John Christensen ■ How Global Audit Firms Are Using Their Lobbying Clout to Dilute Sarbanes-Oxley Reforms
The dirty world of tax evasion and avoidance involves all sorts of unpleasant and anti-social characters, none more so than the professional enablers who devise avoidance schemes, market these schemes to their clients, lobby governments for special treatments and permissive laws, and generally play the role for tax dodgers that Tom Hagen played for The Godfather. Deloitte is one of these enablers, in fact one the global top 20, so it’s disturbing to read that according to this recent article by financial journalist Francine McKenna, Deloitte is taking the lead in lobbying for dilution of key parts of the US Sarbanes-Oxley Act (2002) relating to regulation of auditors. According to McKenna:
” . . auditors and the AICPA, their trade association, (are) taking advantage of the “Trump” window to roll back Sarbanes-Oxley reforms. The industry is targeting the strict SOX auditor independence rules and the authority of the Public Company Accounting Oversight Board, the industry regulator established after Enron and its auditor, Arthur Andersen, collapsed.”
The international accounting and audit industries have not exactly covered themselves in glory in recent decades. Quite the opposite: audit failures have been rife and spectacular, not least the failure to spot the impending collapse of Lehman Bros and many other financial institutions that bellyed-up during the great financial crisis. Our colleague Professor Prem Sikka has explored these failures at length here, here and here. As McKenna notes, it was the behaviour of failed accounting giant Arthur Andersen, one of the then Big Five, which led to the inclusion in Sarbanes-Oxley of a prohibition on auditors from also offering consulting services:
“Arthur Andersen’s focus on its lucrative consulting versus its audit of Enron was the catalyst for critics to succeed in getting prohibitions against consulting to audit clients into the Sarbanes-Oxley law. The service restrictions prohibit audit firms from providing non-audit services such as internal audit outsourcing services, financial information systems design and implementation, and bookkeeping to an audit client including company affiliates.“
Sensible provisions, given the overlapping conflicts of interest that are rife in the financial services sector, though in practice they were largely ignored:
” . . however. The SEC and PCAOB rarely enforced any of the pre- or post- SOX auditor independence rules. Between 2002 and 2012, the SEC and PCAOB made only a handful of enforcement actions against the firms and they were minor. The enforcement actions related primarily to infractions that had occurred before the 2002 SOX service prohibitions were enacted.”
So why are the Big 4 firms now engaging in extensive lobbying around The Hill in the hope that the Trump admininstration will go soft on financial regulation? Well McKenna offers a clue:
“In November of 2014, the International Consortium of Investigative Journalists (ICIJ) and its media partners released 28,000 Luxembourg tax-ruling documents prepared by PricewaterhouseCoopers for 340 corporate clients, including a very large number of PwC audit clients. PwC had sold, and client audit committees had approved, non-audit tax services for “transaction[s] initially recommended by the accountant, the sole business purpose of which may be tax avoidance and the tax treatment of which may be not supported in the Internal Revenue Code and related regulations.” That’s prohibited by the Sarbanes-Oxley Act of 2002.”
Precisely. The Big 4 firms are up to their necks in independence violations that haven’t yet been investigated by the regulators, and are keen to change the rules before the latter come knocking on their doors.
Knowing what we know about President Trump’s kow-towing to big business interests (see last week’s announcement on climate change, for example) we should expect the worst. Read McKenna’s full article here, and weep.