Page 56 - The Economist20171214

Business
56 The Economist December 16th 2017

Also in this section
57 South Africa’s corporate scandal
58 Shopping malls merge
58 Corporate tax in America
59 Business secedes from Catalonia
59 America’s box office reels
60 The Ivanka brand
61 Schumpeter: The Santa clause

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The Big Four counting restatements have fallen over
Custodians of capitalism time in America (see chart), and inspectors
are findingfeweraudit deficiencies. In Brit-
ain, where auditors have been required to
discuss contentious bits of the audit for
some years already, 81% of FTSE 350 audits
inspected by regulators in 2016 either met
their standards or had only minor pro-
Washington, DC blems, up from 56% five years before.
The auditindustryhas improved. Butfurtherprogress is notassured
But two big weaknesses in the audit in-
HE collapses of Enron and WorldCom incentive problems that have long riddled dustry remain. First, at a global level, quali-
Tin the early years ofthis century turned the profession, which is dominated by the ty is still relatively low. A survey of 36
book-cooking into front-page news. Inves- Big Four partnerships—Deloitte, EY, KPMG countries last year by the International Fo-
tors lost over $200bn; in 2002 the stock- and PwC. To foster investor trust, listed rum of Independent Audit Regulators
market fell by over a fifth between April firms must engage external auditors. But found that an “unacceptably high” 42% of
and July. In response, America’s Sarbanes- companies pay them, not investors, which 855 audits did not meet inspectors’ stan-
Oxley Act set up a new body, the Public may dampen the motivation to scrutinise. dards. All ofthe Big Four have been caught
Company Accounting Oversight Board In the West, stronger oversight does ap- up in scandals in recent years, particularly
(PCAOB), to supervise auditors. pear to have coincided with better quality. in emergingmarkets.
Its quest to give auditors more teeth Accounting scandals are far from con- American regulators can lift standards.
continues, with the introduction of new signed to history’s ash heap. In America The PCAOB inspects audits forall firms list-
rules that James Doty, its outgoing chair- last year, forexample, PwC settled a $5.5bn ed in America, regardless of the auditor’s
man, bills as the most significant changes lawsuit alleging negligence when it gave location (though China refuses its inspec-
to reporting by auditors in over 70 years. Colonial Bank a clean bill of health in the tors access). More of its sanctions have
The question now is whether Mr Doty’s years before the lender’s collapse in 2009; been taken against foreign firms, including
successor, who was announced by the Se- the bank turned out to have made loans affiliates ofthe BigFour. In its severest pun-
curities and Exchange Commission (SEC) against assets that did not even exist. Yet ishment ever, it fined Deloitte in Brazil $8m
on December 12th along with four new both the frequency and the severity of ac- last year for doctoring paperwork and hid-
PCAOB board members, will keep heading ingevidence from inspectors.
in the same direction. Senior executives at the Big Four admit
New disclosures on auditors’ tenure All adding up to embarrassment about violations
and independence take effect this week. United States, listed companies abroad. But because most country firms
And from 2019 auditors must go above and Largest individual negative Number of are legally distinct affiliates, they have
restatements, $bn restatements
beyond the low bar they have historically been able to avoid broad reputational
8 2,000
set themselves, which is a pass or fail damage. And the worry is that neither
“opinion” on whetherfinancial statements companies norregulators can afford to dis-
obey accounting rules. They will have to 6 1,500 cipline auditors harshly for their failings
explain “critical audit matters”, meaning because of the second big flaw: limited
occasions when they had to confront com- 4 1,000 competition. The Big Four dominate audit
pany management. Many big firms loathe for large listed companies, scrutinising the
these changes, warning that investors will 2 500 accounts of 99% of those on the S&P 500
be swamped by minutiae. Their real fear and the FTSE 100. Companies’ choices are
may be a loss ofcontrol overthe flow ofin- 0 2002 04 06 08 10 12 14 16 0 even more limited because conflict-of-in-
formation to investors. Source: Audit Analytics terest rules forbid the same firms from sell-
The rules are meant to mitigate the ingconsultingand auditservices. Over 85% 1