It is hard not to think about the Enron and Arthur Andersen debacle when looking into the ever increasing complexity of compliance frameworks (Cole, 2014). Although many people were shocked by the white-collar crimes committed in one of the biggest companies in US history, one can also argue that Enron executives were not immune to such temptations. They tasted power and the financial benefits that comes with managing one of the fastest growing companies in the 1990s (Hays & Ariail, 2013).
Thus, there was pressure to keep up the good work, or in their case, to keep up appearances. The most shocking part is not the criminal activity of unscrupulous corporate leaders at Enron, but how they were able to get away with it for so long. It was a punch in the gut for many regulators when they discovered that Enron was able to deceive so many for an extended period of time because of the help of the accounting firm Arthur Andersen (Hays & Ariail, 2013). The Enron and Arthur Andersen debacle justified the ever increasing complexity of auditing requirements, such as the new ruling from the Public Company Accounting Oversight Board or PCAOB that mandated the disclosure of the engagement partner that handled a particular audit. It is important to find out if the revelation improves the quality of the auditing process and level of accountability as perceived by the insiders and corporate leaders of the accounting firm in order to garner support for the new measure.
PCAOB’s New Rule
Before its fall from grace, Arthur Andersen was a revered accounting firm (Hays & Ariail, 2013). Due to the integrity of former leaders, the company became a gold standard in the world of auditing firms. Without a doubt, Enron benefited from its association with Arthur Andersen. Shareholders, creditors, and other stakeholders found a higher level of assurance every time they remembered Arthur Andersen’s stamp of approval on Enron’s financial statements. However, after several decades of success and expansion into the global market, Arthur Andersen underwent a transformation that resulted in a hybrid business model that allowed the firm to act as Enron’s auditor, and at the same time, the energy company’s consultant (Hays & Ariail, 2013). The Sarbanes-Oxley Act of 2002 was specifically crafted to address the legal loopholes that were uncovered during the corporate fraud trials concerning Enron and Arthur Andersen (Hays & Ariail, 2013).
A decade or so after the Enron and Arthur Andersen’s corporate scandal, numerous laws and regulations were ratified or implemented in order to prevent a repeat of the accounting-related problems that rocked the financial world at the turn of the 21st century. However, there is no such thing as being overly cautious in the world of corporate finance. It is imperative to keep developing new standards in order to keep up with unscrupulous business leaders thinking of new ways to beat the system. However, the PCAOB’s new set of requirements was the byproduct of the repeated clamor for greater transparency and accountability (Securities and Exchange Commission, 2016).
In December of 2015, the PCAOB adopted a new rule that requires audit firms to make known the name of the audit engagement partner assigned to an audit assignment in favor for a publicly traded company (Securities and Exchange Commission, 2016). Based on information released by the PCAOB, the engagement partner is also the person in-charge or the primary leader of the team handling the auditing process (Petherbridge & Messier, 2015).
Possible Disadvantages of the New Rule
It is difficult to see any type of advantage or disadvantage in implementing the new disclosure requirement. This assertion is based on the need to investigate the ramifications of the new rule from the audit firm’s point of view (Cole, 2014). They already have access to this information. In fact, they know more about the engagement partner as opposed to an outsider seeking to learn more about the professional background of the lead auditor assigned to a particular auditing assignment (Brown, 2015). However, if forced to identify one disadvantage, one can argue there could be a minimal disadvantage in overlapping work or duplicate work. It has something to do with the added paper work, depending on the specifics of the new rule.
The Advantages of the New Rule
The disclosure of the engagement partner’s name has no significant impact on the quality of the audit process, it does not enhances the accountability factor of the said auditing protocol (Cole, 2014). There is no significant change or benefit because even in the absence of the new ruling, a well-respected and effective auditing firm already employed a strict and thorough documentation process. In other words, they employ an efficient and reliable monitoring convention in order for them to connect a specific engagement partner to a specific audit report. The availability of digital technology and other sophisticated storage system makes it easier to store and retrieve information. In other words, this critical information is already within the grasp of the auditing firm.
There is no added benefit for the accounting firm in the context of transparency, such as having access to more information regarding the professional career or business endeavors of the engagement partner. The firm does not need to know this type of information, because the firm already had access to this type of data even before the new rule came out. The firm does not get any benefit, such as improvement in the quality of the auditing process, because the firm handles the vetting procedure or the background check even before assigning a project to the engagement partner. The firms is able to do this because the engagement partner is an employee of the firm. The accounting firm is aware of any potential conflict of interest or any appearance of irregularity. Thus, the audit already completed the due diligence aspect of the process, and the corporate leaders are not going to assign a particular engagement partner to a specific auditing project if they are not sure of being able to get the highest audit quality and ensure a high level of accountability (Public Company Accounting Oversight Board, 2015).
The improvement in audit quality and accountability is something that is gained by investors and stakeholders examining the future viability of a publicly traded company. If the audit firm made a mistake in assigning someone to a particular project, the firm will never find any fault in that decision, because they made the decision on the basis of existing information within the firm. However, if there is a conflict of interest or any type of problem, the person performing due diligence will be the one who will spot the problem or irregularity (Petherbridge & Messier, 2015). Thus, this new rule only benefits the investors and regulating agencies.
Conclusion
From an auditing firm’s point of view, there is no added benefit for complying to PCAOB’s new rule regarding the high level of transparency related to engagement partners or lead auditors. More often than not, audit firms have greater access to critical information regarding the work history and business dealings of the engagement partner, because he or she is an employee of the said audit firm. Thus, there is no significant impact when it comes to audit quality and accountability. Audit firms are not going to assign an engagement partner if he or she is not a perfect fit for the said auditing job. However, investors are regulating agencies are going to benefit from the new rule, because they are able to have greater access to information that enables them to understand if there is any conflict of interest or similar problems.
References
Brown, R. (2017). Regulation of corporate disclosure (4th ed.). New York, NY: Wolters Kluwer.
Cole, C. (2014). Audit partner accountability and audit transparency: Partner signature or disclosure agreement. Journal of Accounting and Finance, 14(2), 84-101.
Hays, J., & Ariail, D. (2013). Enron should not have been a surprise and the next major fraud should not be either. Journal of Accounting and Finance, 13(3), 134-143.
Petherbridge, J., & Messier, W. (2015). The impact of PCAOB regulatory actions and engagement risk on auditor’s internal audit reliance decisions. Journal of Accounting and Public Policy, 35(1), 3-18.
Public Company Accounting Oversight Board. (2015). PCAOB adopts rules requiring disclosure of the engagement partner and other audit firms participating in an audit. Web.
Securities and Exchange Commission. (2016). PCAOB; order granting approval of proposed rules to require disclosure of certain audit participants on a new PCAOB form and related amendments to auditing standards.Web.