November 2, 2009
Keeping Corporations HonestBy Jim Yardley
A penny. Almost annoying when you get one as change, isn't it? What can you really do with it?
How about use that penny to fundamentally change the financial markets? Would that be a pretty good use of a penny? I think so.
For thirty years I was the financial controller for several different firms (as large as a quarter billion dollars in annual revenues), all of which were publicly held, and all of which were audited annually. From the perspective of a working accountant, audits are an unavoidable nuisance, but I also understand why they are necessary. But again, as a working financial accountant who spent thirty years keeping my employers solvent, I made sure that the auditors got the right "spin" on the numbers.
That's why I have to say that there are better ways to run audits so that stockholders, and potential stockholders, get a much better view of what's going on inside a firm.
Above all, let me be completely clear about this: there is absolutely no place for the government in the actual exercise of auditing businesses.
First, any time there is a potential for a politician to get a "campaign contribution" from a firm, there is the temptation to tamper with the outcome of an investigation.
Second, Congress has demonstrated that they are, to put it as generously as I can, woefully inept at actually running a business. They were unable to run a Senate dining room, and the less said about the postal service, Social Security, Medicare, and Medicaid, the better.
Finally, there are laws already on the books that mandate annual audits, so just leave them alone. The only thing that additional legislation will do is generate additional expenses (I refer you to Sarbanes-Oxley), so any "new and improved" audits will only tell investors that there will be a lot less profit that they might share in. Somehow I think that might result in a less-than-happy outcome for the firm in particular and the market in general.
So how can we avoid another Enron, or Bernie Madoff, or Fannie Mae and Freddie Mac fiasco? How about truly independent audits? I mean audits that do exactly what they are intended to do...not window-dressing festooned with accounting gibberish, but valid, penetrating audits of how the company is operating, how it is growing or shrinking, and what changes the management is making to stem the flow of red ink or to achieve the twin dreams of every CEO in America: being accused of generating obscene or immoral profits by Nancy Pelosi while simultaneously having Ralph Nader in front of your building screaming the most offensive epithet in a liberal-progressive's arsenal -- Capitalist!
Under the present system of audits, the individual boards of directors of publicly held businesses select an audit firm to audit their books. Right. That's helpful, isn't it? That's a little like letting Bernie Madoff choose who will audit his investment firm. Not exactly the strongest indicator of an objective assessment. This is especially true when, like Arthur Anderson at Enron, the audit firm wants to come back for another extremely expensive audit contract year after year after year, so issuing an adverse audit report would be seriously biting the hand that feeds.
Now (and I'd like to thank you all for being so patient with me) here's where the penny comes in.
Who is really interested in an in-depth, objective, and disinterested audit of a publicly traded corporation? The corporation or the corporate management? Hmmm? No, wrong answer. The government? Again, no, but thanks for playing! How about the current stockholders? Maybe, maybe not. It depends on how many shares are held by insiders.
How about people who are not current stockholders but are interested in deciding if the shares are worth the asking price? Yes! Right answer! We have a winner.
Now, how do we get the kind of audit report that those folks need in order to make an informed decision?
First, we collect a penny -- $0.01, 1₵, one hundredth of a dollar -- on the exchange of every share of stock traded each year. Only a penny. By my calculations, trading volume on the NYSE, AMEX, and NASDAQ totals somewhere in the $3.5-to-$4.0-billion-shares-per-day range. Assuming 250 trading days per year (to keep the math as simple as possible), that would be a total of between 875 billion and one trillion shares traded each year. So the total amount collected, at a penny per share regardless of the transaction value, would be between $8.75 billion and $10 billion annually.
This money would be held in trust by the exchanges. None would be touched by the government. Asking any government to "hold" money would be like giving a crack addict some cash and a shopping list and actually expecting to see groceries coming through the door at some time.
This money would be used to pay for half the audit fees for every company listed on the exchanges. No longer would the corporate management be able to seek out a "tame" audit firm. By paying half the fees, the auditors would have two different bosses, and they would know that a major misrepresentation in their results would lead to the exchanges questioning their competence to audit any firm on their exchange.
The second change needed would be even more influential in assuring objectivity and candor in audits. Congress (I'm sorry, but every now and again we actually have to use the government and not just ignore it) would have to pass a minor change in the legislation which mandates annual audits for publicly held corporations. No audit firm could audit any corporation for more than three years in a row, and must not be re-hired for further audits until six years has elapsed since their last audit. Think of it as term limits for auditors.
This would result in audits not only reviewing and evaluating the performance of the corporation, but reviewing and evaluating the performance of the preceding audit firm every third year. No one likes the idea of peer review, and this would, shall we say, "encourage" transparency and objectivity in reporting.
Such a system would eliminate the corporate inbreeding that undermines investor confidence in the market, and eliminate to a large degree the screaming, finger-pointing headlines that feed the liberal-progressives who want to control the free market.
And best of all, you can have it all for only a penny!