In a speech at the Commonwealth Club in San Francisco recently, EY CEO James Turley called for more regulation of audit firms. His premise that audit quality has improved as a result of SOX and the PCAOB while ‘possibly’ accurate (and I’m not conceding that) is irrelevant. Foremost I don’t believe that quality has improved for quality firms. I can’t speak for EY. Perhaps they are better for it. The SEC and the PCAOB for all intents and purposes initially adopted the accounting and internal control standards that were already promulgated by the profession. Adding another layer of regulation sufficed only in adding additional cost to public companies. And now Mr. Turley wants to expand that further. Why?
Since my introduction to the profession in the 1970’s when we were attacked by Michigan Democratic Congressman John Dingell, we have fought for self regulation. Obviously the SEC Practice Section of the AICPA (the forerunner to the Center for Audit Quality CAQ) failed miserably and here we are. Based on his leadership, it appears the CAQ is on the same course. One of the defining characteristics of any profession is self regulation. So we apparently have failed as a profession if you are to subscribe to Mr. Turley’s pleading or does he have another motive?
Economists define this propensity of larger firms ‘getting cozy’ with regulators in order to drive up costs and limit competition from smaller firms as ‘regulatory capture’. Banks, drug companies, airlines – accounting firms? Bigger isn’t better, but it certainly seems to be more expensive.
From my days as a young corporate bank officer for a mid-sized California bank in the early 1970’s, I recall having regulatory audits by Federal regulators, the State of California examiners, and the Federal Depositors Insurance Corporation (FDIC). We also had our own internal audit department as did every other bank. And as every other bank has had since then. Total regulation. It’s obviously worked well Mr. Turley. In my professional lifetime a list of the most heavily regulated industries would include banks, airlines, railroads, banks, banks, banks. More regulation. Yeah! That’s the answer.
More recently we have two great examples of failures by federal regulation in Madoff and Stanford. I challenge you to name one economy with more regulation than we have had in the US that has been more successful. Ever. I can list dozens that failed with more regulation.
I disagree vehemently with Jim Turley. Additional regulation if warranted should come from inside the profession – specifically the CAQ which Mr. Turley happens to be the sitting Chair of. Do the job you signed on for with the CAQ Mr Turley. That he wants to abdicate that responsibility is incredibly disturbing. That he proposes to add additonal layers of cost – cost that he and his firm will derive revenue directly from- is unconscionable.