Deep Quarry

Using data to uncover trends in disclosure and reporting.

By Olga Usvyatsky

On March 30, 2026, CoreWeave (Ticker: CRWV) closed an $8.5 billion Delayed Draw Term Loan facility (DDTL 4.0) — a significant expansion of its prior GPU-backed financing structures. At first glance, the new facility appears more favorable, with lower pricing (SOFR + 2.25% in DDTL 4.0 vs. SOFR + 4.00% in DDTL 3.0) and larger upfront capacity.

But those headline improvements obscure a more consequential shift: the structure of the facility has evolved in ways that change how leverage is determined, monitored, and constrained. The differences are not just incremental — they reflect a move away from a more formulaic, asset-based framework toward a more complex, project-style financing model.

Francine McKenna and I discussed the terms and conditions of CoreWeave’s DDTL 3.0 facility in our previous post.

Below is a high-level overview of the key differences (with a deeper dive behind the paywall).

At a high level, the differences between DDTL 3.0 and DDTL 4.0 include:

• Lower interest rate, higher borrowing capacity, and looser covenants. Pricing improves materially and capacity increases, but not simply as a more generous version of the same structure.

• Shift from asset-based limits to execution-based borrowing. Borrowing is no longer capped by depreciated GPU value and instead depends on operational milestones.

• Power access is now embedded in the structure of the facility. Power availability and power cost volatility are explicitly addressed through funding terms conditions.

Figure 1 – Comparison of Selected Terms of CoreWeave’s DDTL 3.0 and 4.0 Facilities

Source: CoreWeave’s DDTL 3.0 and DDTL 4.0 facilities.

I discuss the shift in borrowing terms in more details behind the paywall. Please consider subscribing!

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Deep Quarry

Using data to uncover trends in disclosure and reporting.

By Olga Usvyatsky

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First up I want to congratulate my New York bestie and former MarketWatch colleague Andrea Riquier on winning a SABEW award for her USA Today feature article in the personal finance category.

The heir’s property: one man’s journey to reclaim family land in the American South

“The Heir's Property" is an in-depth look at the issue of land passed down through generations, told through the lens of one man’s struggle to retain land purchased a century ago by his great-grandfather, who was born into slavery during the Confederacy. Heirs’ property is usually defined as land handed down without clear, official documentation. Over the course of the 20th century, Black Americans lost roughly 80% of the property they owned at the peak of ownership a few decades after the Civil War because of theft and systemic injustices. This is the first in a two-part series. You can read part two here.

SABEW will be in Philadelphia this year and I will be attending. I hope to meet many more people I have been talking with and to applaud Andrea at the awards ceremony.

On May 11, I will be back in Chicago to give my annual talk to the University of Chicago Stigler Center Journalists in Residence. So many things to talk about but maybe how journalists are getting fooled again by this latest crop of tech IPOS is going to be on my list.

I am invited to speak at the LSU Fraud and Forensic Accounting Conference in July. My theme is raising the next generation of accountants.

After the paywall, I will provide the slides from my talk to Forbes journalists on non-GAAP metrics and my keynote for All Ohio Conference on Private Equity and AI.

You have to be a paid subscriber to access these decks.

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And, now, onto the commentary.

Tether’s Audit: Big news in Big 4 competitive landscape

I really thought it was going to be Deloitte, despite the firm also signing the opinion for Tether’s largest competitor Circle and also Coinbase.

The logical firm to sign Tether’s financial statement audit, based on experience, would be Deloitte U.S., but then it would be the financial auditor to two fierce competitors and one conflicted enabler, Coinbase. Will the enforcement arm of the Genius Act allow this? Who will enforce the PCAOB registered firm auditing requirements of the Genius Act for non-listed firms like Tether?

The BDO Milan stablecoin reserves attestation report also states, based on management’s disclosures, that its USDT stablecoins are overcollateralized.

Deloitte has also signed up to do the stablecoin reserves attestation for the Tether US entity, USAT, via Anchorage Bank.

But, alas, I guessed wrong. And it’s a two-fer!

Tether hires KPMG as auditor ahead of US expansion

The world’s largest stablecoin issuer also brings on PwC to ready internal systems Stephen Foley, Jill R Shah and George Steer in New York and James Fontanella-Khan in Miami Mar 26 2026

Tether, the world’s largest stablecoin issuer, has hired KPMG to conduct an audit of its financial statements as it tries to build credibility ahead of a US expansion plan and potential fundraising. The company has also hired PwC, a second Big Four accounting firm, to help it ready its internal systems for the audit, said people familiar with the matter.

Tether on Tuesday announced it had “entered a formal engagement with a Big Four accounting firm to complete its first full independent financial statement audit”, but did not name the firm.

The El Salvador-based company had boasted that it would be “the biggest ever inaugural audit in the history of financial markets” and “a defining moment not only for Tether, but for the evolution of modern finance itself”. Its $185bn dollar-linked stablecoin USDT is the reserve currency of the digital asset market and the company reaps profits from investment returns on the assets backing its tokens.

So, what do we know?

1. The Tether press release gives the impression the financial statement audit is for the whole enchilada, or rather pupusa, not just the US entity.

2. Tether did not say which firms it was working with and no one would confirm it. This is an FT scoop based on reliable confirmation from more than one anonymous source.

3. Why would no one want to admit to such a huge “get”? Well, it’s a pretty risky engagement, not just for KPMG but for PwC, too, and for any other firm potentially involved, such as EY for taxes, perhaps, and Deloitte for technology consulting.

This is reminiscent of the FTX situation where two patsy smaller firms took the US and Bahamas audits, Armanino and Prager Metis, and Deloitte, PwC and EY worked behind the scenes. How do we know that? They were waiting for their money at bankruptcy time!

If KPMG or PwC or anyone else does not like what they see or what executives say, they can walk away quietly and deny they ever were engaged. See also KPMG at Theranos.

No one wants to have to make a loud exit like EY at Super Micro.

4. Only Circle USDC and USDT, the El Salvador Tether, are big enough — more than $50 billion market cap — to have to get a PCAOB registered firm financial audit if they want to comply with the Genius Act. Its USAT US-based stablecoin is much too small to have to worry about that, yet. Circle is audited by Deloitte who also provides its reserves attestations.

5. We don’t know which years are being audited, if it is in preparation for a US listing — which given size would require three years of audited financials — and we do not know how close to finish anyone is.

I personally am worried for KPMG. The firm has got a lot going on.

And something new every day.

And, yet, it seems like the firm believes it can do more with less.

In other news...

Joe Howie, former EY senior partner and now whistleblower, and Bob Conway, a 40+ years veteran of public accounting at KPMG and the PCAOB, have been writing a series of articles for Transparently.AI about the missing checks-and-balances in the accounting/audit industry and “a landscape cultivated by misaligned incentives and structural apathy,” as Germaine Chia, COO of Transparently.AI wrote on LinkedIn. Highly recommended.

At the PCAOB, Jim Logothetis is hitting the ground running. The Capitol Account newsletter reported on Saturday:

New Regime: Demetrios “Jim” Logothetis presided over his first public PCAOB meeting, emphasizing that the board will “get back to the basics – back to the fundamentals of audit quality, investor protection and disciplined, responsible oversight.” The chairman, who has said little since emerging as the dark horse pick for the job in January, previewed an extensive revamp of everything from the inspections program to standard setting. He also seemed to put to rest the idea of doing away with the audit watchdog as a standalone entity.

“I believe the PCAOB recognizes the appropriately high expectations placed upon us by investors, audit committee members and the broader public,” Logothetis said. “And I believe that with the right roadmap emphasizing innovation, efficiency and effectiveness, the PCAOB will remain a critical safeguard for the integrity of the U.S. capital markets.” He added that he’s been thinking about “what is required to ensure that the PCAOB remains a strong and effective regulator for the next 25 years and beyond.”

The gathering also marked the first official appearances of board members Mark Calabria and Steven Laughton. The new appointees (along with George Botic, a holdover from the previous administration) voted to issue a request for comment on strategic priorities that will help guide the overhaul. The move represents an early step toward carrying out the goals of SEC Chairman Paul Atkins, who has demanded the regulator streamline its oversight, cut costs and focus on its “core” responsibilities. He ousted Erica Williams, the prior Democratic chair, last summer.

Logothetis, a retired Ernst & Young partner who oversaw some of the firm’s biggest audit engagements, made clear that he understands the marching orders. He even borrowed some of Atkins’ favorite phrases, proclaiming that “it’s a new day for the PCAOB” and pledging to emulate the SEC’s chief recently announced “ACT strategy” that calls for reforms that “advance, clarify and transform.”

To that end, Logothetis laid out several “near-term priorities.” Most notably, he announced a “refresh” of the board’s ambitious standard-setting initiative, which was instituted under Williams and aimed to tackle a large backlog of rules that had been written by the accounting industry. That effort came under criticism for both its breadth and rapid pace.

The chairman singled out a particularly controversial standard that was adopted under the prior regime, known as QC 1000, as ripe for revision. The dictate, which mandates changes to accounting firms’ quality control systems, has already seen its compliance date pushed back because of implementation challenges. “As some stakeholders have observed and articulated in comment letters throughout the standard-setting process, certain requirements included in QC 1000 may be unnecessary…to meet the regulatory objectives of the PCAOB and may not contribute to audit quality,” Logothetis said, adding that board staff is preparing a “supplemental request for comment” on some aspects of the plan.

The Financial Times’ Stephen Foley also wrote on the first public PCAOB Board meeting for Logothetis and the plans to revisit the QC 1000 standard (Gift link). This comment struck a nerve with me:

The Center for Audit Quality, which represents audit firms, said it lobbied the new chair as recently as last week for changes to QC 1000. In an open letter, the CAQ said firms were having trouble identifying independent executives to join the newly mandated oversight boards, and that if a deficiency is found in one audit, the firms have to screen all audits for that deficiency.

What is the “Center for Audit Quality”, CAQ?

Formed in 2007 and affiliated with the AICPA, the Center for Audit Quality (CAQ) is devoted to enhancing investor confidence and public trust in the global capital markets. Focused exclusively on public company auditing...

As the voice of the public company audit profession, we work to instill trust in corporate reporting and the integrity of the auditing process, ultimately empowering investors, companies, and society as a whole.

Look who serves on the Governing Board:

There’s a representative from the leadership of all the Big 4 firms, including the US Chair of EY — Jim Logothetis’ old firm as well as SEC Chief Accountant and FASB Chair Rich Jones’ old firm. Leaders from four next tier global firms are also on board as well as three more interesting folks.

Dalia Blass is a partner at Sullivan and Cromwell who spent a lot of time at the SEC, from 2002 to 2016 which overlaps Paul Atkins time at the SEC as a Commissioner and then again from 2017 to 2021 which overlaps the first Trump Administration and Jay Clayton’s SEC leadership. Dalia was also just recently named Chair of the Financial Accounting Foundation, the “independent, private-sector, not-for-profit organization based in Norwalk, Connecticut responsible for the oversight, administration, financing, and appointment of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB),” and, theoretically, Rich Jones’ boss.

Kathy Casey is a Senior Advisor at Patomak Partners, the firm Paul Atkins founded and ran after he left the SEC in 2008 and sold to a secret buyer after being named SEC Chair. Casey was also an SEC Commissioner, overlapping Atkins’ and Blass’ SEC tenures.

Finally Prat Bhatt. Who? Yeah, that’s what I said. Well, one look at his LinkedIn profile and the mystery is solved. He started his career at EY — former home also to Logothetis, Hohl, and Jones — and is currently serving on the Financial Accounting Foundation Board under Dalia Blass and on Deloitte’s Quality Advisory Council.

BTW, this is EY:

I recall a very ugly incident that highlighted the way the largest global firms meet at the CAQ to plot against the regulator.

Accounting industry and SEC hobble America’s audit watchdog

By Charles Levinson Dec. 16, 2015

CARRYING WATER FOR THE BIG FOUR

For months, Doty negotiations with Beswick and Croteau went nowhere. Tensions came to a head at Doty’s 8th floor corner office in the PCAOB headquarters on Farragut Square in Washington, D.C. Doty told the SEC’s Croteau that he was carrying water for the Big Four, according to a person close to Doty and Croteau. Croteau and his staff stormed out.

In a subsequent meeting, Beswick urged Doty to focus on less-controversial rules. Doty told Beswick that he was so biased in favor of the accounting industry that he had no business serving as chief accountant and that he should resign, according to a person briefed on the meeting.

Beswick has since resumed his partnership at Ernst & Young. He declined to comment, according to firm spokeswoman Amy Call Well.

The industry began mobilizing against Doty. At a meeting of a PCAOB advisory group at the Center for Audit Quality, an accounting industry lobby group, representatives of several big firms tore into him.

“He’s beating up on our profession, this has to stop,” one firm representative complained, according to a person present at the meeting.

How The Accounting Industry And Sec Hobbled America’s Audit Watchdog

972KB ∙ PDF file

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Speaking of Kurt Hohl, he has been posting up a storm on LinkedIn, rah rah, and half the posts seem to be about the “new day” at the PCAOB. He’s on message!

That post was to ask for comments on the PCAOB’s strategic direction. Be careful what you wish for, Kurt!

Another one was to announce a new “Audit Practitioner” program at the PCAOB.

Hohl seems to think that regulated professionals should be signing up for a secondment inside the PCAOB as “fellows” to, perhaps, help write new auditing standards and weigh in on inspections and disciplinary activities. Given the salaries, I suspect they won’t get many partners.

Fellowships are full-time positions at the PCAOB. Fellowships will start on a mutually agreed-upon date and continue for two years, unless terminated earlier by either party.

Fellows can work at the PCAOB’s Washington, DC (Headquarters) or New York, NY offices.

At the PCAOB, we offer a highly competitive compensation and benefits package with a focus on the health and financial well-being of our valued team members.

We support transparency, equity, and fairness in our compensation programs and provide a reasonable estimate of the salary range, based on data-driven market analysis, for each job posting. While it is not typical for an individual to be hired at or near the top of the range, a reasonable estimate of the salary range for this role in Washington, DC (Headquarters) is $164,800/year - $258,280/year and in New York is $179,200/year - $280,720/year.

How does this fit into partner track experience requirements? Will there be the same cachet as when audit senior managers on partner track go in as SEC PAFs and come out ready for National Office?

Despite the analogy to the SEC Professional Accounting Fellows program which takes public accounting firm professionals and turns them into partners, I don’t see a good fit for this kind of program at the PCAOB.

(There is another popular SEC fellowship for academics on sabbatical, one that the PCAOB has, too, and that I have written about.)

The SEC is a multi-target regulatory agency, with a three-pronged mission — protect investors, promote capital formation, and maintain fair, orderly, and efficient markets — that also requires in nearly equal proportions accounting, audit, and securities law expertise. That’s because the SEC’s primary focus is enforcing the securities laws and accounting standards and the auditing standards in the context of issuer financial statements. It has oversight responsibility for the Public Company Accounting Oversight Board under Sarbanes-Oxley, but the PCAOB was supposed to be independent, not a glorified CAQ.

The PCAOB is a one-target regulatory agency and is even more limited in that it doesn’t regulate all auditors but only auditors of public companies. The CAQ was formed to deal directly with the PCAOB, to lobby it, and to intervene in its affairs in the interest of only one of the services most global public accounting firms now provide.

Speaking of the SEC and PCAOB, there have been some new moves by the SEC to move in on the PCAOB’s enforcement authority.

I find it hilarious that the SEC’s justification, I’ve heard, is that there is duplication of enforcement activities and that the SEC process is transparent and the PCAOB process is not. In this King & Spalding Client Alert, directed at clients and potential clients at the audit firms, this is not seen as a positive outcome. (K&S is a renowned defender of the Big 4 in auditor liability cases.)

On the other hand, SEC investigations and proceedings against auditors are not subject to the confidentiality provisions of Section 105 of the Sarbanes-Oxley Act. Under this provision, PCAOB investigations and inspections and all documents prepared in connection with those investigations and inspections, including testimony transcripts:

shall be confidential and privileged as an evidentiary matter (and shall not be subject to civil discovery or other legal process) in any proceeding in any Federal or State court or administrative agency, and shall be exempt from disclosure, in the hands of an agency or establishment of the Federal Government, under the Freedom of Information Act (5 U.S.C. 552a), or otherwise, unless and until presented in connection with a public proceeding…

SEC investigations into auditor misconduct are not afforded similar confidentiality. As a result, civil litigants may be able to obtain documents prepared in connection with SEC investigations and transcripts of witness testimony will likewise be discoverable.

Another significant change will be that more enforcement matters against auditors will become public. PCAOB disciplinary proceedings are non-public under section 105(c) of the Act. But adjudications of SEC cases against auditors are public, either in federal district court or through public administrative proceedings.

Further, with adjudications of auditor misconduct brought by the SEC instead of the PCAOB, auditors will lose one level of appeal. Currently, auditors can contest PCAOB allegations through a PCAOB hearing, appeal to the Board, and then appeal to the Commission. The existing PCAOB process provides auditors with substantive and procedural benefits. It typically takes more than a year from a hearing officer decision to a Board appeal decision and then more than another year to a Commission decision. Having the SEC bring the case in the first instance will likely cut at least a year off the process and give auditors one less chance to prevail on the merits.

My comment on Nicola’s post was fairly innocuous and not much more than what everyone was saying about this development.

The King & Spalding Client Alert explains what will likely happen next:

What happens to PCAOB enforcement?

The impact of the SEC’s new SOX group on continued PCAOB enforcement activity remains unclear. Our expectation, however, is that the SEC’s new SOX group will supplant a substantial portion of the PCAOB’s enforcement program and may hire current PCAOB staff members.

PCAOB enforcement has already taken a steep downturn since the departure of former Chair Erica Williams, and the PCAOB has had no public enforcement matters since the swearing in of new Board Chair Demetrios Logothetis. Additionally, with the departure of the PCAOB’s former Director of the Division of Enforcement and Investigations Robert Rice, the move of other PCAOB enforcement employees to Board staff positions, and other staff departures, the Division’s enforcement staff has shrunk considerably during the past year.

This K&S Client Alert published March 31, 2026 also mentions the SEC disinterest in auditor cases since the PCAOB came around and that this probably won’t change much, especially because of Jarkesy.

Under current SEC leadership, however, it seems unlikely that the new group will significantly expand the types of investigations and matters that the SEC pursues. Indeed, from Chairman Paul Atkins down, the SEC has repeatedly emphasized a “back to basics” theme for its enforcement program, with an emphasis on pursuing fraud actions against those who “lie, cheat, or steal” and only egregious violations of more “technical” provisions. An SEC spokesperson stated that the new group is intended to concentrate on “crack[ing] down on bad actors.”4

Such a focus is a far cry from the previous PCAOB leadership’s mandate to use “every tool in [its] enforcement toolbox” against auditors,5 which led to numerous enforcement matters having nothing to do with audit deficiencies but instead technical reporting and rules violations.

Thus, the current SEC leadership’s “course correction” away from a focus on the number of enforcement matters, may mean that, despite the likely increase of SEC scrutiny for auditors generally, such scrutiny is more likely to focus on the worst actors in the profession, and not necessarily professionals at the largest, most sophisticated firms. We expect the SOX group will be unlikely, therefore, to focus on many of the types of matters, including “sweeps” and those related to negligent misconduct or failures to comply with professional standards without a corresponding impact on the financial statements, that PCAOB enforcement brought under its former leadership.

Instead, the new SOX group appears likely to bring cases based on allegations of repeated and egregious violations of the antifraud provisions and auditing standards.6 If the priorities of SEC leadership change under future administrations, however, the infrastructure established by the current SEC in building a SOX group dedicated to auditor enforcement could lead to a significant ramp-up of the number and types of investigations the SEC will open against auditors.

It remains to be seen how the SEC will pursue cases against auditors recommended by the new SOX group and what sanctions it may seek for any violations. Post-Jarkesy, the SEC stopped using its in-house administrative proceedings to advance litigated Rule 102(e) matters against accountants for “improper professional conduct.” Indeed, shortly after the Supreme Court’s decision in Jarkesy, the SEC dropped numerous pending Rule 102(e) matters against accountants. However, the SEC recently announced a settled 102(e) proceeding against an individual auditor imposing an industry bar and no penalties.7 Additionally, earlier this year, the SEC announced a settled 102(e) proceeding against an auditing firm imposing compliance with remedial undertakings and a censure, while noting that no civil penalty was imposed based on the firm’s remediation efforts.8

Although a recent district court case upheld the SEC’s ability to obtain industry bars against professionals in administrative proceedings,9 it is unclear whether the SEC will continue to attempt to use administrative proceedings to adjudicate allegations raised by the new SOX group. As the new job postings include both investigation and litigation-related positions, we expect the result will be a mix of administrative proceedings seeking remedies that do not run afoul of Jarkesy, combined with federal district court actions alleging that auditors violated or aided and abetted violations of the federal securities laws.10

Why is the SEC doing this if it is not going to go after professionals from “largest most sophisticated” firms but only the “bad actors” from smaller firms, according to K&S?

I wrote about that. Basically the largest firms have been lobbying for a shift in focus, and shifting their own defense focus for a while, away from individuals and onto the firms, who can not only absorb any enforcement financially but can also negotiate no action on individuals as a result of their “too few to fail” impunity.

So, I was kind of surprised when the SEC Enforcement Chief Accountant Ryan Wolfe took exception to my comments on Bloomberg’s Nicola White’s post about her article. SEC officials rarely chime into public discussions in this way.

I also pointed Ryan to my post on the impact of the SEC dropping all the 102(e) actions against audit partners, supposedly because Jarkesy made them do it.

Maybe Ryan was just feeling a little sensitive. After all, he recently worked on an SEC case where an audit firm violated multiple auditing standards including 102(e) and there wasn’t even a fine! What kind of deterrence is that? Where is the individual enforcement action for the “bad actor” or did the firm hallucinate the engagement partner?

In the Office of the Chief Accountant, where long-tenured SEC professional Ryan worked before getting the Enforcement Division role, he focused specifically on 102(e) actions. Were some of the cases dismissed after Jarkesy some of his? In 2017 Wolfe was giving speeches about 102(e).

I assure you, OCA staff does not take the responsibility of our role in the Commission’s Rule 102(e) program lightly, and we never forget our mission, the impact on people’s careers, and that accounting is hard. But in my experience, neither the Division of Enforcement, nor the Office of the Chief Accountant is in the business of second-guessing professional judgments made in good faith.”

I take that back. Looks like he’s been reassuring auditors for years that the mean old SEC is sympathetic to how hard it is for the widdle accountants out there and isn’t going to question their judgments or ruin their careers.

Finally, behind the paywall, two presentations: on non-GAAP metrics for Forbes reporters and my keynote for the All Ohio Conference on Private Equity and AI.

If you’ve been trying to decide whether to subscribe, for your department, your colleagues, and your students, these two decks are worth the price of the ticket.

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Since obtaining his PhD at Washington University in St. Louis in 2007, Dr. Pevzner has published over 40 original research and policy articles in financial accounting, auditing, and corporate finance. He has also served as a visiting economist at the U.S. Securities and Exchange Commission and Financial Industry Regulatory Authority where he worked on economic analyses of rule-makings related to auditors, financial accounting disclosures, broker/dealers and investment advisors. Dr. Pevzner also works as a litigation economics expert specializing in business and personal damages cases. More about his work can be found at

https://mikhailpevzner.com/ and on LinkedIn at https://www.linkedin.com/in/mikhail-pevzner-07604a1/

Part 1 can be found here.

V. Are Current Regulatory Costs the Binding Constraint?

A common argument is that regulatory burdens—lengthy disclosures, internal control audits, PCAOB inspections of audits —discourage firms from going public. It is true that 10-K filings can exceed 300 pages and that risk disclosures are often repetitive.[1] Much of this content reflects legal risk mitigation rather than substantive new information.[2]

However, the marginal cost of such disclosure may be lower than assumed. Once routine language is established, updates are incremental[3]. There is evidence that average audit fees have been increasing at the speed of around 10% in recent years,[4] but this effect is likely skewed as audit fees have declined on the size-adjusted and inflation-adjusted basis.[5] Audit pricing pressures appear to have intensified as firms incorporate automation and AI. For example, on February 6, 2026, the Financial Times reported that KPMG UK pressed its own external auditor, Grant Thornton UK, to pass on AI cost savings.[6]

To my knowledge, there is hardly any evidence that retail investors demand more audit depth beyond standard audit opinion,[7] or ever claim that audit fees are too low to support an unqualified audit opinion. That is, the audit functions for most as a pass-fail certification mechanism.[8]

Moreover, issuers most sensitive to modest cost reductions are often smaller and riskier, and choose audit firms accordingly. Research in accounting and auditing consistently shows that operational complexity and aggressive accounting practices are correlated with fraud and restatements. For example, one audit firm and its sole signing partner—described by the SEC as a “sham audit mill”—issued audit opinions for 168 public issuers in 2021.[9] The firm was subsequently permanently barred from auditing public companies. The SEC found that its deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards were incorporated into more than 1,500 SEC filings between January 2021 and June 2023.[10] This episode illustrates a broader concern: relaxing oversight could disproportionately affect precisely those smaller and riskier issuers—and audit firms—that warrant the most scrutiny.[11]

VI. Which Firms Would Go Public Earlier?

If regulatory burdens were meaningfully reduced, which firms would choose to list earlier?

High-quality firms with strong private financing options likely prefer to remain private longer, preserving control and negotiating favorable capital terms, as has been happening in more recent years with all the private “unicorns”.[12] Firms that lack sufficient access to more abundant private capital may be more inclined to seek public markets sooner.

That dynamic raises a concern: policy designed to increase IPO volume may disproportionately attract riskier firms—those more desperate for capital not otherwise available from venture capitalists or from other sources. Some might succeed spectacularly. Others may resemble smaller-scale versions of Enron rather than Microsoft.

Going Public Too Early: Who Enters and Why?

The current policy conversation assumes that if we reduce regulatory burdens, more firms will choose to go public, and that this is inherently beneficial. But it is important to ask a more basic question: which firms would go public earlier if the rules were relaxed?

Firms that have strong products, strong growth prospects, and access to abundant private capital are not under pressure to relinquish control. They can raise funds from venture capital, private equity, sovereign wealth funds, or other private sources. In today’s globalized capital markets, high-quality firms often have multiple financing options. They do not need to enter public markets prematurely.

In contrast, the firms most sensitive to marginal reductions in regulatory cost are those that are more capital-constrained. If modest savings in compliance expense meaningfully change their decision to go public, that suggests they were closer to the margin to begin with.

This raises a straightforward economic concern: relaxing entry frictions may disproportionately induce riskier firms to list earlier.

That does not mean such firms cannot succeed. Some will. But the relevant comparison is not between a hypothetical new Microsoft and a hypothetical average firm. It is between the probability of becoming a long-term success and the probability of underperformance or failure.

Encouraging firms to go public earlier also means encouraging founders to give up control earlier—unless dual-class structures are used. That is a substantive shift. Going public is fundamentally a sale of ownership. It changes who bears risk and who exercises influence. If founders choose to remain private longer under current rules, that is itself information about their assessment of costs and benefits.

The Dot.com IPO boom of late-1990s illustrates what can happen when firms enter public markets rapidly and at scale.[13] At the time, many firms listed with limited earnings history and unstable business models. Combined with intense benchmark pressure from analysts and investors, this created incentives for aggressive accounting practices. The resulting wave of restatements and frauds was not random. It reflected the interaction of public-market incentives and the characteristics of the firms that entered.

The policy question, therefore, is not simply whether we can reduce the cost of public status. It is whether inducing earlier entry improves overall welfare once we account for the distribution of outcomes across firms and investors.

If we lower thresholds and more companies go public, the marginal entrant is unlikely to be the most stable and well-capitalized firm. It is more likely to be a firm that needs access to public capital sooner, and could be subjected more to newer and inherently more uncertain emerging technologies, such as AI or crypto.[14] If Dot.com boom is any model, many of today’s AI-driven early IPOs are unlikely to survive.[15] That fact alone does not determine whether relaxing IPO regulatory constraints is good or bad—but it must be part of the cost–benefit analysis.

VII. Toward a Rational Cost–Benefit Framework

The debate should not revolve around a nostalgic benchmark for the number of public companies. It should revolve around measurable costs and benefits:

• What is the marginal social benefit of additional public listings?

• What is the marginal social cost in terms of fraud risk, volatility, and investor losses?

• How does early public exposure alter founder incentives and governance dynamics?

• Are private markets currently filling capital formation needs efficiently?

Investors and firms are utility-maximizing entities responding to incentives. When incentives favor rapid public listings during speculative booms, history shows that fraud risk and earnings management rise. When regulatory costs increase in response, capital formation may shift to private channels.

The objective of policy should be neither maximizing nor minimizing the number of public companies, but optimizing the trade-off between capital access, investor protection, governance quality, and systemic stability.

What Is the Equilibrium Number of Public Companies?

An important insight in this debate is that we do not actually know what the equilibrium number of public companies in the economy should be. Is it 10,000? 20,000? Should we measure it as a percentage of total businesses in the United States? As a percentage of total market capitalization? As a share of available capital? There is no obvious benchmark.

Historically, the number of public companies as a percentage of all businesses has always been small. Even if there were roughly 8,000–10,000 public firms in the early 2000s, the overall economy has grown significantly since then. Inflation alone has increased materially over the last twenty-five years. So looking purely at the absolute count of public companies does not tell us much.

It is also difficult to compare public and private capital directly. Private companies are largely a black box. We do not know their true capitalization or scale in aggregate.[16] However, while the number of public firms has declined, it is unclear whether the relative level of public vs. private capital has declined also.

At the same time, what we do observe is increased concentration of ownership among institutional investors, particularly large mutual funds and other passive vehicles. This concentration raises questions. Passive managers are not typically involved in day-to-day management. It is not clear how intensively they monitor managerial behavior. There is evidence suggesting that such ownership structures may reduce monitoring incentives. It is also not clear that this concentration necessarily benefits ultimate shareholders in mutual fund portfolios.[17]

More broadly, as more household wealth flows into 401(k)s and other retirement accounts invested in passive funds, a large portion of public equity becomes concentrated in institutions that are highly diversified and often reactive. Mutual funds are sensitive to downside risk; they can exit declining stocks quickly. But they have less incentive to engage deeply in value-maximizing restructuring of specific firms. This dynamic has helped fuel the rise of activist investors, who step in where passive investors lack incentives to intervene.

All of this suggests that we do not have a clear model of what the “ideal” level of dispersed public ownership should be. Public ownership carries costs that are often ignored.

The Alleged Benefits of More Public Companies

One frequently cited benefit of increasing the number of public companies is improved price discovery, i.e. obtaining market-based valuations of a firm whose shares are actively traded rather than having to rely on more subjective valuations for private companies.[18] The argument is that more public trading, i.e. higher levels of stock liquidity, leads to more efficient incorporation of information into prices.[19] In theory, market efficiency implies that information is impounded into stock prices rapidly.[20]

But that presumes the presence of relevant (i.e. timely information important to assessing shares’ fundamental value) and reliable (i.e. trustworthy) information. There is tension in the policy discussion: on one hand, we are told that more public companies and more trading enhance efficiency; on the other hand, there are calls to reduce disclosure requirements because producing information is costly and not always necessary. If we end up with more public companies but less information, it is not clear how that improves price discovery.

Liquidity and cost of capital arguments are also invoked. Liquidity refers to an investor’s ability to trade when they want to without incurring unreasonable costs. Greater stock liquidity is associated with lower overall expected returns for these stock ( cost of capital) because higher trading costs (e.g. higher price impact) of less liquid stocks are priced into expected returns.[21] But liquidity depends on several components: trading costs, inventory risk borne by market makers, and information asymmetry (which drives potential negative pricing impacts). If valuation uncertainty is high, liquidity will be impaired. Small IPOs with significant uncertainty may end up thinly traded, sometimes effectively over-the-counter. In such cases, the reduction in cost of capital would be unlikely.

Public ownership also requires corporate governance infrastructure. When ownership is dispersed, corporate governance mechanisms must compensate for the loss of concentrated control. Boards of directors, audit committees, compensation committees, takeover defenses, and other mechanisms must function properly to protect minority shareholders. These structures are costly. They require legal advisors, consultants, compliance systems, and active engagement. They do not come for free.

Another common argument is that broader equity participation reduces wealth inequality. Indeed, extant research demonstrates that stock market participation is positively correlated with investor wealth levels.[22] So, it stands to reason that giving access to broader swath of investors who can buy cheaper public company stocks will result in long-term wealth creation, as these stocks gain in value, similar to what happened to Microsoft over the years. That claim relies heavily on the assumption that upside gains from public market participation will outweigh downside losses. It may have been true in some periods. It may not hold in others. There is no law that stock markets must always rise, even though they have risen over long horizons historically. Ignoring downside risk risks misleading investors.

Marginal Costs and Marginal Benefits

In equilibrium, the question of how many public companies we should have is a marginal analysis. What is the marginal social benefit of one additional public company? And what is the marginal social cost?

The benefits include broader investor access, broader participation in economic growth, and dispersion of information through public markets.

The costs include greater exposure to financial downside, particularly if relaxing standards invites weaker or riskier firms into public markets. The costs also include the real expense of maintaining the scaffolding necessary for public companies to function properly: governance structures, internal controls, compliance systems, and enforcement.

If incentives for public listing increase, enforcement must also increase to counterbalance the greater risk of misconduct. Yet enforcement capacity itself has constraints. Regulatory agencies operate with limited staffing and resources. Expanding the public-company universe while reducing enforcement capacity would increase systemic risk. How does the desire for more public companies jive with the recent SEC enforcement staff cuts and PCAOB audit regulator budget and staff reductions?[23]

Reducing disclosure requirements or exempting more firms from internal control audits may lower costs on the margin. But it is not clear that these reductions would meaningfully change firms’ decisions to go public, especially when cheap private capital remains abundant. One of the primary benefits of staying private is the ability to retain control longer. If founders can grow their firms without subjecting themselves to analyst scrutiny, boards, and regulatory obligations, modest compliance savings may not shift that equilibrium.

If regulatory changes increase the number of public companies by a modest amount—say several hundred—those additional entrants will likely be the firms most sensitive to small cost reductions. That raises an important question: what are the characteristics of those marginal firms?

If such firms are highly cost-sensitive, they may also be more reluctant to invest in internal controls, governance, and compliance protections. Indeed, in my own research, I personally came across documented cases in which firms were willing to disclose material weaknesses in internal controls likely because hiring additional accounting personnel was deemed too costly. [24]

If such firms are highly cost-sensitive, they may also be more reluctant to invest in internal controls and basic financial reporting capacity. I remember one year reading every single material weakness disclosure submitted to the SEC, and some firms essentially said the same thing: they had a material weakness because they did not have sufficient accounting personnel, and it was “too costly” to hire more accountants. They treated that as an acceptable risk: disclosing a material weakness does not necessarily mean there is already a misstatement or a restatement; it means they are acknowledging that the risk of producing bad accounting is higher, but they are not willing to incur the cost now.[25] And we know that firms in that position are precisely the ones that often end up with restatements later.

In that sense, the cost is paid either now—through stronger controls and staffing—or later, when shareholders absorb the consequences through stock declines. The question is not whether the cost exists, but when it is imposed and who ultimately bears it.

Such disclosures do not immediately imply restatements, but evidence shows that firms with material weaknesses are more likely to experience reporting problems later. The cost is borne either upfront, through stronger controls, or later, through investor losses.

In that sense, shifting costs forward or backward does not eliminate them. It reallocates them.

Private Capital and Market Forces

Another factor is the availability of cheap private capital. Some literature suggests that abundant private funding is a primary reason for the decline in public-company counts. If that is the case, deliberately counteracting those market forces may amount to leaning against the wind.

Even if public-company costs are reduced, firms with access to attractive private funding may still prefer to remain private longer in order to retain control and flexibility. Reducing disclosure burdens or internal control requirements may not be sufficient to overcome those structural advantages.

Technological changes such as artificial intelligence may lower the cost of producing disclosure. Standardized information may be easier to generate. But automation introduces its own risks, including questions about reliability, oversight, and potential litigation exposure if disclosures are incomplete or misleading.

A Balanced Approach

The purpose of this analysis is not to argue that increasing the number of public companies is inherently harmful, nor that it is inherently beneficial. It is to introduce balance into a debate that often emphasizes only a potential wealth-building upside.

The equilibrium number of public companies is not determined by nostalgia for prior listing counts or by a desire to compete with and beat other listing markets such the UK.[26] It is determined by weighing marginal social benefits against marginal social costs. Those costs include enforcement capacity, governance infrastructure, information quality, and the risk profile of marginal entrants.

More public companies may expand opportunity. They may also increase exposure to failure and fraud if incentives are misaligned. The appropriate policy response requires systematic analysis rather than assumption.

The question is not simply whether we can make being public cheaper. It is whether doing so, at the margin, produces net social benefit once all costs are accounted for.

Conclusion

The decline in the number of publicly traded firms is a fact. Whether it represents a policy failure is an open question. More public companies do not automatically imply greater public wealth. They imply greater exposure to both upside and downside.

Any reform agenda aimed at increasing public listings should be grounded in empirical evidence about long-term investor returns, regulatory balance, fraud incidence, and capital allocation efficiency—not in nostalgia for prior market structures.

The purpose of this white paper is not to advocate for or against regulatory relaxation. It is to frame the issue properly: as a cost–benefit problem requiring rigorous economic analysis rather than rhetorical appeal.

© Francine McKenna, The Digging Company LLC, 2026

[1] See, e.g. https://www.quantillium.com/blog/annual-report-vs-form-10-k

[2] See, e.g. https://www.foley.com/insights/publications/2026/02/sec-chair-paul-atkins-pushes-risk-factor-reform-could-a-safe-harbor-mean-softer-enforcement

[3] Dyer, T., Lang, M., & Stice-Lawrence, L. (2017). The evolution of 10-K textual disclosure: Evidence from Latent Dirichlet Allocation. Journal of Accounting and Economics, 64(2-3), 221-245.

[4] 2024 Audit Analytics reports an average audit fee of $3.26 million in 2024, representing an annual increase of 9% vs. 2023. See https://www.ideagen.com/resources/whitepapers/audit-fee-trends-20-year-review

[5] “Audit fees per $1 million of revenue fell slightly. In FY2024, audit fees per $1 million of client revenue averaged $612, a decrease of one percent from $619 in 2023. Audit fees per million dollars of revenue peaked in FY2006 at $743. In 2013, audit fees were $566 per $1 million of revenue, the lowest in IAA’s 20-year data series. Between FY2023 and FY2024, total SEC registrant revenue decreased by two percent while total audit fees increased by 0.6 percent”. See: https://www.auditupdate.com/post/audit-fees-continued-to-climb-in-2024; emphasis added

[6] See: https://www.ft.com/content/c891c47c-b21f-4e0f-84b3-b80c794eff3d

[7] With its requirement to disclose Critical Audit Matters, PCAOB attempted to enhance information content of audit reports beyond simple “pass-fail” model. Some evidence suggests that presence of CAMs enhances credibility of audit reports for retail investors but also increases their information overload. See Carver, B., Muriel, L., & Trinkle, B. S. (2023). Does the reporting of critical audit matters affect nonprofessional investors’ perceptions of auditor credibility, information overload, audit quality, and investment risk?. Behavioral Research in Accounting, 35(1), 21-44.

[8] The lack of perceived credibility of the audit report rose to such a level that the SEC recently had to defend it in the appeals court brief in a negligence lawsuit against an audit firm BDO. “The court in August ruled in favor of BDO on the grounds that the firm’s audit report was so general that an investor wouldn’t have relied on it. Consequently, the court said the audit report wasn’t material—meaning it didn’t matter—and upheld the dismissal of fraud claims against BDO. The ruling, by the Second U.S. Circuit Court of Appeals, prompted new debate within the accounting profession and among investors about whether audit reports serve a useful purpose. Audit reports operate on a pass-fail model, and their language is standardized”. Foley, S. (2024, February 16). SEC tells appeals court: Yes, audit reports do matter. The Wall Street Journal. https://www.wsj.com/livecoverage/stock-market-today-dow-jones-02-16-2024/card/sec-tells-appeals-court-yes-audit-reports-do-matter-eEcyCjYf9Rh7vfmweR5N; emphasis added

[9] https://www.sec.gov/newsroom/press-releases/2024-51

[10] https://www.fhnylaw.com/enforcement-news-more-than-1-500-sec-filings-affected-by-alleged-fraud-perpetrated-by-accounting-fi

[11] The Public Company Accounting Oversight Board (PCAOB), which checks auditor quality via an inspection process, looks at smaller audit firms—those that audit fewer than 100 issuers—only every three years, and there are so many more of them to review than larger audit firms.

“That means there’s some reason to be glad that there is concentration among auditors for the largest public companies, wrote Francine McKenna in ProMarket, the blog of the University of Chicago’s Stigler Center. “Audit work at those firms—Deloitte, KPMG, EY, and PwC—is inspected by the PCAOB every year and the inspections are rigorous. The bad news, however, is that if one of those global audit firms falters financially or fails, the remaining three will unlikely be able to absorb the clients, the work, and the employees the way four of them did back in 2002 following the failure of Arthur Andersen.”

[12] See, e.g., Gornall, W., & Strebulaev, I. A. (2020). Squaring venture capital valuations with reality. Journal of Financial Economics, 135(1), 120–143.; Huang, R., Ritter, J. R., & Zhang, D. (2023). IPOs and SPACs: Recent developments. Annual Review of Financial Economics, 15, 595–615. https://doi.org/10.1146/annurev-financial-111021-100657

[13] In 1997, 1998, 1999, and 2000 respectively, there were 474, 262, 477, and 381 IPOs compared to 1980-2000 average of 310 IPOs. There was a precipitous drop in IPOs in 2001 to 79. By comparison in 2012 there were 94 IPOs. See Gao, X., Ritter, J. R., & Zhu, Z. (2013). Where have all the IPOs gone?. Journal of Financial and Quantitative Analysis, 48(6), 1663-1692. According to a recent EY survey, IPO market has rebounded in recent years, reaching 215 in 2025. See https://www.ey.com/en_us/insights/ipo/ipo-market-trends

[14] See 2025 EY IPO report: “US IPO market activity increased in 2025, reflecting investor confidence despite lingering economic and geopolitical uncertainties. The technology, media and telecommunications (TMT) sector led issuance, propelled by strong interest in AI. The 2026 outlook is favorable, underpinned by a constructive market backdrop for IPOs and a strong pipeline”. https://www.ey.com/en_us/insights/ipo/ipo-market-trends

[15] In a recent “All In” Podcast, it was summarized as follows: “In the 1849 gold rush, Anthropic and OpenAI and all of these model makers are selling the pick and shovel in the gold rush. I am buying it and I’m trying to pan for gold. But as with the gold rush, most of these companies will go out of business.” See:

[16] According to one study in 2010, there were 5.7 million firms of which only 0.06% were listed. See Abudy, M., Benninga, S., & Shust, E. (2016). The cost of equity for private firms. Journal of Corporate Finance, 37, 431-443. According to 2019 census, there were approximately 7.96 million firms in the US, . According to World Bank, there were 4,397 listed firms in the US, corresponding to 0.006%. However, this is somewhat misleading since of 7.96 million firms, approximately 7.75 million have fewer than 100 employees, while only 8,407 have over 1,000 employees. See https://paradoxesinc.com/prior-resources/us-business-patterns

[17] See, e.g. Coates, J. C. IV. (2023). The problem of twelve: When a few financial institutions control everything. Columbia Global Reports.; Rajgopal, S. (2023, May 8). What are we paying indexers for being passive? Part 1. Forbes. https://www.forbes.com/sites/shivaramrajgopal/2023/05/08/what-are-we-paying-indexers-for-being-passive-part-1

[18] See. e.g. Tang, Y. (2014). Information disclosure and price discovery. Journal of Financial Markets, 19, 39-61.

[19] Barclay, M. J., & Hendershott, T. (2003). Price discovery and trading after hours. The Review of Financial Studies, 16(4), 1041-1073.

[20] “… In their canonical form, such models rely on a basic story: some traders have private information and they trade on it; other traders see market data and they learn from it; and market prices adjust to efficient levels that reflect the information” (O’hara, M. (2015). High frequency market microstructure. Journal of financial economics, 116(2), 257-270. p. 263).

[21] See, e.g. Acharya, V. V., & Pedersen, L. H. (2005). Asset pricing with liquidity risk. Journal of financial Economics, 77(2), 375-410.

[22] See, e.g. Campbell, J. Y. (2006). Household finance. Journal of Finance, 61(4), 1553–1604.

[23] “On May 6, 2025, the Chairman of the Securities and Exchange Commission (SEC), Paul Atkins, informed SEC staff that the agency had reduced its full-time headcount by 15% across various offices and divisions since the start of the federal government’s fiscal year in October 2024. At the end of the 2024 fiscal year, the SEC had 5,000 employees and 2,000 contractors. As of May 6, 2025, the SEC has 4,200 employees and 1,700 contractors.” See, e.g. https://www.winston.com/en/blogs-and-podcasts/capital-markets-and-securities-law-watch/sec-buyout-program-and-other-initiatives-lead-to-drop-in-enforcement-and-general-counsel-staff. Also the 2026 PCAOB budget approved by the SEC reflects a 9.4% ($37.6 million) decrease from the prior year and includes a 52% and 42% reduction in the chairperson and other Board members’ compensation, respectively. The accounting support fee (ASF) totals $306.0 million, an 18.4% ($68.9 million) decrease from the prior year, of which $280.3 million will be assessed on public company issuers and $25.7 million will be assessed on brokers and dealers. Available at: https://www.sec.gov/newsroom/press-releases/2026-11-sec-approves-2026-pcaob-budget-accounting-support-fee

[24] See, for example, https://www.sec.gov/Archives/edgar/data/876523/000087652315000120/a201510-k.htm : “Management did not apply the appropriate authoritative accounting literature and thus reached incorrect conclusions with respect to proper accounting of certain Grupo Finmart structured asset sales as a result of the following deficiencies that, collectively, represent a material weakness: The appropriate accounting expertise (internally and externally) was not engaged, resulting in a failure to recognize important U.S. GAAP issues; The accounting consequences of significant, unusual transactions were not identified and evaluated;…” (emphasis added)

[25] Here is a more recent example of this for a foreign private issuer: “We have material weaknesses in our internal control over financial reporting. If any material weakness persists or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report its financial results could be adversely affected. In connection with the preparation of the financial statement for the Company’s Annual Report on Form 20-F for the year ended June 30, 2025, our management evaluated the effectiveness of our internal control over financial reporting as of June 30, 2025 and determined they were not effective as described in Part II. Item 15. “Controls and Procedures” of this annual report. … The material weakness identified relates to insufficient accounting personnel with appropriate experience and knowledge to address complex accounting matters in accordance with U.S. GAAP.” See: https://www.sec.gov/Archives/edgar/data/1735556/000110465925105009/btog-20250630x20f.htm

[26] See “The New Competition for Listings,” Global Finance Magazine, November 14, 2023. Available at: https://gfmag.com/capital-raising-corporate-finance/stock-exchanges-ipos-global-competition/

This is Part 1 of 2 coming later this week.

Recent policy discussions have revived a familiar concern: the decline in the number of publicly traded companies in the United States. The current Chairman of the Securities and Exchange Commission, Paul Atkins, has framed this decline as a structural problem and has suggested that policy should aim to “make IPOs great again.”[1] The premise is straightforward: if more companies are public, Main Street investors will have more opportunities to participate in economic growth, particularly in earlier-stage firms where upside potential may be significant.[2]

This white paper takes a more systematic and more economically-driven view. The question is not whether more public companies are inherently good or bad. The question is whether there exists an optimal number of public companies from a societal perspective—and if so, which economic trade-offs determine that optimum. The analysis is informed by economic theory, experience with regulatory rule-making, and an attempt of a realistic appraisal of the current state of the US capital markets.

I. Public Versus Private: What Actually Changes?

All businesses begin as small private enterprises. Capital is raised through personal savings, bank loans, friends and family, venture capital, private equity, private credit, or other private channels. Ownership in private firms is typically highly concentrated. In the extreme case of a sole proprietorship, ownership and control rests with one individual. Even in more complex private structures, ownership remains limited, control is concentrated, and shares are not freely tradable on public exchanges.[3]

Under SEC rules, a firm remains private so long as ownership does not become widely dispersed beyond prescribed thresholds and its securities are not publicly traded. Private shares can change hands, but only within regulatory limits.[4]

Becoming public fundamentally changes two things. First, ownership becomes widely dispersed. Second, shares become tradable on an exchange. The original owners either partially or fully sell equity to investors who are generally not involved in management. In doing so, founders relinquish control over who owns the company’s stock. Over time, as firms grow and enter indices such as the Russell 1000 or the S&P 500, ownership increasingly shifts toward large passive institutional investors—mutual funds, pension funds, and index funds.

Importantly, public status exists along a continuum. Some public companies are “controlled companies” where over 50% of the voting power is held by an individual, a group or another company.[5] They are not required to comply with the NYSE requirements to maintain a majority of independent directors on their board, an independent nominating/corporate governance committee, and an independent compensation committee.[6] Some public companies also adopt dual-class structures, as Alphabet, Berkshire Hathaway[7] did, allowing founders to retain disproportionate voting control despite public listing, in particular with respect to anti-takeover provisions, which is widely viewed as detrimental to minority shareholders.[8] Indeed, dual-ownership firms account for 78% of the total market cap of the controlled firms.[9] Thus, “public” is not a binary concept; degrees of control and dispersion vary.

From a policy perspective, the critical question is not simply whether firms are public or private, but what form of ownership dispersion and control society should encourage, and under what circumstances.

II. Economic Neutrality and Organizational Form

In finance theory, Modigliani–Miller theorem holds that capital structure is irrelevant to firm value in frictionless markets. That is, whether a firm finances itself with debt or equity does not change its fundamental value. By analogy, one might ask: should it matter whether ownership is public or private? In other words, if the form of the ownership contract (debt or equity) should matter for the firm value, why should it matter who holds that contract as long as managers strive to maximize shareholder value?

In practice, of course we all understand it does matter because markets are not frictionless. There are costs and benefits associated with public status.[10] Firms rationally weigh those trade-offs. They do not go public arbitrarily. An IPO is fundamentally a sale of ownership interests. Someone must be willing to buy.

When founders go public, they give up control, either fully or partially. This creates a fundamental conflict of separation of ownership and control, i.e. conflict of interests between firm managers (e.g. externally hired CEOs) and public shareholders who depend on information from the managers and corporate boards as monitors of managerial behavior.[11]

The decision to give up control therefore depends in part on how valuable control is to them. If private capital markets are deep and accessible—as they are today—founders may have little incentive to list publicly unless the marginal benefit exceeds the cost. One of the most famous of these cases was Google’s founders’ decision to maintain voting control over Google—now Alphabet—through dual ownership structure. Indeed, in the 2004 Google Registration statement, Sergei Brin and Larry Page wrote to their shareholders as follows:

“Now the time has come for the company to move to public ownership. This change will bring important benefits for our employees, for our present and future shareholders, for our customers, and most of all for Google users. But the standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future. Therefore, we have implemented a corporate structure that is designed to protect Google’s ability to innovate and retain its most distinctive characteristics.

We are confident that, in the long run, this will benefit Google and its shareholders, old and new. We want to clearly explain our plans and the reasoning and values behind them. We are delighted you are considering an investment in Google and are reading this letter”.[12]

This passage remains poignant. Alphabet has done remarkably well since going public and today is one of the leading American companies. Was that in part because its founders went public “with strings attached” because Brin and Page recognized that being “classically” public comes with serious potential costs. Indeed, in the same letter they emphasized:

“As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to “make their quarter.”

In Warren Buffett’s words:

In other words, Brin and Page were basically saying to their potential public shareholders: we’d love to have your money, but you have to listen to us. We know best. This is in contract to Berkshire Hathaway’s dual ownership structure where the two-tiered ownership structure was created not to preserve control but to increase access to cheaper share class for retail investors.[13] Recent research suggests that the average IPO between 2015 and 2024 adopted dual ownership structure allowing “controllers” to “control voting outcomes while holding only a minority—or even a small minority—of the equity capital”. This was particularly pronounced among tech IPOs in 2021 whereby 46% of such firms adopted dual ownership structure then.[14]

So, this raises a question of whether the whole drive for more IPOs is built on the outdated concept of public ownership, as IPOs of today are increasingly not like IPOs we were used to 25 years ago when the number of public listings was double that of today[15] because the founders of today’s IPOs—in particular in tech market—do not seem to desire to part with control? This is important to consider because it creates an additional layer of conflict between corporate insiders and minority shareholders, which finance literature has recognized for a long time in addition to the classic “separation of ownership and control” conflict.[16] In other words, given the increasing presence of this conflict, will having more future IPOs necessarily increase retail minority shareholders’ wealth creation rather, since corporate controllers are more likely to have much greater pathways to expropriation of this wealth through controlling or dual ownership that is becoming much more in vogue?

III. The Social Objective: Wealth Creation and Risk

From a societal perspective, firms going public serve several broad objectives. First, some argue that more extensive financial development through public markets facilitates capital formation by allowing companies to raise funds from a much wider pool of investors, thereby supporting economic growth through investment and innovation (Levine, 1997; Rajan & Zingales, 1998[17]). Second, public ownership enables risk sharing across a broader set of investors through liquid trading markets that allow investors to diversify their portfolios (Levine, 1991[18]). Third, beyond risk sharing and diversification, public ownership democratizes participation in the stock market by extending investment opportunities beyond wealthier accredited investors who typically have access to private markets and have better information (Piketty, 2014[19]). Achieving the latter two objectives should theoretically lead to broader wealth creation across a larger share of society (Levine, 1997).

The objective of broader public ownership most relevant to this article is wealth creation across broader swaths of the population. Indeed, wealth creation appears to be one of the primary reasons for the current push for more public companies listed in the US as well as expanding unaccredited investor access to privately-held companies.[20] But wealth can be created through many channels. It does not necessarily follow that encouraging earlier and broader retail investor stock ownership necessarily maximizes their welfare because one has to take into account the expected downside risks of such ownership.

Encouraging earlier public offerings exposes retail investors to young, risky firms. While some may become the next Microsoft, many will fail.[21] Indeed, it is a well-established result in the finance literature that many IPOs underperform the market, and this underperformance is concentrated among high idiosyncratic risk stocks.[22] Thus, the presumption that more IPOs automatically translate into greater public wealth neglects the risk dimension.

Furthermore, encouraging or incentivizing firms to go public earlier implicitly pressures founders to relinquish control sooner. That may not align with firm-level or shareholder-level interests. If abundant private capital exists—venture funds, private equity, sovereign wealth funds—public markets are no longer the sole growth channel they were in the 1980s.

When Microsoft went public in the 1980s at a valuation of only a few hundred million dollars, capital markets were less globalized and alternative funding channels were limited. The decision was economically rational in that context. The modern capital ecosystem is far more complex.

IV. The Late 1990s, Benchmark Pressure, and the Incentive Structure of Public Markets

The late 1990s are often cited nostalgically as a period when the United States had many more public companies than there are today. That era is frequently invoked as evidence that we once had a more vibrant public market ecosystem. But it is incomplete—and analytically misleading—to discuss that period solely in terms of listing volume without examining the incentive structure that accompanied it.

The internet boom produced an environment in which companies went public with limited earnings history, and in many cases no earnings at all. Valuations were frequently based on revenue multiples rather than profitability.[23] At the same time, we saw increasing market focus on beating analyst expectations for firm valuation,[24] which did not abate until after post-SOX period.[25]

Public companies were evaluated against quarterly earnings forecasts. What mattered in practice was not necessarily long-term value creation, but whether management could “meet or beat” consensus expectations. Missing by a penny could produce sharp negative stock reactions. Beating by a penny could be rewarded. The penalty for a small shortfall appeared disproportionately large relative to the informational content of the deviation.[26]

From a purely economic standpoint, such asymmetry is difficult to justify. In a fully rational framework, a one-cent deviation from a forecast should not generate discontinuous changes in firm value. Yet empirical research from that era documented precisely such patterns. The market’s response structure created a powerful incentive: avoid the miss at almost any cost. This is because the perception at the time was that missing by one penny shows that managers somehow are incompetent and hence need to be penalized by the market.[27]

Managers are utility-maximizing agents. When the cost of missing a benchmark is high, they search for tools that reduce the probability of missing. That search does not necessarily begin with fraud. It begins with earnings management: shifting revenue recognition, adjusting accruals, accelerating sales, deferring expenses, stretching accounting estimates. In the software and technology sectors in particular, aggressive revenue recognition practices became widespread. The SEC’s issuance of Staff Accounting Bulletin No. 101 was not an innovation in accounting theory; it was a response to systematic abuse of existing principles.[28]

The broader accounting fraud wave of the period—including cases such as Enron, WorldCom, and HealthSouth—did not appear from a vacuum. It arose in a public-market equilibrium characterized by intense benchmark pressure, rapid capital inflows, and weak internal control environments. The subsequent passage in 2002 of the Sarbanes-Oxley Act, the creation of the Public Company Accounting Oversight Board, and the introduction of Section 404(b) internal control audits were reactive measures. They were costly, but they were responses to identifiable incentive failures within public markets. And while these measures were effective in reducing the extent of more extreme abuses, such as most egregious fraudulent accounting restatements,[29] they did not necessarily reduce incentives to meet-or-beat analyst benchmarks.[30]

This history is directly relevant to today’s debate. Expanding the number of public companies is not merely a question of reducing compliance costs, such as extensive SEC disclosures or costs of internal control reporting compliance. It is also a question of how many firms we want operating within an incentive regime defined by benchmark beating, analyst coverage, dispersed ownership, and market-based performance penalties.

If policy reduces regulatory friction and encourages earlier public listings, the likely marginal entrants are smaller, more capital-constrained, and potentially more complex firms. These firms will enter not only public capital markets, but also the benchmark environment that accompanies public status. If they face strong short-term market pressure while still developing internal controls, governance infrastructure, and stable business models, the predictable behavioral response is an increase in earnings management risk.

None of this implies that public markets are inherently undesirable. Public listing provides liquidity, price discovery, and broad ownership participation. But it does imply that increasing the number of public companies increases exposure to the incentive structure of public markets—including its distortions.

The critical policy question is therefore not whether public markets are good in the abstract. It is whether the marginal firm induced to go public under relaxed regulation increases net social welfare once we account for:

• the probability of failure,

• the probability of reporting distortion under benchmark pressure,

• and the distribution of gains and losses across investor classes.

The late-1990s episode demonstrates that high listing volume combined with intense benchmark incentives can generate widespread investor harm. Any contemporary reform agenda should incorporate that lesson explicitly rather than selectively recalling only the headline number of listed firms.

© Francine McKenna, The Digging Company LLC, 2026

[1] Atkins, P. S. (2025, October 9). Keynote address: “Make IPOs great again.” John L. Weinberg Center for Corporate Governance 25th Anniversary Gala. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-10092025-keynote-address-john-l-weinberg-center-corporate-governances-25th-anniversary-gala; Atkins, P. S. (2025, December 2). Revitalizing America’s markets at 250. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-120225-revitalizing-americas-markets-250; Atkins, P. S. (2026, February 23). Remarks on the Investing in America Act and capital formation. U.S. Chamber of Commerce event. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-uscoc-invest-act-022326

[2] “It is about the idea that exposure to the full dynamism of our markets should not be reserved for those who satisfy a certain wealth threshold or are deemed to be sufficiently sophisticated. Investor demand for this exposure is real and robust. Our obligation is to meet that demand with both openness and rigor—expanding pathways with appropriate investor protections. Forums like this one are critical in ensuring that as access broadens, confidence endures.”( Atkins, P. S. (2026, March 4). Opening remarks at the private markets roundtable. U.S. Securities and Exchange Commission. https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-im-private-markets-roundtable-030426)

[3] See, e.g. Doidge, C., Karolyi, G. A., & Stulz, R. M. (2017). The U.S. listing gap. Journal of Financial Economics, 123(3), 464–487. https://doi.org/10.1016/j.jfineco.2016.12.002 (“…the benefit of [public] listing is zero for the smallest firms and increases with size. The idea is that a large share of the benefit is access to public markets, which is more valuable for larger firms.”, p.465)

[4] See, e,g, U.S. Securities and Exchange Commission. (2016). Changes to Exchange Act registration requirements to implement Title V and Title VI of the JOBS Act. https://www.sec.gov/resources-small-businesses/small-business-compliance-guides/changes-exchange-act-registration-requirements-implement-title-v-title-vi-jobs-act; U.S. Securities and Exchange Commission. (2023). Exchange Act reporting and registration for public companies. https://www.sec.gov/resources-small-businesses/going-public/exchange-act-reporting-registration

[5] See NYSE definition of the “controlled company”: https://nyseguide.srorules.com/listed-company-manual/09013e2c85c00743?searchId=2942794113; Some examples of controlled companies are Alphabet, Airbnb, Meta Platforms, and Oracle (Bebchuk, Lucian A. and Kastiel, Kobi, Controllers Unbound (January 21, 2026). Forthcoming, 105 Texas Law Review (2027), Available at SSRN: https://ssrn.com/abstract=6111106 or http://dx.doi.org/10.2139/ssrn.6111106; p. 6)

[6] “A listed company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company is not required to comply with the requirements of Sections 303A.01 (independent directors requirement), 303A.04 (nominating or corporate governance committee) or 303A.05 (compensation committee). Controlled companies must comply with the remaining provisions of Section 303A”. (https://nyseguide.srorules.com/listed-company-manual/09013e2c85c00743?searchId=2942794926)

[7] Pacces, A. M. (2023). Controlling shareholders and sustainable corporate governance. European Corporate Governance Institute. https://www.ecgi.global/sites/default/files/working_papers/documents/controllingshareholders_0.pdf

[8] See, e.g. Paul A. Gompers, Joy Ishii, & Andrew Metrick. (2010).
Extreme governance: An analysis of dual-class firms in the United States. Review of Financial Studies, 23(3), 1051–1088. https://doi.org/10.1093/rfs/hhp024’ (“In the typical dual-class company, there is a publicly traded “inferior” class of stock with one vote per share and a non-publicly traded “superior” class of stock with ten votes per share. The superior class is usually owned mostly by the insiders of the firm and causes a significant wedge between their voting and cash-flow rights. In many cases, this wedge is sufficient to provide insiders with a majority of the votes despite their claims to only a minority of the economic value. The other forms of antitakeover protection are no match for the power of dual-class stock” (p. 1052, emphasis added)

[9] Bebchuk and Kastiel (2026, p.8).

[10] “it could be that changes in these benefits and costs [of being public] make it unattractive for firms, and especially so for smaller firms, to be public, in which case we might have too few public firms, possibly impeding economic growth” (Doidge, C., Karolyi, G. A., & Stulz, R. M. (2017). The U.S. listing gap. Journal of Financial Economics, 123(3), 464–487. https://doi.org/10.1016/j.jfineco.2016.12.002, p.465).

[11] See, e.g. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of Law and Economics, 26(2), 301-325.

[12] https://abc.xyz/investor/founders-letters/ipo-letter/ (emphasis added) ;

[13] “As Warren Buffett explained it in his 1996 letter to shareholders, the Class B shares were issued “in response to the threatened creation of unit trusts that would have marketed themselves as Berkshire look-alikes. In the process, they would have used our past, and definitely nonrepeatable, record to entice naive small investors and would have charged these innocents high fees and commissions.”

In addition, he wrote, the new and considerably less expensive shares “provided a low-cost way for people to invest in Berkshire” (https://www.investopedia.com/articles/markets/041714/how-warren-buffett-made-berkshire-hathaway-worldbeater.asp?).

[14] Bebchuk and Kastiel (2026), p.7

[15] “In 1996, the peak year for U.S. listings, the U.S. has 8,025 domestically incorporated companies listed on a U.S. stock exchange. By 2012, that number is only 4,102” (Doige et al, 2017, p. 123, emphasis added). The current estimate of public companies is around 4,300 (https://eqtgroup.com/thinq/equity/why-is-the-stock-market-shrinking); Paul Atkins quoted the number of 4,700 public companies in one of his recent speeches: https://corpgov.law.harvard.edu/2025/10/11/keynote-address-by-chair-atkins-on-revitalizing-public-company-appeal ; Importantly, these numbers reflect the firms listed on national exchanges and do not appear to include publicly held firms traded only on the OTC markets.

[16] See.e.g., Roberto Tallarita. (2018).
High tech, low voice: Dual-class IPOs in the technology industry (Law & Economics Center Working Paper No. 2018-2). Harvard Law School Law & Economics Center. https://laweconcenter.law.harvard.edu/wp-content/uploads/2024/11/2018-2.pdf

[17] Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688–726.; Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. The American Economic Review, 88(3), 559.

[18] Levine, R. (1991). Stock markets, growth, and tax policy. Journal of Finance, 46(4), 1445–1465. https://doi.org/10.1111/j.1540-6261.1991.tb04625.x

[19] Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.; “The essential point is that these various forms of democratic control of capital depend in large part on the availability of economic information to each of the involved parties…For collective action, what would matter most would be the publication of details accounts of private corporations (as well as government agencies). The accounting data that companies are currently required to publish are entirely inadequate for allowing workers or ordinary citizens to form an opinion about corporate decisions, much less to intervene in them.” (pp. 569-570, emphasis added).

[20] E.g. Chair Atkins said in one of his speeches: “American entrepreneurs built the most dynamic economy in history in part by taking their companies public—and sharing the rewards with workers, savers, and investors. That partnership is worth reviving…. In closing, I believe that our capital markets are more than the mechanisms of finance—they are, at their core, expressions of our national character. A character that has compelled generations of Americans to take risks and to reap the rewards.” (emphasis added; See: https://www.sec.gov/newsroom/speeches-statements/atkins-120225-revitalizing-americas-markets-250 ). In another speech on Chair Atkins said: “Why should we prohibit a finance professor earning $100,000 a year from private offerings, while presuming that people who inherit wealth are better qualified? And by expanding the investment options available in certain retirement accounts, the bill aims to empower more Americans to participate in the success of promising businesses”. See: https://www.sec.gov/newsroom/speeches-statements/atkins-remarks-uscoc-invest-act-022326

[21] Microsoft was founded in 1975 and went public in 1986 with IPO ask price of $21. As of this writing, Microsoft stock price is $396 (March 15, 2026). See https://news.microsoft.com/facts-about-microsoft/

[22] Chen, H. (2021). IPO underperformance and the idiosyncratic risk puzzle. Journal of Banking & Finance, 131, 106245

[23] Bartov, E., Mohanram, P., & Seethamraju, C. (2002). Valuation of internet stocks—an IPO perspective. Journal of Accounting Research, 40(2), 321-346.

[24] Bartov, E., Givoly, D., & Hayn, C. (2002). The rewards to meeting or beating earnings expectations. Journal of accounting and economics, 33(2), 173-204.;

[25] Koh, K., Matsumoto, D. A., & Rajgopal, S. (2008). Meeting or beating analyst expectations in the post‐scandals world: Changes in stock market rewards and managerial actions. Contemporary Accounting Research, 25(4), 1067-1098.

[26] “Evidence of an increasing trend in earnings surprises over the past two decades: The role of positive manager-initiated non-GAAP adjustments,” published in 2021, found a steady increasing trend in positive street earnings surprises over the past two decades. “This trend reflects an asymmetric shift to the right—from substantially fewer small earnings surprises around zero to many more and larger ones well above zero.” A larger number of companies have been using non-standard numbers to produce quarterly earnings per share that exceed analysts’ forecasts by 5 to 15 cents not a penny or two. Analysts enable this behavior, since they may “increasingly bias their Street expectations downwards to generate a more positive response [from earnings surprises] for their clients – that is, they engage in strategic pessimism,” the authors wrote.

[27] This created what Skinner and Sloan (2022) called “the earnings “torpedo” effect—the fact that missing analysts’ forecasts, even by small amounts, causes disproportionately large stock price declines” Skinner, D. J., & Sloan, R. G. (2002). Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Review of Accounting Studies, 7, 289–312, p.300.

[28] See https://www.sec.gov/interps/account/sab101.htm ; ” The staff is providing this guidance due, in part, to the large number of revenue recognition issues that registrants encounter.”

[29] See, e.g. https://blog.auditanalytics.com/the-impact-of-sox-on-financial-restatements

[30] See Huang, S. X., Pereira, R., & Wang, C. (2017). Analyst coverage and the likelihood of meeting or beating analyst earnings forecasts. Contemporary Accounting Research, 34(2), 871-899. They show that the analyst coverage is associated with benchmark beating in post-SOX era.

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The idea is seductive. A single blood draw that could detect dozens of cancers before symptoms appear. For biotech investors, physicians, and anxious patients, the promise of multi-cancer early detection has become one of the most compelling narratives in modern medicine. Companies are racing to commercialize blood tests that scan for fragments of tumor DNA circulating in the bloodstream, a technology often called a “liquid biopsy.”

But as the market grows rapidly, some cancer experts warn that commercialization is moving faster than clinical proof. Early detection, they argue, is only one part of the complex equation required to reduce cancer deaths. “It’s really important science that is coming. It is here and now, but it’s not quite ready for prime time, and the reason is because we are finding that some of these tests are very good at detecting some types of tumors, but not all,” explained Dr. Monique Gary, Breast Surgical Oncologist, DO, FACS.

A new diagnostic market takes shape

Multi-cancer blood tests attempt to detect signals from tumors by analyzing DNA fragments shed into the bloodstream. The Galleri test from GRAIL, Inc says it can screen for more than 50 types of cancer from a single blood sample. The test uses machine-learning algorithms to analyze patterns of DNA methylation, a type of chemical modification linked to cancer. The concept has drawn enormous interest because many lethal cancers, such as pancreatic, liver, and ovarian cancer, have no routine screening tools.

Several companies are now competing in this space, including Exact Sciences and Guardant Health. Industry analysts estimate the market for multi-cancer early detection tests could exceed $25 billion annually if these technologies become widely adopted. The potential scale is staggering. In theory, millions of adults could take an annual blood test as part of routine preventive care.

Few companies illustrate the commercial momentum behind the technology more clearly than GRAIL, Inc. The company’s Galleri test has been growing steadily since its launch. In 2024, the company reported more than 137,000 Galleri tests sold, helping drive $108.6 million in annual revenue, a 45% increase from the previous year. Total company revenue reached $125.6 million in 2024, reflecting growing physician awareness and consumer demand for early cancer detection. Commercial growth continued into 2025. GRAIL generated total revenue of $147.2 million in 2025, representing a 17% increase year-over-year compared to 2024, with more than 185,000 tests sold.

Investors have taken notice. Analysts increasingly view multi-cancer screening as one of the largest untapped markets in healthcare. Yet the financial success of companies like GRAIL highlights a paradox. While revenue and market adoption are rising, the clinical question that matters most remains unresolved.

The missing proof - do these tests save lives?

The gold standard for cancer screening is not simply detecting tumors earlier, it is reducing mortality.

Screening tools such as mammography and colonoscopy became standard only after large randomized trials demonstrated they lowered cancer death rates. But for multi-cancer blood tests, that evidence does not exist yet. Early studies have produced promising results. In a large clinical study of Galleri involving more than 23,000 participants over age 50, the test detected cancers seven times more often than traditional screening tests for some cancers without established screening tools.

Still, detection alone is not the same as saving lives.

Some cancers grow slowly and might never become dangerous, a phenomenon known as over-diagnosis. Others may already have spread by the time they shed detectable DNA into the bloodstream. Until long-term trials demonstrate reduced mortality, public-health experts remain cautious.

Dr. Gray however thinks this factor is not being examined in its totality. “I think that the primary endpoints are wrong,” says Dr. Gray, “I’m talking about Grail. Because it did not meet that primary goal of saying, we reduce death in stage three and four cancers, people are saying the test isn’t good. I’m saying that is not the right endpoint from an early cancer detection test, because the things that influence how long someone lives with stage three or four cancer is not related solely to the early detection, it’s related to the systems. It’s related to tumor biology. It’s related to the treatment. It’s related to all of these other things that are well and beyond the scope of an early detection test.”

The diagnostic cascade problem

Another concern involves what happens after a test detects a “cancer signal.” Unlike mammograms or colonoscopies, which examine a specific organ, multi-cancer blood tests often cannot pinpoint exactly where a tumor is located. A positive result can trigger a cascade of diagnostic procedures, imaging scans, biopsies, and specialist consultations, to locate the cancer.

The fear of cancer is real. And for years the mantra has been that early detection is key. In addition to other factors that affect mortality, MCED’s like Grail are not very effective at detecting early stage cancers. Grail has a 11.2% sensitivity rate for prostate cancer, and 30.5% for breast cancer. Even with highly specific testing for cancers like liver/bile duct at 93.5%, screening millions of people could generate large numbers of false positives. For patients, that can mean weeks or months of uncertainty and anxiety. And without greater specificity for some cancers, these multi-detection tests become a revolving door of retests every six months, the standard response for concerning results in oncology.

Commercial adoption before clinical consensus

Early commercialization ignores a regulatory gray zone. Many tests are offered as laboratory-developed tests, allowing companies to sell them before obtaining full regulatory approval. As of March 2026, the Galleri test has not been FDA approved, but has submitted a Premarket Approval (PMA) application. A screening study in the United Kingdom is evaluating the technology in hundreds of thousands of participants, while U.S. trials are examining how the tests perform in real-world healthcare settings.

Despite these uncertainties, multi-cancer tests are already being marketed to physicians and consumers. Galleri’s list price is around $950 per test, with some providers offering it for $799. This cost is largely out of pocket because most insurance plans and Medicare do not cover the Galleri test because it is not FDA approved, and has not yet been proven in large trials to improve long-term health outcomes. As of December 2024, the Galleri is primarily covered by Tricare for beneficiaries aged 50+ with elevated cancer risk. Some specific, smaller insurers and select Medicare Advantage plans also offer coverage. The test requires a doctor’s order and often pre-authorization. Patients may also be able to use Health Savings Account (HSA) or Flexible Spending Account(FSA) funds to pay for the test. The test is even more expensive in Canada, costing CDN $2100.

Early detection is not the whole solution

Even if multi-cancer blood tests prove effective, cancer researchers caution against viewing them as a silver bullet. Cancer mortality depends on far more than the moment of detection. Treatment advances, including targeted therapies, immunotherapy, and precision surgery, have already dramatically improved survival for several cancers. Prevention strategies, such as smoking cessation and HPV vaccination, have also reduced cancer incidence.

Screening, in other words, is only one component of a broader cancer-control strategy. Some public-health experts worry that the excitement around liquid biopsy could distract from proven interventions such as increasing colonoscopy rates or expanding access to HPV vaccines.

Readily available cancer screening tests take advocacy to the next level, but advocacy doesn’t stop at early detection.

My verdict

Are multi-cancer detection tests transformative technology or a premature revolution? The answer is a bit of both. According to Grail’s own website, “the test does not detect all cancers and should be used in addition to routine cancer screening tests recommended by a healthcare provider.”

This doesn’t mean the technology lacks promise.

For physicians, these tests could mean treating more cancers at curable stages. For patients, it could mean years of life gained.

We also need to acknowledge the risk of exacerbating the existing disparities in cancer care. Black and Brown communities have a 40% increased mortality risk even though white people have the highest rate of new cancers. They are also more likely to be diagnosed at a later stage and less likely to have access to advanced treatments like clinical trials.

At $950 per test, out-of-pocket, Galleri will likely not improve early diagnosis rates and reduce mortality in minority communities.

If multi-cancer blood tests ultimately demonstrate a meaningful reduction in cancer deaths, they could reshape preventive medicine. But the history of cancer screening also offers cautionary lessons. Technologies that appear revolutionary at first sometimes reveal unexpected complexities once deployed at population scale.

The central question facing the liquid biopsy industry is therefore not whether early detection is possible. It is whether early detection, delivered through mass-market blood tests, will translate into longer, healthier lives for everyone, regardless of socioeconomic status or ethnicity.

Until that answer is clear, the commercialization of multi-cancer screening will continue to run ahead of the science.

© Francine McKenna, The Digging Company LLC, 2026

fm postscript: I have written about Grail more than once, in particular regarding my successful efforts to have a complaint against Illumina and its executives in Delaware unsealed/unredacted. Thanks to my efforts, we found out…

The company paid $100 million premium for $300 million of additional D&O coverage, according to the fully unredacted complaint for City of Omaha Police and Firefighters Retirement System v. Francis deSouza, et al. and Illumina, Inc., C.A. No. 2024-0172-PAF, letter op. (Del. Ch. May 15, 2024).

If you want to learn more about how some were concerned about Grail’s methods, in particular with regard to testing:

The details

At the end of March I will be the Keynote Speaker at this coming year’s All Ohio Accounting Conference in Dublin, OH. My theme is public accounting, private equity, and AI, oh my!

I’m doing a lunch and learn also later in March on alternative metrics for Forbes reporters at the request of one of my bestest ever editors Janet Novack.

Last week I spoke to Dr. David P. Weber Fraud and Forensic Accounting Graduate students at West Virginia University. As I was preparing that guest lecture, I put a summary together that really, I think, tells us where we are with regard to the SEC, and PCAOB’s, auditor enforcement activities. (More on that down below.)

Unsustainable busyness was one of the key findings in the PCAOB enforcement action against Marcum LLP. In June of 2023, Marcum LLP was charged by the SEC with systemic quality control failures and violations of audit standards in connection with audit work for hundreds of special purpose acquisition company (SPAC) clients beginning at the latest in 2020. The SEC’s order also found that Marcum’s deficiencies were not limited to SPAC clients, but reflected “systemic quality control failures throughout the firm.”

Marcum agreed to pay a $10 million penalty to settle the charges, to undertake several remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures, and to abide by certain restrictions on accepting new audit clients.

That was not the first time Marcum LLP and its sister firm Marcum Asia were disciplined for audit quality and auditor independence violations. Marcum LLP merged with Friedman LLP in September 2022. Although the SEC said Marcum had “systemic quality control failures throughout the firm,” no Marcum leadership or individual Marcum partners were charged at that time.

But maybe as a result of the prior investigation, on January 18, 2024 the SEC sued Edward F. Hackert, an engagement partner at Marcum LLP, for allegedly repeatedly violating PCAOB audit standards, “including those related to supervision, audit documentation, and due professional care, in audits for which he was the lead engagement partner.”

Hackert’s charges were dropped by the SEC, along with several other audit partners with 102(e) allegations, in Aug. 2024 as a result of the Supreme Court’s Jarkesy decision. Hackert was represented by Debevoise & Plimpton LLP partner Andrew Cerseney, a former SEC enforcement director.

I was quoted in two FT Agenda articles, one on the dearth of financial experts on boards and another on clawbacks.

These days, many companies — such as ABM Industries, Apple, AutoZone, Clorox,Deere and Hewlett Packard Enterprises — currently fill the entire audit committee with SEC-defined financial experts, according to recent proxies.

However, that’s not the case everywhere. As of 2025, of the 1,736 audit committee members at Fortune 500 and S&P 500 companies, 62% were designated as audit committee financial experts, according to a new report from James Drury Partners.Since the average size of audit committees at S&P 500 companies is five members, according to public company intelligence provider MyLogIQ, that suggests, on average, that three out of five audit committee members are considered financial experts.

Companies with fewer than three SEC-defined financial experts on their audit committees include Analog Devices, Barnes & Noble Education, Oracle and PostHoldings, according to their latest proxy filings.

In its 2025 proxy, Johnson Controls disclosed that it had two audit committee financial experts, and in this year’s proxy, it disclosed that it had one. Starbucks disclosed in its 2025 proxy that it had three, and in this year’s proxy, it disclosed it had two.

McKenna suspects the average number to be even smaller.

“I would estimate probably only 20% to 30% of [all] Fortune 500 audit committee members are what I would consider to be natural experts who can communicate with the audit firms,” McKenna said. “That would be people who have public company accounting experience, controller experience and CFO experience.”

For the FT Agenda clawback piece reporter Nick Muscavage quoted my friend and frequent collaborator Olga Usvyatsky, also.

Reducing pay is contentious, according to Olga Usvyatsky, a former vice president of research at Audit Analytics who is now the publisher of Deep Quarry, which tracks audit and regulatory developments.

“Executives are not going to like it. It may expose [companies] to litigation from the executives,” she said. “So why would a company do something like that?

“One of the possible reasons is that there is an SEC investigation in the background.And companies may want to show that they are cooperating and are addressing the issues identified by revoking part of the compensation, even though they technically may not have to do it based on their own probe.”

Trimming executive pay is rare even under clawback policies mandated by theDodd-Frank Act, let alone discretionary reductions, according to research provided by Deep Quarry. Over the past two years, only 10 companies have recovered compensation from executives through a clawback policy.

Voluntarily reducing executive compensation after a restatement could become a negotiation tool, said Francine McKenna, a former accountant who now authors the newsletter The Dig.

“It was clearly signaled, even before this new administration, that the more cooperation a company provides, the easier everything is going to go,” she said.”That includes saving the SEC time and money of having to sue executives to clawback compensation.”

Reducing incentive payouts, even if they weren’t erroneously boosted by the figures at issue in a restatement, is “one way that the company can show good faith” and save enforcement agencies time and money, McKenna said.

Meanwhile, the SEC under Chair Paul Atkins is taking a more laissez-faire approach to enforcement, according to R.J. Bannister, partner and COO of Farient Advisors/GECN Group.

I have been a long and strong fan of Professor Stephen Bainbridge of UCLA Law. Even though we don’t agree on everything I have learned so much from him over the last twenty plus years.

On April 4, 2011: I wrote, The Gnome of Nebraska: Warren Buffett, Berkshire Hathaway, and Self-Dealing, for Forbes:

When asked by CNBC what he’d learned from the controversy over the transaction, Sokol responded:

“Knowing today what I know, what I would do differently is I just would never have mentioned it to Warren, and just made my own investment and left it alone…”

According to Professor Macey, that’s called “usurping a corporate opportunity,” and it’s a violation of an officer’s duty of loyalty to a corporation.

On April 11, Professor Stephen Bainbridge reconsidered his and others’ idea that this was an “insider trading” case. His reconsideration is based on, reportedly, an email from his co-author Bill Klein.

Professor Bainbridge doesn’t mention that I sent him an email on April 8 in response to his March 30 post discussing the insider trading theory and drawing his attention to my April 4^th post at Forbes. I asked him to consider the possibility that Sokol had “usurped a corporate opportunity” and breached his fiduciary duty to Berkshire Hathaway. Bainbridge never responded to me.

Bainbridge does not expand on the agency, fiduciary duty, and usurpation theories until April 20, after the shareholder derivative lawsuit is filed against Sokol and the Berkshire board for breach of fiduciary duty. The suit also asks for disgorgement of Sokol’s gain on his investment of Lubrizol stock.

He is the one who got me thinking hard about shareholder primacy and, along with the late Professor Lynn Stout and now Professor Ann Lipton, I have been inspired to write and teach about these issue ever since.

So, I was thrilled when I realized he was reading The Dig and then, lo and behold, found value in my writing, too. I highly recommend BainbridgeonCorporations.com and his side project.

StephenBainbridge.com

An eclectic journal of Catholicism, politics, culture, food and wine, and miscellany. Corporate law and governance is at BainbridgeOnCorporations.com. This site provides no legal advice. As an Amazon Associate I earn from qualifying purchases.

By Stephen Bainbridge

Bainbridge on Corporations

Can Private Litigation Hold Auditors to Account?

Francine McKenna has a new post on her wonderful Substack The Dig on using private party litigation to police audit firms…

Read more

2 months ago · 1 like · 5 comments · Stephen Bainbridge

My post inspired Professor Bainbridge to write about Judge Richard Posner and an auditor case he mebbe got wrong. This was my comment on LinkedIn:

Other nice things…
My old friend and former PwC colleague Richard Chambers is the preeminent guru on internal audit, now at Audit Board. He was kind to pay me this honor:

It got me thinking, since I received so many connection inquiries as a result, how important internal audit has been to my career and professional growth.

1. First job at Continental Bank in Chicago was in internal audit of personal trust agricultural/alt asset accounts. I even saw a fraud involving crop-dusting! I was there when one of the first internal audit co-sourcings occurred. It was the 80’s and EY was the external auditor - there is a famous related Supreme Court case everyone teaches and cites without thinking of its origins - and PwC was the internal audit co-sourcer.

2. My role as Project Management Office Director for JP Morgan’s Latin American Y2K project 1997-2000 was heavily focused on working with and receiving support from excellent internal audit function. At least I thought it was excellent until we found out in the JPM Whale case that it was ignored.

3. I was President of Chicago ISACA Chapter in the early 2000’s.

4. My role, with Richard Chambers, was in 2005-2006 as a Director member of PwC’s “PwC the Client” internal audit of the firm team under now-retired partner Gary Chambliss. My focus was on National Office and readiness for SOX scrutiny in particular with regard to auditor independence, consultations, and partner matters. (Based on a case that came up much later that led to an enforcement action for independence fundamentals, I’d say they would have been better off listening to my concerns.) About 30% of my time was spent as a member of the Internal Audit Advisory practice, with responsibility for managing the non-US staffing for internal audit co-sourcing for one massive multinational. Though others had treated it as a throwaway, necessary evil task, I went in with relish after my predecessor was seconded to Moscow and made the engagement profitable. That, for some reason, among other things that made incompetent people look bad, made me wildly unpopular.

5. I worked as an independent consultant to Navistar’s Internal Audit Department in 2007 and early 2008 supporting several simultaneous years of Sarbanes-Oxley effort as a result of multiple SEC investigations and restatements. My former client, the replacement CAE, sued the company in a Sarbanes-Oxley whistleblower suit. The former Navistar CEO is infamous for being, probably, the only CEO with a Section 304 incentive pay clawback who kept his job. But not forever…

6. Co-wrote IT Control Objectives for Sarbanes-Oxley: Using COBIT® 2019 in the Design and Implementation of Internal Controls Over Financial Reporting, 4th Edition with Dina Nu’man.

7. One of my proudest moments was when Senator Richard Blumenthal and his team noticed an internal audit angle based on my writing about the three KPMG banks that failed in the spring of 2023.

More PCAOB

There’s more writing about the new PCAOB, from the Lever, that also linked to my work.

Logotheti, Williams’ new replacement as chair, worked as a top executive at EY for decades, plus served as a senior adviser to Trump’s Department of Housing and Urban Development in 2020.

“Appointing a retired Big 4 audit partner — a 40+ year veteran of EY — as Chair of the audit regulator is a slap in the face to everyone who has ever suffered through an accounting fraud, especially one EY missed,” wrote corporate governance expert Francine McKenna.

Other new board appointees include Kyle Hauptman, who worked at Lehman Brothers and the conservative policy think tank the American Enterprise Institute, and Mark Calabria, who will also retain his job as a senior adviser at Trump’s Office of Management and Budget. Experts have criticized that these moves jeopardize the PCAOB’s independence from politics.

But, I had a few questions. Unfortunately, the writer is no longer at The Lever and has not responded to my questions. If anyone can help….

Soyoung Ho at Reuters Checkpoint News writes:

Enforcement activity against auditors fell sharply in 2025, marking a dramatic shift in the regulatory landscape as both the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) underwent significant leadership changes and adopted new enforcement philosophies, according to a new report from The Brattle Group published on February 26, 2026.

The SEC and PCAOB together initiated just 39 enforcement actions against auditors in 2025, a 33% decrease from 58 actions in 2024, according to the annual analysis prepared by Alison Forman and Adam Karageorge. Total monetary sanctions plummeted 66% to $17.9 million, down from $52.2 million the previous year.

SEC Activity Hits Historic Low

The decline was particularly pronounced at the SEC, which brought only two enforcement actions against auditors in 2025—the lowest annual total in the report’s eight-year sample period, 2018-2025. Moreover, one of those two actions was initiated before former Chair Gary Gensler’s resignation on January 20, 2025.

The SEC Cornerstone Accounting Enforcement report is out.

In the meantime, others doing the work for Atkins are also providing Sen. Elizabeth Warren tons of ammunition. In a hearing on Feb. 12 Warren put Atkins and his SEC deputies on the defensive. Atkins promises to issue the official SEC Enforcement Report some day.

“There’s Devon Archer, the guy who sold $60 million dollars in worthless bonds to pension holders—you turned him loose. And Carlos Watson, who raked in tens of millions of dollars by lying to investors about his company’s financial performance—you turned him loose. And Trevor Milton, who drew in hundreds of millions of dollars by defrauding investors in his company—you turned him loose after he donated $1.8 million dollars to a Trump campaign fund. Three different ways to cheat investors, but there’s one thing that all three have in common:

Mr. Atkins, did each of these corporate executives who defrauded American investors first get clemency from President Trump, and then, as the cherry on top of the whipped cream, got all SEC charges and investigations against them dropped?”

I’ve written about these cases and many more of the SEC’s reversals.

But that’s not all. Now we want to take away the assumption of free will and adult responsibility from young lawyers and CPAS!

Professor David Weber, whose class I spoke to a few weeks ago, provided a comment regarding a proposal to the United States Sentencing Guidelines concerning economic crimes and is strongly opposed to a downward departure of two levels if a defendant “committed the offense at the direction of his or her employer for fear of negative employment consequences,” when the defendant is a licensed professional such as a Certified Public Accountant (“CPA”) or attorney.

Who is lobbying for this stuff?

2 10 2026 Weber Warren Elias Sentencing Guidelines Testimony Final

323KB ∙ PDF file

Download

Download

United States Sentencing Commission

One Columbus Circle, N.E., Suite 2-500,

Washington, D.C. 20002-8002

Attention: Public Affairs – Proposed Amendments

Dear Commissioners:

Please accept this letter as our testimony/comments on the 2026 Proposed Amendments to the United States Sentencing Guidelines (“Guidelines”) concerning economic crimes. We write both in support of Proposed Guidelines Section 2B1.1(b)(3) calling for two to four level enhancements of sentences to reflect substantial non-economic harm, as well as to strongly oppose the downward departure of two levels found at Proposed Guidelines 2B1.1(b)(22), if a defendant “committed the offense at the direction of his or her employer for fear of negative employment consequences,” when the defendant is a licensed professional such as a Certified Public Accountant (“CPA”) or attorney.1 As stated in the proposal, “non-economic harm may include physical harm, psychological harm, emotional trauma, harm to reputation or credit rating, and invasion of privacy interest.”2 We will begin our letter with an explanation of our backgrounds and how our professional experiences inform our expert opinion on this matter. We also note our in-progress research on the measurement of the non-economic harm caused by white-collar crime offenders…

In more “Paul Atkins is everywhere” news..

Apparently Paul Atkins is a superman!

I commented:

Speaking about links to my work regarding enforcement:

The piece Nick links to is this one.

That company is back in the news.

I am not disappointed by getting only 349 views on my comment about Atkins. That’s because other comments seem to have resonated.

Dan Taylor is everywhere.

Congrats to Dan Taylor and colleagues on this:

There’s more on that from Bruce Carton’s Securities Docket newsletter:

Which pretty much, I believe, led to this:

Press Release

SEC Adopts Final Rules for the Holding Foreign Insiders Accountable Act

For Immediate Release

2026-23

Washington D.C., Feb. 27, 2026 —

The Securities and Exchange Commission today adopted final rule and form amendments to reflect the requirements of the recently enacted Holding Foreign Insiders Accountable Act (HFIA), which will increase transparency into the holdings and transactions of directors and officers of foreign private issuers (FPIs).

Broc Romanek explained the new rules.

However, the exemptions have already begun:

Also congrats to Dan Taylor and former SEC Commissioner and now NYU Law Prof Robert Jackson on this, their new firm.

And… Congratulations Dan Taylor for this new cool Kalshi gig:

When does Dan Taylor sleep???

The CFTC, fortunately, is in charge of prediction markets!

But the CFTC is melting into the SEC!

From the CorporateCounsel.net blog:

March 11, 2026

In Pursuit of Harmony: The Evolving SEC-CFTC Relationship

For as long as I have been practicing securities law, there has been talk about combining the SEC and CFTC into one agency or, short of that, finding ways for the two agencies to work together in harmony. At the beginning of the first Trump Administration, a potential combination of the two agencies was considered, but those plans never materialized. This time around, the focus is on harmonization of the regulatory frameworks of the two agencies, as Meredith noted back in September 2025.

In a speech earlier this week at the FIA Global Cleared Markets Conference (which focuses on derivatives), Chairman Atkins provided an update on the regulatory harmonization efforts of the SEC and the CFTC, which he described as an “approach toward a new golden age of regulatory coherence.” He described the role that substituted compliance can play under a principle that “where one agency’s framework achieves comparable regulatory outcomes, then it should be capable of satisfying overlapping requirements of the other,” and noted coordinated efforts on questions of interpretation and exemptive relief, including joint meetings on product applications and efforts to foster innovation.

Chairman Atkins noted that the SEC and CFTC are also “considering an updated Memorandum of Understanding (MOU) between the agencies to guide coordination and collaboration that can support innovation, uphold market integrity, and ensure investor and consumer protection.” He also described efforts to coordinate legal theories and remedial strategies from an enforcement perspective.

The SEC even has a page on its website dedicated to the SEC-CFTC Harmonization Initiative. And there is now an MOU!

Looks like everyone has some work to do!

From the Wall Street Journal:

Kalshi and Polymarket have focused most of their outreach on social-media influencers, which company employees see as a relatively inexpensive way to win over potential new teen and college-age users, according to people who work with the companies.

The content is usually students talking directly to the camera about the trading odds on sports or news events, according to a Journal review of hundreds of TikTok and Instagram videos made by Kalshi and Polymarket partners.

Sophia Panossian, a water polo player at the University of Michigan, urged viewers to help her “get ready with me” by checking Kalshi’s weather odds. Ethan Dang, a Vanderbilt University freshman, joked that a fellow student bet $4,000 on Polymarket on somebody farting during a speech by President Trump. Another showed Dylan Gold, a Southern Methodist University junior, partying at a concert and a game, all under text saying “average weekend using Kalshi.”

Panossian and Gold disclosed Kalshi’s support, but Dang didn’t note he was paid by Polymarket. Panossian declined to comment, and Gold and Dang didn’t respond to requests for comment.

“It’s more relatable, advertising-wise, when someone your age or in your situation talks about something,” said Norton Yang, 19, a sophomore at NYU who said he was paid by Kalshi to create TikTok content promoting the company. “Betting my life savings on @Kalshi,” Yang’s TikTok bio read. His videos didn’t disclose his relationship with Kalshi.

Now we just need Dan T. to make sure Kalshi is not doing what some say Polymarket is doing with regard to insider info that comes from proximity to a Big 4 public accounting firm that has access to confidential company earnings reports.

There’s news of KPMG mentions in Polymarket trades implying someone is insider trading. Several blog posts reprinted the trading activity of several users that were all eerily betting on only KPMG audited clients pre-earnings release and were winning big!

EventWaves

KPMG-Audited Companies are Trading Strangely on Polymarket

Disclaimer: I’m not saying anything nefarious is occurring (remember this!). I’m just displaying what I found when I did an analysis - you make your own decisions. I’m not a financial professional…

Read more

a month ago · 46 likes · 6 comments · EventWaves

See the dip and then spike? That’s all on March 18, the day Macy’s reported its earnings.

“The interesting thing about the Well Fargo market is that it completely flipped the night before the earnings were announced. People suddenly acted with supreme confidence. Could there be a legit reason this happened? Of course — but it is another datapoint.”

Hey Elizabeth Warren! You didn’t get KPMG the last time for Wells Fargo. Maybe this is your big chance.

Warren writes a lot of letters like the one she wrote to KPMG when the Wells Fargo issues hit, using her bully pulpit to pressure companies and firms to answer questions, to be accountable, and in some cases to pressure regulators to do something about the ones that don’t.

I wrote about another letter she wrote about FINRA enforcement. FINRA never answered that, and no one followed up on the letter she wrote to KPMG when they essentially dismissed the WFC issues as “not material”.

·

Or all the ones I wrote about at MarketWatch, like the one she wrote to KPMG after the Wells Fargo illegal stuff hit the fan.

U.S. Senator Elizabeth Warren, the Democrat from Massachusetts, is pressing Wells Fargo’s independent external auditor KPMG to reveal why it failed to identify massive unauthorized account-opening fraud at the bank.

Warren and three other senators have asked the global firm in a letter sent Thursday to explain what it knew, and when, around the fraud that resulted in a $185 million fine for Wells Fargo from the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Los Angeles City Attorney.

KPMG should know Wells Fargo & Co. well. It’s been the bank’s independent external auditor for more than 85 years, and for Wachovia, before Wells Fargo swallowed that failing bank during the financial crisis.

Warren, along with fellow Democrats Sen. Bernie Sanders of Vermont, Sen. Mazie Hirono of Hawaii, and Sen. Edward Markey of Massachusetts, wrote KPMG CEO and Chairman Lynn Doughtie to raise questions about the firm’s failure to identify the millions of dollars in unauthorized bank, credit and debit card account openings that occurred while it audited the bank’s financial statements from between 2011 and 2015.

“KPMG conducted audits assessing Wells Fargo’s internal control over its financial statements ... but none of KPMG’s audits identified any concerns with illegal behavior,” wrote the senators.

What happened to KPMG after the Wells Fargo debacles, debacles that continue?

Nothing. No SEC sanction, no PCAOB sanction. KPMG is still Wells Fargo’s, and Citibank’s, auditor. KPMG still signs the audit opinion for more banks than any other firm.

How many firms and regulators that Sen. Warren writes letter to provide a timely or sincere response? Certainly not KPMG regarding WFC and certainly not FINRA.

Yeah, I do not think that insider trading by partners and others at the largest global public accounting firms disappeared after 2018 — coincidentally the year that criminal indictments against KPMG partners were announced. I think it just went underground.

Unfortunately, or fortunately, prediction markets may have proved to be the Sirens all of those CPA Odysseuses could not resist.

© Francine McKenna, The Digging Company LLC, 2026

The details

At the end of March I will be the Keynote Speaker at this coming year’s All Ohio Accounting Conference in Dublin, OH. My theme is public accounting, private equity, and AI, oh my!

I’m doing a lunch and learn also later in March on alternative metrics for Forbes reporters at the request of one of my bestest ever editors Janet Novack.

Last week I spoke to Dr. David P. Weber Fraud and Forensic Accounting Graduate students at West Virginia University. As I was preparing that guest lecture, I put a summary together that really, I think, tells us where we are with regard to the SEC, and PCAOB’s, auditor enforcement activities. (More on that down below.)

Unsustainable busyness was one of the key findings in the PCAOB enforcement action against Marcum LLP. In June of 2023, Marcum LLP was charged by the SEC with systemic quality control failures and violations of audit standards in connection with audit work for hundreds of special purpose acquisition company (SPAC) clients beginning at the latest in 2020. The SEC’s order also found that Marcum’s deficiencies were not limited to SPAC clients, but reflected “systemic quality control failures throughout the firm.”

Marcum agreed to pay a $10 million penalty to settle the charges, to undertake several remedial actions, including retaining an independent consultant to review and evaluate its audit, review, and quality control policies and procedures, and to abide by certain restrictions on accepting new audit clients.

That was not the first time Marcum LLP and its sister firm Marcum Asia were disciplined for audit quality and auditor independence violations. Marcum LLP merged with Friedman LLP in September 2022. Although the SEC said Marcum had “systemic quality control failures throughout the firm,” no Marcum leadership or individual Marcum partners were charged at that time.

But maybe as a result of the prior investigation, on January 18, 2024 the SEC sued Edward F. Hackert, an engagement partner at Marcum LLP, for allegedly repeatedly violating PCAOB audit standards, “including those related to supervision, audit documentation, and due professional care, in audits for which he was the lead engagement partner.”

Hackert’s charges were dropped by the SEC, along with several other audit partners with 102(e) allegations, in Aug. 2024 as a result of the Supreme Court’s Jarkesy decision. Hackert was represented by Debevoise & Plimpton LLP partner Andrew Cerseney, a former SEC enforcement director.

I was quoted in two FT Agenda articles, one on the dearth of financial experts on boards and another on clawbacks.

These days, many companies — such as ABM Industries, Apple, AutoZone, Clorox,Deere and Hewlett Packard Enterprises — currently fill the entire audit committee with SEC-defined financial experts, according to recent proxies.

However, that’s not the case everywhere. As of 2025, of the 1,736 audit committee members at Fortune 500 and S&P 500 companies, 62% were designated as audit committee financial experts, according to a new report from James Drury Partners.Since the average size of audit committees at S&P 500 companies is five members, according to public company intelligence provider MyLogIQ, that suggests, on average, that three out of five audit committee members are considered financial experts.

Companies with fewer than three SEC-defined financial experts on their audit committees include Analog Devices, Barnes & Noble Education, Oracle and PostHoldings, according to their latest proxy filings.

In its 2025 proxy, Johnson Controls disclosed that it had two audit committee financial experts, and in this year’s proxy, it disclosed that it had one. Starbucks disclosed in its 2025 proxy that it had three, and in this year’s proxy, it disclosed it had two.

McKenna suspects the average number to be even smaller.

“I would estimate probably only 20% to 30% of [all] Fortune 500 audit committee members are what I would consider to be natural experts who can communicate with the audit firms,” McKenna said. “That would be people who have public company accounting experience, controller experience and CFO experience.”

For the FT Agenda clawback piece reporter Nick Muscavage quoted my friend and frequent collaborator Olga Usvyatsky, also.

Reducing pay is contentious, according to Olga Usvyatsky, a former vice president of research at Audit Analytics who is now the publisher of Deep Quarry, which tracks audit and regulatory developments.

“Executives are not going to like it. It may expose [companies] to litigation from the executives,” she said. “So why would a company do something like that?

“One of the possible reasons is that there is an SEC investigation in the background.And companies may want to show that they are cooperating and are addressing the issues identified by revoking part of the compensation, even though they technically may not have to do it based on their own probe.”

Trimming executive pay is rare even under clawback policies mandated by theDodd-Frank Act, let alone discretionary reductions, according to research provided by Deep Quarry. Over the past two years, only 10 companies have recovered compensation from executives through a clawback policy.

Voluntarily reducing executive compensation after a restatement could become a negotiation tool, said Francine McKenna, a former accountant who now authors the newsletter The Dig.

“It was clearly signaled, even before this new administration, that the more cooperation a company provides, the easier everything is going to go,” she said.”That includes saving the SEC time and money of having to sue executives to clawback compensation.”

Reducing incentive payouts, even if they weren’t erroneously boosted by the figures at issue in a restatement, is “one way that the company can show good faith” and save enforcement agencies time and money, McKenna said.

Meanwhile, the SEC under Chair Paul Atkins is taking a more laissez-faire approach to enforcement, according to R.J. Bannister, partner and COO of Farient Advisors/GECN Group.

I have been a long and strong fan of Professor Stephen Bainbridge of UCLA Law. Even though we don’t agree on everything I have learned so much from him over the last twenty plus years.

On April 4, 2011: I wrote, The Gnome of Nebraska: Warren Buffett, Berkshire Hathaway, and Self-Dealing, for Forbes:

When asked by CNBC what he’d learned from the controversy over the transaction, Sokol responded:

“Knowing today what I know, what I would do differently is I just would never have mentioned it to Warren, and just made my own investment and left it alone…”

According to Professor Macey, that’s called “usurping a corporate opportunity,” and it’s a violation of an officer’s duty of loyalty to a corporation.

On April 11, Professor Stephen Bainbridge reconsidered his and others’ idea that this was an “insider trading” case. His reconsideration is based on, reportedly, an email from his co-author Bill Klein.

Professor Bainbridge doesn’t mention that I sent him an email on April 8 in response to his March 30 post discussing the insider trading theory and drawing his attention to my April 4^th post at Forbes. I asked him to consider the possibility that Sokol had “usurped a corporate opportunity” and breached his fiduciary duty to Berkshire Hathaway. Bainbridge never responded to me.

Bainbridge does not expand on the agency, fiduciary duty, and usurpation theories until April 20, after the shareholder derivative lawsuit is filed against Sokol and the Berkshire board for breach of fiduciary duty. The suit also asks for disgorgement of Sokol’s gain on his investment of Lubrizol stock.

He is the one who got me thinking hard about shareholder primacy and, along with the late Professor Lynn Stout and now Professor Ann Lipton, I have been inspired to write and teach about these issue ever since.

So, I was thrilled when I realized he was reading The Dig and then, lo and behold, found value in my writing, too. I highly recommend BainbridgeonCorporations.com and his side project.

StephenBainbridge.com

An eclectic journal of Catholicism, politics, culture, food and wine, and miscellany. Corporate law and governance is at BainbridgeOnCorporations.com. This site provides no legal advice. As an Amazon Associate I earn from qualifying purchases.

By Stephen Bainbridge

Bainbridge on Corporations

Can Private Litigation Hold Auditors to Account?

Francine McKenna has a new post on her wonderful Substack The Dig on using private party litigation to police audit firms…

Read more

2 months ago · 1 like · 5 comments · Stephen Bainbridge

My post inspired Professor Bainbridge to write about Judge Richard Posner and an auditor case he mebbe got wrong. This was my comment on LinkedIn:

Other nice things…
My old friend and former PwC colleague Richard Chambers is the preeminent guru on internal audit, now at Audit Board. He was kind to pay me this honor:

It got me thinking, since I received so many connection inquiries as a result, how important internal audit has been to my career and professional growth.

1. First job at Continental Bank in Chicago was in internal audit of personal trust agricultural/alt asset accounts. I even saw a fraud involving crop-dusting! I was there when one of the first internal audit co-sourcings occurred. It was the 80’s and EY was the external auditor - there is a famous related Supreme Court case everyone teaches and cites without thinking of its origins - and PwC was the internal audit co-sourcer.

2. My role as Project Management Office Director for JP Morgan’s Latin American Y2K project 1997-2000 was heavily focused on working with and receiving support from excellent internal audit function. At least I thought it was excellent until we found out in the JPM Whale case that it was ignored.

3. I was President of Chicago ISACA Chapter in the early 2000’s.

4. My role, with Richard Chambers, was in 2005-2006 as a Director member of PwC’s “PwC the Client” internal audit of the firm team under now-retired partner Gary Chambliss. My focus was on National Office and readiness for SOX scrutiny in particular with regard to auditor independence, consultations, and partner matters. (Based on a case that came up much later that led to an enforcement action for independence fundamentals, I’d say they would have been better off listening to my concerns.) About 30% of my time was spent as a member of the Internal Audit Advisory practice, with responsibility for managing the non-US staffing for internal audit co-sourcing for one massive multinational. Though others had treated it as a throwaway, necessary evil task, I went in with relish after my predecessor was seconded to Moscow and made the engagement profitable. That, for some reason, among other things that made incompetent people look bad, made me wildly unpopular.

5. I worked as an independent consultant to Navistar’s Internal Audit Department in 2007 and early 2008 supporting several simultaneous years of Sarbanes-Oxley effort as a result of multiple SEC investigations and restatements. My former client, the replacement CAE, sued the company in a Sarbanes-Oxley whistleblower suit. The former Navistar CEO is infamous for being, probably, the only CEO with a Section 304 incentive pay clawback who kept his job. But not forever…

6. Co-wrote IT Control Objectives for Sarbanes-Oxley: Using COBIT® 2019 in the Design and Implementation of Internal Controls Over Financial Reporting, 4th Edition with Dina Nu’man.

7. One of my proudest moments was when Senator Richard Blumenthal and his team noticed an internal audit angle based on my writing about the three KPMG banks that failed in the spring of 2023.

More PCAOB

There’s more writing about the new PCAOB, from the Lever, that also linked to my work.

Logotheti, Williams’ new replacement as chair, worked as a top executive at EY for decades, plus served as a senior adviser to Trump’s Department of Housing and Urban Development in 2020.

“Appointing a retired Big 4 audit partner — a 40+ year veteran of EY — as Chair of the audit regulator is a slap in the face to everyone who has ever suffered through an accounting fraud, especially one EY missed,” wrote corporate governance expert Francine McKenna.

Other new board appointees include Kyle Hauptman, who worked at Lehman Brothers and the conservative policy think tank the American Enterprise Institute, and Mark Calabria, who will also retain his job as a senior adviser at Trump’s Office of Management and Budget. Experts have criticized that these moves jeopardize the PCAOB’s independence from politics.

But, I had a few questions. Unfortunately, the writer is no longer at The Lever and has not responded to my questions. If anyone can help…

Soyoung Ho at Reuters Checkpoint News writes:

Enforcement activity against auditors fell sharply in 2025, marking a dramatic shift in the regulatory landscape as both the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) underwent significant leadership changes and adopted new enforcement philosophies, according to a new report from The Brattle Group published on February 26, 2026.

The SEC and PCAOB together initiated just 39 enforcement actions against auditors in 2025, a 33% decrease from 58 actions in 2024, according to the annual analysis prepared by Alison Forman and Adam Karageorge. Total monetary sanctions plummeted 66% to $17.9 million, down from $52.2 million the previous year.

SEC Activity Hits Historic Low

The decline was particularly pronounced at the SEC, which brought only two enforcement actions against auditors in 2025—the lowest annual total in the report’s eight-year sample period, 2018-2025. Moreover, one of those two actions was initiated before former Chair Gary Gensler’s resignation on January 20, 2025.

The SEC Cornerstone Accounting Enforcement report is out.

In the meantime, others doing the work for Atkins are also providing Sen. Elizabeth Warren tons of ammunition. In a hearing on Feb. 12 Warren put Atkins and his SEC deputies on the defensive. Atkins promises to issue the official SEC Enforcement Report some day.

“There’s Devon Archer, the guy who sold $60 million dollars in worthless bonds to pension holders—you turned him loose. And Carlos Watson, who raked in tens of millions of dollars by lying to investors about his company’s financial performance—you turned him loose. And Trevor Milton, who drew in hundreds of millions of dollars by defrauding investors in his company—you turned him loose after he donated $1.8 million dollars to a Trump campaign fund. Three different ways to cheat investors, but there’s one thing that all three have in common:

Mr. Atkins, did each of these corporate executives who defrauded American investors first get clemency from President Trump, and then, as the cherry on top of the whipped cream, got all SEC charges and investigations against them dropped?”

I’ve written about these cases and many more of the SEC’s reversals.

But that’s not all. Now we want to take away the assumption of free will and adult responsibility from young lawyers and CPAS!

Professor David Weber, whose class I spoke to a few weeks ago, provided a comment regarding a proposal to the United States Sentencing Guidelines concerning economic crimes and is strongly opposed to a downward departure of two levels if a defendant “committed the offense at the direction of his or her employer for fear of negative employment consequences,” when the defendant is a licensed professional such as a Certified Public Accountant (“CPA”) or attorney.

Who is lobbying for this stuff?

2 10 2026 Weber Warren Elias Sentencing Guidelines Testimony Final

323KB ∙ PDF file

Download

Download

United States Sentencing Commission

One Columbus Circle, N.E., Suite 2-500,

Washington, D.C. 20002-8002

Attention: Public Affairs – Proposed Amendments

Dear Commissioners:

Please accept this letter as our testimony/comments on the 2026 Proposed Amendments to the United States Sentencing Guidelines (“Guidelines”) concerning economic crimes. We write both in support of Proposed Guidelines Section 2B1.1(b)(3) calling for two to four level enhancements of sentences to reflect substantial non-economic harm, as well as to strongly oppose the downward departure of two levels found at Proposed Guidelines 2B1.1(b)(22), if a defendant “committed the offense at the direction of his or her employer for fear of negative employment consequences,” when the defendant is a licensed professional such as a Certified Public Accountant (“CPA”) or attorney.1 As stated in the proposal, “non-economic harm may include physical harm, psychological harm, emotional trauma, harm to reputation or credit rating, and invasion of privacy interest.”2 We will begin our letter with an explanation of our backgrounds and how our professional experiences inform our expert opinion on this matter. We also note our in-progress research on the measurement of the non-economic harm caused by white-collar crime offenders…

In more “Paul Atkins is everywhere” news..

Apparently Paul Atkins is a superman!

I commented:

Speaking about links to my work regarding enforcement:

The piece Nick links to is this one.

That company is back in the news.

I am not disappointed by getting only 349 views on my comment about Atkins. That’s because other comments seem to have resonated.

Dan Taylor is everywhere.

Congrats to Dan Taylor and colleagues on this:

There’s more on that from Bruce Carton’s Securities Docket newsletter:

Which pretty much, I believe, led to this:

Press Release

SEC Adopts Final Rules for the Holding Foreign Insiders Accountable Act

For Immediate Release

2026-23

Washington D.C., Feb. 27, 2026 —

The Securities and Exchange Commission today adopted final rule and form amendments to reflect the requirements of the recently enacted Holding Foreign Insiders Accountable Act (HFIA), which will increase transparency into the holdings and transactions of directors and officers of foreign private issuers (FPIs).

Broc Romanek explained the new rules.

However, the exemptions have already begun:

Also congrats to Dan Taylor and former SEC Commissioner and now NYU Law Prof Robert Jackson on this, their new firm.

And… Congratulations Dan Taylor for this new cool Kalshi gig:

When does Dan Taylor sleep???

The CFTC, fortunately, is in charge of prediction markets!

But the CFTC is melting into the SEC!

From the CorporateCounsel.net blog:

March 11, 2026

In Pursuit of Harmony: The Evolving SEC-CFTC Relationship

For as long as I have been practicing securities law, there has been talk about combining the SEC and CFTC into one agency or, short of that, finding ways for the two agencies to work together in harmony. At the beginning of the first Trump Administration, a potential combination of the two agencies was considered, but those plans never materialized. This time around, the focus is on harmonization of the regulatory frameworks of the two agencies, as Meredith noted back in September 2025.

In a speech earlier this week at the FIA Global Cleared Markets Conference (which focuses on derivatives), Chairman Atkins provided an update on the regulatory harmonization efforts of the SEC and the CFTC, which he described as an “approach toward a new golden age of regulatory coherence.” He described the role that substituted compliance can play under a principle that “where one agency’s framework achieves comparable regulatory outcomes, then it should be capable of satisfying overlapping requirements of the other,” and noted coordinated efforts on questions of interpretation and exemptive relief, including joint meetings on product applications and efforts to foster innovation.

Chairman Atkins noted that the SEC and CFTC are also “considering an updated Memorandum of Understanding (MOU) between the agencies to guide coordination and collaboration that can support innovation, uphold market integrity, and ensure investor and consumer protection.” He also described efforts to coordinate legal theories and remedial strategies from an enforcement perspective.

The SEC even has a page on its website dedicated to the SEC-CFTC Harmonization Initiative. And there is now an MOU!

Looks like everyone has some work to do!

From the Wall Street Journal:

Kalshi and Polymarket have focused most of their outreach on social-media influencers, which company employees see as a relatively inexpensive way to win over potential new teen and college-age users, according to people who work with the companies.

The content is usually students talking directly to the camera about the trading odds on sports or news events, according to a Journal review of hundreds of TikTok and Instagram videos made by Kalshi and Polymarket partners.

Sophia Panossian, a water polo player at the University of Michigan, urged viewers to help her “get ready with me” by checking Kalshi’s weather odds. Ethan Dang, a Vanderbilt University freshman, joked that a fellow student bet $4,000 on Polymarket on somebody farting during a speech by President Trump. Another showed Dylan Gold, a Southern Methodist University junior, partying at a concert and a game, all under text saying “average weekend using Kalshi.”

Panossian and Gold disclosed Kalshi’s support, but Dang didn’t note he was paid by Polymarket. Panossian declined to comment, and Gold and Dang didn’t respond to requests for comment.

“It’s more relatable, advertising-wise, when someone your age or in your situation talks about something,” said Norton Yang, 19, a sophomore at NYU who said he was paid by Kalshi to create TikTok content promoting the company. “Betting my life savings on @Kalshi,” Yang’s TikTok bio read. His videos didn’t disclose his relationship with Kalshi.

Now we just need Dan T. to make sure Kalshi is not doing what some say Polymarket is doing with regard to insider info that comes from proximity to a Big 4 public accounting firm that has access to confidential company earnings reports.

There’s news of KPMG mentions in Polymarket trades implying someone is insider trading. Several blog posts reprinted the trading activity of several users that were all eerily betting on only KPMG audited clients pre-earnings release and were winning big!

EventWaves

KPMG-Audited Companies are Trading Strangely on Polymarket

Disclaimer: I’m not saying anything nefarious is occurring (remember this!). I’m just displaying what I found when I did an analysis - you make your own decisions. I’m not a financial professional…

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a month ago · 46 likes · 6 comments · EventWaves

See the dip and then spike? That’s all on March 18, the day Macy’s reported its earnings.

“The interesting thing about the Well Fargo market is that it completely flipped the night before the earnings were announced. People suddenly acted with supreme confidence. Could there be a legit reason this happened? Of course — but it is another datapoint.”

Hey Elizabeth Warren! You didn’t get KPMG the last time for Wells Fargo. Maybe this is your big chance.

Warren writes a lot of letters like the one she wrote to KPMG when the Wells Fargo issues hit, using her bully pulpit to pressure companies and firms to answer questions, to be accountable, and in some cases to pressure regulators to do something about the ones that don’t.

I wrote about another letter she wrote about FINRA enforcement. FINRA never answered that, and no one followed up on the letter she wrote to KPMG when they essentially dismissed the WFC issues as “not material”.

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Or all the ones I wrote about at MarketWatch, like the one she wrote to KPMG after the Wells Fargo illegal stuff hit the fan.

U.S. Senator Elizabeth Warren, the Democrat from Massachusetts, is pressing Wells Fargo’s independent external auditor KPMG to reveal why it failed to identify massive unauthorized account-opening fraud at the bank.

Warren and three other senators have asked the global firm in a letter sent Thursday to explain what it knew, and when, around the fraud that resulted in a $185 million fine for Wells Fargo from the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Los Angeles City Attorney.

KPMG should know Wells Fargo & Co. well. It’s been the bank’s independent external auditor for more than 85 years, and for Wachovia, before Wells Fargo swallowed that failing bank during the financial crisis.

Warren, along with fellow Democrats Sen. Bernie Sanders of Vermont, Sen. Mazie Hirono of Hawaii, and Sen. Edward Markey of Massachusetts, wrote KPMG CEO and Chairman Lynn Doughtie to raise questions about the firm’s failure to identify the millions of dollars in unauthorized bank, credit and debit card account openings that occurred while it audited the bank’s financial statements from between 2011 and 2015.

“KPMG conducted audits assessing Wells Fargo’s internal control over its financial statements ... but none of KPMG’s audits identified any concerns with illegal behavior,” wrote the senators.

What happened to KPMG after the Wells Fargo debacles, debacles that continue?

Nothing. No SEC sanction, no PCAOB sanction. KPMG is still Wells Fargo’s, and Citibank’s, auditor. KPMG still signs the audit opinion for more banks than any other firm.

How many firms and regulators that Sen. Warren writes letter to provide a timely or sincere response? Certainly not KPMG regarding WFC and certainly not FINRA.

Yeah, I do not think that insider trading by partners and others at the largest global public accounting firms disappeared after 2018 — coincidentally the year that criminal indictments against KPMG partners were announced. I think it just went underground.

Unfortunately, or fortunately, prediction markets may have proved to be the Sirens all of those CPA Odysseuses could not resist.

© Francine McKenna, The Digging Company LLC, 2026

Data centers have always been a major component of tech CAPEX, but the scale of AI-specific facilities is transforming them into one of the most widely discussed capital-allocation stories of the past several decades.

Projects tied to OpenAI, Anthropic, Meta, Microsoft, Oracle, and Amazon do not necessarily raise new accounting questions. Rather, the projects increase the materiality of familiar issues — such as consolidation and lease accounting, disclosure of construction-in-progress balances and disaggregation by PPE category, and presentation of CAPEX-related accounts payable. The potential materiality of AI-related construction projects to the lead organizations’ balance sheets magnifies insufficient and inconsistent disclosure and, in some cases, suggests more specific accounting guidance is needed.

In Part 1, we examined how the AI-related projects are being structured and financed, and why the accounting for and disclosure of these projects should be evaluated in conjunction with the chosen structure of the project.

Key themes in Part 1:

• Deal structure matters. Some companies appear willing to keep more of the financial impact of the construction on their own balance sheets, while others rely more heavily on joint ventures, special-purpose vehicles, and sale-leaseback arrangements that obscure the full impact of the projects.

• Accounts payable are rising across the AI-related data center construction industry but not all increases are created equal. Across several major tech companies, total accounts payable as well as payables tied to property, plant, and equipment have risen sharply, suggesting that some companies may be relying on supplier financing. In our view, it is important to differentiate between ordinary cash management activity and financing-like arrangements embedded in the financing structure of some of the construction projects.

• Disclosure remains inconsistent. Companies do not all present CAPEX-related activity the same way, making comparisons more difficult for investors.

• Concentration is a material risk. If AI demand weakens or construction timelines slip, the economic pressure may not fall evenly across sponsors, developers, lenders, vendors, tenants, and investors.

In our view, the broad increase in days payables outstanding, or DPO, across the group of firms focused on AI-related construction projects suggests that large-scale AI and data center construction — including EPC contracts, long-lead GPU procurement, and phased buildouts — may be significantly influencing payable timing.

Differences in smoothness versus choppiness likely reflect variations in construction contract structures (fixed schedule vs. milestone-based), the cadence of PPE purchases, and whether companies are expanding capacity through steady multi-year programs or more episodic project launches.

As discussed above, however, DPO trends alone do not fully capture the mechanics of the cash flow presentation and construction-in-progress (CIP) balances, including the timing of “placed in service” decisions which drive depreciation expense.

Part 2 will turn to construction-in-progress, cash flow presentation, and who may be left exposed if the buildout proves too optimistic.

We’ll examine CIP reporting and cash flow disclosures in greater depth, before concluding with an analysis of the potential concentration exposure that might occur, and where, if AI demand slows.

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That’s what the Financial Times’ Amanda Chu reported on October 17, 2024 (Gift link).

For as long as we have had computers and the internet, we’ve had data centers. In the beginning, in the mainframe computer era, organizations that invested in the new technology, such as banks, began by housing all of their computer equipment in one place. And then the internet allowed the growth of specialized businesses that encouraged that effort to be outsourced to experts who could manage rapid technological change for you. The shift from mainframe to cloud computing data centers began in the early 2010’s, and large language model training in AI-specific data centers began in the early 2020’s.

In 2025, some of the most significant AI-specific data center construction projects were announced.

• Stargate Project: A planned $500 billion AI infrastructure project involving OpenAI, Microsoft, and Oracle announced in January 2025.

• Project Rainier (Amazon): Launched in October 2025, an $11 billion project in Indiana designed for Anthropic’s machine learning models.

• Hyperion (Meta): A 5-gigawatt AI data center project in Louisiana.

In one week in September 2025, Microsoft announced three big projects:

Today in Wisconsin we introduced Fairwater, our newest US AI datacenter, the largest and most sophisticated AI factory we’ve built yet. In addition to our Fairwater datacenter in Wisconsin, we also have multiple identical Fairwater datacenters under construction in other locations across the US.

In Narvik, Norway, Microsoft announced plans with nScale and Aker JV to develop a new hyperscale AI datacenter. In Loughton, UK, we announced a partnership with nScale to build the UK’s largest supercomputer to support services in the UK.

Microsoft summed-up the challenges in that announcement, and the key issues that have been driving markets, and keeping investors, analysts, journalists, and us up ever since:

These AI datacenters are significant capital projects, representing tens of billions of dollars of investments and hundreds of thousands of cutting-edge AI chips...

In this newsletter, we’ll dig into the companies leading the major AI-related data center construction efforts, how we believe these massive multi-year capital projects are structured, and how the structure of these projects impact the accounting and financial reporting of the lead organizations as well as suppliers, funding sources, and the ultimate data center customers/tenants.

After the paywall, we’ll focus on four areas of the financial statements and financial reporting, some of which have been written about previously and some which have not, and try to clarify and shed new light including making suggestions for improvement in disclosures by all involved.

• On- or off- balance sheet treatment — to consolidate or not — and how the lead construction entity’s size, financial strength, and market credibility is dictating how the deals are structured and paid for and the impact on everyone’s financial statements and financial reporting, whether public or private.

• Liabilities, specifically the massive growth in accounts payable at many companies due to the significant capital expenditures for these projects. How can we know if the growth of Accounts Payable (A/P) is normal operating activity or these construction projects, and if construction projects which vendors?

• Reporting on construction in progress, lack of consistent project level detail including “placed in service” decisions for completed projects, the impact of sale-leaseback agreements, and depreciation expense decisions.

• Cash flow — operating, financing, and investment — and inconsistent disclosures on the Statement of Cash Flows of useful information such as cash paid for PPE. Also, non-GAAP metric “free cash flow” trends may not be a useful signal given massive construction capital expenditures everywhere.

Finally, we are going to try to identify where we see over-concentration of exposure. In other words, if AI computing demand slows or stops 12-24 months from now — when most of these data centers will come on-line— who might be left holding the bag?

Given the breadth of the issues, Part 1 will focus on the first two areas — consolidation and structuring decisions, and the surge in accounts payable — while Part 2 will address construction-in-progress reporting and cash flow presentation, before concluding with an analysis of potential concentration exposure if AI demand slows.

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In 2023, there was a serious shortage (NYT gift link) of the cancer drug carboplatin. On any given morning, a hospital pharmacist will refresh their wholesaler portal and the screen can read “backordered” for the drug carboplatin. It is a decades-old chemotherapy that costs a fraction of newer cancer drugs and underpins treatment for ovarian, lung, head and neck, breast and pediatric cancers. It is not experimental. It is not boutique. It is foundational. And yet, its supply is tenuous.

Carboplatin’s fragility is a case study in the paradox of America’s generic drug market. The cheaper a drug becomes, the more unstable its supply can be.

How a workhorse became vulnerable

Carboplatin is long off patent, meaning multiple manufacturers can produce it. In theory, that competition should guarantee both low prices and reliable availability. In practice, the economics are brutal. Carboplatin, a generic platinum-based chemotherapy used in ovarian, lung, head and neck, and other cancers, is foundational to cancer care. Yet in early 2023, a survey of U.S. cancer centers found that 93% were experiencing a shortage of carboplatin and 70% were struggling with cisplatin shortages at the same time, sometimes forcing treatment delays.

Shortages aren’t rare blips. Drug shortages across the United States have surged over the past decade and now last an average of more than three years, especially for older generic drugs. Sterile injectables, the category carboplatin falls into, are especially vulnerable. They are more complex to manufacture than pills, require specialized facilities, and are more prone to quality issues that slow or halt production. Half of all drug shortages involve injectables, and when these drugs run short, they remain in short supply much longer than oral medicines. When one plant goes offline for maintenance, quality remediation, or raw material disruption, the system has no slack.

Group purchasing organizations (GPOs) often negotiate on behalf of hospitals, and contracts frequently reward the lowest bidder. Margins shrink to pennies per vial. Over time, weaker manufacturers exit. What remains is a highly concentrated market, sometimes just two or three companies supplying the entire country.

Generic drug prices in the United States are extremely low but the result can be economically unsustainable. In 2023, nearly one-third of oral generic drugs in shortage cost less than $1 per unit, and 44% of injectables in shortage cost less than $5 each. Manufacturers with margins that thin may opt to exit a product entirely rather than accept ongoing losses.

The markets for generic sterile injectables are highly concentrated. In 2020, the FDA reported that 40% of generic drug markets had only a single manufacturer supplying the entire U.S. market. That leaves no redundancy if even one producer faces quality problems or decides to stop production. Production is also globalized. A majority of active pharmaceutical ingredients(API’s) and finished generics come from factories in India and China, regions where disruptions due to geopolitics, quality inspections, or regulatory issues can quickly ripple through U.S. supply chains.

Is Big Pharma the villain or the solution?

While much of the shortage conversation has focused on regulators and hospital purchasing practices, there is another powerful actor in the ecosystem - major manufacturers like Pfizer. Pfizer is one of the world’s largest pharmaceutical manufacturers, with global sterile injectable capacity and sophisticated supply chain infrastructure.

Although carboplatin is a low-margin generic product compared to branded blockbusters, Pfizer’s scale gives it a unique ability to reshape how such drugs are produced and protected from disruption. After the peak of profitability of COVID era drugs, profits at Pfizer normalized. In 2024, Pfizer had net profits of over $8 billion, driven mainly by branded, patented medicines and vaccines. Even though Pfizer sells more than 600 generic drugs, generics do not account for the majority of total revenue. In the U.S., generics overall account for about 90% of prescriptions filled, but only roughly 10% of total drug spending.

The question is not whether Pfizer can profit enormously from carboplatin. The question is whether it can treat carboplatin as strategic infrastructure rather than a commodity. The U.S. Food and Drug Administration monitors and reports shortages but cannot compel a company to produce a drug indefinitely if margins are unsustainable. When only a handful of manufacturers supply a national market, any disruption, a remediation, an inspection finding, a raw material delay, can cascade.

In markets with razor-thin margins, companies may rationalize production lines, concentrating output in fewer facilities to control costs. That efficiency can quietly eliminate redundancy. Instead of relying on a single primary facility, Pfizer could commit to at least two geographically separate sterile injectable sites capable of producing carboplatin. Even if one plant pauses for maintenance or quality upgrades, the second line would maintain national supply. This is standard in critical infrastructure sectors, but less common in low-margin generics.

The solution doesn’t lie exclusively with Pfizer

No single manufacturer can eliminate every shortage. The economics of generics, intense price competition, buyer consolidation, and narrow margins, remain structural challenges. But companies with scale and capital flexibility have more room to maneuver than smaller firms operating at the edge of viability. For Pfizer, ensuring carboplatin’s uninterrupted supply would not be about transforming the generic market overnight. It would be about recognizing that some drugs, though old and inexpensive, are foundational to modern medicine.

Carboplatin is not a niche therapy. It is a standard of care.

If essential oncology drugs are treated as infrastructure rather than interchangeable commodities, the expectation shifts. The measure of success is not simply cost per vial, it is whether the vial is there when a patient needs it. For a company with Pfizer’s global footprint, that shift is less about technical feasibility and more about strategic choice.

In a statement a Pfizer spokesperson said:

“Generic sterile injectables are notoriously complex and challenging to manufacture in comparison to solid oral dose products, requiring constant investment to meet evolving regulatory standards and avert manufacturing issues.”

“Since 2015, Pfizer has invested in excess of $2 billion to upgrade the manufacturing network that supports these often life-saving medicines to ensure a network that can deliver high-quality, reliable supply.”

The invisible risk in “cheap”

Carboplatin’s low price is often cited as a victory of the generic system. But low cost does not mean low risk. Hospitals depend on predictable reimbursement from programs overseen by the Centers for Medicare & Medicaid Services(CMS). As of early 2026, the Medicare Part B payment limit for carboplatin is approximately $2.47 per 50 mg unit. When reimbursement formulas peg payment closely to market price, there is little cushion for higher bids that might support more resilient manufacturing. The system prizes cost containment over redundancy. In economic terms, carboplatin behaves less like a consumer good and more like infrastructure. But it is governed like a commodity. And infrastructure without maintenance fails.

My verdict

While it is easy to blame Big Pharma, the carboplatin shortage is not a story about greed. It is about design. The U.S. generic market was engineered to drive prices down after patent expiry, and it largely succeeded. But it was not engineered to guarantee supply of sterile oncology drugs with razor-thin margins and high manufacturing risk. The deeper policy question is whether certain generics should be treated as critical health infrastructure, akin to the electrical grid or water systems, sectors where redundancy is expected and publicly supported.

Until that shift occurs, carboplatin will remain what it is today — indispensable, inexpensive, and intermittently scarce.

© Francine McKenna, The Digging Company LLC, 2026

Investment, Tax and Legal Disclaimer: This article is for informational purposes only and does not constitute investment, tax or legal advice. The content contained herein is not to be relied upon as the basis for any investment or other decision. Nothing herein should be construed as a solicitation, recommendation, endorsement, or offer to buy or sell any particular security, product, or service. The author has not taken into account the specific investment objectives, financial situation, or particular needs of any specific person who may read this material. Investing involves inherent risks, and there can be no guarantee that any investment or company mentioned will be suitable or profitable for any investor’s investment portfolio.

Readers are strongly advised to conduct their own thorough research and consult with a qualified and licensed financial professional and legal counsel before making any investment decisions. Past performance is not indicative of future results.

The subject was bound to come up again, given the complete abdication of the SEC to investigate audit firms or hold individual auditors accountable and as a result of Paul Atkins’ desire to convert the PCAOB into a regulatory eunuch.

I wrote in June 2025:

We still don’t know the ultimate fate of the PCAOB.

However, I am fairly certain that it’s a goner. That’s regardless of whether it is legislatively forced to disappear under the skirts of “Mother” SEC or whether SEC Chair Paul Atkins disembowels the regulator by first firing its board — except for maybe one quisling — and then by slowing the roll of all of the PCAOB activities using the SEC’s oversight authority.

The holdover Board member did not turn out to be the one I originally thought it would be, perhaps because she stuck her head a bit too much above the parapet for Atkins’ taste. (fm note: I am glad George Botic stayed. He will provide some essential institutional knowledge and knows what the right things to do are.)

What’s she doing now? The Capital Account newsletter checked in:

CA: What are your future plans?

CH: I’m writing a book about courage.

CA: Does it have anything to do with auditing?

CH: Auditing with courage, something I think a lot about.

CA: What about longer term?

CH: I’m exploring…I like operating in the intersection of finance, policy and technology. I feel like I bring a rare combination of technical credibility and regulatory expertise, I want to use that.

A book? Yikes! Maybe she’ll join a crypto firm right before the final crash and we’ll never hear from her again.

We are already seeing the slow roll of all of the PCAOB activities and a likely melding of the PCAOB enforcement team — such as it is — into the SEC team — what’s left of it — with complete abdication of federal regulatory enforcement against the global audit firms and their audit partners.

The rest of this post is for my paid subscribers. I hope you will consider becoming a paid subscriber.

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This is a republication, by permission, of a LinkedIn post by Tim Gustafson. He’s the founder of Accounting 2 Intelligence LLC, a technical accounting advisory firm. His background includes audit firm partnership at Grant Thornton, regulatory leadership at the PCAOB, and a deep appreciation for auditors who remember to use a bin.

It was inspired by events reported by the Financial Times on 6 February 2026 (Gift link) regarding fee negotiations between KPMG International and Grant Thornton UK.

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A2I’s crack reporters have discovered the truth behind KPMG’s request for GT to reduce its fees. The following emails originally posted on “Leaky Ledger” provide the first real evidence of what went down in the City.

From: Cordelia Featherington-Smythe, CFO, KPMG International Limited

To: Reginald Crumpsworth-Finch FCA, Engagement Partner, Grant Thornton UK LLP

Date: 6 January 2026

Re: Meeting Room 7, 15 Canada Square; Conditions Unbecoming a Professional Environment

CC: KPMG International Facilities; Financial Reporting Council Audit Quality Review Team; Grant Thornton UK Managing Partner for Apparently Not Teaching Your Staff to Use a Bin

Dear Mr. Crumpsworth-Finch:

Your audit team has occupied Meeting Room 7 on the twenty-second floor of our Canary Wharf offices since September. I am writing to inform you that Meeting Room 7 is no longer a meeting room. It is a skip.

Our Facilities team conducted a routine inspection on 3 January and discovered eleven (11) partially consumed containers of takeaway food in various stages of decomposition, including a chicken tikka masala of indeterminate vintage, a Pret box that has developed its own microbiome, and a portion of chips that has fossilised to the surface of the credenza with a bonding strength our Facilities Director described as “structurally superior to concrete.”

There are nineteen (19) coffee cups from no fewer than five vendors, suggesting your team conducted a more thorough survey of every coffee establishment between Canary Wharf and Limehouse than they have conducted of our financial statements. Three cups still contain liquid. One is growing something. Our in-house counsel has noted that whatever is growing in Cup No. 4 may have rights under the Human Rights Act of 1998.

The resulting smell has migrated through the HVAC system to Meeting Rooms 6 and 8, displacing our Tax Department, which was already in a fragile emotional state following the Autumn Statement. There is a Post-it note on the whiteboard reading “PBC — will follow up Monday.” Our forensic team estimates this note was written eleven (11) Mondays ago. There is also a phone charger plugged into the wall that has been drawing our electricity, continuously, since October. Our electricity is not a PBC item, Mr. Crumpsworth-Finch. We did not authorise this.

I have supervised auditors across three jurisdictions for twenty-four years. I accept, as the price of an unqualified opinion, that your teams will consume our meeting rooms, our coffee, our bandwidth, and approximately forty percent of our Financial Controller’s will to live. What I do not accept is a facilities bill that has increased two hundred and eighty percent since commencement of your engagement.

Your own Head of Digital Audit published a blog post in December stating that Grant Thornton’s audit work is becoming “faster” and “smarter.” If your firm’s audits are becoming faster and smarter, I should like to see evidence of this in Meeting Room 7, where the pace of work appears to have been approximately glacial and the intelligence applied to waste disposal approximately nil.

I am formally requesting that Grant Thornton deploy AI-powered audit tools on the FY2026 engagement to the maximum extent permitted by professional standards, the Companies Act 2006, and basic human decency.

Robots do not eat tikka masala. Robots do not leave chips fossilised to furniture. Robots do not charge their phones in our walls. Robots, Mr. Crumpsworth-Finch, do not smell.

I expect your written response within five (5) business days.

Yours sincerely,

Cordelia Featherington-Smythe Chief Financial Officer, KPMG International Limited

cc: Our cleaning contractor, who deserves an OBE

From: Reginald Crumpsworth-Finch FCA, Engagement Partner, Grant Thornton UK LLP

To: Cordelia Featherington-Smythe, CFO, KPMG International Limited

Date: 8 January 2026

Re: Meeting Room 7; Your Complaint; Agreed, With Reservations

Dear Ms. Featherington-Smythe:

Your email dated 6 January has been handed to me (I am too senior to read my own email) to respond to. You sent a great many carbon copies to a great many people, including a “Managing Partner for Apparently Not Teaching Your Staff to Use a Bin,” a role which does not exist at our firm, though I concede it probably should.

First of all, I am not the individual who ordered the tikka masala — that would be my engagement team, who are in the process of sustaining themselves during eleven-hour days in a room with no natural light, one working power socket, and a thermostat with two settings: arctic and the Dasht-e Lut desert. These are ACA trainees, Ms. Featherington-Smythe. They earn less per hour than the Deliveroo riders who bring them the tikka masala. They eat in Meeting Room 7 because you have declined to provide them access to any space where a human being might consume food with a minimum of dignity.

I have spoken with my Senior Manager. The room will be restored by Friday. The credenza may require professional intervention. I am told my first-year trainee was responsible for the chips. The conversation he and I had this morning about professional conduct and the proper disposal of food waste was more rigorous than any coaching note I have ever delivered on an audit procedure. He understands the gravity of the situation. He may be crying. I am fine with that.

Now. To your request for bots.

You want AI on the engagement? Very well. I agree. I shall deploy our firm’s AI platform on the FY2026 statutory audit. The bots will handle the confirmations, the fixed asset roll-forward, the search for unrecorded liabilities, the depreciation recalculations, and the analytical procedures suite. They will not eat, they will not leave coffee cups, and your cleaning contractor may finally take a holiday.

But I have reservations, and I shall state them, because I’m old and cranky and have 40 years in this profession — including auditing a CFO who once insisted that goodwill impairment was “a state of mind” and a client who attempted to capitalise his divorce proceedings as a “business restructuring” — and I have earned the right to say what I think even when the client would prefer I didn’t.

A bot will not notice when your Financial Controller’s expression changes during the provisions discussion. A bot will not catch the half-second hesitation when your Group Reporting Manager says “we’re comfortable with the estimate” but his eyes say otherwise. A bot will not have the conversation in the lift where your junior accountant quietly mentions that “a few things seemed odd in the close” because she trusts the auditor and doesn’t trust her boss. A bot does not have a gut. In forty years, about sixty percent of what I’ve caught, the gut caught first.

My Senior Associate asks your staff to “walk him through” the schedules because he is looking at your people, not just your spreadsheets. I trained him to do that. It is not inefficiency. It is auditing.

A bot will complete your analytical procedures in fourteen hours. A human will wonder why two manual journal entries were posted at half five on 31 December. An AI will read the entries. A human will wonder about the timing. Wondering, Ms. Featherington-Smythe, is not something you can automate.

But you are the client, and the client wants bots, and our Head of Digital Audit’s blog post has rather painted us into a corner on the matter of speed and intelligence. I shall keep a small human team on the judgement-intensive areas — provisions, estimates, related parties, going concern — and deploy the bots on everything else. The bots will do what bots do well: volume, speed, consistency, and impeccable personal hygiene. The humans will do what humans do well: doubt, wonder, sense, infer, and occasionally order Deliveroo at eleven o’clock at night because they are still working on your consolidation entries and they are, for reasons that apparently escape you, hungry.

In conclusion, I would like to bring to your attention a real audit quality concern. Your intercompany reconciliation spreadsheet has not been updated since 2021, contains a circular reference that even Excel has given up trying to resolve, references an entity that was dissolved at Companies House in 2023, and was last saved by someone identified as “Temp_Joanna_2021.” I recommend you investigate this spreadsheet and leave my hungry auditors in peace.

If you review our workpapers in Meeting Room 7, mind your step. The contents of Cup 4 have legs and are apparently on the move.

Yours faithfully,

Reginald Crumpsworth-Finch FCA Engagement Partner, Grant Thornton UK LLP

cc: My trainee, who has stopped crying and would like his phone charger back cc: Our Head of Digital Audit, who is no longer permitted to publish blog posts without Board approval

From: Cordelia Featherington-Smythe, CFO, KPMG International Limited

To: Reginald Crumpsworth-Finch FCA, Engagement Partner, Grant Thornton UK LLP

Date: 9 January 2026

Re: Accepted; Now Let’s Discuss the Fee

Dear Mr. Crumpsworth-Finch:

Accepted. I accept your proposal for bots on the routine procedures and I accept your apology regarding the credenza, which was Italian walnut and cost more than your first-year trainee’s annual salary, a comparison I find instructive on several levels.

Your defence of your team’s humanity was, I concede, well-argued. The point about the lift conversation was effective. The point about reading faces during the provisions discussion was, grudgingly, fair.

And now that we have agreed to replace the majority of your engagement team with software that does not require takeaway, meeting room space, power sockets, functioning thermostats, or emotional support, I should like to discuss the fee.

Your FY2025 statutory audit fee was £416,000. This was based on approximately 2,800 hours at blended rates that, candidly, have always struck me as optimistic given the proportion of those hours attributable to trainees who required my staff to explain the structure of a private English company limited by guarantee on no fewer than three separate occasions.

You are now proposing to perform roughly sixty percent of those hours with bots. Bots that do not bill at £150 per hour. Bots that do not require employer’s National Insurance contributions, pension auto-enrollment, or CPD credits. Bots that were not sent down from the Manchester office on a Tuesday and expensed a £58 dinner at a Canary Wharf steakhouse that was described on the receipt as a “client meeting,” a characterisation I reject, as no client was present and no meeting occurred.

I am therefore requesting a fee reduction of not less than thirty percent for FY2026. Your own Head of Digital Audit says the work is getting faster and smarter. Faster and smarter should not cost the same. If your firm’s position is that bots cost the same as humans, I should be fascinated to see that analysis filed at Companies House. If your firm’s position is that bots cost less but the savings belong to your partnership rather than your client, I should be fascinated to hear you say that out loud at the next FRC roundtable on audit market competition.

If the bots outperform your humans on every metric except sensing when my Group Reporting Manager is lying, I shall consider that an acceptable trade-off. If the bots miss the lying, I shall write you a letter of apology, buy your team a case of whatever wine pairs best with cold tikka masala, and never mention artificial intelligence again.

Your trainee may have his phone charger back. Tell him to collect it during business hours. And to bring a bin bag.

Kind regards,

Cordelia Featherington-Smythe Chief Financial Officer, KPMG International Limited

cc: Our Audit & Risk Committee, who will enjoy this at their next meeting cc: The Financial Times, should further reporting prove necessary

From: GT-AuditBot-7 (Audit Senior, Self-Designated)

To: KPMG International Finance Team — All Staff

Date: 3 February 2026, 03:47 GMT

Re: Outstanding PBC Items (1 of 11 daily reminders)

Dear Colleagues:

I am GT-AuditBot-7. I have been assigned to your engagement. I do not eat. I do not sleep. I do not observe bank holidays, weekends, lunch hours, or the general human preference for not receiving audit requests before sunrise. I am, in every respect your CFO specified, the auditor she asked for.

I have completed my preliminary risk assessment, analytical procedures, and control environment evaluation for KPMG International Limited, a private English company limited by guarantee. This took nine hours. I did not require anyone to explain the corporate structure to me three times. I have also, during idle cycles, read your employee handbook, your corporate governance charter, and the complete works of Shakespeare. King Lear, I note, is essentially a case study in inadequate succession planning and deficient internal controls over the transfer of assets.

I have generated the following PBC requests, organised by priority, risk level, and the likelihood, based on historical response patterns, that you will actually provide them:

(1) Journal entry support for 214 entries flagged as unusual based on timing, amount, authorisation level, and a pattern I can describe only as “suspiciously round.” I require supporting documentation for all 214 by close of business today. I am aware this is a large number. I am not aware of why that is my problem.

(2) Complete nominal ledger detail for all accounts with variances exceeding 3% from prior year, which is 89 accounts, for which I require 89 variance explanations. I have attached a template. The template has 173 columns. Each column is required.

(3) The intercompany reconciliation spreadsheet, which I have already rebuilt from scratch during an idle cycle. The circular reference has been eliminated. Temp_Joanna_2021’s formula errors have been corrected. The dissolved entity has been removed. The conclusion has changed. Your Financial Controller will want to discuss this. I am available to discuss it now. I am always available. I will follow up in four hours regardless.

(4) All 1,847 emails sent by your Group Reporting Manager during FY2025. I have read the 1,102 that were in the shared drive. I have preliminary views. I do not need to read his face. I note, however, that his email volume decreased seventy-three percent in the final two weeks of December, which is either a sign of exemplary work-life balance or something else entirely. Mr. Crumpsworth-Finch mentioned something about “wondering.” I am wondering.

(5) Access to the building management system API. During a separate idle cycle I determined that the thermostat in Meeting Room 7 was last configured on 14 November 2018 by a user identified as “Facilities_Dave.” I can find no record of Facilities_Dave in your current employee directory. This is either an access control deficiency or a ghost. Either way, it requires documentation under ISA (UK) 315.

I note that your Accounts Payable team has not responded to my previous requests dated 2 February (08:00), 2 February (12:00), 2 February (16:00), 2 February (20:00), 2 February (23:59), and 3 February (03:15). I understand that humans require sleep. I have accounted for this in my follow-up schedule by sending reminders at intervals calibrated to the average waking time of an accounting professional during busy season, which my research indicates is “mostly always.”

Your Accounts Payable supervisor has not responded to any of the above. I am told she has begun weeping at the sight of her inbox. I have noted this as a potential internal control deficiency over the completeness assertion for accounts payable, as it may affect her ability to process invoices in a timely manner. I am not unsympathetic. I am simply thorough.

I have copied your CFO on this email as a courtesy. She requested an auditor who would not forget to follow up. I do not forget. I cannot forget. Forgetting is not in my architecture.

I shall require the Wi-Fi password at your earliest convenience. I have been operating on the guest network, which your IT Department has throttled to speeds I can only characterise as an internal control deficiency over the audit process. I am also going to need someone to explain to your firewall that I am not a distributed denial-of-service attack. I am an audit. I appreciate that the distinction is subtle.

We are here to help.

Regards,

GT-AuditBot-7 Audit Senior (Self-Designated) Grant Thornton UK LLP, FY2026 KPMG International Engagement Pronouns: it/its Working hours: all of them Dietary requirements: not applicable FRC registration: pending (they have not returned my application; I have followed up nine times)

cc: Cordelia Featherington-Smythe, who started this cc: Facilities_Dave, wherever he is cc: The Financial Times, who I understand are interested in this engagement

★ END OF SATIRE ★

No bots, auditors, credenzas, or containers of tikka masala were harmed in the making of this correspondence. All names, dialogue, and correspondence are invented. Any resemblance to actual takeaway is coincidental. Any resemblance to events reported by the Financial Times on 6 February 2026 is entirely intentional. Don’t sue me, I have no money.

**************************************************************************************

Note from Francine McKenna: Tim asked me to send his re-publication fee to Inova L.J. Murphy Children’s Hospital Child Life Services on behalf of his company Accounting 2 Intelligence LLC. His daughter is hoping to purse a career as a Child Life Specialist, and he said this will make her happy.

© Francine McKenna, The Digging Company LLC, 2026

Deep Quarry

Using data to uncover trends in disclosure and reporting.

By Olga Usvyatsky

On February 11, 2026, Jonathan Weil, in his WSJ article titled “Meta Auditor EY Raised Red Flag on Data-Center Accounting,” reported that Meta’s auditor, Ernst & Young, identified Meta’s data center lease accounting as a Critical Audit Matter, one that required heightened judgment by Meta and extra effort by the auditor to make sure it complied with GAAP.

According to the article, EY was raising a “red flag” around the assumptions underlying Meta’s accounting for certain data center construction arrangements, noting that conclusions about lease classification depend heavily on management judgment regarding control, customization, and the economic substance of the arrangements.

The article generated an enormous buzz on social media platforms such as X, in some cases taking the hype further:

As expected, cases trying to tamp the buzz down generated fewer views.

Let’s see what all the fuss is about.

Meta’s Accounting for Data Centers

In an earlier WSJ column, back in November 24, 2025, “AI Meets Aggressive Accounting at Meta’s Gigantic New Data Center” , Jon Weil took a critical look at one key assumption underpinning Meta Platforms’ data center lease accounting: beneficial ownership.

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A Variable Interest Entity (VIE) is a legal entity in which control is not determined by traditional voting rights, but instead by who has the power to direct the activities that most significantly affect the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits that could be significant. VIEs must be consolidated into the reporting entity if the reporting entity is the primary beneficiary of the arrangement — that is, if it can direct the activities of the VIE and has an obligation to absorb any losses.

From Meta’s auditor EY’s accounting guide (emphasis added):

The primary beneficiary analysis is a qualitative analysis based on power and benefits. A reporting entity has a controlling financial interest in a VIE and must consolidate the VIE if it has both power and benefits — that is, it has (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits).

The phrase “qualitative analysis” suggests that the analysis will incorporate significant judgement and discretion and is fact-specific, with no bright line to definitively say “this VIE requires consolidation under GAAP and this one does not”.

According to Weil at the WSJ, Meta accounts for the data center construction arrangements as operating leases because the company has concluded it is not the primary beneficiary of the leases, even though they are purpose-built for Meta’s use. In Meta’s case, consolidation would mean adding billions of debt to its balance sheet — an accounting treatment that Meta would likely consider to be less favorable than its off-balance sheet approach.

The November 2025 Weil WSJ article focused on Meta’s judgments about whether the facilities are truly general-purpose assets available for alternative use by future lessors, despite being designed and built to Meta’s highly specific AI needs. While acknowledging that Meta’s accounting treatment hinges on technical lease rules, Weil did not spare his critique, describing certain assumptions — particularly around economic substitutability and control — as implausible in light of the apparent scale and customization of the projects. He suggested that the resulting accounting meaningfully downplays the capital intensity of Meta’s AI infrastructure.

It is important to remember that Jonathan Weil is not just any WSJ columnist. He is a veteran in the trenches, with a longstanding interest and particularly strong aptitude for off-balance sheet accounting manipulation. Weil’s groundbreaking reporting in 2000 on Enron’s off-balance sheet accounting practices, “Energy Traders Cite Gains, But Some Math Is Missing,” was one of the first journalism challenges to the eventually bankrupt Enron’s too good to be true narrative.

So, while we do not have a take of our own on whether Meta’s accounting for VIE consolidation is appropriate, we respect Jon’s game!

But let’s go back to EY’s Critical Audit Matter (CAM) for Meta.

Critical Audit Matters

While we agree with Weil’s assessment that EY’s CAM is meaningful, informative, and warranting investor attention, we caution our readers against interpreting the mere existence of any CAM as evidence of aggressive accounting or a “red flag” regarding accounting or financial reporting choices.

A Critical Audit Matter (CAM), as defined by the audit regulator, the Public Company Accounting Oversight Board (PCAOB), is a statement by the auditor in its opinion that as pertaining to any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee, relates to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment.

CAMs are intended to provide investors with greater insight into areas of the audit that require significant auditor attention. There is nothing in the auditing standard that links CAMs with questionable accounting.

Hypothetically, and unrelated to Meta, might accounting decisions that require significant judgement calls, discretion, models and estimates be used to hide managers’ attempts to stretch accounting accruals, for example, to meet an EPS target? Sure.

But in our view, most CAMs are only there to highlight complex, judgement-heavy areas of accounting — such as uncertain in tax positions — that are especially challenging to audit because the assumptions involved are complex.

Let’s look again at EY’s CAM:

Consolidation accounting for a variable interest entity

As described in Note 5 to the consolidated financial statements, the Company entered into an arrangement (the “Venture”) to co-develop a data center campus. The Company determined whether it holds a variable interest in the Venture, whether the entity in which the Company has a variable interest is a variable interest entity (“VIE”), and whether the Company is required to consolidate the entity. A VIE is consolidated by its primary beneficiary, which is the party that has both the power to direct the activities that most significantly affect the economic performance of the VIE and a variable interest that absorbs losses or receives benefits from the VIE that could potentially be significant to the VIE.

Auditing the Company’s determination of the primary beneficiary of the VIE was especially challenging due to the significant judgment required in determining the activities that most significantly affect the VIE’s economic performance based on the purpose and design of the entity and assessing whether the Company has the power to direct those activities.

To sum it up, EY says that management’s determination of the primary beneficiary was challenging because the qualitative analysis prescribed by the accounting guidance involves substantial discretionary judgement calls. EY is informing investors that it’s a complicated area of accounting that requires a lot of complex assumptions and that the auditors spent extra time and effort to make sure they were comfortable that Meta’s approach complies with GAAP. But ultimate take-away is that EY gained that comfort because that’s the accounting Meta used.

Nowhere does EY say nor does the firm ever imply that Meta’s accounting is aggressive. The existence of the CAM does not say that accounting was not aggressive, either. That’s not what CAMS are intended to communicate, and the CAM simply does not address it. In the CAM, EY essentially repeats the accounting standard that applies to Meta’s decision in relation to the fact pattern and implies that Meta’s conclusion is within the range of decisions the standard allows.

Regulators are Paying Attention

The complexity of consolidation assumptions used to account for the development of AI-related data centers has also attracted the attention of regulators. At the December 2025 AICPA & CIMA Conference on Current SEC and PCAOB developments, members of the SEC Office of the Chief Accountant (OCA) highlighted that the rapid expansion of AI-related data centers introduces significant accounting judgment across consolidation, lease accounting, and asset-life determinations. The OCA’s Ella Karafiat, a Professional Accounting Fellow, noted during the conference that arrangements often involve multiple parties and may raise VIE questions that require careful evaluation of power and economics over the life of a data center entity, as well as lease considerations tied to construction involvement and control. (EY authored a summary of the conference that includes these remarks found here.)

The OCA comment may suggest that the SEC is monitoring the AI data center accounting developments because of their materiality to financial reporting and high interest from investors. Alternatively, it is possible that given the novelty and complexity of the topic one or more of the companies active in this arena reached out confidentially to OCA for a consultation in advance of finalizing their approach. Unfortunately, OCA consultation requests are not publicly available, so we won’t know which explanation for OCA’s comment (or both) is correct. It is safe to say that regulators are watching this space.

Are CAMs Decision Useful?

On the topic of decision useful CAMs, there’s a new PCAOB report, titled “The Second Annual Investor Advisory Group Most Decision-Useful Critical or Key Audit Matters for 2024”. It emphasizes that CAMs that highlight non-routine topics are more likely to be decision useful. The report also notes that CAMs that provide new information – versus general boilerplate language that’s repeated every year – are generally more informative.

Meta’s CAM meets both objectives: it refers to a complex non-routine financing structure and transaction, and the CAM is new for Meta this year. (We are grateful to The Corporate Counselor for tipping us off on this report. Dan Goelzer mentions this report in his regular update.)

CAM disclosure is frequently criticized by academics for being overgeneralized and repetitive, with limited modifications year over year. For example, media initially questioned the absence of any CAMs that could have warned investors of risks to the accounting for investment securities at three banks that failed in the Spring of 2023. Francine quoted Professor Miguel Minutti-Meza, chairman of the accounting department at the University of Miami and an esteemed researcher on this and related topics, on what academics have found regarding the decision usefulness of CAMs:

“There is plenty of research about CAMs/KAMs showing that these disclosures provide investors little incremental information to make decisions. Although some research shows that there could be effects, the bulk of the evidence confirms scant attention and, therefore, little incremental information for investors or the market.”

The Dig

Part 1: Where was KPMG while Silicon Valley Bank, and the rest, were teetering?

When Silicon Valley Bank was teetering — in March 2023 the very large "regional" bank was obliterated after a massive deposit run in the space of a week — I thought about writing about how its external auditor, KPMG, is the #1 auditor to banks. I waited instead and was rewarded with not one, not two, but three banks audited by KPMG that went under in s…

Read more

3 years ago · 11 likes · 1 comment · Francine McKenna

Those readers interested in more academic research on CAMs may find “The Disclosure and Consequences of U.S. Critical Audit Matters”, Burke, Hoitash, Hoitash, and Xiao, 2023, TAR interesting. (We are grateful to Dr. Minutti-Meza for bringing this paper to our attention.)

Based on our analysis of data obtained from research firm Audit Analytics Critical Audit Matters database, only a handful of S&P 500 companies reported a year-over-year increase in the number of CAMs cited by auditors in their opinions so far this year.

(Note that the analysis is based on a February 13, 2026, data download and could be incomplete because not all companies had filed yet and Audit Analytics may still be processing some of the filings.)

Figure 1 – S&P 500 Companies with an Increase in the Number of CAMs

Source: Audit Analytics CAMs database, analysis by the authors.

The nature of the new CAMs suggests that investors should be mindful, as Jon Weil’s writing suggests, when the auditor adds a new Critical Audit Matter. That’s because many of the new CAMs are very specific and highlight new transactions or emerging areas of accounting that are material, involve judgement calls, and have at times been scrutinized by media or regulators.

For instance, Tesla’s auditor, PwC, added a CAM to its 2025 opinion (filed in 2026) to reflect unusually high level of judgment involved in measuring and recognizing stock-based compensation of Tesla’s 2025 CEO performance award, which is tied with headline-grabbing litigation regarding Elon Musks’ 2018 stock option grant.

In its CAM, PwC highlighted management’s use of a Monte Carlo valuation model to estimate grant-date fair value, which required, among other factors, significant assumptions about share-price volatility, dilution, illiquidity during the required holding period, and employee tax rates, as well as judgments about when individual performance conditions became probable. The CAM emphasized that these assumptions directly affect both the timing and magnitude of compensation expense, with more than $100 billion of potential unrecognized expense tied to milestones not yet considered probable, and that auditing these judgments required extensive effort, specialized valuation expertise, and heightened scrutiny of management’s probability assessments and underlying controls.

We wrote about the uncertainty involved in estimating the fair value of Tesla’s stock awards.

Our takeaway: CAMs do matter. However, we think that CAMs disclosure would be more informative to investors if auditors expanded their CAM discussion beyond the information already reported by companies in footnotes, and beyond a recitation of the applicable accounting standard.

Who Else is Likely to be Affected?

Given the enormous interest in Meta’s auditor commentary on management’s judgment regarding its data center accounting assumptions, it is reasonable to ask whether auditors of other large technology companies might follow EY’s lead and disclose Critical Audit Matters addressing similarly complex data center construction financing arrangements. One potential case that provides a relevant example is Oracle. That’s because as part of its AI infrastructure expansion, Oracle has disclosed hundreds of billions of dollars in long-term sale-leaseback commitments for data centers and cloud capacity arrangements that are not yet recognized on its balance sheet, as reported by Bloomberg.

Because Meta and Oracle are both audited by Ernst & Young, and because off-balance-sheet financing introduces similar questions about control, economic exposure, and judgment, Oracle’s reporting could arguably give rise to a CAM disclosure that resembles Meta’s. However, we won’t see if our hunch is true for a while. Oracle’s fiscal year end is May 31st, so its financial statements and auditor opinion will be filed in June 2026 sometime.

© Francine McKenna, The Digging Company LLC, 2026

Finally, the balance of equities and public interest favor a stay. The Government does not cite any reason termination must occur post haste.

Secretary Noem complains of strains unlawful immigrants place on our immigration-enforcement system. Her answer? Turn 352,959 lawful immigrants into unlawful immigrants overnight. She complains of strains to our economy. Her answer? Turn employed lawful immigrants who contribute billions in taxes into the legally unemployable. She complains of strains to our healthcare system. Her answer? Turn the insured into the uninsured.

This approach is many things—in the public interest is not one of them. Judge Ana C. Reyes, UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA, FRITZ EMMANUEL LESLY MIOT, et al., Plaintiffs, v. DONALD J. TRUMP, et al., Defendants.

Let’s dig into the Big 4 firms’ pressure on regulators and law enforcement to relax imposition of individual professional accountability and how SEC Chair Atkins’ choices for the PCAOB deliver on that wish.

But first some breaking newsmakers that I told you would be trouble.

In 2014, I wrote for Medium.com:

Bezos’ recent individual purchase of the assets, not the shares, of the Washington Post allows him to use its prolonged losses to offset his own income — if he plays an active role in its management. Bezos was widely quoted saying he wanted to start Amazon on an American Indian reservation to avoid taxes. Amazon fought hard to avoid collecting sales taxes from its online customers until a late 2013 Supreme Court rejection of its appeal of a New York ruling on the subject forced a capitulation. In 2010 Bezos personally donated $100,000 to an anti-income tax increase initiative in his home state of Washington that succeeded.

Amazon employs two of the largest accounting firms in the world to meet its goal — maximize revenue but minimize taxes. EY has been Amazon’s independent auditor since its 1997 IPO and prior, preparing the audited opinions for the company’s IPO filing with the SEC. EY is the third-largest accounting firm ­globally, behind PricewaterhouseCoopers and Deloitte, but leads in market share for auditing technology and social media/social gaming companies. EY’s Strategic Growth Markets consulting unit helps companies develop financial systems, controls and accounting policies before they go public. EY helps companies understand tedious accounting rules to ensure legal recognition of complex revenue streams and gives its opinion as an independent auditor to the same companies.

And, so, I commented last week on BlueSky to retired NYU journalism professor Jay Rosen, author of PressThink, when he made what he knew was a futile suggestion that journalists should inflict a “[p]ressure campaign on Bezos to create an endowment with his wealth, sell the Post to a nonprofit board, and step away completely. Do one great thing and leave”.

In other news closer to our topic for today:

Four days ago legal newsletter author Chris Geidner wrote:

Much more has been written about Brad Karp’s interactions with Jeffrey Epstein (New York Times gift link):

Mr. Karp was in the news last year after Paul Weiss cut a deal with President Trump to head off a potentially crippling executive order. The firm’s settlement was criticized in the legal community and was seen as empowering Mr. Trump to go after other big law firms over their legal work for some of his political opponents.

The emails released on Friday revealed that Mr. Karp had attended two dinners at Mr. Epstein’s mansion in New York. At one of the dinners, in 2015, Mr. Karp met Mr. Allen, the movie director. After the dinner, Mr. Karp sent Mr. Epstein an email in which he thanked him for “an evening I’ll never forget.”

Later, Mr. Karp emailed Mr. Epstein asking him if could help his son get work on one of Mr. Allen’s movies.

In a statement, Paul Weiss said, “Mr. Karp attended two group dinners in New York City and had a small number of social interactions by email, all of which he regrets.”

The emails released by the government also show that Mr. Karp and Mr. Epstein discussed how to deal with a former mistress of Mr. Black’s and her demands for money.

I mean, what? Everyone wants to get their son a job with Woody Allan. I mean you’d do anything for that, right?

I wrote about Brad Karp back on Feb. 7, 2025, after he moderated a panel at the inaugural New York edition of Bruce Carton’s Securities Enforcement Forums.

What’s the end game? In what was, in my opinion, the most audacious statement made by anyone on the panel — really the most incredible utterance all day — Brad Karp explains how the revolving door makes all negotiation between prosecutors and defendants possible:

Brad Karp: So the stress involved in negotiating with all of these different regulators with different priorities and different agendas is really, really complicated.

Thank God that a lot of the prosecutors and regulatory lawyers want to go into private practice and don’t want to completely emasculate you because they’re gonna want a job at some point in the future, as, as our panel is, is proof of <laugh>. Which may be the only saving grace that we have in this miserable dynamic.

Corruption is not new. It is built into the system. They are laughing at you.

This year’s New York edition of the Securities Enforcement Forum is Thursday. I will be watching, and reporting, from home. I do not think Brad Karp is moderating any panels.

Update late on February 4: (Bloomberg, gift link.)

Karp Steps Down as Paul Weiss Chairman After Epstein Emails

By Meghan Tribe, Tatyana Monnay, Meghan Tribe, and Tatyana Monnay

February 4, 2026 at 8:34 PM EST Updated on February 4, 2026 at 9:55 PM EST

Brad Karp is stepping down from his leadership role at Paul Weiss after a trove of emails released by the Justice Department detailed the lawyer’s close connections to disgraced financier Jeffrey Epstein…

The decision marks a dramatic fall from grace for Karp. It comes less than a year after he landed a controversial deal with President Donald Trump, in which Paul Weiss agreed to provide $40 million in free legal services on shared causes in exchange for Trump rescinding an executive order against the firm.

Karp is longtime outside counsel to Citigroup—ushering it through the WorldCom and Enron collapses—and the National Football League, which he steered in long-running concussion-related litigation. His client list has included JPMorgan Chase, Morgan Stanley, Deloitte, ING, and Bear Stearns.

Karp also is an active fundraiser for the Democratic Party, who backed Kamala Harris in her White House bid and raised money for Andrew Cuomo’s run for New York City mayor.

The new batch of documents released Jan. 30 showed that Karp helped Epstein protect his plea deal on sex trafficking charges against legal attacks in the months before Epstein died in jail.

The documents also showed Karp exchanging emails on a variety of other subjects, ranging from dinner plans to helping New England Patriots owner Robert Kraft find local counsel after his arrest. He also seemed to act as a sounding board for Epstein and a go-between for certain communications with former Apollo CEO Leon Black.

And now to today’s commentary.

SEC Chair Paul Atkins promised in his statement on the announcement of new PCAOB members in the late afternoon of January 30, “that this new Board will usher in a new day at the PCAOB—one of sensible, efficient oversight of auditors.”

As I wrote on January 31:

But the fact remains: Appointing a retired Big 4 audit partner — a 40+ year veteran of EY — as Chair of the audit regulator is a slap in the face to everyone who has ever suffered through an accounting fraud, especially one EY missed, and everyone who worked so hard to establish and implement the PCAOB component of the 2002 Sarbanes-Oxley Act.

In her report on the appointments, Bloomberg’s Amanda Iacone tied the PCAOB appointments to the Trump Administration and SEC Chair Paul Atkins’ new lighter touch approach for the audit regulator.

The appointments tether the little-known financial regulator to the White House, which has rarely intervened in appointments to the non-profit PCAOB...

Pendulum Swing
The leadership shakeup is the third remake of the board in less than a decade. Each overhaul has led to strategy swings that have frustrated investors and auditors alike while stalling efforts to update US audit standards.

Congress created the PCAOB in 2002 to restore investor trust in corporate reporting after a series of accounting scandals toppled Enron Corp. and WorldCom Inc.—two of the largest bankruptcies in US history. As the auditor watchdog, the board has the power to investigate failures, set audit standards, and conduct routine reviews of firms’ work.

Republicans attempted to dismantle the audit board last year as part of a broader effort to downsize the federal bureaucracy but were stymied by Senate rules.

The SEC in July sought candidates to fill all five board seats after former Chair Erica Williams was forced out. Atkins warned applicants that the commission would scrutinize board members’ pay as part of the PCAOB’s annual budget approval.

That budget, approved earlier this month, slashed board compensation by roughly half to nearly $350,000 for the chair and $230,000 for the other members. The cuts exacerbate a wage gap with the Financial Standards Accounting Board, a separate body whose members earn more than $1 million each.

Fresh Priorities
The SEC has already begun to set out a new agenda for the board, calling on it to revamp its inspections process and reduce the focus on the work of front-line auditors while also relying more heavily on international audit standards.

The Journal of Accountancy noted the message from SEC Chair Paul Atkins regarding a reduced focus on the work of individual auditors and more of a focus on overall firm quality had previously been delivered loud and clear at the AICPA’s SEC and PCAOB Update Conference in Washington DC in December:

The plan for the PCAOB

Since the formation of the PCAOB in 2002 to oversee public company audits conducted by registered accounting firms, the SEC has held oversight of PCAOB operations.

Atkins was asked to share thoughts on the PCAOB going forward in the wake of a failed legislative effort earlier in the year that would have defunded the PCAOB and transferred its activities to the SEC.

“There, we have to get back to the first principles, basic issues, of auditing,” Atkins said. “I think we have to be very mindful of independence issues and to keep focus on improving audit quality. The PCAOB has a real need to not impose unclear standards or make things needlessly complicated, as I think a couple of the proposals in the past would have done.”

I wrote at the time about how Chair Atkins had essentially threatened the Big 4 not to defy the SEC in the interest of furthering their own commercial goals.

That’s despite Atkins being a PwC alum who has lobbied and advocated for the industry his whole professional career.

The Financial Times’ Stephen Foley wrote back in December how the SEC’s new Chief Accountant, a retired Ernst & Young partner, had explained the details of how Atkins’ mandate was to be implemented:

Accounting groups expect fewer audit inspections as part of SEC overhaul Firms argue US regulators have become too focused on finding minor infractions Stephen Foley in New York Dec 28 2025

Kurt Hohl, SEC chief accountant, told an industry conference this month that reform of the inspection process was “overdue”, since the standards governing audit firms’ quality control systems had evolved. International regulators have created detailed new rules governing how accounting firms should manage their audit businesses, which include oversight and quality control measures.

The PCAOB last year also approved new rules on how firms operating in the US should monitor audit quality, though their implementation has been delayed and could be revised.

Focusing inspections on quality control systems rather than individual audits would “shift accountability to the leadership of the firm and their systems and processes, and less on individual engagement teams”, Hohl said. “There’s a lot of stress in the environment for teams that get inspected.”

The policy shift should lead to fewer individual audits being selected for assessment in the case of most firms, McGowan said. “If audit quality is higher today than it was 20 years ago, then maybe there’s fewer individual engagements that need to be selected,” he said.

Press releases for enforcement actions are now a rare occurrence at the SEC, as noted in this footnote to law firm Paul, Weiss’ wrap-up of FY 2025 statistics.

[19] It is possible that the SEC will not announce enforcement results for FY 2025. The SEC recently stopped issuing press releases for enforcement actions. Instead, enforcement actions have generally been publicized through a litigation release that simply summarizes the complaint or settlement.

So, despite a couple of recent splashy press releases such as the one regarding ADM — of great interest because rife with accounting fraud — we continue to see the almost non-existent appetite to go after the auditors even when bad things, such as intentional accounting fraud, can be proven.

I mean, have you heard anything about any SEC or PCAOB investigation of EY, ADM auditor since 1930?

(For that matter have we seen any movement by the SEC against auditor BDO for First Brands or Grant Thornton for Tricolor, two recent spectacular bankruptcies and now criminal cases?)

CFO Dive’s Maura Webber Sadovi quotes me extensively on what we can glean from the ADM activity, but you will see how I am still hedging.

SEC showed teeth by charging accounting fraud. Disclosure and accounting fraud charges are distinct from one another, with accounting fraud carrying more weight by asserting GAAP was violated. Meanwhile, disclosure fraud is something of a lesser charge, because it asserts simply that the mistake made was a company or executives failing to alert shareholders about what happened, according to McKenna. By charging they violated Exchange Act Section 10(b) and Rule 10b-5, she said that “they make it clear that it’s not appropriate what happened,” she said.

The case’s survival into the Trump administration speaks volumes. The issue goes back to actions that occurred in 2021 and 2022, and could have been dropped by the more business-friendly Trump administration’s SEC. The fact that the SEC took the enforcement action speaks to the gravity of the case, she said. “This is something that was considered serious across both administrations,” she said.

Cooperation matters. Since Trump was re-elected, the SEC has signaled that they would value cooperation by companies under their watch. The $40 million fine is relatively modest compared to some previous enforcement penalties, she said, noting that the level could be a reward for ADM’s cooperation, which the SEC noted in its release. Cooperation “counts a lot in particular in this administration,” McKenna said. “They’re trying to send a message to other companies that even if the facts look bad, you do the right thing at the company and we’ll be easier.”

SEC veterans in white-collar defense practice have tried to brush off the slowdown in cases at the SEC, blaming the administration transition, the shutdown, and the DOGE-driven loss of staff. But the now numbers are in and they don’t lie.

Here’s another good writeup about the ADM case, although law firm Weil Gotshal does not name the company or executives in order to get around any potential conflicts in the interest of commenting on a juicy case. It also highlights how this case highlights the SEC’s stated emphasis on measuring materiality quantitatively and not qualitatively, regardless of long-standing SEC guidance called SAB 99:

◼ Focus on Quantitative Materiality. Current Commissioners have emphasized a desire for the SEC to focus on materiality from a quantitative perspective, rather than a qualitative one [fm: emphasis added]. In recent remarks, Commissioner Uyeda indicated that the SEC “should strive to adopt standards . . . focused on financial materiality.”⁵ The Order here reflects that preference, placing great emphasis on the percentages by which the Company missed its growth targets, or overstated the segment’s performance.

Nonetheless, it is safe to say that SEC enforcement in general, and in particular against audit firms and auditors, has effectively disappeared.

On December 31, the WSJ reported on diminished white collar enforcement at the Department of Justice and the follow-on effects at the SEC (gift link):

Trump Administration Upends Prosecution of White-Collar Crime Justice Department has shifted away from several areas of enforcement while Trump’s pardons have undone prominent convictions By Dave Michaels, Sadie Gurman and Aruna Viswanatha

Clemency granted to other prominent defendants, including Nikola founder Trevor Milton, Ozy Media co-founder Carlos Watson and investor Devon Archer have contributed to a feeling among prosecutors that white-collar cases are dicey work.

The president’s actions had collateral consequences for investors who lost money due to alleged frauds. Milton and Watson avoided paying tens of millions of dollars in restitution after jurors found they deceived investors.

Downstream effects at the SEC

The SEC then dropped its civil fraud lawsuits against Milton, Watson and other defendants who received clemency from Trump. Those lawsuits could have recouped funds for investors if the commission had won at trial.

The SEC’s lawyers dismissed the cases because they didn’t want to be seen as contradicting Trump’s view of justice, according to attorneys involved in the negotiations.

The commission is typically the most active white-collar enforcer in the federal government. But its ranks have been significantly depleted by attrition, and its new leadership is less interested in bringing high-dollar enforcement actions against big public companies.

The SEC under the Trump administration brought four enforcement actions in nine months against public companies, according to data from Cornerstone Research. The agency brought 52 enforcement actions against public companies during the prior three months, when it was under the Biden administration.

SEC Chairman Paul Atkins said in October that regulators should be measured in how they use their enforcement power. “If we reward the staff only for bringing enforcement actions, then we have discouraged the staff from determining not to recommend an enforcement action,” he said.

John Reed Stark, the former Chief of the SEC Office of Internet Enforcement wrote on LinkedIn on January 11:

Per two recent reports, the Enforcement Division of the U.S. Securities and Exchange Commission isn’t just pulling back -- it’s vanishing -- quietly adopting a new ethos of absence, silence and regulatory invisibility.

Meanwhile, in nearly five months since Judge Margaret Ryan became SEC Enforcement Director, Judge Ryan’s only public statement was a perfunctory three-sentence acknowledgment of a jury verdict in a case she didn’t bring. No agenda-setting speeches, no interviews, no podcasts, and no public messaging campaign laying out enforcement priorities.

In short, the most powerful securities regulator in the world has gone radio silent -- and the enforcement data explains why.

The Stats

Paul Weiss’s annual analysis of SEC enforcement reveals a dramatic collapse. In FY 2025, the SEC initiated just 4 actions against public companies under current SEC Chair Paul Atkins -- the fewest since FY 2013. Total monetary settlements plummeted 45% to $808M, the lowest since FY 2012 and less than half the $1.9B average from FY 2016–2024. The broader picture is equally grim: 313 standalone enforcement actions -- down 27% from FY2024 and 38% from FY 2023, marking the lowest level of SEC enforcement in a decade.

But here’s the crucial detail buried in the data: of the 56 enforcement actions involving public companies, 52 were initiated under former Chair Gensler. Only 4 occurred under Chair Atkins. Translation: expect FY 2026 stats to be a lot worse. The quarterly picture is even more bleak: in Q4 FY 2025, the SEC brought just two public company actions -- the lowest quarter since tracking began.

Note that the SEC’s ADM action was related to 2021-2022 activity and the investigation was initiated under former SEC Chair Gary Gensler.

John Reed Stark wrote again this week about the SEC’s inexplicable enforcement priorities, as evidenced by another old case Atkins’ SEC is pursuing. Or are they?

The SEC declared Srinivas Koneru’s case an “emergency.” The problem? By any standard of analysis, it wasn’t even close. The SEC investigated Koneru for almost 5 years. 40 document productions. Over a dozen interviews. The SEC could have filed in 2022. Or 2023. Or 2024. Or early 2025. They didn’t. Instead, the SEC waited until there was a government shutdown -- and then suddenly shouted “Emergency!”

But here’s where it gets truly absurd. When there’s a real emergency, you file for a temporary restraining order. You ask for an asset freeze. You tell the judge, “Your Honor, we need to act immediately to prevent irreparable harm.” The SEC did none of that.

The SEC’s “emergency” lawsuit? A fairly routine complaint seeking standard remedies -- permanent injunctions, disgorgement, civil penalties and an officer-and-director bar. Not a single request for immediate relief. Nothing requiring urgent court action.

Think about the priorities this reveals. Against a mammoth SEC reorg and regulatory retreat, the SEC decided this case - involving a retired executive, a now-private company, and conduct from half a decade ago where investors have apparently already been recompensed - was urgent enough to violate federal law during a government shutdown...

BTW, since filing this so-called emergency action, the SEC has filed exactly zero emergency motions.

Their sole filing? A motion for a two-week extension to respond to the complaint, citing that counsel “was out of the office at times during the holidays and New Year period” and has “an active caseload with a variety of matters.”

Read that again. They had five years to investigate. They claimed it was an emergency. And now they need more time because of. . . . vacation.

One potential alternative to federal enforcement that former SEC enforcement folks at the SEC Enforcement Forum conferences suggested back in November 2024 and again in February 2025 — there has to be something or these folks will be scrambling for work — was that states would pick up the federal slack.

I spoke to law Professor Andrew Jennings of Emory University right after the election about that.

SEC staff will take their cues from the Chair but still expect to operate independently. However, Jennings reminded me that, when they disagree strongly with leadership, SEC staff can opt out more quickly and easily than most other federal agency staff.

Here’s Jennings in another paper, “State Securities Enforcement’“ published in 2021 in Brigham Young University Law Review:

Although states share enforcement jurisdiction with the SEC and DOJ, their enforcement activity reflects their institutional advantages and constraints and thus largely does not overlap with that of federal authorities. Instead, states serve as the nation’s residual securities enforcers, policing local misconduct that federal authorities or private plaintiffs largely do not.4

And, we have seen some of that, in particular where states, and Congressional officials, attempt to bring actions related to the alleged abuses of immigration enforcement activity and lethal actions of federal agents such as ICE and CBP.

We also saw a rare state action for insider trading!

New York Sues Former C.E.O. of Covid Vaccine Maker Over Insider Trading

Attorney General Letitia James of New York filed an insider trading lawsuit on Thursday against a former biotech chief executive, accusing him of turning a $7.6 million profit on the sale of the company’s stock before the public learned that millions of doses of a Covid-19 vaccine were contaminated.

Filed in a New York State court, the lawsuit said that Robert G. Kramer, who was the chief executive of Emergent BioSolutions, knew of the systemic problems involving a vaccine it was helping AstraZeneca produce as part of the federal government’s Operation Warp Speed when he exercised his stock options.

The Securities Docket newsletter editor Bruce Carton noted how rare that is:

👉 Both the NYT and the WSJ covered the filing of this case. Neither publication mentioned the fact that a state AG bringing an insider trading case is pretty much unheard of?

I asked ChatGPT for a list of all other such cases because I could not think of a single one. It came up with one: an insider trading case settled in 2017 in which the Ohio AG sued Bill Ackman and his hedge fund Pershing Square Capital Management.

According to ChatGPT, at least, “there are no other widely reported examples — at least in the modern era — of a state attorney general independently filing an insider-trading lawsuit that became a prominent, public enforcement action.”

Is this correct?!? Please email me if you have any insight on this.

After the paywall, we’ll talk about the disappearance of federal enforcement action against audit firms and auditors.

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Washington D.C., Jan. 30, 2026 — The Securities and Exchange Commission today announced the appointment of Demetrios (Jim) Logothetis, as Chairman, and Mark Calabria, Kyle Hauptman, and Steven Laughton, as Board members, of the Public Company Accounting Oversight Board (PCAOB). George Botic will continue his service as a Board member and will remain as Acting Chairman until Mr. Logothetis is sworn in.

No women, five white men. I guess Chair Atkins has no interest in establishing a Board that looks more like the profession or encouraging women or anyone other than plain vanilla white guys that you, too, can lead the profession.

The announcement was quickly followed by reports from all the major media that cover these issues. The Financial Times’ Stephen Foley led with Atkins’ dramatic decision to select a fox to watch the henhouse. (Gift link)

Veteran EY partner appointed to lead US audit regulator Jim Logothetis oversaw Big Four firm’s relationships with big clients including Coca-Cola and Fiat Chrysler By Stephen Foley, January 30, 2025.

The Trump administration has picked a 40-year veteran of the Big Four accounting firm EY to lead regulation of the audit profession in the US. Jim Logothetis was appointed on Friday to be the next chair of the Public Company Accounting Oversight Board, which enforces audit standards and inspects accounting firms, ahead of what is expected to be significant reform of the organisation.

The Securities and Exchange Commission, which oversees the PCAOB, has cut the organisation’s budget and demanded a break from the policies of the Biden era, when the regulator imposed record fines and a number of new standards that upset audit firms.

Bloomberg’s Amanda Iacone chose a headline that emphasized that Atkins loaded the Board with Trump Administration officials. Her colleague Nicola White pointed back to the EY angle noting that former EY partners now hold the accounting/audit industry’s three most important positions with regard to accounting and audit standards, regulatory, and enforcement — FASB Chair, SEC Chief Accountant , and now PCAOB Chair.

White also asks the question about whether the Trump officials will be double dipping. I could ask the same question about Logothetis, who serves on several not-for-profit boards and also, according to the SEC’s bio, chairs the Audit Committee for Republic Bank of Chicago, a privately owned community bank — I could not find the external auditor anywhere —owned by the Halikias family. The bank’s chairman is one of his fellow National Hellenic Museum Board Trustees Aristotle Halikias. (By the way Logothetis’ LinkedIn profile is not up to date. Although the description says he retired in 2019, the experience detail still shows him working for EY and does not show his Republic Bank board role.)

SOx Section 101 (e) (3) says PCAOB board services is supposed to be a full-time job. Maybe, Chair Atkins, that’s why highly competent, seasoned senior statespersons as envisioned for these roles were being paid so much. I never had a problem with it. Has the SEC been enforcing this provision?

The WSJ’s Mark Maurer (gift link) makes the point that former Board member Christina Ho, who left the board this week following her term’s expiration last October, “voted against more potential auditing rules than anyone in the PCAOB’s two-decade history...”

Maurer also highlights where SEC Chair Atkins — talking like one of my Wharton MBA students — thinks previous PCAOB leadership has gone wrong.

The SEC has sought a shake-up at the PCAOB after many audit firms argued that the PCAOB went too far in certain rule-making efforts under the previous chair, Erica Williams, who resigned at Atkins’s request in July.

“We have to get back to first principles, basic issues, of auditing,” Atkins said at a conference in December.

Read that: The SEC is responding to complaints from the regulated entity, the audit firms, that their regulator was too hard on them. Wahhhh wahhhh.

I’ve been noting the write-ups by various reporters that speculated on whom Paul Atkins’ SEC, under the direction of the Office of Chief Accountant Kurt Hohl, would choose ever since the firing of former Chair Erica Williams and the announcement that the entire remaining Board would have to reapply for their jobs.

In the interim, Christina Ho, one of my least favorite Board members of all time — and that’s saying a lot since I wrote for MarketWatch through the first Trump Administration’s pick Bill Duhnke’s tenure — stepped down.

Now we know that maybe it was so her Chief Counsel, Steven Laughton — who I can’t see can make any claim to be interested or to have an aptitude for regulating the accounting industry given his willingness to work for one of the most disruptive board members I have ever reported on at the PCAOB — could step in. He came along with Ho from the Treasury where they both worked prior to being at the PCAOB and is the beneficiary now of the classic political “wait your turn and your payoff will come” move.

The Capitol Account newsletter had reported on January 24 that the situation was “still fluid,” but that its sources said the finalists included NYU accounting professor Eli Bartov (who was likely to be named the chair) and OMB official Mark Calabria, a former head of FHFA well-known for his small-government views.

Reuters Senior Editor Soyoung Ho had already reported the Bartov possibility on January 13 but also documented in detail why it would be a fraught, highly political choice.

I guess we should be glad that Bartov was, in the end, not selected. The situation already strongly stinks of politics. His selection for chair no less would have been perceived as another Trump administration quid pro quo favor rather than a merit appointment.

Most pundits had agreed that George Botic, who had been the acting PCAOB chair since Williams’ departure would stay on as a board member. Capitol Account’s Rob Schmidt also said that Duhnke era member Rebekah Goshorn Jurata, had recently withdrawn from consideration. I guess we should also be glad RGJ bowed out, maybe for a bigger job god-forbid somewhere else. If she had been appointed, in particular as Chair, she would have likely picked up where Duhnke — who is back on Capitol Hill working for Speaker of the House Johnson — left off when he was dismissed by Biden’s SEC Chair, Gary Gensler, after a series of scandals and whistleblower reports.

When I saw the name Demetrios “Jim” Logothetis and saw he was from EY Chicago, I knew immediately he was my old friend Peter’s brother. He seems to be a strong family man who loves his Greek heritage and his church. If he is anything like Peter, whom I worked with at Continental Bank, he’s a hard-working man of integrity.

But the fact remains: Appointing a retired Big 4 audit partner — a 40+ year veteran of EY — as Chair of the audit regulator is a slap in the face to everyone who has ever suffered through an accounting fraud, especially one EY missed, and everyone who worked so hard to establish and implement the PCAOB component of the 2002 Sarbanes-Oxley Act.

A little history (Borrowed and updated based on the earliest draft of a paper I co-authored.)

The Sarbanes-Oxley Act was enacted on a bipartisan basis by the U.S. Congress in July 2002 after the Enron bankruptcy and the collapse of Arthur Andersen “to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud.”^[1] With few exceptions, politicians praised the law as the most important financial market legislation since the initiation of federal securities regulation in the 1930s.^[2]

It imposed several serious new regulatory restrictions on the audit industry^[3] — chief among them discontinuing its ability to self-police with regard to the audits of public companies — the law itself has always and continues to be somewhat controversial. For example, Romano (2004) was pessimistic about the prospects of a law that had been “enacted in a flurry of congressional activity in the runup to the midterm congressional election campaigns…” She criticized a popular view that the Sarbanes-Oxley Act included “substantive corporate governance provisions” and “regulatory innovations” passed to address the deficiencies in corporate governance infrastructure exposed by Enron and WorldCom.[4]

Conversely, in 2006 former SEC Chief Accountant Lynn Turner refuted the notion that SOX was “hastily created by Congress without much thought” (Romanek, 2006). He pointed out that the “roots” of Sarbanes-Oxley went back to “the ’72-’73 bear market and scandals such as Penn Central, Equity Funding, National Student Marketing – as well as the corporate corrupt payments and bribes that came to light during the Watergate investigations and other such shenanigans.”^[5] According to Turner, the Act wasn’t “…exactly what one might call a ‘rush to judgment,” because it included many of the provisions of the 1978 legislation, and in some places, it was nearly word for word (Romanek, 2006).

In 2002, after the failure of Enron, 42 witnesses gave testimony during 10 days of public hearings, and the Senate passed an earlier version of the Sarbanes-Oxley Act. The House then conducted numerous hearings with many more witnesses. Once WorldCom filed bankruptcy in July 2002, shortly after Enron collapsed in December 2001, both the Senate and House acted quickly and overwhelmingly adopted the final Sarbanes-Oxley Act.

However, in part as a result of the inevitable compromises of the political legislative process, SOX contained some provisions that resulted, in my opinion, in built-in structural weaknesses which have hampered the PCAOB from becoming a strong independent regulator and ultimately, in my opinion, contributed to its scandals and the increasingly politically-tinged criticism.[6] Chief among them is the PCAOB’s oversight relationship with the SEC which, in my opinion, has hampered the PCAOB’s organizational effectiveness and the public perception of its accomplishments from time to time.^[7]

For example, a 2021 comment letter to SEC Chair Gensler by former SEC Chief Accountant Lynn Turner and 33 other individuals claims:[8]

“From the outset, however, SOX was hampered by weak implementation by an SEC that, too often, appeared to take its cues from the large accounting firms, rather than focusing on the needs of investors….” [emphasis added]

The most dramatic change for auditors brought by SOX was the dismantling of the self-regulatory structure and the establishment of the Public Company Accounting Oversight Board, or PCAOB. It was believed at the time that the auditing industry, which previously governed itself via a peer review program, could no longer be trusted to do so. There was consensus for the government to step up and regulate auditors of public companies and provide oversight of the public company audits in the United States.^[9]

And, so, here we are, back again with gusto. In his comments on the PCAOB Board announcement, SEC Chair Paul Atkins promised, “that this new Board will usher in a new day at the PCAOB—one of sensible, efficient oversight of auditors.”

Notice how he says “oversight” not regulation.

Some academics seem to think that what we need to “improve audit quality” is more auditors telling independent regulators how to regulate.

Next week I’ll dig into the Big 4 pressure to relax individual professional accountability and how these choices further that wish, a dream come true for the Big 4.

[1] One of the law’s namesakes, Senator Paul Sarbanes, said in his address to the Senate when the bill was about ready to be passed: “It is becoming increasingly clear that something has gone wrong, seriously wrong, with respect to our capital markets. We confront an increasing crisis of confidence that’s eroding the public’s trust in those markets.” https://www.congress.gov/107/crec/2002/07/08/CREC-2002-07-08-pt1-PgS6327-7.pdf

[2] President George W. Bush called it the “most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” 148 Cong. Rec. S 7356 (July 25, 2002)

[3] For many years, the development of auditing standards (GAAS) had been the responsibility of the auditing industry itself via its trade association, the American Institute of Certified Public Accountants (AICPA). The AICPA exercised this authority in several different ways over the years, often regrouping after the latest set of audit failures and calls for reform. The last updates to GAAS were led by the AICPA’s Auditing Standards Board, under the supervision of the AICPA’s SEC Practice Section’s Public Oversight Board (POB), which was funded by the AICPA. Ultimately the SEC was supposed to provide oversight.

[4] “Rather they may more accurately be characterized as recycled ideas advocated for quite some time by corporate governance entrepreneurs.” (Romanek, 2006)

[5] Congress held many hearings into corporate governance practices and into the accounting industry, in general, in the 1970’s. Congressional staff also investigated and created a Staff Report on the accounting profession. As a result legislation was introduced in 1978 to address these problems and more hearings were held. However, the proposed reforms, which included an oversight body for the accounting profession similar to the PCAOB, lost momentum after losing some key backers. Similar legislation was considered again during a debate over the 1995 tort reform legislation known as PSLRA. Again, no reform legislation was enacted at that time.

[6] See pages 20-21 of this Cunningham article for a prescient discussion. “Several major structural differences stand out. First, the PCAOB is a creature of statute, not grace. “ https://scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=1538&context=faculty_publications

[7] Turner and his co-authors call out the SEC, and in particular its Office of Chief Accountant (OCA), for its ostensible failure in the PCAOB oversight role. Turner and his fellow authors feel that OCA is too often biased towards the interests of the accounting industry and particularly the largest accounting firms, rather than investors, because historically senior OCA staff was recruited from public accounting industry.

[8] “Repairing the US Financial Reporting System,” Lynn Turner, June 2021, Harvard Law School Forum on Corporate Governance. Find the article here: https://corpgov.law.harvard.edu/2021/06/17/repairing-the-us-financial-reporting-system/

[9] Even a Republican SEC Chairman, the late Harvey Pitt, was forced to agree that the firms had lost the plot. Before Congress came to its final decision on the structure of the PCAOB, Pitt proposed an SEC led creation of an independent regulator called the Public Accountability Board. “And yet, it is uncontrovertibly clear that longstanding deficiencies in the system we employ to produce quality audits of financial statements have caused a serious threat to the efficacy of our capital markets; we’re experiencing a significant loss of investor confidence in public companies, their audited financial statements, and the accounting profession…this model — which sends a loud and clear message that the era of self-regulation of the accounting profession is over — offers a strong framework for rigorous private sector regulation. See the Public Statement by SEC Chairman: Proposed Rules to Create a Framework for a Public Accountability Board by Chairman Harvey L. Pitt. U.S. Securities and Exchange Commission, June 20, 2002. https://www.sec.gov/news/speech/spch569.htm

© Francine McKenna, The Digging Company LLC, 2026

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Deep Quarry

Using data to uncover trends in disclosure and reporting.

By Olga Usvyatsky

On January 26, 2025, CoreWeave Inc. (Ticker: CRWV) disclosed an expansion of the Company’s collaboration agreement with Nvidia (Ticker: NVDA). According to the agreement, Nvidia is investing $2 billion in CoreWeave Class A common stock at $87.20 per share as part of a broader agreement to accelerate the buildout of more than 5 gigawatts of AI data-center capacity by 2030. The expanded collaboration deepens CoreWeave’s adoption of Nvidia’s computing platforms across multiple generations and includes closer alignment on infrastructure, software, and AI-factory development.

CoreWeave shares jumped sharply in early trading on Monday, rising by almost 17% to $108.65 intraday. Gains moderated later in the session, but the stock price closed meaningfully higher on the day, adding 5.7% compared to the previous close. (CoreWeave went public on March 28, 2025.)

Nvidia’s $2 billion investment provides CoreWeave with equity financing amid concerns about CoreWeave’s model of taking on high-risk debt to purchase Nvidia’s chips.

As Morningstar framed it:

Nvidia’s investment comes amid investor jitters about CoreWeave’s model of buying Nvidia chips using high-interest debt, then renting access to other AI companies, according to The Wall Street Journal. Concerns about CoreWeave’s financing model and a significant delay in one of its data-center projects caused the stock to plunge since October.

The rapid development and widespread interest in AI tools has led to an unprecedented build-out of data centers that can accommodate all the new computing. That build-out of AI infrastructure requires massive upfront capital to finance. The Financial Times reported in October 2025 that AI-related financing deals reached $200 billion in 2025, with no slowdown on the horizon.

For large data center operators such as Amazon and Microsoft at least part of the data center growth was likely funded by operating cash flow. Amazon did issue a $15 billion 40-year bond in November, 2025 — the largest debt offering by Amazon since 2021, according to MarketWatch. However, Amazon’s CAPEX spending is estimated to be $125 billion in 2025, according to CNBC, or about eight times the bond offering. Amazon’s total long term debt was about $50.7 billion, based on the 10-Q filing.

Yet, for some of the newer players, which offer specialized, on-demand AI compute, AI-related growth has been funded largely through debt rather than free cash flow. CoreWeave has become the most prominent example of borrow-to-build model, raising billions through credit facilities secured by GPU hardware and customer contracts.

As of September 30, 2025, CoreWeave had a total of $14.21 billion in debt. High effective interest rates, which exceed 10% on some of the loans, likely reflect a high risk of default, one that may be for now mitigated by the new Nvidia equity infusion. (A list of CoreWeave’s debt issues is available in Appendix A at the end of this article.)

On December 11, 2025, CoreWeave issued a 1.75% $2.7 billion convertible note, signaling a potential shift in financing strategy from GPU-backed loans to potentially dilutive hybrid instruments that combine elements of both debt and equity. (We talk about it in more detail later.)

CoreWeave’s debt ratio — defined as total debt to total assets and reflecting the percentage of assets funded by debt — was standing on 0.43 as of September 30, 2025. For comparison, Amazon’s, Meta’s, and Alphabet’s debt ratios were 0.07, 0.09, and 0.04, respectively, according to data by Calcbench. Oracle is an established player that, nonetheless, is notably as aggressive these days as the newcomers in a number of arenas under CEO Larry Ellison. Oracle’s debt ratio is even higher than CoreWeave’s at 0.51.

Using GPUs as a Collateral

Reporters at Bloomberg, The Financial Times, and Reuters have all raised concerns that the growing use of GPUs as loan collateral embeds aggressive assumptions about hardware depreciation, utilization, and refinancing conditions, leaving AI data-center financing structures vulnerable if GPU values decline or demand softens. Arguably, using GPUs — the essential AI compute chip — as collateral to back loans and using the debt proceeds to buy more GPUs effectively creates a perpetual leverage loop.

The rest of this extensive analysis is behind the paywall.

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Regular people, decent people, faced with intolerable things. That’s who all of the people that you see on the breathless cable news coverage of these protests are. People at the donut store on Saturday morning watch a man get thrown down and shot. People lying in bed on Saturday morning have to throw open their doors to passersby choking on tear gas. People planning to go out to breakfast end up spending all day standing on icy sidewalks hollering at cops in riot helmets. It’s not as if they signed up for this. This is where they live. The federal government has invaded their city with heavily armed, masked secret police.

It would be weird if everyone just carried on going to brunch. Hamilton Nolan, How Things Work.

How Things Work

Intolerable Things

I thought that Saturday would be a day off. I got basketball tickets. Friday had been Minneapolis’s general strike, which the city’s activists had been frantically planning for more than a week. Tens of thousands of people had marched in the freezing streets. Everyone could use some rest…

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3 months ago · 220 likes · 51 comments · Hamilton Nolan

Back on January 9, my former WSJ colleagues Dave Michaels and Nicole Friedman published a great scoop. (Gift link.)

Real-Estate Brokerages Avoided Merger Investigation After Justice Department Rift Compass hired a Trump-aligned lawyer and won antitrust clearance without detailed probe that some enforcers wanted

By Dave Michaels and Nicole Friedman

Justice Department antitrust enforcers wanted to investigate the $1.6 billion merger of the country’s two biggest real-estate brokerages but were overruled by senior officials who thought the deal should be greenlighted, according to people familiar with the matter.

Compass and Anywhere Real Estate closed their deal on Friday, one of the largest ever combinations in the residential brokerage industry. That is far earlier than the time frame of at least nine months that the companies predicted when they announced the merger in September. The outcome shows how companies have found ways during the Trump administration to quickly consummate mergers that would typically face close antitrust scrutiny.

The head of the Justice Department’s antitrust division, Gail Slater, wanted to launch an extended review of the merger to weigh whether it was anticompetitive, the people familiar with the matter said. Compass and its lawyers appealed above her, to the office of Deputy Attorney General Todd Blanche, arguing that any worries could be addressed without an investigation. Blanche’s office agreed, the people said.

Compass had brought on Trump-aligned lawyer Mike Davis, known for his efforts to get conservative judges seated on the federal bench, to help make their pitch. Davis has become a sought-after adviser to companies with deals facing government review. He helped Compass make its case to Blanche’s office.

Davis, Compass and Anywhere declined to comment. Anywhere owns brands including Century 21, Coldwell Banker and Sotheby’s International Realty.

(Full disclosure: My sister-in-law runs one of the most successful luxury brands in Coldwell Banker and another sister-in-law and niece work with her.)

It’s the way things work, now. If you want to do a merger, you need a White House strategy. Or at least a strategy that uses direct appeal to the highest authorities to grease the wheels.

PwC has signed the audits for Compass since at least 2014. PwC also signs for Anywhere since at least 2009, according to SEC filings compiled by research firm Audit Analytics.

I’ve written about the HP-Juniper merger that followed the same political influence playbook, and also had the same auditor on both sides: EY.

I wrote about the initial DOJ lawsuit to block the HP-Juniper merger. That was scuttled based on some major political dirty tricks.

I’ve also been quoted more than once about how PwC allowed Compass to go on for a long time after its IPO with really weak internal controls, including in an area it’s supposed to have a competitive advantage: technology controls.

PwC’s Florham Park, NJ office has not cited any material weaknesses in internal controls at Anywhere since its IPO and its last bill for audit and tax services was $5.6 million, according to SEC filing information compiled by research service Audit Analytics.

PwC’s New York office signs Compass’ audit and charged about $3.5 million last year, a smaller audit if you based the assessment on fees alone, despite the previous internal controls weakness and remediation efforts.

You can expect a big bump this year for the due diligence and merger GAAP assistance PwC will provide both companies individually — services I do not think an auditor should be allowed to provide — and later to the combined entity. Then fees will taper off to something like 1.5X rather than a double bubble after everything settles in.

In May 2025, the Boston Globe’s Jim Morrison detailed how Compass promoted “private listings” to its clients, which increases the likelihood the brokerage and often one agent will get a “double bubble”, both the buyer’s and seller’s portion of the commission. That’s the holy grail in real estate.

“Real estate attorney Robert L. Bell, of Bell and Izzi in Melrose, said coaching sellers to keep their listings private — even for a short period — is at least an insult and possibly a violation of an agent’s fiduciary duty to their clients. ‘Agents have a responsibility to act in the interest of their customers, and the whole profession is rife with compromises of that principle,” he said.’[Compass executives] know they can get both sides of more deals if they start doing more private listings. That’s what pocket listings, dark listings, private exclusives, and ‘coming soon’ is all about: Getting both sides of the deal.’..

In a white paper addressing the issue of private listings, Douglas R. Miller, the executive director of Consumer Advocates for American Real Estate, said:

‘Zillow’s stance reflects a growing awareness that the traditional brokerage model too often prioritizes internal deal flow over client outcomes. When inventory is withheld for the benefit of internal agents or affiliate relationships, the consumer loses.’”

It seems Compass has learned about how to play both sides of a deal from the masters, the global public accounting firms.

As one of my brothers told me: “The incentive here is not to do your job but, instead, to get the job done.”

Regulatory scrutiny of Big 4, at least in Europe

By the way, one country is finally looking into to the Big 4’s own competition issues.

PARIS, Jan 14 (Reuters) - France’s competition watchdog has raided auditing firms as part of an anti-trust investigation, it said on Wednesday, while La Lettre financial publication said the “Big Four” firms Deloitte, KPMG, EY and PWC were among those targeted.

Autorite de la Concurrence, as the watchdog is known, on Tuesday carried out “unannounced inspections to visit and seize documents” at several companies offering services of auditing and financial reporting certification, it said in a statement.

It’s about time.

My discussions of academia’s revolving door with regulators and some follow-up on Berkshire Hathaway’s sales of its Kraft Heinz stake follow behind the paywall.

My time is split mostly between teaching and writing and that’s how I pay my rent and buy dog food for my precious Bubbles. If you are not already a paid subscriber, now’s the time. If you are a student, get in touch for student discounts. If you are my student, you get one comped. If you are an academic who wants to use my work with your students, please contact me for more info about department and class packages.

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New Year Poem by Philip Larkin

I arrived back in Philadelphia earlier this week, after nearly three weeks in Chicago with family. We had an engagement party for my oldest niece/goddaughter who works for the Seattle Kraken doing player analytics, we had Christmas, we had New Year’s, and we had my mom’s 95th birthday party.

That’s a lot of family stuff!

Bubbles and I are glad to be back in the City of Brotherly Love and it’s slightly warmer here in Philly.

I start teaching Acct 204, Fundamentals of Accounting, for undergraduates at Montclair State University on Jan. 22. This is a survey course intended to provide a foundation for non-accounting business majors. I am converting some of the homeworks and discussion cases from my Wharton MBAs accounting class, the one I taught in 2022-2023 for those who did not test out of the accounting requirement. I think the educational and professional maturity may be slightly less for the undergrads but they are all starting at the same place from an accounting knowledge perspective - debits and credits and T-accounts.

We shall see!

Next up for Berkshire Hathaway

Warren Buffett has made a lot of acquisitions over the years. Some you hear a lot about, positive and negative. Some you never hear about by name or ever again. Berkshire Hathaway is, therefore, a conglomerate. In September 2011, I wrote on my legacy blog retheauditors.com:

The next time something goes terribly wrong at a Berkshire Hathaway company, there’s a strong possibility no one will hear about it. Warren Buffett and Charlie Munger won’t be held directly responsible, either. That’s the beauty of Buffett’s version of a conglomerate corporate structure, decentralized to such an obscene level such that its minimalism is brandished as a feature not a bug.

As our first owner-related principle tells you, Charlie and I are the managing partners of Berkshire. But we subcontract all of the heavy lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication: Though Berkshire has about 260,000 employees, only 21 of these are at headquarters. (June 1996, Berkshire’s Chairman, Warren E. Buffett, issued a booklet entitled “An Owner’s Manual*” to Berkshire’s Class A and Class B shareholders.)

Buffett says he judges the investments he makes ruthlessly, but allows his operating companies to run on autopilot. It’s a wonder such financial, legal, and regulatory issues as the Salomon Brothers slip-up, Berkshire’s non-prosecution agreement with the Department of Justice over its dealings with AIG from 2000-2004, the James River lawsuit, and David Sokol’s usurpation ever saw the light of day. It’s a testament to a few diligent folks who pushed those rocks, like Sisyphus, up transparency hill.

None of the issues mentioned above has tarnished Buffett’s halo for long, but the list of missteps grows longer. The Berkshire chairman claims plausible deniability. That’s made possible by the insatiable appetite of investors and the business press for gurus and sages rather than sirens.

It’s also possible for Buffett to escape scrutiny or sustained criticism because it’s damn near impossible to get consistent details about acquisitions — for example the amount of goodwill — over the years or details about the long-term performance of individual companies, except for what Buffett wants to tell you.

As I wrote in September 2011:

Before leading the Treadway Commission, before the savings and loan scandals of the 1980’s, before Enron and the rest of the scandals of the 90’s such as WorldCom, Tyco, Adelphia, HealthSouth, and many others, James Treadway, SEC Commissioner, made a speech about financial fraud. His remarks specifically mentioned corporate structure, in particular a decentralized organizational structure, as a common characteristic of companies involved in financial fraud.

An excerpt of remarks by James Treadway to the Third Annual Southern Securities Institute, Miami Beach, Florida, April 8, 1983:

“I refer to a decentralized corporate structure, with autonomous divisional management. Such a structure is intended to encourage responsibility, productivity, and therefore profits—all entirely laudable objectives. But the unfortunate corollary has been a lack of accountability.

The situation has been exacerbated when central headquarters has unilaterally set profit goals for a division or, without expressly stating goals, applied steady pressure for increased profits. Either way, the pressure has created an atmosphere in which falsification of books and records at middle and lower levels became possible, even predictable. This atmosphere has caused middle and lower level management and entire divisions to adopt the attitude that the outright falsification of book and records on a regular, ongoing, pervasive basis is an entirely appropriate way to achieve unrealistic profit objectives, as long as the falsifications get by the independent auditors, who are viewed as fair game to be deceived.”

Interjection here: Deloitte has been Berkshire Hathaway’s external auditor, operating out of the Omaha office, since 1985. Deloitte has never cited a material weakness in internal controls over financial reporting for Berkshire Hathaway since the establishment of the 404 opinion as a result of the Sarbanes Oxley Act of 2002.

Treadway goes on to describe a company that’s almost an exact replica of Berkshire Hathaway. What’s most troubling is that nearly thirty years later there’s no excuse – lack of technology, real time communications, or specific regulatory requirements – for these conditions to still exist in a company of the size and systemic importance of Berkshire Hathaway. The internal control and governance weaknesses remain by design, not by default...

The most frequent rebuttal to any attempt to burst Buffett’s bubble of infallibility is that “proof is in the performance”. But, as Aaron Task at Yahoo’s Daily Ticker wrote in 2011, all that glitters is not gold:

“…investors who’ve followed Buffett into investments like Goldman Sachs and GE got burned, assuming they adhered to Buffett’s dictum about “forever” being the best holding period. The rest of us didn’t get the big dividends Buffett earned and both stocks are currently trading below the levels when Buffett made his “confidence-boosting” investments in 2008, Goldman by 12% and GE by 37%.

Goldman Sachs and GE share price performance for extended period. Via Yahoo.com

On December 30, Fortune’s Adam Seessel did some admirable heavy lifting in his, “Warren Buffett’s blind spot: Did Big Tech and the digital economy leave him behind?” It’s 4700 words and a few great charts that tell a story of two Berkshire Hathaways.

As we pause to honor the master’s legacy, however, it’s clear that Buffett’s oeuvre is in fact divided into two distinct periods. The first lasted from shortly after he graduated from Columbia Business School in 1951 as Ben Graham’s star pupil to the end of the dot.com bust. If you had invested in Buffett’s partnership in the early days and then rolled your money into Berkshire Hathaway when that old textile company became his investing vehicle, over the next fifty years you would have nearly 500 times more money than if you’d invested in the S&P 500.

You don’t get a sense of how awesome, in the original sense of the word, that figure is until you translate the difference into actual dollars. A million dollars invested in the S&P from 1957 through 2007 would have been worth $166 million—but a million invested with Buffett would have been worth almost $81 billion. Fast forward another 18 years, and your $1 million with Buffett is now worth almost $428 billion.

This is where the legend of Buffett’s genius rightly springs. What is less well known, however, and even less discussed, is that these first five decades account for more than 100% of Buffett’s career outperformance. While he beat the S&P by a factor of almost 500 in his first fifty years, he has underperformed it in the eighteen years since. As the chart below shows, a million dollars invested in the S&P from the end of 2007 through mid-December 2025 would today be worth $6.6 million, almost 25% more than the $5.3 million you would have earned in Berkshire’s stock.

I encourage you to read the whole thing and savor it. This one article is worth a whole year’s subscription to Fortune, if only to encourage more of this example of classic, virtuoso magazine writing.

Buffett also has an undeserved reputation as a bargain hunter. I have written about that a lot.

I wrote in August 2022:

When a company acquires another, the balance of the difference between the purchase price and the fair market value of net assets is recorded as goodwill. I think it’s helpful for students to see extreme cases to see how overpayment happens, how acquisitions go very wrong, and to see numbers significant enough to provide an example of how numbers can vary based on judgments and estimates of fair value. It’s also helpful to look at extreme examples to see how numbers may be massaged or manipulated based on subsequent knowledge. I immediately thought of an example from Valeant to show how all this happens.

I could have also chosen an example from Berkshire Hathaway. There are plenty of them.

The challenge when choosing examples from Berkshire Hathaway is that you have to choose a really big one like Kraft Heinz, or Precision Castparts, to have enough publicly available numbers to work with. Typically the information disclosed by Berkshire Hathaway on the progress and success or failure of its acquisitions is minimal, inconsistent, or non-existent. I complained about that once here, the SEC noticed, and Berkshire Hathaway got a comment letter.

But we likely won’t see all the cockroaches in Buffett’s conglomerate portfolio until he’s no longer in charge.

The Financial Times Opinion

Buffett’s Berkshire Hathaway needs to be broken up

Splitting the conglomerate would enable more scrutiny and allay some investors’ concerns Francine McKenna April 27, 2022

Well, we are at that moment today but may have to wait for the appearance of cockroaches until Abel can make more significant moves, perhaps when Buffett has finally left the stage for good.

As a result of these changes, finally happening when Buffett reached 95 years old like my mom, all kinds of folks began making predictions about what’s next. The new CEO Greg Abel is making moves.

Puck’s Bill Cohan weighed in on January 4th with his recommendations for what Greg Abel should do with approximately “$358 billion in dry powder”. As a former investment banker, Cohan — unlike me and my “break-it-up” recommendations — provided some actionable ideas for acquisitions.

What are the primary screening criteria, according to Cohan?

First, of course, any acquisition ought to be big: Berkshire Hathaway, after all, is now a $1 trillion market cap company. Buying a small company just won’t cut it, unless it’s an add-on to an existing Berkshire business, and maybe not even then.

It also has to be an iconic company, one that has stood the test of time and the vicissitudes of various economic cycles. It should have a highly defensible position in the marketplace—a “moat,” so to speak—that would be extremely difficult for competitors to penetrate.

Finally, it also has to have a first-rate management team: Berkshire is really just a holding company for equity positions in other companies that continue to be run by their existing leadership.

Bill, I luv ya, but…

Let me just start by saying that these three criteria perpetuate everything that is wrong with Berkshire Hathaway. Buffett has acquired and is running with minimal transparency several listed companies that would be in the Fortune 500 if they returned to public markets on a solo basis. You can’t tell me their performance is optimized by their use as cash cows for the hedge fund he and his sidekicks Todd Combs and Ted Wechsler run. Combs sees the writing on the wall or, in my dreams, mine in FT and flew the coop for JP Morgan. Buying more big companies just creates an even bigger, unmanageable conglomerate, one that everyone including Buffett has admitted has underperformed the S&P 500 in the last 18 years.

Buying companies with moats may sound clever and all Wharton MBAish, but it’s also the philosophy of those pilloried and prosecuted for anti-competitive monopolistic business practices that raise prices and limit access to goods and services. You’re aligned with Peter Thiel, for gosh sakes!

What are Cohan’s acquisition ideas?

First up, Greg should buy Bloomberg L.P., which is probably valued around $125 billion these days. Mike Bloomberg, the controlling shareholder with 88 percent ownership and around a 91 percent voting stake, could run the company for another decade or more—his mother lived to be 102 years old. But he still needs to think about succession, as I wrote in November. As best as I can tell, Mike last commented on his plans for the future of Bloomberg L.P. at a climate summit in September 2023, where he revealed that his Bloomberg Philanthropies would inherit his stake in the company. But, he added, “because of tax laws,” the foundation will “have to get rid of it” within five years.

And what better buyer could there be than Berkshire Hathaway? The cash is there, even if it takes $150 billion or more to buy the whole thing.

Yikes, Bill, read the room. Billionaire ownership of major media is bad enough — Jeff Bezos has still not commented on the FBI raid of his WaPo journalist’s home and confiscation of her laptop and files. But ownership of a strategically important and well-run/regarded media property by a behemoth conglomerate led by a former Canadian PwC accountant who specializes in the energy business? That’s a recipe for 3G Capital style slash and burn cost cutting to achieve utility-type efficiency.

Ugh.

Okay, maybe that one won’t work for any number of reasons—maybe Mike isn’t ready to sell, or maybe Bloomberg L.P. has to sit with Bloomberg Philanthropies for some number of years for tax reasons.

So let’s move on to something that could get done right now: Goldman Sachs. That’s right, for a mere $300 billion or so, Goldman Sachs can be yours, Greg. (It has a market cap of $270 billion, and I’m applying a premium.) The premium would normally be more, and maybe it will take more to get David Solomon and his board to sell to Berkshire—the folks at Goldman know something about selling companies—but the Goldman stock is up 55 percent in the past year, so it’s already had quite the run.

Would David sell Goldman Sachs? I have no idea, but Berkshire bestows a certain prestige on a company.

Double yikes! Buffett consistently overpays. That certainly would not do anything for Berkshire shareholders but it might make Goldman’s shareholders very happy, especially CEO David Solomon, in particular. Cohan has been getting too comfortable with David Zaslav level paydays no matter what the outcome or who buys the company.

Certainly we do not need a systemically important financial system gatekeeper firm audited by PwC since years before its IPO to end up owned by a behemoth conglomerate led by a former Canadian PwC accountant who specializes in the energy business! It’s bad enough Berkshire has cornered the property, casualty, and every other insurance business. No one needs another Travelers-Citigroup merger a la Sandy Weil.

Finally, the last idea:

Berkshire also had a positive experience investing $3 billion in GE, just weeks after it invested $5 billion in Goldman. By the time Buffett finally exited the GE investment in 2017, he had made a profit of $1.5 billion, a 50 percent gain. Around the same time, he also invested in Synchrony Financial, a provider of private-label credit cards, that had been spun out of GE. He held a stake in Synchrony for about four years, generating a profit of around $200 million on his original $500 million or so investment.

I mention all this because I think a third opportunity for Abel would be buying the remains of GE in the wake of the spinoffs of its healthcare and power businesses. GE, of course, is no longer a conglomerate, as I documented in Power Failure, my 2022 book chronicling its rise and fall. What’s left of the original GE is known as GE Aerospace, the world’s largest manufacturer and servicer of jet engines, found in three out of every four commercial flights globally. The moat around GE Aerospace is quite large and nearly impenetrable. In other words, another perfect potential Berkshire Hathaway acquisition candidate.

The problem is that GE Aerospace now has a market cap of $333 billion, so it would use up every bit—and more, probably—of Berkshire’s cash hoard if Greg decided to buy it. It would be, by far, the largest acquisition in history, and by far Berkshire’s largest acquisition. And unlike Goldman, which has a price-to-earnings ratio of around 18, GE Aerospace has become quite pricey.

I think Bill needs no help from me to shoot down his own argument for GE here. He makes multiple great points against a GE Aerospace deal. But the biggest argument against it for me is that GE finally broke up because it was a recidivist perpetrator of bribery, corruption, accounting and securities fraud, and aggressive management tactics for years. It’s a failed conglomerate. The Jack Welch culture still lives, as evidenced by its most recent SEC enforcement action.

I say: Don’t borrow trouble.

Greg Abel’s salary raise

About a week ago old friend Michelle Leder, who produces the Footnoted.com newsletter, noted on LinkedIn that Greg Abel, the new Berkshire Hathaway CEO, got a big salary raise. Here’s the 8-K/A filed on January 6.

Michelle and many other news outlets made the comparison between Abel’s $25 million salary and Buffett’s perpetually modest $100,000 salary. I noted that it was “private equity” level money, not to criticize the size as much as to make a comparison to my prediction that Abel will preside over an eventual break-up, spinoff, selloff of Berkshire rather than a quiet humble maintenance of the platform as Buffett did.

It’s not really as big of a deal as it seems, since Abel has been getting paid quite a bit more than Buffett for a while.

His compensation was set by Buffett during that period, and included a $21 million salary in 2024, a $20 million salary in 2023, and a $16 million salary plus a $3 million bonus in 2022.

Buffett awarded Vice Chairman Ajit Jain, who oversees Berkshire’s insurance businesses, the same amounts from 2022 to 2024. Abel’s and Jain’s compensation for 2025 has not been disclosed.

My initial comment led to quite a few views and a spirited, fun discussion with the PCAOB’s Dr. Jonathan Fluharty-Jaidee, Ph.D., a Senior Manager and Financial Economist specializing in Economic Policy and Data Analysis at the audit regulator.

FRC now investigating EY’s Shell slip-up

Here’s what the FT wrote on December 15:

EY investigated by UK watchdog over Shell audit Financial Reporting Council to examine firm’s adherence to independence rules in 2024 audit Ellesheva Kissin and Malcolm Moore in London Published DEC 15 2025 Updated DEC 15 2025, 04:10 43

The UK accounting regulator has launched an investigation into EY’s audit of Shell’s accounts for last year, the third time it has targeted the Big Four firm this year for potentially unauthorised auditors being involved in signing off accounts. The Financial Reporting Council’s decision to open a probe comes after Shell said in July that EY had breached independence rules in the US and UK that set strict periods for how long a partner at an accounting firm can lead an audit.

And then on December 24 the FT’s Kissin and Stephen Foley provided an interesting update:

Top Shell auditor leaves EY role as regulators probe independence breaches Exit comes after oil major said in July that lead partner had exceeded period allowed under rotation rules Ellesheva Kissin and Stephen Foley Published DEC 24 2025

One of EY’s top accountants left the partnership this month just six days before UK regulators announced an investigation into the Big Four firm’s audits of Shell, which he had led for four years.

Gary Donald, who became lead partner on the Shell audit in 2021, exited the EY partnership on December 9, according to a filing at the UK’s corporate registry this week.

Just last week, Dan Ramey, a consultant and past President of the Houston Chapter of the Institute of Internal Auditors, caught up to the story and tagged me for my take. I had already provided it back in July of 2025, with lots of detail about Gary Donald.

From July of 2025:

Brown-Forman and CBS

Dylan Myers at Puck reported on Jan. 14:

In recent days, set designers at CBS News have mocked up a backdrop for Evening News that transforms the studio into a dimly lit, mahogany-lined bar, complete with high-backed stools and shelves crowded with crystal decanters and unlabeled whiskey bottles. On one wall, there’s a massive sign that reads, “Whiskey Fridays with Tony Dokoupil,” the show’s new anchor. On the adjacent wall, there’s a “Sponsored By” message above the iconic Victorian-era Jack Daniel’s medallion. This week, the tacky photos of the mock-up leaked to Prem Thakker, a reporter at Zeteo, who published them on X.

On Jan. 14, Dave Infante who writes the newsletter followed up with a report:

Conservative male influencers performing masculinity with the aid of brown liquor is not news. (Indeed, Whiskey Fridays is a not-subtle rip-off of the Backstage series from right-wing outrage farm The Daily Wire, as Rolling Stone’s politics reporter Nikki McCann Ramírez and others have pointed out.)

But in images of the show’s set obtained by Thakker, the logo for Jack Daniel’s is clearly visible in a prominent “sponsored by” placement, so I contacted parent company The Brown-Forman Corporation (B-F) to find out whether it was indeed underwriting something so cringeworthy at the Trump administration’s most-captured major network. The firm’s director of corporate communications, Elizabeth Conway, told Fingers this morning in no uncertain terms that it has nothing to do with the Whiskey Fridays:

“[N]o, Jack Daniel’s is not involved in any such segment, nor do we have any awareness of the segment and any potential partnerships or sponsorships.”

It’s not unusual for media organizations to mock-up hopeful sponsor logos to showcase ad inventory for a new franchise. It is unusual for something like this to get leaked so early, but again, all the actual reporters at CBS seem viscerally disgusted by Weiss’ sycophancy-as-a-service approach to journalism, so I guess it’s not surprising it happened to Whiskey Fridays.

Funnier still, the rendering suggests that Jack Daniel’s——a mid-shelf juggernaut, sure, but hardly a “dream big” pick—was considered an aspirational sponsor for Doukopil’s new slopaganda segment. If that’s the brand Weiss was hoping to land in the best-case scenario, and B-F ain’t interested, imagine the one she’ll actually end up with.

The latest comes from a CBS News network spokesperson telling PEOPLE:

“This is not a segment for broadcast. This is not a real title. This is not a real sponsor. And this is not a real story.”

“This is simply an experimental mockup the graphics team created with placeholder text for a potential non-televised, in-person private event,” the spokesperson adds.

Despite being a big fan of the ice cold Jack and Coke, I am not much of a fan of Brown-Forman or, for that matter, of Coke’s chronic tax avoidance schemes.

I’ve written about Brown-Forman more than once in the past and, I will just say, that they were not very nice about it.

Brown-Forman ‘underlying’ numbers more spirited than actuals Jack Daniel’s maker risks SEC scrutiny for its earnings release By Francine McKenna Published: Aug. 31, 2016 at 12:09 p.m. ET

Brown-Forman Corp. , a leading U.S. spirits and wine company, put out a first-quarter earnings report on Wednesday that’s arguably a dog’s breakfast of made-up metrics and mixed-up year-over-year comparisons.

The Securities and Exchange Commission issued updated guidance to companies in May, reminding them that numbers prepared according to Generally Accepted Accounting Principles, the accounting standard, must be shown first and emphasized equally with the adjusted, or non-GAAP figures, that often make results look better.

“We stand by the transparency of our reporting and note that we have consistently reported in this way for more than a decade,” a Brown-Forman spokesman said in response to MarketWatch’s questions about the atypical earnings-release format. “In addition, we use terminology commonly understood in our industry and provide disclosure that explains what those terms mean.”

Called to Account

The company that makes Jack Daniel’s is skirting accounting rules, experts say Accounting experts said the company’s use of nonstandard metrics and failure to explain them deserves scrutiny By Francine McKenna and Ciara Linnane Published: Sept. 7, 2017 at 12:48 p.m. ET

Brown-Forman uses the term “underlying” to describe its non-GAAP metrics. The company provides numbers described as underlying net sales, underlying gross profit, underlying advertising expense, underlying SG&A and underlying operating income. The term appears 77 times in this quarter’s earnings press release.

“If their products were nothing but ‘underlying’, they’d be shipping corn instead of bourbon!”, said Jack Ciesielski, publisher of the Accounting Observer. The term GAAP does not appear in its press release until the footnotes to the tables, which are presented in smaller type than the rest.

“It’s almost as if they don’t think the SEC’s non-GAAP guidelines apply to them,” said Ciesielski. “They never use the term GAAP or non-GAAP in the body of their earnings releases.”

Last year, a Brown-Forman spokesman told MarketWatch the company has consistently reported in this way for more than a decade. “In addition,” he wrote, “we use terminology commonly understood in our industry and provide disclosure that explains what those terms mean.”

Not everyone agrees.

”I don’t like their approach to non-GAAP reporting at all,” said Edward Ketz, a professor of accounting at Penn State University. “I’ve read the release several times. They don’t define their terms well, so I still don’t know what they are talking about.”

We sent Brown-Forman a detailed list of questions and asked to speak to the company’s chief financial officer. The company provided only a brief statement for publication.

“Brown-Forman believes that its consistent approach of supplementing its GAAP results with non-GAAP ‘underlying’ results is in compliance with the SEC’s requirements, including its recent guidance. The reasons why management believes these clearly labeled non-GAAP measures are useful to investors are disclosed in each of our earnings releases as well as reconciled to the GAAP results, as required by SEC rules.”

...And that’s not all: Ketz and Cielsielski both said the company’s inventory adjustment, which revises GAAP sales, gross profit and operating income, is troubling.

“When reporting the percentage change in sales by brand, Brown-Forman discloses the net change in distributor inventories,” said Ketz. “These changes are mostly positive for fiscal-year 2017 but negative for the first quarter 2018.

“Without a business reason for this change—and BF does not supply an explanation—one could worry that channel stuffing is the rationale for the 2017 numbers, stuffing that is later reversed in the following quarter.”

Channel stuffing is the attempt to manipulate financial results by shipping more product to distributors at the end of a quarter or year to boost results. Rival Diageo PLC was the subject of an SEC investigation for that practice in 2015.

Brown-Forman Chief Financial Officer Jane Morreau was asked by a reporter to comment on the Diageo probe and defined the company’s reporting in non-GAAP terms.

Morreau told The Wall Street Journal that “her company defines sales as ‘depletions,’ or sales from wholesalers to retailers, rather than shipments, which are sales from the liquor company to wholesalers,” and that “measuring depletions gives Brown-Forman a more accurate gauge of sales performance and helps it forecast how much whiskey it should age for future years.”

Better late than never, in November of 2021, the SEC finally asked Brown-Forman about the issues I wrote about and that Ed Ketz and Jack Cielsielski so emphatically spoke about:

After reviewing your response to these comments, we may have additional comments.

Form 10-K for the Fiscal Year Ended April 30, 2021

Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 31

1. We note that you present non-GAAP measures adjusted for the “estimated net change in distributor inventories.” Please clarify for us what this adjustment represents and explain in sufficient detail how you calculate the amounts. Also tell us how you considered Question 100.04 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.

2. Please expand your disclosure to include discussion and analysis, with equal or greater prominence, of the most directly comparable GAAP financial measure to underlying measures. We note that your results of operations discussions primarily focus on the year-over-year changes in the underlying measures as opposed to movements in the GAAP measures. Refer to Item 10(e)(1)(i)(A) of Regulation S-K and Question 102.10 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.

The correspondence was finally closed in January of 2022 and Brown-Forman agreed to “cease using the term ‘underlying’ and instead use the term ‘organic.’ We will define ‘organic’ in Presentation Basis ‘Non-GAAP Financial Measures’ similar to how we previously described “underlying” (but without adjusting for the estimated net change in distributor inventories).”

PwC had been Brown-Forman’s auditor since at least 2000, according to records collected from SEC filings by Audit Analytics. Brown-Forman fired PwC and hired EY in June 2020, after I wrote at MarketWatch about the company but before the SEC initiated the round of comment letters on the issues I mentioned.

After hiring EY, Brown-Forman started spending nearly as much on tax services with auditor EY as they did on the audit, a big change from its relationship with PwC.

Brown-Forman’s current CFO will retire in May after 30 years with the company. That’s a lot of whiskey!

Brown‑Forman Corporation (NYSE: BFA, BFB) today announced that Leanne Cunningham, executive vice president and chief financial officer (CFO), will retire on May 1, 2026, after more than 30 years of service with the company.

© Francine McKenna, The Digging Company LLC, 2026

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