That’s Why They Make The Big Bucks

Richard Murphy gets pretty tough on PwC partners’ pay in his blog, Tax Research UK.

Question: What’s £757,000?

Answer: The average earnings of a partner in PWC in the UK last year.

Justification: There isn’t one.

Why?: They take no risk. PWC cannot fail. It’s the biggest firm of accountants in the world.

The justification for such rewards, whether in accounting firms or law firms, in the past, has been their partnership model. Although Richard argues later in his post that there should be no risk premium for an oligopoly, a firm that’s too big (or “important”) to fail, I have to disagree slightly. For true partners in the firms (not principals or non-equity partners), there is still a requirement to contribute capital, and that capital, for the most part, is held by the firm and at risk.

Imagine working at a public company and getting only a draw on your pay, subject to the results of the tax return for the firm, and then having these earnings calculated by someone else and distributed to you via a Form K-1.

The average cited in these articles, (there was an earlier one with a figure for partners at Deloitte in the UK pointing out that their CEO makes almost double what the PwC CEO makes) is just that, an average. New partners make much less and older partners make more, the ones who sell more make more and ones who sell less make less, those who suck up better make more and ones who do the right thing at the expense of the firm make less, and so on.

There is no guarantee that the reported profit figures divided by the number of partners, equally, is how it’s really divvied up. And how do they calculate that profit figure? Is anyone giving you the details? They don’t use GAAP or IFRS or disclose a set of audited financial statements. Is it possible that this is all just for publicity? If they won’t fess up on their own, maybe the tax authorities should take a look and see whether what their telling the media is the same as what’s on their tax returns.

Then imagine that the firm pressures you to maintain the balance of your earnings inside the firm, in a “fund” that can disappear quickly in a bankruptcy filing, as your recourse or legal claim may be dependent on the firm’s records. If the partnership has a pension plan that is funded and ERISA qualified, there is no problem. It would be protected from creditors’ claims. However, if the plan is unfunded and payable out of the earnings of the partnership, we have a different matter. Unfortunately, pension plans at many professional service firms are unfunded. Under these circumstances the retired partners become creditors with respect to the retirement benefits. Ask the former Arthur Andersen partners if they could have it all back and they will tell you they wish they had taken every dime out when they could.

Imagine keeping all of your money, except what you need for monthly expenses and other major investments, under the control of a firm like BDO or KPMG (or really any of the others nowadays,) where they’ve been constantly hit with litigation and huge settlements. After all, the firms capital, for the most part, may still come from the partners’ capital. When you need funds, you have to call the “Partner Services” office and ask for a wire transfer.

Interesting case: If the firm acts as your intermediary in wiring your money all over the place, do they have to “Know Their Customer?” In other words, if they act in the partners’ place (since it’s the firm’s account they are getting the money out of not an account with your name on it at Fidelity or something…)do they have to do the due diligence to assure themselves and the government that a partner is not sending money to a bad place or circumventing a divorce decree or bypassing money laundering regulations or transferring funds to an offshore tax haven or supporting Islamic “charities” or paying a gambling debt or …? Just a thought.

Anyway, I think the partners in the Big 4 are taking a lot of risk nowadays and deserve every penny or pound Sterling they can stash away from their firm. Do they know how or where their firm is using their money? Do they know the full extent of “partner matters” on the table at their firm? Do they know how much is at risk and whether they will have to pay up at some point like the KPMG partners did after the tax shelter settlement? Or maybe after the IRS is done auditing PwC’s tax filings related to the sale of their consulting practice?

The business news service says that the IRS is evaluating the timing of tax deductions, PricewaterhouseCoopers’ pension plan, and how the firm moved profits between international units, said a person briefed on the audit. The review may be completed later this month and the IRS is expected to reach its conclusions by the end of the year, PricewaterhouseCoopers’ tax partner Samuel Starr said in a June 15 letter to the New York-based firm’s 2,000 U.S. partners, who could be liable for any back taxes.

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