Audits Are About to Get Way Worse

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Exxon’s Shareholder Lawsuit Loses Steam

It was only a few weeks ago that ExxonMobil initiated a lawsuit against two activist investors, Arjuna Capital and Follow This, to put a stop to an upcoming ESG-oriented shareholder proposal at the company—part of what the oil giant sees as an “ambition to micromanage ExxonMobil’s business decisions regarding emissions reduction targets.” Pretty soon after the initial complaint, though, Arjuna and Follow This decided to withdraw the proposal they were preparing for Exxon’s board meeting. Exxon still wants to sue, but in the absence of an upcoming shareholder proposal, the judge overseeing the case is starting to wonder whether Exxon still has a case.

Here’s US District Judge Mark Pittman’s skeptical quote, per Reuters:

"As it stands now, the Court struggles to see what the ongoing case or controversy is in this matter given the only relief sought from the Court was a declaration that Exxon may exclude Defendants proposal from its annual shareholder meeting.”

Even if this lawsuit doesn’t pan out, there’s no reason to expect Exxon will suddenly make nice with the scores of socially-conscious activists pushing for change at the company. “ESG” is now mostly a buzzword and a bugbear for many in the oil and gas industry—there are plenty of cultural reasons why Exxon may want to nip this movement in the bud, too.

Elon Acts Out

It’s a question many of us in the tech world are now forced to ask ourselves on a regular basis: what is going on with Elon Musk? After the Tesla CEO had his eye-watering $55.8 billion pay package slashed by a Delaware court (the word the judge used was “unfair”), he began lashing out at the state’s court system, threatening to move the country’s premier electric car company from Delaware to Texas. Like many companies incorporated in Delaware, Tesla isn’t meaningfully based in the Blue Hen State. In fact, Tesla already moved its official headquarters to Austin a couple years ago. Musk recently posted a poll on the social media website X, which he owns, asking users whether they supported Tesla’s move to Texas. When users seemed to like the idea, Musk wrote that “Tesla will move immediately to hold a shareholder vote to transfer state of incorporation to Texas.”

The fact that this exorbitant pay package was up for debate at all comes down to a single shareholder, a heavy metal drummer named Richard Tornetta, who at the beginning of the legal proceedings in 2018 owned just nine shares of the company.

Musk, though he only controls 21.9% of Tesla shares, holds a huge amount of sway over the board, and will probably succeed in convincing shareholders to move the company to Texas—a state with courts that might choose to handle similar lawsuits in an entirely different way. (In her ruling on the pay package, Delaware judge Kathaleen McCormick wrote that Elon enjoys “thick ties” to Tesla’s board, and that his relationship with the directors gives him “enormous influence” over the company’s decisions.)

It’s a cumbersome way of skirting unfriendly courts, but one that, when the next Richard Tornetta comes along, might just pay off.

Audits Are Getting Worse

Each year, once the major accounting firms have completed their audits of all the public companies in the US, a nonprofit called the Public Company Accounting Oversight Board audits those audits, combing through the reports for any signs of carelessness. It’s been a thing since 2002—a requirement of Sarbanes-Oxley.

Back in November, one of the organization’s board members mentioned during a talk that, on the whole, the six major auditors of US companies seemed to be getting worse at their jobs. “42% of firms the PCAOB inspected in 2022 had a quality control criticism related to engagement quality reviews, up from 37% in 2020,” said George R. Botic.  And though the PCAOB’s 2022 reports aren’t yet publicly available, Botic also mentioned that so-called “Part I.A deficiencies”—the most severe class of audit deficiencies—are up 10% year-over-year among these six firms.

Now, the accounting powerhouse PwC is stepping up to take some of the blame. In a January 2024 memo, the firm admitted that of the 54 audits reviewed by the PCAOB for 2022, 5 were found to have Part I.A deficiencies. That’s up from 2 in 2021, and just 1 in 2020.

The numbers aren’t catastrophic, but they do represent a worrying trend. Investors have a right to know how boards are spending their money each year; if auditors can’t maintain their standards, why should directors maintain theirs?