First, we nuke the SEC. This isn’t really that radical. There’s precious little evidence that it does what it purports to – namely, protect investors. If anything, it protects investment managers and others from investors, who might suspect they’re getting ripped off. Sure, it can catch the occasional insider trading case, but they’re usually pretty obvious when you see a massive trade right before big news comes out.
Second, we stop letting companies hire their own auditors. Companies have little incentive to hire aggressive auditors. An auditor won’t get business by being a pain in the ass to the company it’s auditing. The game is to do the bare minimum that makes everyone happy. That state of affairs works fine in the boom times, but when the recession comes, the whole charade is exposed for what it is.
Finally, we make each listed company pay a fee to an independent auditing organization. Rather than hire the auditors directly, companies will pay some portion of their revenue to an independent industry body (like the SIPC or some such) that then hires auditors for its member companies. The auditor would work for this group, and it’s ability to get business year-on-year would be tied to its performance. Whiff too often? You’re done. No more work for you.
Dennis, like Prem Sikka (who is also in action today) thinks that reform is unlikely if the existing institutions stay in place. I agree. They have been captured by those they are meant to regulate. As such they have failed. We need new regulation, new people and new ideas.
I like those Joe puts forward.
I’ll add another. It is very obvious that substantial reform of the regulation of the corporate sector is needed. This regulation is currently paid for by taxpayers which is the wrong solution, I suggest. There are more than 2.4 million companies in the UK right now. They need pay just £15 a year to exist. That’s absurd: no wonder Companies House does such an appalling job in making sure that the most basic compliance with accounting and filing requirements takes place.
Companies must be made to pay for proper independent regulation, including their audit. There is an easy way to do this. The filing fee must be increased. That for small companies that do not need audit should increase to not less than £250 a year – enough to ensure staff are available to run a proper register of beneficial owners of all companies, to chase them when filing does not take place and to fund prosecutions for those in breach of their obligations. In addition this will pay for the supply of meaningful data on companies to the tax authorities, which should include collection of compulsory data on which entities have bank accounts from banks themselves since this is sure indication that those companies must be trading and that they must not, as a result, be allowed to be struck off the Register without settlement of all tax liabilities due.
Second, all large companies requiring auditing should be required to pay a fee based on a ratio of their turnover, employees and total assets. Auditors would be paid from this fund.
It’s completely possible. And the data on total audit fees paid in the last year needed to set the budget is already on public record if only someone is willing to work it out so a loss is unlikely, and could be recovered in future years in any event.
Add in additional fees for companies in other regulated sectors and the mechanisms for independence could all be in place in no time at all.
But please don’t say radical reform is not possible: it is.