Would You Rather: Have Part II of PCAOB Inspection Report Released or Find Out an Audit Partner Passed Along Inside Information?

Oh, to be a Big 4 firm these days. Yes, billions of dollars flow in from every corner of the world thanks to your professional services, but thanks to the audit practice, there's peril around every corner! 

The news that former KPMG audit partner Scott London passed along inside information to someone outside the firm is just the latest incident that would give an audit firm leadership and compliance folks raging headaches. Another recent cause for heartburn is PwC's situation: it is one of only two firms (Deloitte being the other) that have had the distinct pleasure of the PCAOB releasing Part II of their inspection report to the public.

Now, just for fun let's put ourselves in an imaginary nightmare scenario — if your firm had to go through one of these two predicaments: 1) Discover that a partner engaged in insider trading activity or 2) Have Part II of the PCAOB's inspection report released, which would you choose? Let's examine each, shall we?

Predicament A: Partner is involved in insider trading — This particular situation is bad for all kinds of reasons that we are watching unfold this very day. An individual partner and his office have been positively identified. Clients fees have evaporated. Also, because this involves an audit partner, the offense looks especially egregious.  The G-men are involved. According to a general counsel friend we spoke to, "more collateral damage could result from this," meaning more clients could leave or regulators might insist on a more in-depth investigation. Insider trading attracts a huge part of the financial media so it has the firm's PR people on the run. The faint silver lining in this scenario, however, is that it can be plausibly blamed on a rogue agent within firm, which KPMG has aptly done. That person was promptly eliminated. Problem solved!

Predicament B: PCAOB Part II is released — This is no treat either. One of the firm's core functions, a function that evokes virtues from the firm's leaders that they wear like a badge of honor, is being questioned. Many people will see this as indicative of wider, systemic issues at the firm. Part II could have a direct effect on audit professionals by way of  more robust methodologies that would increase their workload. The national leadership is forced to address a firm-wide issue that happened on their watch. If there is a bright side to this fix it is the fact that a large portion of the details — the clients affected, the partner and offices responsible — are still kept secret. Yeah, the PCAOB may be trying to change that, but it's not exactly moving at light speed on the issue. 

Our general counsel friend, if (s)he had to choose one situation that would ruin their life for the foreseeable future, went with Option B. The secrecy afforded by the PCAOB's inspection process, even if Part II is released, makes for a slightly more desirable pickle.  

And really it seems like a no-brainer. Yeah, your firm might suck at what it's supposed to do, but at least it can suck with relatively anonymity and obscurity. Scott London's name will be in every single one of those reports out there. A lot of financial reporters don't even know what the PCAOB is or does. If a Part II gets released, most of them barely notice.

So, which one would you choose? No copping out with "I'd quit" either. You have to assume you're under duress from Lucifer or some other unholy figure that has tied you to chair and is holding your family hostage. Sorry to make it such an extreme scenario, but imaginary white-collar adventures like this are important exercises.  

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