How this little-known agency is risking your financial future

How this little-known agency is risking your financial future

♫ You spend your entire career building, and building, and building a life’s savings for you and your family. But let’s say when you need those funds the most, a major financial scandal causes the stock market to lose value— and with it, your savings. If you think this is unlikely, think again. Because the watchdog Congress created to police some of the biggest and most powerful firms in American business isn’t doing its job. Today, Deloitte, PricewaterhouseCoopers, KPMG, and Ernst & Young are the largest auditing firms in the world—and they’ve earned the title of “The Big Four.” The Big Four dominate the global and domestic market, auditing nearly half of all publicly traded companies in the United States, and 99% of companies in the S&P 500. Their audits certify that these large corporations are being fair and accurate in their financial reporting, which can include information that has significant effects on stock prices. But there’s a conflict of interest here. Auditing firms, after all, are paid by the companies they audit. This can give them a powerful incentive to let things slide. Let’s use some real world examples of why auditors are so important. When the stock market crash of 1929 helped usher in The Great Depression, it became clear that public companies could not be trusted to tell the truth about their financial performance. So to prevent this from happening again, the government required that public companies have their financials assessed by an objective third party— an auditor. ♫ But then in the 1990s and early 2000s, a series of major accounting scandals proved that these audits weren’t enough to prevent wrongdoing. In the early 2000s the collapse of stock market titans Enron and Worldcom, the largest bankruptcies in U.S. history at the time, cost shareholders billions of dollars and wiped out thousands of jobs. These two companies had built their success on financial illusions, which they couldn’t have done without Arthur Andersen, the auditing firm that signed off on both companies’ books. In 2002, Congress passed the Sarbanes-Oxley Act. One of the bill’s major elements was the creation of an institution, under the Securities and Exchange Commission, that would oversee public accounting firms and hold them accountable. “Peekaboo” or the “Public Company Accounting Oversight Board” would, essentially, audit the auditors. But it’s not doing an effective job, and your financial security is on the line. Every year, PCAOB scrutinizes a sample of audits performed by each of The Big Four and issues inspection reports of its findings. We studied more than 15 years of these reports, focusing on the biggest firms under PCAOB’s jurisdiction: The U.S.-based arms of The Big Four. We found that PCAOB cited: Yet, in that same time period, PCAOB brought only 18 enforcement cases against The U.S. Big Four or their employees. PCAOB is empowered to fine auditing firms up to $2 million per violation for an ordinary violation, and up to $15 million per violation for more serious violations. For example, recklessness or repeated negligence. Yet in its entire history, PCAOB has fined The U.S. Big Four $6.5 million—total. If the 808 failed audits were as bad as PCAOB’s own reports asserted, PCAOB could have fined The Big Four at least $1.6 billion. That means PCAOB has fined less than one half of one percent of what it could have. PCAOB was created out of a real need to reduce the risk that as a result of fraud, error, or corporate incompetence, your financial future disappears. It was supposed to help prevent man-made financial disasters that cripple communities and crater the economy. Yet when it comes to some of the biggest firms under its jurisdiction, PCAOB has barely taken action in comparison to the failures it itself identified. Is this setting us up for another financial disaster?

David Anderson

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