Audit Failure – Yet Another Solution Looking For a Problem to Solve!

Having failed to push mandatory audit rotation through Congress, the “audit failure” crowd has now come up with yet another solution to the “problem.”  According to an article in the August 20th Wall Street Journal, as proposed by Robert C. Pozen, a lecturer at the Harvard Business School, auditors should be required to re-propose for selection every 15 years.

Again, citing no evidence and displaying the normal lack of understanding of the issue, Professor Pozen has concluded that auditors are too cozy with management rather than with the corporate boards who hire them.  Faced with mandatory risk of being discharged, apparently so goes the logic, an auditor will now pay attention to the board.

I have a better solution, but first some background.

The first 30 years of my career, mostly as a senior partner at Coopers & Lybrand, were spent dealing with far more registrants, both at the management and board level, than Professor Pozen has ever contemplated.  Since then, I have sat on four registrant boards and I now chair two audit committees.

Professor Pozen is to be commended for worrying about the  “problem,” but to the extent there ever was one – and there was as I shall explain shortly, the solution has been provided by Sarbanes – Oxley.  I have had my share of issues over SarbOx, mostly as it relates to unleashing the PCAOB, which is entirely unregulated, but one thing that SarbOx did accomplish was to breathe life into audit committees.

Corporate cultures in the pre SarbOx era did not pay much attention to Audit Committees.  After all, who understood that stuff anyway?   Besides, the action – and board status — was elsewhere.  As a result, the committee was usually staffed with the board dregs – the activists, token not-for-profit types and retired human relations guys.  Taking issues to these groups that were at odds with management was incredibly high risk.  The Chair of the Audit Committee – often a retired CEO without a financial background — would merely look at the CFO with a blank look on his face.

All too often, the objective of the discussion was to rationalize the problem away, leaving the auditor to be “punished” by management – usually with the threat of replacing them with auditors who would be more “manageable.”

You may look for no better example of such governance incompetence than the performance of the Enron board in general and its audit committee in particular.  They were prepared to accept anything proposed by their management and blessed by their auditors without challenge.

Then, along came Sarbanes – Oxley.  For all of its flaws, SarbOx changed the rules of the game.

Audit Committees are now far more likely to be staffed with experienced, capable executives with broad operational and financial experience, such as the two committees I chair.  As the Audit Committee chair, I am quite confident that both our auditors and our management teams understand for whom they work.

That leads me to my solution to Professor Pozen’s problem.

If the auditors and management is confused as to who is running the place, forget audit rotation – go find yourself a competent Audit Committee chair. Let’s stop looking for more solutions to a problem for which the solution is in place and spend our time ensuring that audit committees are staffed by the capable executives mandated by Sarbanes – Oxley.

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