Worldly Wise: Auditors strive to be invisible

If the people who audit the public companies in the US are forced to reveal themselves, then the terrorists will win.

At least that's one of the arguments coming from the US accounting profession, now that its main regulator is thinking of requiring audit partners to sign their names when they vouch for companies' financial statements.

Such a proposal by the regulator, the Public Company Accounting Oversight Board, is long overdue. For it to matter, though, the board also must survive a more existential challenge.

Last week the Supreme Court heard arguments in a lawsuit that seeks to disband the quasi-governmental agency, on the grounds that the process for appointing its board members is unconstitutional. A ruling against the board, which was created in 2002 by the Sarbanes-Oxley Act, could mark a lost chance to bring needed transparency to a system shrouded in secrecy.

The way audit reports are done now in the US, only the accounting firm's name appears on the signature line. Outsiders usually have no way of knowing which partners are in charge of auditing which companies' books. That's how the firms like it. Consider this bit of hysteria from a September 11 letter to the board by Paul Rohan, director of financial reporting and quality control at UHY LLP in New Haven, Connecticut, which audits 73 public companies.

"An audit engagement partner who is identified to all by a PCAOB-mandated signature on the audit report could become the target for those bent on domestic or international terrorism," Rohan wrote. Risks could include "assassination or kidnapping to the engagement partner and that partner's family".

His comments came in response to a question in the board's July proposal asking if an exception is needed where disclosure "could lead to an imminent, significant threat" to personal security. Rohan told me, "There are a lot of people out there who would conduct violence for violence's sake. This would be one way of providing them with a target for a grievance."

Wacky arguments such as that underscore how right Sarbanes-Oxley was to strip the accounting profession of its authority to set standards for auditing public companies. Even the big firms have resorted to varying degrees of fear-mongering.

Privacy concerns

Deloitte & Touche LLP in its comment letter said disclosing partners' names "could lead to significant security and privacy concerns". Grant Thornton LLP said its best partners may refuse lead roles on "challenging audits because of real or perceived increased legal liability risks or personal security risks associated with particular clients".

Gee, do they think officers and directors at the companies they audit should get to remain anonymous, too?

Under the board's proposal, the partner who has final responsibility for a company's audit would be required to sign the audit report. This would make it possible for outsiders to check the person's background. If the financial statements later turned out to be inaccurate — or worse, fraudulent — the partner's name already would be a matter of public record.

While this requirement is the norm in Europe, the audit firms don't want it in the US. They say such disclosures wouldn't provide useful information to investors, and may lead to increased liability for individual partners in lawsuits.

KPMG LLP said disclosure "could impose additional stress, as well as personal security concerns, on the engagement partner". For example, "media coverage of financial problems at a company might cite the audit firm and the individual engagement partner by name". Heaven forbid someone like me should do that.

The board's proposal brings to mind a former partner at Arthur Andersen LLP's Phoenix office named Jay Ozer, who eventually lost his state licences and was barred from practicing before the Securities and Exchange Commission.

Ozer was the lead audit partner at three Andersen clients that turned out to be frauds. One during the 1980s was Lincoln Savings & Loan, whose chief, Charles Keating, went to prison. Another was the Baptist Foundation of Arizona, a 1990s Ponzi scheme that cost investors more than $500 million (Dh1.8 billion). Finally, in 2004, Ozer paid a $50,000 fine to settle fraud accusations by the SEC over his audit work for Styling Technology Corp., a beauty-products maker that went bankrupt in 2000.