We have been saying for five or more years now that treating the vote on ratifying the selection of auditors as a “routine matter” is increasingly absurd, in light of the seemingly never-improving and clearly unsatisfactory number of audit failures reported each year by the PCAOB.
This season, there were far too many straws in the wind and roilings-of-the-waters on the auditor scene to possibly ignore - starting with the 35.1% vote against ratifying the auditor at GE… in light of the numerous re-statements, write-downs and earnings misses there, where their auditor failed to ring even the tiniest alarm bell.
And then…in the U.K. - which is often miles ahead of us on governance issues (like required shareholder approval of buyback plans, for example) - a FTSE 250 company, construction group SIG, voted to oust Deloitte after SIG admitted to repeatedly overstating its profits in previous years.
And then…“Audit Analytics” came out with the news that the GE result didn’t even manage to crack the ‘Top-3 no-vote getters for the three years ended December 31, 2017. Their blog said that that the biggest No-vote-getters were Plymouth Industrial REIT (2015) - 49% votes no, Health Warehouse.com (2016) - 45% and Planet Fitness (2018) - 37%: In 2017, they noted, 15 companies received more than 20% of votes against ratification and three companies - Planet Fitness, Consolidated-Tomoka Land and Kulicke & Soffa Industries - each received more than 36% of votes against auditor ratification. But, surprise, surprise? The old auditors are still serving at all three companies…and at GE too - amazingly - as we write this.
And then…came a blizzard of horror stories in the press about KPMG International, which licenses its name and oversees audit operations of its licensees on a global scale. KPMG’s affiliate in Dubai investigated its own audits of once high-flying Abraaj Group, a 7/5 WSJ story revealed, following investor allegations that significant fund monies had been taken and used for inappropriate purposes. Surprise again? KPMG found they’d done nothing wrong. Concurrently, the former Abraaj founder is under an arrest warrant in the UAE for floating $48 million in bad checks!
So then…when Abraaj filed preliminary liquidation papers…the board hired Deloitte to investigate KPMG: Deloitte found that fund money had indeed been used for improper purposes, and that Abraaj “lacked proper governance” …But then… once again, Abraaj appointed another KPMG unit - KPMG Lower Gulf to investigate - which (surprise again?) found that the fund was “in line with proper procedures.” And then…in an astonishingly flippant flip of the bird to investors…the Abraaj board commented that it was not up to them to say if there was a conflict of interest in appointing KPMG Lower Gulf…
The WSJ article cited a raft of other KPMG horror stories - the fact that the US unit recently fired several employees following an information stealing scandal, as reported here earlier….and that the firm was “under fire” in South Africa for ties to issues involving a “politically connected family” - and OUCH AGAIN! - that UK regulators declared in June that the quality of its audits of a now-failed construction firm was “unacceptable.”
Perhaps the most shocking thing of all…If you review the Audit Analytics statistics on auditor tenure, the number of companies that have retained the same audit firm for 25, 30, 40, 50, 75 and 100 years in a row make it intellectually and statistically impossible to believe that audit committees have been conducting rigorous and thorough reviews before asking for “shareholder ratification” of their recommendations.
We are not fans of mandatory auditor rotation, and, as mentioned, we no longer able to convince ourselves that treating auditor ratification as being a “routine matter” is justifiable under current conditions. We think we have a better - and an easy-to-implement idea: Amend Audit Committee Charters to require the Committee to formally put the audit assignment out for competitive bids at least once every ten years.
Your editor had an experience with this in his first year on a non-profit board, which had used the same audit firm for over 60 years, and that shows what a wonderful thing this can be:
The non-profit was very happy with the old firm - and with their top-to-bottom familiarity with the non-profit - and with the audit management and staff, where there were well-developed working relationships with all the key staffers…But they felt that after 60 years a fresh look was warranted.
They asked the current firm - and one other, of similar size, focus and reputation - to take a top-to-bottom look at the non-profit’s current environment, to suggest ways to tighten things up and perhaps to reduce activities if they saw any such opportunities…and to propose their fees for going forward.
The non-profit got more than a half-dozen ideas for improvements from each firm - that were all put in place. They reduced the audit fees by 20%. But most important, the board felt that they had truly done their due diligence…and their duty as fiduciaries.
Two more straws in the wind on the auditor front blew by us this season… at two small biotech companies that a CTH LLC Inspector of Election attended:
At the first meeting the incumbent accounting firm received approval from only 54% of the votes present ….and the audit partners were asked to stay afterwards to speak with the board. At another meeting, the very next morning, a second biotech company had decided not to put the ratification of auditors up for a vote this year because they are planning to initiate a bidding process shortly. Since there were no “routine proposals” to vote on, the quorum was a mere 54% which, fortunately for them was not an entire surprise, or a problem to the company.
The bottom line here: There seems to be a movement afoot among smaller and newer biotech companies - many of which have investors and often some directors in common - to question what are perceived as being unusually high audit fees for companies in this market segment. Straws in the wind indeed.
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