In spite of the fact that public-accounting firms rely on their respective audit clients’ decisions to be retained to perform the next year’s audit, society deems an unqualified audit-opinion to be independent. The assumption is that the audit firms can police themselves, keeping their financial pressures from influencing the audit opinions. The ongoing temptation is of course to produce a clean opinion so as to be retained as the client’s public accountants. Unfortunately, someone at a given CPA firm must have authority requiring attention both to audit opinions and the firm’s own financial performance; internal policies separating pressure from the latter from reaching the former can thus be easily overcome from the vantage point of that authority. This vulnerability was on display in 2015 in the “dot-com” industry in BuzzFeed.
In April 2015, BuzzFeed News’s Deputy Managing Editor, Annie Strasser, found that the company’s business interests had influence the deletion of posts critical of products of companies paying BuzzFeed for advertising space online. Specifically, one post criticizes the board-game Monopoly, whose maker Hasbro had signed an advertising contract with BuzzFeed. Another post criticized the ad campaign for the soap-maker Dove. That campaign included ads on BuzzFeed’s site.
Although BuzzFeed’s editor-in-chief, Ben Smith, insisted that his decision to delete the posts had been editorial in nature—that neither the advertisers nor BuzzFeed’s advertising department had influenced him—that he reinstated the posts following the review suggests that his claim that the posts had been “personal opinions” and thus prohibited is false. “I field complaints all the time from companies and individuals, including advertisers, and see it as my job to shield you from that pressure,” he wrote in a memo to staff. Contradicting this statement, however, Mark Duffy insists that Smith had pressured him to soften or remove posts due to pressure from BuzzFeed’s advertisers.
Unfortunately, an executive claiming to have safeguarded an internal firewall while doing the opposite is not unique to BuzzFeed. In the year, the SEC found that executives at S&P Rating Agency had ignored firewalls they themselves were promoting. At the very least, lest we as a society be deemed to be inconsolably gullible, we can conclude that asseverations made by executives whose authority covers two departments whose interests are in tension or outright conflict cannot be relied on for support that the firewalls are operational and durable. I would even state that such firewalls are themselves faulty if a person has authority over departments on both sides of them. As CEO’s have such authority, we as a society should not place any confidence in internal firewalls. To obviate structural conflicts of interest, the tension or conflict itself must be “designed out” of the company in question. In public accounting, for example, the audit clients should not have a role in deciding whether their respective CPAs are retained for another year. Although it is undoubtedly easier to rely on the audit-firms’ firewalls, getting at the design-problem in the industry itself (and in that of the rating agencies) is necessary to obviate the conflict of interest.