Last night I saw upon the stair

A little man who wasn’t there

He wasn’t there again today

Oh, how I wish he’d go away

 — Hughes Mearns, 1899

 An
under-appreciated power of the bloggers is the capacity for a two-way
conversation, right out in full public view.

 That was my
reaction, anyway, to Francine McKenna’s December 7 post, “They Weren’t There:
Auditors and the Financial Crisis” – the gist of which is that the Big Four
firms, who audited every one of the institutions complicit in the financial
crisis, have been absent not only from visible influence on the catastrophe,
but also from the post-mortem recriminations and accountability.

 Any regular reader
here should also be subscribing to Re:The Auditors, where Francine airs a central
theme:

“The auditors should have been there, as a
last stop, where the buck should have stopped, as gatekeepers, watchdogs,
advocates, and the last bastion of standards and expected values shareholders
can look to.”

Here – in response
to the always tart-tongued Francine — is why the auditors weren’t there:

The simple if
depressing reason is that their core product has long since been judged
irrelevant. The standard auditor’s report is an anachronism — having lost any
value it may once have had, except for legally-required compliance (here). 

If that single page
disappeared from corporate annual reports, no honest user of financial
information would admit to missing it. Nor, offered the choice, would any
rational CFO pay the fees to obtain it.

There is plenty of
assurance that users would value and pay for – that much is clear from the
debates about the largely unrealized usefulness of reports on governance,
sustainability and intangible assets outside the scope of historical cost-based
reporting (for specifics, this column of mine goes back to April 2006).

But not in the current
liability environment, where the large accounting firms are captive to their
business model and paralyzed from innovation by their twinned lack of vision
and influence.

On the other side,
the regulators’ mantra that “audits are essential” is no more than the
unexamined and self-reflexive assumption that audit reports will simply and
always be there – like air or water
or electricity. Whereas, if another fragile Big Four firm does trip into
disintegration, nothing within the capacity of any regulator on earth will be
able to put the shattered networks back together again, or compel the delivery
of audits when there is nobody left to perform them.

If there is to be
an adult conversation around this issue — and along with Francine, there are real participants — for general examples, Tom Selling's stimulating Accounting Onion, Dennis Howlett's acerbic AccMan, or Richard Murphy's Tax Research UK — there are at least three other
chapters to be aired, at whatever length is needed for credibility:

First, it is past
time to put final closure to the talk of unachievable structural “solutions” to
the Big Four’s complete dominance of large-company global audits. None of these
can happen – as sketched out here – whether it be growth to competitive scale
of a Five or Six, break-ups to restore a new but even further weakened Eight,
mandatory rotation, new insurance or outside capital, liability limitations, or government take-over
of the entire function.

Second, the
financial structure of the private Big Four partnerships must be recognized as
too weak and limited to sustain their current exposure — here. Unlike the
banks, their franchise is not “too big to fail” – the question is whether there
is a better cliché than “too weak to survive.”

Finally, as a
message to the Big Four leadership who have no choice but to get out in front,
the private sector must acknowledge that no help will be forthcoming from
government. Legislators – whose essential DNA bars them from any activity other
than belated over-reaction – cannot be counted on for anything other than
interference (here).

Worse, coordinated
regulatory strategies are impossible at the global level – witness the
floundering over GAAP / IFRS convergence as a simple example – while in
the United States, a populist-oriented administration is not about to provide
relief to a white-collar profession perceived to be overpaid and
under-performing.

So there is no falling
back upon the fallacious assumption that “’they’ won’t let another firm fail.”
There is no “they” – no regulator or politician with the vision, interest or
authority to prevent a debacle.

Francine’s massive
army of readers is a potential force to be reckoned with – and has plenty at
stake, whether as practitioners with careers-at-risk or users in search of better quality financial information. 

With their
engagement, the evolution to a sustainable, achievable new model of reporting
and assurance is possible – however unlikely, absent real commitment to a
fresh and holistic approach.

But the dialog has
to move beyond whiny finger-pointing, and the simplistic recitation of
unrealistic “solutions.

And the sooner, the
better.  

Thanks for joining this dialog. Your
comments are welcome either here or to Francine. Please share with friends and
colleagues. And if not a subscriber, you are invited to join at my Main page.