Critics question effectiveness of auditing oversight board

By David S. Hilzenrath
Sunday, July 11, 2010

Outside auditors play a crucial role in the nation's financial system. As the watchdogs of corporate accounting, they are supposed to protect investors. But after a series of spectacular failures -- Enron, WorldCom, Tyco, Adelphia, Global Crossing and more -- Congress put a new cop on the beat.

Eight years later, has that cop -- a board to audit the auditors -- made your investments any safer?

It's called the Public Company Accounting Oversight Board -- PCAOB, or "Peekaboo" for short. And figuring out what difference it has made can be like a game of hide-and-seek.

In fact, the board looks a lot like the system it was designed to replace: slow to act, veiled in secrecy and weak -- or weak-willed.

The wave of accounting scandals that devastated share prices and destroyed the Arthur Andersen accounting firm years ago left policymakers questioning the value of the audits. With Andersen gone, the stakes became even higher: Like some of the companies they audit, the remaining Big Four accounting firms are regarded as potentially "too big to fail."

When the Supreme Court rejected a challenge to the board's constitutionality in June, the board breathed a sigh of relief. But should you?

Along with other watchdogs, auditors did not prevent the financial crisis of recent years that had at its roots the proliferation of shoddy subprime mortgages and securities based partly on "liars' loans." Whether auditors share responsibility is a subject of litigation and debate.

Some of the most detailed assertions about their performance come not from the Peekaboo but from reports of court-appointed examiners who have investigated corporate bankruptcies.

At subprime lender New Century Financial, KPMG auditors "acquiesced in New Century's departures from prescribed accounting methodologies" and at times "acted more as advocates for New Century," examiner Michael J. Missal wrote.

At Lehman Brothers, the investment bank that collapsed in 2008, examiner Anton R. Valukas faulted auditor Ernst & Young for, "among other things, its failure to question and challenge improper or inadequate disclosures."

The government gave the PCAOB the power to rewrite standards for auditors, but the board has made little use of that power. The old standards, widely criticized as having been written by the auditing industry to insulate auditors from liability, for the most part remain unchanged.

When auditors are suspected of negligence or complicity in cooking corporate books, PCAOB enforcement cases can take several years to resolve. In the meantime, even the fact that the board is investigating is concealed from the public.

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