Just because PwC, as defunct Alabama-based Colonial Bank’s outside auditor, missed a massive fraud at the bank that sank it in 2009 and cost the FDIC $2.5 billion doesn’t mean PwC did anything wrong…
Just because the fraud PwC missed was engineered between a top Colonial executive’s mortgage department and the bank’s biggest mortgage banking client, and PwC never looked into the legitimacy of any of the mortgages that were put up as collateral, doesn’t mean PwC did anything wrong…
According to PwC, they didn’t do anything wrong because they’re not responsible for not knowing what they didn’t know or what was hidden from them.
And that’s a good defense, though it’s not what you want to hear from an institution entrusted with high-level auditing.
Even though a judge at the United States District Court for the Western District of Washington ruled last week that the FDIC could sue PwC doesn’t mean that they are in any danger of being held accountable for rubberstamping the audit reports that were relied on by investors and regulators.
So, the FDIC’s lawsuit will be settled out of court and sealed. We’ll never know how negligent PwC was, or how negligent they will continue to be.
That’s just the way it goes in the protected world of the Big Four accounting firms – the same way it still goes at the big rating agencies.
They’re all protected by the same regulator who oversees both industries: the Securities and Exchange Commission.
The Big Four’s Chokehold on the System
I’ve spilled enough ink on how corrupt the rating agencies were and how the SEC protected them.
I haven’t shared what I know about how the Big Four accounting giants (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) are also protected by the SEC, the regulator they captured years ago.
Now, with the prospect of the FDIC suing PwC over their failure to catch what they should have caught in their normal course of auditing, it’s time to shine the light on the same old SEC – again.
The story starts with the Public Company Accounting Oversight Board, the PCAOB.
After some terrific accounting scandals came to light in 2001 (most infamously the implosion of Enron), Congress enacted the Sarbanes Oxley Act of 2002, or SOX for short.
SOX was about accounting accountability. While the SOX Act is long and complicated and calls for lots of regulations and checks and balances including provisions for whistleblowers, the meat of it is about CEOs and CFOs being legally liable for signing off on accounting paperwork and audits.
In establishing SOX, Congress established the Public Company Accounting Oversight Board to set standards and to lead the charge against wrongdoers.
PCAOB is technically a “private” company funded by the fees it collects from the accounting firms, broker-dealers, and others it has jurisdiction over.
The chairman and board of the PCAOB are picked by the 5-member board of the Securities and Exchange Commission. Most of the time, the chair of the PCAOB and its small board comes from some connections to Congress and an administration, are lawyers who’ve served in other government associated positions, or come from private practice but have solid government credentials and friends in high places.
For the most part, the PCAOB tries to fulfill its mandate. That isn’t the problem.
The problem is the SEC – and within the SEC, the Office of the Chief Accountant has the Chief Accountant himself. The Chief Accountant essentially has direct responsibility over the PCAOB.
That is the problem.
Wolves Guarding Hen Houses
Most of the Chief Accountants, who oversee and dictate policy at the PCAOB, come from the Big Four accounting firms.
The SEC’s new Chief Accountant, Wesley Bricker (blessed by Mary Jo White, the former chair of the SEC who anointed Bricker in November 2016), was a partner responsible for banking, capital markets, financial technology, and investment management at PricewaterhouseCoopers LLP.
We’ll see the effects of Mr. Bricker’s influence as accounting rules and regulations get a good looking over in the near future.
We already know that Mr. Bricker’s predecessor, Chief Accountant James Schnurr, was friendly with the accounting industry which he oversaw.
Schnurr, anointed by SEC chair Mary Jo White in 2014, was deputy managing partner at the world’s largest accounting firm, Deloitte & Touche, prior to his regulatory service.
While Mr. Schnurr was deputy managing partner at Deloitte, the accounting giant audited and rubberstamped the books of Bear Stearns, Washington Mutual, and Fannie Mae. Each went bust soon after, costing investors over $115 billion in losses.
Besides Mr. Schnurr’s deep ties to Deloitte, that same former SEC chair Mary Jo White represented Deloitte while she was a partner at law firm Debevoise & Plimpton. And Chair White’s husband, John White, is a partner at law firm Cravath Swaine & Moore, which counts Deloitte among its clients.
But none of that is out of the ordinary.
Each of Mr. Schnurr’s predecessors, going back to 1992, came from senior partnerships at one of the Big Four accounting firms.
Most returned to their firms when their stint as Chief Accountant ended.
In reality, “The very people the PCAOB is regulating are the ones that are overseeing them,” according to Lynn E. Turner, a former Big Four accounting executive who served as chief accountant of the SEC from 1998 to 2001.
Every wonder why there aren’t thousands of executives prosecuted under the SOX rules that were supposed to bring them to justice? Now you know.
PwC will settle with the FDIC, maybe get a slap on the wrist, and move on with their business of charging their clients hefty fees to rubberstamp their books and records. They, like the other giant accounting firms, are protected by the regulators whose strings they pull.
Keep that in mind next time you hear about one of these giants claim they had no idea what was being hidden from them in their audits.