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ACCOUNTING WATCHDOG'S ACTIONS MAKE IT LOOK LIKE LAPDOG

The official mission of the auditing profession's watchdog is "to protect the interests of investors." In practice, what it really protects best are the dirty secrets of the accounting firms and their corporate audit clients.

Created in 2002 by the Sarbanes-Oxley Act, the Public Company Accounting Oversight Board inspects the firms that audit companies with U.S.-traded securities. In its brief history, the board has identified scores of companies where outside auditors have done lousy jobs checking the books. Investors crave that kind of knowledge.

In its reports to the public, though, the board doesn't name the companies. So last month, for instance, when the board released its annual inspection report on Grant Thornton LLP, the sixth-largest U.S. accounting firm by revenue, one of the audits it criticized was at a company identified only as "Issuer A." Transparency, this isn't.

The report said Grant Thornton failed "to obtain sufficient competent evidential matter to support its audit opinion" and "failed to identify" an accounting violation "that it should have identified and addressed before issuing its audit report."

In a response letter, the firm complained about the harsh wording and said it had identified the problem. The violation: Issuer A, which restated its financials last year, had left off its balance sheet a certain 90 percent-owned partnership, the rest of which was owned mainly by company insiders.

Here's what the report left out: Issuer A is Tarragon Corp., a New York real estate developer awash in Florida condominiums. Last year's restatement slashed 2005 net income 39 percent to $88.5-million. And Grant Thornton remains its auditor. Faced with those facts, some investors during proxy season almost certainly would vote to fire the auditor and perhaps even withhold votes from directors who sit on the company's audit committee.

I uncovered Tarragon's identity with the help of a database maintained by Audit Analytics, a research firm that tracks restatements. Tarragon CEO William Friedman confirmed the match.

Investors shouldn't have to go to this much trouble.

"That's clearly information investors would want to have," says James Melican, chairman of research firm Proxy Governance Inc., which provides proxy-voting recommendations to investors. "I don't see any particular reason why it should be secret."

The board's inspection reports have multiple parts, most of which by law must remain secret. The part that summarizes selected audits where inspectors found problems is the part the board must release publicly, under the Sarbanes-Oxley Act.

So why keep the names of companies a secret, if this part of the report is supposed to be public? In a 2004 policy statement, the board said a certain section of Sarbanes-Oxley "expressly restricts" it from identifying companies in the public portions of its reports.

As far as I can tell, though, that section says no such thing. Melican, a lawyer who once was general counsel at International Paper Co., agrees.

Ed Nusbaum, Grant Thornton's CEO, says the secrecy lets auditors speak freely with inspectors. If the board named names, "no one will want to discuss anything," he says, "and we won't have the opportunity to improve the audit in the same way."

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