What does this say
about the value placed by investors on the independence of outside auditors: 

Two trading days
after KPMG withdrew its audit reports on the financial statements of its Los
Angeles clients Herbalife and Skechers, because of inside information shared by
its promptly sacked and criminally charged engagement partner Scott
London, the stock price of both of those stocks has
actually risen!

The consequences of
London’s passing on, to the million-dollar
benefit of his golfing pal Bryan Shaw, will be swift and nasty:

• Ratted
  out by Shaw, London will cut the fastest plea deal the prosecutors will offer.

• KPMG
  will hurl its checkbook at every dollar of costs incurred by its ex-clients to
  obtain replacement auditors.

• Aggressive
  plaintiffs’ lawyers will fashion some theory of shareholder harm – despite the stock
  price upticks – doubtless spinning a conspiratorial connection with the
  long-running spat over Herbalife between raider Carl Icahn and shortseller Bill
  Ackman, and eventually coercing a nuisance-level settlement.

• And the
  American securities and accountancy regulators – the SEC and the PCAOB – will
  vie with each other in a pell-mell rush, recalling the unseemly post-Enron
  haste with which the Sarbanes-Oxley law was passed in 2002, to push a
  requirement that auditors of US public companies identify by name their
  partners signing client audit reports.

This last has been
opposed with intensity by the American accounting profession, although long in
place in much of the world without measurable adverse effects.   

Nor, it should be
noted, with measurable benefits either – as client managements and audit
committees in the US have never lacked access to the decision-qualifying
information necessary about the engagement personnel at their audit firms.

In the wishful
search for magic bullets aimed at the structural weaknesses in the
auditor-client business model, “partner naming” is a distinctly small-bore and
ineffective weapon. 

But London’s
downfall does require re-framing my opening question, this way, heretical as it
may seem:

What value to the operation of the capital
markets – if any — is actually delivered by the entire structure of auditor
independence? 

London’s
professional position was destroyed, and his liberty put in jeopardy, not because he violated the elaborate
dictates of the auditor independence rules, but because of his multi-year
violations of the insider-trading prohibitions of the American securities laws.

And on the other
hand, despite KPMG’s immediate and apologetic resignation and report withdrawals,
the stock market has given credence to the assertions that the substantive
content of the Herbalife and Skechers financial statements are unaffected (even
given the charges hurled in the Icahn/Ackman dust-up).

In short, the
indifference of equity investors to the state of KPMG’s independence speaks
volumes.

I’ve long been
saying (here
and here)
that – under the “client pays” business model for financial statement
assurance, invented back in the Victorian era – the accounting profession has
gained nothing positive for years, by way of reputation, stature or risk and
exposure mitigation, from the intellectually unsatisfactory edifice of
“appearance of independence.”

Now, the stock
price non-event of Scott London’s misadventures equally shows the converse –
that investors impose no downside price penalty on even a slam-dunk
independence violation.

Conclusion: the
time, energy and cost of maintaining the outmoded and anachronistic structure
of “independence” should be re-directed to the long roster of topics
legitimately worthy of the effort.

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