Bureau of PricewaterhouseCoopers?

So, here is my fix. It is exactly what one would expect from a former US Treasury tax lawyer: have the SEC affirmatively protect the small investor with regard to financial information of public companies by nationalizing the audit function.

Companies would be required to prepare financial statements that, in management’s judgment, best present the company, not that are merely “generally acceptable.” (See my post of July 8.) The accounting rules would be set by a government agency (the SEC), not a private group, as today (the Financial Accounting Standards Board). These rules would be codified. The SEC, not private firms hired by the audited company, would do all audits. In appropriate cases, the SEC might even comment publicly on a stock price range that is appropriate in light of what is learned during the audit.

Whoa, socialized capitalism!?!? There’s more has a defense.

The most obvious critique is that this would be prohibitively expensive. And it would be spendy (as they say in Minnesota), no doubt. But, my proposal would replace the already really expensive private audit process. The SEC could use the money that companies currently are spending on huge accounting fees. Today, FASB and the Public Company Accounting Oversight Board (which licenses the auditors) are supported by a fee that the SEC collects from public companies. (The PCAOB structure is being attacked in the courts as being unconstitutional. I think that this litigation could be very interesting. Michael, oh Administrative Law guru, what do you think?) These fees could be expanded, perhaps with no net drain on companies. In any event, safer markets would encourage more investment, perhaps even increasing the pathetically low US saving rate, making any net cost of my proposal less troubling.

Another bureaucracy? Hey, I worked at the US Treasury. I had dealings with the SEC. I know first hand of the problems with government agencies. But, I also have had lots of dealings with the big accounting firms. They have their own bureaucracy that confounds reason and efficiency every bit as much as at the IRS and the SEC. (Admittedly, there are numerous government agencies that run much worse than the big accounting firms, however.)

Executives will scream that having the SEC looking over every business decision will stifle management’s entrepreneurial spirit so as to seriously hurt the US economy. Unfettered foreign competition will eat our financial lunch. Maybe. But, US firms should have a lower cost of capital, which is one heck of an advantage. And, as recent events have demonstrated, many managements of public companies are driven, not by free-wheeling entrepreneurship, but by unbridled self-interest. Think of all of the talent and resources spent cooking books and in doing transactions that made no business sense in order to get an accounting advantage. A wee bit of oversight actually might make managements get back to making money, which would make companies more productive.

All of which may just demonstrate that I really am no expert on corporations…..

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