Peeling away financial reporting issues one layer at a time

Where is the Center for Audit Quality When We Actually Could Use It?

Below is an email I received from Lynn Turner. My several comments are in brackets, and the italics/bolding are all supplied by yours truly (I also took the liberty of fixing a couple of minor typos):

"One of the interesting side stories during the Congressional Debate on the IPO legislation [Jumpstart our Business (JOBS) Act, which I wrote about in my previous post] is the remarkable deafening silence of the Center for Audit Quality (CAQ) [which tries to brand itself as "nonpartisan" and "dedicated to enhancing investor confidence and public trust in the global capital markets" – but behaves more like a joint venture of the Big Four and the AICPA] as the debate had moved to the Senate. While in the past they have been very vocal opposing legislation that would step on the independence of the FASB, and that would roll back the SOX requirement for companies to have their internal controls examined, there are no such letters forthcoming to the Senate this time.

I suspect it is because in the legislation, there are provisions that would limit the ability of the PCOAB to impose auditor rotation. In addition, the legislation would impose a new requirement on the SEC to conduct a cost benefit test of any new rule the PCAOB itself adopts, prior to the SEC approving the rule. This would apply to new rules the PCAOB has under consideration such as to expand what the auditor reports to investors, and efforts to enhance auditors' objectivity and independence through such means as auditor rotation. And the laws would require the SEC to do the analysis within 60 days of when the PCAOB adopts a new rule. This is an impossible task given court rulings in the last year on how the SEC must perform such analysis.

As such, this proposed law would likely make it most difficult for the PCAOB to adopt new rules, if the large[st seven] auditing firms [all of which are represented on the CAQ's governing board] opposed them. Already, I understand the CAQ has told reporters litigation would be forthcoming if the PCAOB adopted a standard for auditor rotation.

It appears as if the CAQ has finally shown its true colors. One must wonder if its independent board members agree with this approach as we have heard nothing publicly from them on this.

As to those (only three) "public" board members, let me get this part out of the way first: I am told by an anonymous source, who is plugged in enough to know about such things, that public board members receive around $100,000 in compensation for serving. Not that this arrangement explicitly buys silence in public on matters inimical to the interests of international auditing firms, but at least it is something that the CAQ should be more upfront about. I haven't found anything on the CAQ website to indicate how board members are recruited or compensated.

At a minimum, these "public" board members should be questioning the CAQ administration as to whether a lack of comment is a breach of commitment to CAQ'ss stated mission.  But, I'm going to take this one step further for one particular public board member, Harvey Goldschmid. He is a former SEC Commissioner and a long-time member of the law faculty at Columbia. I am unable to bring any direct evidence to bear on the question, but I do find it (more than) curious that, at the behest of CAQ, he has insinuated himself into the IFRS adoption discussion, yet he has kept his own counsel on the JOBS Act.   

As to IFRS, Mr. Goldschmid has chosen to be a strong proponent of IFRS adoption by the SEC in conferences sponsored by CAQ-allied entities. His message has been that the U.S. must adopt IFRS forthwith – or else face dire consequences. In doing so, he makes no apology or allowance for the fact that he is speaking outside of his field of expertise; he is not an acknowledged expert on accounting and auditing matters. I have also stated that I believe his rhetoric, made in tandem with the IASB chairperson (also not an auditing and accounting expert), were synthesized from an admixture of vague generalities, selective use of the facts, cherry picking of academic research, and biased speculations of a doomsday to come if the SEC does not act to adopt IFRS.

I'm not saying that every securities law professor has a civic or moral duty to make their views known on every proposed piece of capital markets regulation, but I do find it remarkable and ironic that Mr. Goldschmid chooses to speak freely about IFRS adoption, while choosing to keep his own counsel on topics that are right square in his wheelhouse: SEC registration requirements and exemptions.

Stated another way, I know of no other securities law professor who is advocating publicly for IFRS adoption except for Mr. Goldschmid; however, I do know that many prominent professors are highly circumspect or critical of the JOBS Act. Here's just three:

  • John Coffee, Mr. Goldschmid's colleague at Columbia no less, has derisively nick-named the bill's crowd-funding provision the "boiler room legalization act." As to other provisions of the bill, he is not so impressed by those either.
  • Harvard law professor John Coates finds it "odd" that "amid an economic downturn caused in part by financial deregulation … Congress should be actively considering (and indeed have passed in the House) a raft of proposal [sic] for more financial deregulation.
  • If the views of other prominent academics in his field are not persuasive enough, then perhaps Mr. Goldschmid should consider the views of MIT Economist Simon Johnson, who has called the JOBS bill, "a colossal mistake of historic proportions" that won't create jobs and will raise the cost of capital instead.

Surely, for such a significant piece of capital markets regulation, an active and lauded former Commissioner would not want to miss an opportunity to weigh in along with his academic colleagues, wouldn't he?

Lynn is absolutely correct: if the CAQ were truly nonpartisan, as opposed to the equivalent of the National Rifle Association for international auditing firms, it would have issued a public comment on the JOBS Act – at least to the extent that it affects auditors and financial reporting. And, as Lynn strongly implies, the CAQ board should be called to account.  Moreover, if Harvey Goldschmid cares to be perceived as an independent thinker, as opposed to a hired gun, we should be hearing what he has to say about the JOBS Act as well.

The collective failure to speak out on the JOBS Act undermines CAQ and Mr. Goldschmid's credibility on every other issue for which he has supported CAQ; and most especially, IFRS adoption.

1 Comment

  1. Reply Lynn Rees March 23, 2012

    The CAQ must have heard you. They sent a letter yesterday.

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