A few months ago, a committee advising Treasury Secretary Henry Paulson on the “state of auditing” recommended that Big 4 audit firms be required to submit audited financial statements to the Public Company Company Accounting Oversight Board (PCAOB). It’s suggested that the firms be required to report their financials in accordance with Generally Accepted Accounting Principles (GAAP), and that those results be made public.
Currently, the audit firms don’t make their financial results public because they’re private companies and not required to do so. Privately held companies do not have to release their financial statements to anyone unless they choose to do so. The Big 4 firms each report some information on revenues to the public, but this is really for PR purposes only (to show how big they are) and the numbers aren’t calculated on a GAAP basis.
The heads of the committee making the recommendation to the Treasury, Arthur Levitt and Donald Nicolaisen, say that presenting audited financials to the public would create greater accountability. It is also suggested that doing so would be a step toward “transparency” for the auditing firms.
I say this recommendation is silly. What transparency will audited financial statements really provide? Does anyone really care what the revenues or expenses of the auditing firms are? I doubt the investing public cares.
There is other information on the auditing firms that might be valuable, however. It would be interesting to see which public company clients are paying the largest fees. It is important to know how much clients are paying for audit services versus other services. (This information on audit fees is already widely available in the SEC filings of the public companies that are audited, but it would be nice for the auditing firms to report this information in one document.)
It might be wise to delve into potential conflicts of interest. I’d be interested in knowing how many adverse audit opinions were issued (hint: not many) and I’d like the opportunity to evaluate how often the audit firms are essentially selling clean opinions to their clients.
None of those items are likely to be contained in the audited financial statements of the firms, so it doesn’t seem like releasing the statements offers anything of value to the public.
Besides, the auditing firms are private companies. Why should they have to release their numbers? Just because they participate in this game called auditing public companies? What on earth do their own financial statements have to do with whether or not audits are effective at protecting investors?