Monday, December 27, 2004
Vanishing auditors
Tom Kirkendall thinks that Fannie Mae, having fired KPMG, may have a very difficult time finding an auditor among the remaining "big four" firms. Why? Because the government decided to prosecute Arthur Andersen out of existence.
This problem extends far beyond Fannie Mae, and its consequences are not helpful for those who call for "improving" corporate governance. Corporate governance nannies -- you know, the people who think that American public companies should be held to uncompromising standards of financial probity not required of any other institution on the planet -- say that "good governance" requires that companies switch auditors every few years. They also get jumpy if a company hires anything less than a "big four" firm to do its auditing. They have demanded and secured legislation that virtually requires companies to put directors with public accounting experience on their own audit committees. They then get extremely jumpy if there is the slightest financial conflict of interest between a board's directors and the company's business. How is a public company supposed to comply with all of these demands when there are so few large auditing firms as a result of the government's own policies? The result will be that more public companies will hire no-name or small-name firms to do their auditing, and there will be less transparency in financial statements, rather than more.
Consequently, the Fannie Mae situation highlights one of the largely ignored consequences of the federal government's dubious decision to prosecute Anderson out of business over its role in the Enron accounting scandal. There are simply not enough big accounting firms left to provide audit services for the big companies that need them. Complicating matters even further is that each of the Big Four are literally under siege from civil lawsuits seeking large damage awards that could cripple any or all of them.
So, we already know that the government's regulation of Anderson through criminalization of their audit services cost the marketplace thousands of jobs and one of the relatively few accounting firms that could provide the specialized services that big companies need. Now, we are coming to understand that this dubious governmental policy of criminalizing auditors may result in big companies not being able to to find auditors capable of providing adequate audit services at all.
This problem extends far beyond Fannie Mae, and its consequences are not helpful for those who call for "improving" corporate governance. Corporate governance nannies -- you know, the people who think that American public companies should be held to uncompromising standards of financial probity not required of any other institution on the planet -- say that "good governance" requires that companies switch auditors every few years. They also get jumpy if a company hires anything less than a "big four" firm to do its auditing. They have demanded and secured legislation that virtually requires companies to put directors with public accounting experience on their own audit committees. They then get extremely jumpy if there is the slightest financial conflict of interest between a board's directors and the company's business. How is a public company supposed to comply with all of these demands when there are so few large auditing firms as a result of the government's own policies? The result will be that more public companies will hire no-name or small-name firms to do their auditing, and there will be less transparency in financial statements, rather than more.
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