What, Exactly, Are They Getting Paid For?

I’ve had many conversations in the past with friends who work at companies audited by the Big 4. At my age, my friends are CPA and lawyer types, in responsible positions, making money, planning retirement and paying college tuition. Most of my friends are accountants, a consequence of having had little time while working for others to meet or socialize with anyone else, but also because “birds of a feather flock together.” Some of them are CFOs, CIO’s and Chief Accounting Officers, as well as Chief Audit Executives. (You thought I made this stuff up?)

One of them is a former employee of the Federal Home Loan Bank of Chicago and was in a position to be interacting with their auditor but immune from having to really answer to them. However, they could have invited her and her colleagues, occasionally, to some of the myriad events they have for clients which inform and instruct professionals on the rules and standards they will be judged on in their audit. In one case, an invite filtered to her for a conference on Sarbanes-Oxley Year 2 via the PwC marketing team, but no one from the engagement was planning to go to entertain them. So I volunteered, being new to the firm and interested in the topic and certainly willing to extend a hand in making our clients feel appreciated. We had dinner at a very nice place and the Senior Manager on the engagement, after I had left him several voice mail messages the previous two weeks, finally showed up after we had ordered. He actually engaged for the first time in real conversation, live conversation, with this client. He also picked up the bill, which was huge, and I give him a lot of credit for at least knowing he should do that.

But it’s pretty common nowadays to hear clients say that they never hear from their external audit firm and especially the partner until the audit starts. They also never get invited anymore to anything the firm puts on for clients.

Duh! That money is spent on new clients, not those that are already in the bag. Once you sign the engagement letter, they know they’re probably not getting any more money out of you, since the amount has been sealed in blood by the Audit Committee. That’s why they quietly like the pork barrel provision of Auditing Standard 5, Rule 3525 – Audit Committee Pre-approval of Services Related to Internal Control, which allows the use of the external auditor for additional “internal control related services” to be pre-approved.

Proposed Rule 3525 replaces direction currently contained in AS No. 2 regarding independence and internal control-related services. The PCAOB’s stated intention is to ensure that audit committees are provided information relevant for them to make an informed decision on how the performance of internal control-related services may affect auditor independence. But the new rule also allows audit committees to pre-approve the provision of internal control-related services by their independent auditor on an ad-hoc basis or approved “pursuant to committee-approved policies and procedures.” This means that if the Audit Committee says they “pre-approve” the CFO or others to engage the external auditor to provide these additional services in general, no one has to go back to the Audit Committee and get approval for specific contracts and their specific costs. I called this, “Repealing the AA/Enron Rule.” I also call it pure laziness, all the way around.

Add to this an auditor’s general aversion to risk and conflict, and to engaging too fully with clients, lest they be accused of providing advice and guidance which is now prohibited. The consequence is that you find that the partners and managers from the firms are not much around except when they’re ready to deliver the report. I started to say, “When they need to give you bad news or tell you you can’t do something,” but then I remembered that they usually hold on to the engagement for as long as possible, waiting to be thrown out or to be forced to resign rather than voluntarily give up the revenue. This accommodation for the sake of revenue extends to continuing to look the other way and giving management the benefit of the doubt, even when it’s obvious that the executives are “a few cards short of a full deck, two fries short of a Happy Meal, or a few bricks short of a load, a sandwich short of a picnic, and not the sharpest knives in the drawer.”

You may ask, “How can an aversion to risk coexist with a tendency to stay on risky clients longer than they should?” Well, they’re in the business of making money first, not public servants. Money gets in the way sometimes of good risk management and protection of stakeholders’, especially the company’s shareholders’, interests.

The hits, and lawsuits, they keep on coming…

Hancock, accounting firm both slipped up

“…Baldwyn-based Hancock Fabrics last week dismissed PricewaterhouseCoopers as the accounting firm hired to monitor the company’s financial practices.

On the surface, it seems like a good move considering the home decorating retailer is in bankruptcy reorganization, no longer listed on the New York Stock Exchange and had failed to file financial reports with federal regulators for more than a year before February. But there was something odd in the filing with the Securities and Exchange Commission.

Hancock listed six reasons for dismissing PriceWaterhouseCoopers. In short, the company said the accounting firm had failed to tell the company’s leadership when mistakes were being made.

Hancock, in the filing, admitted it did not have enough people in its accounting department familiar with accounting principles, mismanaged inventory, had problems with managing the firm’s pension program, and failed to insure the company filed proper and timely reports with federal regulators.

These are all things the outside firm should have brought to the attention of senior executives, Hancock asserts…It seems sad the company’s leadership almost blames the accounting firm for failures of its employees and management’s inability to detect and resolve the problems.

How can a company’s leadership not know the retailer hadn’t filed earnings reports?

PriceWaterhouseCoopers, in a letter to the SEC, had no comment on the accusations.

Hancock’s leadership – its CEO and board – must acknowledge their role in allowing this company to miss these critical deadlines. But replacing PriceWaterhouseCoopers may be a first step in regaining order.

We will see.”

1 reply
  1. Krupo
    Krupo says:

    The Hancock situation sounds like a disaster all around.

    Wonder how many such concerns were actually documented in their work and how they dealt with them?

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