For the financial
information community – issuers, users and gate-keepers — what looms ahead for
2013? Now that we have survived the end of the Mayan calendar, crawled back
from the edge of the year-end fiscal cliff, dodged briefly the threat Greece
poses against the Euro, and crowned Alabama as the champions of college
football? 

For starters, in a
very target-rich environment, three potentially malign influences may be in
retreat:

First, on the
everlasting postponement of converged international accounting standards, the
combination of political antagonism and absence of a sensible rationale desirably
signals the end of the endless charade.

IASB chairman Hans
Hoogervorst did temper his usual bellicosity at the AICPA’s annual December knees-up
with the SEC and the PCAOB – not that his sabre-rattling had ever done the
cause any good. The SEC lacks a head cheerleader, being populated these days by
lame ducks, ghosts and placeholders – so with newly-designated chief accountant
Paul Beswick’s deputy Julie Erhardt the nearest to a champion, the diffidence
in her understatement amounted to a punt from the regulatory end
zone.

While across the
Atlantic (see the always-informative Edith Orenstein for the FEI), the ICAEW in the UK bailed out. Its report, The
Future of IFRS, calls for
non-adopters with “strong national GAAP” to take their own convergence “option”
– an unmistakable message to the US to go its own way.

Second — if finally
game-over for convergence, it’s no less so for mandatory auditor rotation –
never more than an unachievable notion in futile search for evidentiary support
(here). Reality has taken hold in Europe in a climb-down from proposed six-year rotations and “audit-only” firms,
despite a fervid pro-rotation residue unrelieved by the complete lack of
factual basis. And an important voice of reason is heard in the US — PCAOB
member Jay Hanson – conceding at the AICPA conference that he “doesn’t know”
what a “reliable study … would conclude with respect to audit tenure’s effects
on audit failures and deficiencies…” and expressing skepticism “as to whether
we would ever be able to make that connection.”

Third – the always-fraught
issue of auditor liability remains challenging, if unlikely to be existential.

The manipulators of
short-term statistics did nobody a favor by asserting in December that “things have changed” for the better from the post-Enron wave of
auditor liability claims – a hostage to fortune disprovable at the time and subject
to immediate invalidation (see below).

On the contrary,
the Big Four in the UK fell all over themselves to emphasize their litigation exposure, in resisting the Competition
Authority’s suggestion of a benign environment. True enough, that official
proposition dangles from two illusory hooks – that short-term calm portends a
longer-lasting trend, and that the large firms have available insurance remotely adequate against potential claims measured in the
billions – neither of which is sustainable.

The real problem is
that the large firms have never succeeded in carrying the burden of their
message – dating back to 2008 and the embarrassing inability of the US
Treasury’s fractious Advisory Committee on the Audit Profession even to agree that life-threatening
litigation was an issue.       

In this tangle
among the confused, the perplexed and the unpersuasive, three recent items are informative:

First, Ernst &
Young’s agreement to pay C$ 117 million to settle civil litigation in Canada
relating to its work for the failed Chinese company, Sino-Forest, does not approach the calculable limit of E&Y’s financial tolerance. But it is
amply big enough to exceed either E&Y’s local Canadian resources or its global-scale
nuisance value. And an upward re-set of the liability record in any developed
economy cannot bode well in the hands of aspirational plaintiffs’ lawyers.

Second, the
slow-moving litigation machinery in Iceland has ground out not only prosecutions
and now jail sentences for senior members of its renegade banking
sector, but also new claims against PwC in both Iceland and the UK, on the non-trivial
order of $ 490 million, relating to its audits of Landsbanki, added to a prior claim for $ 2 billion over its work for Glitnir
Bank, commenced against the firm in the US in 2010 and re-started in Iceland in 2012 (here).

Third, the
HP-Autonomy fiasco in the UK saddles the Deloitte firm with years of runaway
defense costs and disruptive diversion of senior management. Even if Autonomy
CEO Mike Lynch’s robust defense of his company’s accounting proves entirely
vaporous, however, or substance emerges in the announced investigation by the US Justice Department, Deloitte’s
exposure is wrapped in several layers of insulation:

• The
  reluctance of the UK system to impose death-threat damages.
• HP’s reluctance
  to proceed adversely against its own alliance partner.
• The
  high threshold facing HP shareholders attempting to sue Deloittte derivatively
  in the company’s name.
• And the
  hostility of American courts to claims having a foreign nexus and one step
  removed from HP’s own financial reporting.

Auditor regulators
in the United Kingdom not having a record of aggression, timeliness or
ferocity, the Autonomy debacle is unlikely to tar Deloitte, either at all or at
least within a time span occupied by anyone currently in positions of authority
or responsibility.

So much for what may
pass as good news. There’s a good deal more of concern, in this new year – but
not today – so please watch this space.

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