CORPORATE CRIME REPORTER
Former
Reagan SEC Commissioner Calls for Public Auditor
21 Corporate Crime Reporter 8, February 12, 2007
The profit motive and auditing don’t go well together.
And it’s time that the government take over the auditing duties of the big four – Deloitte Touche Tohmatsu, Ernst & Young, KPMG, PricewaterhouseCoopers.
The Securities and Exchange Commission (SEC) should now be in charge of auditing America’s public companies.
That’s the take of Bevis Longstreth.
A partner at Debevoise & Plimpton for more than 30 years.
Appointed by President Ronald Reagan to the SEC.
Served as an SEC commissioner from 1981 to 1984.
Longstreth now believes that the government should audit public companies – the way government bank examiners audit banks.
Longstreth said the idea first confronted him while serving as a member of the O’Malley Panel on Audit Effectiveness.
That panel studied the issue for three years and released its report in 2000.
Longstreth says that the panel sent out questionnaires to every opinion leader in the field, including academics.
“There were a surprisingly large number of accounting professors who said – we have to have a public audit function,” Longstreth recalled. “They had some good arguments for it. At the time, I noticed this and was interested in it but dismissed the arguments. I saw it as unnecessary and probably undesirable – as I’m sure everyone else on the panel did.”
But now, Longstreth has changed his mind.
One thing that helped change his mind – the current push by the big four auditing firms to limit their liability.
“The idea of capping liabilities, which is gaining traction, brought me to the conclusion that a profit-seeking enterprise doing this kind of work – auditing – is very difficult to pull off,” Longstreth said in an interview with Corporate Crime Reporter. “There is an inherent tension between doing a good audit job and maximizing your profits. The tension between those two is too great. You can’t expect both objectives to be well served by a single institution.”
“I don’t think auditing any more than bank examining should be considered to be a high profit area,” Longstreth said. “There are people who do it very well and who are happy to do it and consider it important work that serves the public interest. And that’s really all we are talking about – the public interest.”
“Before
1933, you didn’t have audits of companies. And certainly companies didn’t
feel they needed them and didn’t want them. This is not like hiring your
own lawyer. This is something that companies wouldn’t embrace unless they
are required to embrace it. Therefore, it’s really a public service. I
have sort of given up on the idea that a firm can be a profit-seeking enterprise,
can conceal all of its financials by the way – these auditing companies
are completely opaque – and at the same time perform this public service.”
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