A Case of Regulatory Capture: And Why The SEC Won’t Push Deloitte To The LimitBy Francine • Sep 11th, 2011 • Category: Pure Content, The Case Against The Auditors
Given the SEC’s recent actions against Deloitte Shanghai regarding the firm’s unwillingness to provide audit workpapers for their former client Longtop, I thought it would be helpful to make sure you saw the column below, originally published at Forbes.com on August 22, 2011.
A few things need to be cleared up regarding the SEC’s actions against Deloitte Shanghai, in particular because of inaccurate reporting at Reuters and superficial reporting at the other major media outlets.
- Having ‘Deloitte’ ‘KPMG’ PwC’ ‘EY’ in your name will not generate additional liability or obligation for a non-US audit firm beyond reputational risk.
- The SEC/PCAOB will not pull the registration of a major non-US member firm because of inability to inspect or lack of cooperation with subpoenas. The SEC/PCAOB left reckless Price Waterhouse India of Satyam fame open. Crippled, but still pumping out audits. Fortune 500 multinationals are too dependent on the auditors to use their member firms to get full scope audit coverage even if it’s a sham. As the story below demonstrates, the regulators are at risk of capture by the Big Four audit firms.
- There is no scenario where the SEC asks ‘Microsoft’ for their Chinese audit workpapers, as described by the Chinese academic source that Reuters quoted. The companies don’t have them. The SEC could tell “Microsoft” that their audit opinion is invalid, however, if they believe that a material consolidated portion of the company has been audited by a sham firm and the US firm does not adequately supervise, review, re-test or otherwise make up for this weakness. No valid audit means no exchange listing and the company also violates securities laws.
- Nor is there a scenario where auditors voluntarily give up doing Chinese audits. The business and its potential, like in India, is too lucrative.
To understand the level of regulatory capture in Deloitte’s case, you have to understand how close all the audit firms, but especially Deloitte right now, are to the SEC. I talked about it in my column: “File Under Regulatory Capture: Deloitte’s Fireside Chats”. Deloitte sponsors a program at the SEC Historical Society where they can launder their image and pretend they had nothing to do with the crisis-era crash of Bear Stearns, Washington Mutual, Merrill Lynch, Fannie Mae, Taylor Bean and Whitaker, and Royal Bank of Scotland, to name only the big ones.
On the way to looking for something else – a list of all the S.E.C. Chairmen, Chief Accountants, and Directors of Enforcement since 2000 – I found this. It’s a calendar entry for a program this fall at the U.S. Securities and Exchange Commission (S.E.C.) Historical Society:
Someone will say, “But that’s history. They’re not talking about the day-to-day management of the agency.”
- The current S.E.C. Chief Accountant is a former Deloitte partner, Jim Kroeker.
- Deloitte is the top Big Four audit firm donor to the Society.
- Deloitte is the only U.S. Big Four firm with a representative on the Society’s Board of Advisors.
According to the S.E.C. Historical Society website, “the Society is a 501(c)(3) non-profit organization, independent of the U.S. Securities and Exchange Commission.”
The S.E.C. Historical Society website has a page describing the Deloitte series. It includes the Deloitte logo and a link to their website.
Deloitte Fireside Chats are interactive programs on current issues in financial regulation of interest to the accounting and auditing professions. The audience for each Fireside Chat is invited to submit questions for the program prior to broadcast.
The SEC Historical Society collaborates with Deloitte to broadcast the Fireside Chats. The Society is responsible for the selection of the academic moderator for each Chat; the Society and Deloitte work together to determine the topics and presenters for each program.
Previous topics in the series include:
- Responsibility for Preventing and Detecting Financial Reporting Fraud
- Regulation in the Audit Profession: Yesterday, Today and Tomorrow
- Exploring Principles vs. Rules-Based Accounting and Auditing Standards
- The Role of Professional Judgment in Accounting and Auditing
For more about how Deloitte, as a firm, views these topics on a day-to-day basis, all over the world, you can read:
Slippery People: Corporate Governance At Berkshire Hathaway(Deloitte is the relatively inexpensive auditor for Berkshire Hathway. When a Deloitte Vice Chairman was sanctioned for trading in several Fortune 500 audit clients’ shares, including Berkshire stock, while serving as a client relationship partner to the companies’ audit committees, Berkshire cleared Deloitte of independence violations and kept them on anyway. Better the devil you know…)
Deloitte’s Troubles Bubble To The Surface (Deloitte lost big clients during the financial crisis – Bear Stearns, Merrill Lynch, Washington Mutual, and American Home, to name a few – and is responding to significant litigation as a result of their audit opinions. They’ve kept a few clients too, like Morgan Stanley, Fannie Mae and Royal Bank of Scotland, where some say they shouldn’t have.)