA and its members are generally unwilling to challenge the behavior of large accounting firms because of their reliance on these firms for funding and other resources. Consequently, the Big Four roam relatively free to impose IFRS and their poor auditing practices on the unsuspecting marketplace.
Santa, this request is particularly important since the leadership of the accounting profession is seriously at risk. See Where Are the Accounting Profession’s Leaders?
6. Finally, please bring the Financial Accounting Standards Board (FASB) a giant lump of coal for its efforts with respect to Fair Value Reporting, Repurchase Transactions, and IFRS. All we need to say on this issue is Financial Crisis of 2008, MF Global, and condorsement, and you will get the point, no doubt.
Santa, we’d rather not get too much into this last request so as not to ruin our chances in getting requests one through five…we hope you’ll understand.
Thank you so much for listening to our requests…milk and cookies will be awaiting in Philadelphia and State College. Safe travels.
Grumpy Tony and Grumpy Ed
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.