Food beyond compare

Food beyond belief

Mix it in a mincer

And pretend it's beef

Kidney of a horse

Liver of a cat

Filling up the sausages

With this and that

— Thénardier, “Master of the House,” Les Misérables

The Public Company Accounting Oversight Board – overseer of the
accounting profession in the United States – got in a snit recently, perceiving
that PwC was lax in its efforts to remediate the “significant audit performance
deficiencies” that the agency asserted in its 2008 and 2009 inspection
reports.

Expressing pique as it only could, on March 7, the PCAOB released to an
indifferent public the previously undisclosed “Part II” portions of those
reports.

Did it arouse the aforesaid public to care? Or even to notice?

A predictable handful of the large accounting firms’ most reliably
ardent critics did weigh in (here
and here).

Meanwhile a measured comparison comes to mind – the teapot-scale
tempest aroused in Britain and Ireland this winter, over the discovery of
equine DNA in samples of meatballs and ravioli – not, enforcers emphasized,
because of any actual consumer health hazard, but over alleged deficiencies in labeling
and transparency.

On which my perspective takes from the attitude of my daughter, a
situational vegetarian who, on assignment this last year in Southeast Asia, has
extended her palate and appetite to include crickets, dog conch and scorpion.

In the European kerfuffle, a libertarian-oriented omnivore – believing
in both cultural differences and regulatory intervention only to the minimum
necessary – would favor a simple modified label: “May contain horsemeat”. 

As for the PCAOB, the question has to be asked — How can an oversight
function claim either legitimacy or effectiveness, that:

• Decides for itself how to define and identify not
  a legal or professional standards failure, but an elusive “significant audit
  performance deficiency.”

• Keeps score under its own methods and incentives,
  like a traffic meter maid sent on patrol with a book of tickets and a daily
  quota.

• Must under cover of confidentiality conceal both
  the names and the detailed particulars of its self-defined offenses.

• And then in a burst of ill-temper, decides for
  itself whether the undisclosed substance of a remedial effort is satisfactory
  within unmeasured and unarticulated standards.

It’s no wonder, for two reasons, that PwC saw no reason to pursue its
right of appeal to the Securities and Exchange Commission.

First, because PwC negotiated the ability to append to the PCAOB’s
release a pronouncement of its
commitment to virtuous conduct, positively radiant with unctuous platitudes.

But second and more especially, because under the current model for
compliance with the securities laws, under which there is no available
alternative, the Big Four-dominated market for large-company audit services is
armor-plated against the PCAOB’s pop-gun arsenal. 

Law enforcement, rules compliance and social norm-setting in general
— in contexts that are controversial, subjective and incomprehensible to the
laity — are subject to credibility challenges and diminution of the authority
of their arbiters:

• The Supreme Court’s obscure definition of
  obscenity, “I know it when I see it” (Stewart, J., Jacobellis v. Ohio, 1964).

• The theological search for distinctions between
  mortal and venial sins.

• The nuances and complexity of sport, from
  soccer’s off-side and cricket’s leg-before-wicket to hockey’s high-sticking and
  baseball’s rules on balks and infield flies.

• The subtleties of line-drawing between shrewd and
  informed investing and insider trading, or the bribery of officials and
  accepted business facilitation.

Here — the mutual hypocrisy in the whole sorry audit regulatory
environment is pervasive:

The PCAOB gets to pretend it is engaged in a meaningful exercise,
worthy of being taken seriously in the capital marketplace.

The audit firms are obliged to pretend that they take the cost and
impositions of the inspection process as something more than the de facto license fee paid as a nuisance to
maintain their franchise.

And to the limited extent they really care, financial statement users can
only search elsewhere for meaningful assurance, beyond the model unchanged
since the Victorian era and long since degraded into obsolescence. 

Critics of this dysfunctional structure are entitled to their
finger-pointing cynicism. But their bile is misplaced – until and unless they unite
in advocating an achievable effort to re-engineer the entire system of
reporting and assurance that today only fosters ambiguity, inconsequence and
disrespect.

Until which, at the foot of each PCAOB inspection report should be
appended an adapted version of the suggested European meat label – “May contain
horse-sh*t.”

 

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