We recently looked at the current moves in the United States toward eliminating the audit regulator, the Public Company Auditing Oversight Board…

And as if that wasn’t enough, Francine McKenna recently posted the following on LinkedIn:

• I hear that once the PCAOB is eliminated, there are those in the SEC now who will go after the SOX 404 mandate, and maybe even the audit mandate for all public companies.

She harked back to something she’d written in January 2019:

• “Eliminating the audit mandate altogether is an idea that has been floated as the ultimate solution to the problems that plague the profession.
• ‘[Lynn] Turner argues that, for the system to work and investors to get the information they’ve paid for, major changes must be made.
• His first suggestion: provisions of the Securities Act of 1933 and the Securities Act of 1934 should be amended to remove the requirement that companies be audited. The audit firms are a “subsidized industry, like the credit rating agencies,” Turner told me, and companies are required to pay for “audits no matter the quality.” Instead, he recommends that every three to five years, investors vote on whether they want an audit. Turner says that would require auditors to “justify their existence to investors,” and this could “alter the behavior of auditors, as they would now be beholden to investors.”’…
• Given that most investors seem to be just fine with buying and selling trillions of private and public company shares based on unaudited earnings information filled with unaudited non-GAAP metrics, is it only a matter of time before the wolf —complete relief from all audit-related regulatory burden and expense — blows the whole house down?”

Although one might react to that with intuitive horror, the argument isn’t entirely frivolous: if the purpose of an audit is (broadly) to increase investor confidence in the audited information, and if investors collectively indicate by their actions that they’re sufficiently confident without it, then why continue to impose such a burden, at least on an annual basis? Against that backdrop, the arguments cited above might at least be worth debating – if, that is, the debate took place in an intellectual rigorous manner, and was coordinated across global markets, and market participants had adequate time to prepare for any change of regime. But the proposal to eliminate the PCAOB was shoved with little notice into the middle of a sprawling bill dealing with everything from food stamps to medicare to artificial intelligence to tax cuts, all of this subject to a single up or down vote, hardly inspiring confidence in the underlying analysis and strategy, if any exists.

To my knowledge, Trump himself has yet to opine on the audit issue, but he did in the past sound off on another cornerstone of the reporting regime, in a 2018 tweet:

• In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. “Stop quarterly reporting & go to a six month system,” said one. That would allow greater flexibility & save money. I have asked the SEC to study!

I don’t believe the issue has resurfaced since then, but if it came up once it could clearly do so again. It’s at least vaguely possible then that we could see a U.S. regime where both the frequency of and the assurance attached to periodic financial reporting are rolled back, in which to the extent the assurance is provided at all, it’s subject to less rigorous regulation, and in which (noting McKenna’s comment on SOX 404 – this you’ll recall refers to requirements for maintaining and reporting on internal control over financial reporting) expectations of management and directors become looser. Presumably the argument would be in part that this all “empowers” American corporations to focus on value-generation rather than compliance, increasing the effectiveness of U.S. capital markets. Even in the rosiest outlook though, such a regime would seem to be subject to significantly greater systemic risk and valuation uncertainty.

And to continue the thought experiment, a US in which all of that transpires is probably also one in which other aspects of Trumpism – economic excess and chaos, immigration madness, a wholesale coarsening of the social and cultural fabric – remain intact, collectively sharply reducing the country’s attractiveness as a place to visit or invest in or anything else. Considering all the arguments, and noting that the audit profession probably isn’t light on lobbying power, I wouldn’t expect McKenna’s worst predictions to be realized just yet. But of course, Trumpism has fairly consistently reduced rational expectations to rubble.

And how would Canadian regulators, generally predisposed to follow the lead of their US counterparts for the sake of preserving “competitiveness,” but also at present overseeing a gearing-up rather than a dilution of auditor oversight, react to such a challenge? I’m sure they severely hope they never have to find out…

The opinions expressed are solely those of the author.