Speaking recently at the International Corporate Governance Network Annual Conference in London, Deloitte Touche Tohmatsu CEO William Parrett called on national regulators to convene a special summit before the end of the year with the goal of developing a more uniform global regulatory environment. “In an ideal world, a global regulator would be the answer to greater consistency, but this would be difficult to achieve.” Parrett said. “At a minimum, it would require sovereign states to cede to a global body its right to regulate.”

Parrett recently took some time out of his schedule to speak with Compliance Week correspondent Stephen Taub about his "global regulator" proposal, as well as his thoughts about Sarbanes-Oxley, the rising costs of audits, the Parmalat lawsuit, and many other issues. This week we present Part II of a two-part interview. Click here for Part I of the interview.

Is the auditing profession being picked on—being made the scapegoat for the recent corporate frauds and scandals?

One of the things I wish audit firms had been doing for the last 15 years was a much better job communicating what an audit can accomplish and not accomplish—what people can expect and the gap between what it accomplishes and what an investor thinks it accomplishes. It is enormously difficult to catch a collusive fraud.

Why is that?

You may have 10 to 20 people involved in fraud. At the end of the day, a company’s accounting is based on a double entry bookkeeping system. Controls are based on one person instituting a transaction and others approving it. When during a transaction a person is intent upon covering something up and those approving it also want to cover it up, it makes it extraordinarily hard to find it. This is not to suggest that we can’t do a better job. I’m the first person to say we are human, we are not perfect and we can improve. Technology has come a long way. It can help us improve, particularly in the area of catching collusive fraud.

Would you say CEOs and CFOs were "asleep at the switch," as has been widely alleged?

I don’t thing CEOs, CFOs or auditors were asleep at switch. There are thousands of auditors who provide good input and push back. There are a number of audits during the course of a year where our firm and other firms have uncovered problems, which are dealt with the audit committee, CEO or board, and they fix the problems. These are good companies with right intentions. What we have seen is a number of companies fail. I believe every single one has an element of fraud in them, and a number of them were big. But, thousands and thousands of companies are doing a first class job. We must reduce the failures to zero. But, we’ll never get there. There will always be unethical companies.

Let’s talk about a few high-profile situations involving Deloitte. For example, according to reports, the Public Company Accounting Oversight Board is investigating your firm’s 2003 audit of Navistar International Corp.

Whenever a company has some type of restatement or type of item that is public in their report, Deloitte takes a look at it, the reason for it, what it can learn from it. Others do as well.

But, is the probe warranted?

I don’t want to respond.

What do you think of the recent decision by U.S. District Judge Lewis Kaplan stemming from the Parmalat bankruptcy, which essentially said a case could move forward against Deloitte and Grant Thornton alleging that the different entities of a global accounting firm are related?

It does not imply that at all. It’s a matter that has been tried a number of different times. Accounting firms—our firm—do not have a global partnership. All the judge was referencing was that the fundamental trial goes forward. Basically the judge said the process should move forward in order to draw a conclusion. We’re confident Deloitte will prevail. Parmalat was a collusive firm. The Italian member firm was defrauded. The Deloitte organization is not a global partnership.

Then what is it?

It is a group of about 80 member firms that work together in a cooperative fashion to execute global audits. By law, it cannot be a global partnership. Some people missed this.

What do you mean?

The law says they must be organized this way. They must be certified in a country, and owned by a resident in that country. Many of those countries prohibit cross border ownership. Even most of the 50 states require certification.

What about your typical multinational company that owns its subsidiaries in other countries?

They are corporations, owned by the parent. Deloitte and others are prohibited from owning stock or a partnership interest in those countries. It’s been like this for 100 years. If people want it to be different, then regulators have to get together [and change it]. This is out of our control.

Let’s talk about Deloitte’s agreement to pay $50 million to settle charges stemming from its fiscal 2000 audit of Adelphia Communications Corp.?

It was a large fine. We were collaborative with the SEC to put it behind us.

What do you think of the possibility of KPMG going away like Arthur Andersen?

Deloitte has been quite public [on this matter]. In the late ‘90s, we published that the number of firms should not go below five firms. The U.S. government made a decision to prosecute Arthur Andersen. It’s hard to argue a difference between 5 and 4. Five is good. Four is fine. It would be difficult if there are three.

What kind of difficulties?

A couple of mid-size companies would probably pick up some work if there is a demise. Nonetheless, to replicate networks and organizations takes decades. So, one difficulty would be the limitations from an independent and competitive standpoint.

Why has there been a surge in restatements?

Changing expectations of the investing public and regulations [instituted] in the last decade. There’s a very strong focus today on preciseness of earnings per share as a surrogate for other numbers. The definition of materiality for purposes of determining whether something should be restated has been narrowed.

Is this good?

I don’t think it is good or bad. We need to go back and take a look at what we are trying to accomplish. My personal view is the investing public is better served if there is less focus on quarterly earnings and precise EPS. We should substitute with a range number that the earnings may fall between. Rather than suggest, for example, that a company could earn $1.91 per share, it may be reported as $1.85 to $1.95.

Why have there been so many late filers of late?

Admittedly, I am not close enough [to this issue], but most of them are a result of companies wanting more time to comply with various provisions of Sarbanes-Oxley, and to be accurate. Sometimes it takes more time. There was a significant work load out there and no staff to get together.

Thank you very much for all of your time.

It was my pleasure.

Click here for Part I of the interview with Deloitte Touche Tohmatsu's Global CEO William Parrett.

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