Cage Match – The Lawyers vs. The Accountants
Funny thing happened last night while chatting with the COO of one of the major hedge funds, a group that has been much maligned lately for being shortys. For the umpteenth time in the last month or so it seems, someone assumed that my partner in our firm (actually my brother) was my husband.
And, so, I was reminded of the frequent competition between the two professions, usually healthy and respectful, but sometimes like the one between a bigger, bulkier brother and a smaller, still growing one. (Insert your own bias to see which I think is which…)
Now, I like lawyers.
As I enjoy these lunches, dinners, and late night conversations, I am collecting votes from some of the smartest guys and gals on the question posed by my new survey:
Which “trusted advisor” (to coin a David Maister phrase) was the one who told corporate executives that it was acceptable to backdate stock options, to ensure they were in the money and then not disclose the expense on a timely basis or at all? Who said it was ok to date the paperwork in the past to “paper” it all over and align all the lies intended to enrich a few?
I think it was the accountants, whom at that time were the trusted advisors, hanging in the C-suite not only as auditors but as consiglieres to management on all matters accounting, tax and systems implementation related.
Others think it was the lawyers, inside and out, who parsed the law looking for loopholes and exceptions, advised on the level and probability of enforcement, which at that time was minimal, and then left it up to management to make a decision which, in most cases, was fait accompli.
We’re reminded that breaking the law will still be disciplined , whether by Linda Thomsen and her gang or by the plaintiff’s bar. Links to a couple of recent cases are at the end of this post.
The Corporate Counsel.Net blog quotes a new study on executive pay on the reasons why , unfortunately, this is still the only way to make a lot of people do the right thing:
On pages 6-7 of the paper, there is this finding related to say on pay:
“Compulsion, through crisis or other acute events, is the foundation under most current US corporate initiatives to foster governance dialogues with institutional owners.
Evidence suggests that scandals over executive compensation – whether payouts for failure or backdating stock options – were key contributors in 2007 in motivating certain boards to increase their interaction with shareowners. Exercises in board dialogue on governance have generally not come about in the United States as a product of proactive, long-term strategic outreach by untroubled corporations. This reality has contributed to growing investor conviction that regular dialogue will not spread widely in the absence of compulsion, even where companies are troubled.”
UnitedHealth Settles Suits, Cuts 2008 Profit Forecast
UnitedHealth Group Inc. agreed to pay $912 million to settle two class-action lawsuits against the managed-care provider regarding its historical stock-options practices, as the company again lowered its 2008 profit target and projected second-quarter earnings below expectations.
BROADCOM FOUNDER PLANS GUILTY PLEA ON BACKDATING CHARGES
The Wall Street journal has suggested a 5 year probation and 12 million fine might be part of the deal Broadcom co-founder, Henry Samueli has struck with prosecutors. Federal cases are still pending against three other execs from the company in relation to stock option backdating irregularities.
Wow this one is kinda all over the place, from lawyer v. CPA to ex-husbands to stock option back-dating settlements.
But what resonates with me is your comment that the firms are being told how to run their businesses by their lawyers. That is so true and it’s not even funny in the ironic sense of funny.
At my firm, the conservative, risk-averse culture has turned into an environment in which leadership displays a fanatical focus on eliminating any scintilla of risk that might somehow make an appearance, regardless of probability or impact. We advise clients on how to establish risk management systems, processes and controls … but we ignore all we preach in favor of “protecting the firm” at any cost.
Let me give you one example. Our engagement letter contracts disclaim any third party liability should our work products be transferred without our permission or used for a purpose other than that intended, by parties other than those for whom the deliverable(s) were intended to be used. That should cover it, right? Nope.
We are also required to have that exact same disclaimer language in every deliverable. The rationale? “In case the deliverable is somehow viewed by an unauthorized third party.”
Recently, we were instructed that every single page of every single deliverable needs to have that exact same disclaimer language. (No doubt in case a page is ripped out and then relied on by an unauthorized third party.) Our standard report-writing template was thus modified and pushed to all consultants, at some cost to the partnership.
More recently, we were instructed that any email transmitting a deliverable also needs to have that exact same disclaimer language. (I can’t even come up with a hypothetical ‘what-if’ reason for that one.) Our email system was thus modified, at some more cost to the partnership.
Oh, and by the way, failure to comply is considered to be a Risk Control breach subjecting the offender to serious disciplinary action. One potential action is loss of annual incentive compensation.
Please understand, the consulting arm of the firm has never, ever, been sued by a third party seeking damages for inappropriately relying on a deliverable (i.e., by folks for whom the deliverable was not intended or for uses not intended). The risk is vanishingly small that a third party might receive a deliverable in the first place, or rely on it, or suffer damages for relying on it. And if that disaster should somehow happen, why we are already covered by the language in the engagement letter contract!
But our attorneys have spoken. The firm must be protected. Too bad the firm doesn’t protect itself from those so desperate to justify their salaries that they create silly risks for which cumbersome processes and controls must be established.
Am I passionate about this particular issue? You betcha. I think that Shakespeare guy mighta been on to something….
@Anon You’re right. Sometimes my brain feels full of too much stuff. I got rid of the ex-husband.
I agree. All of this legal disclaimer boilerplate is getting to be too much. However, the third-party language though, seems to me, to be really about something. Given the pressure on the auditors regarding their work when a company is under investigation by the SEC or has to make several restatements, I can understand their concern for the reliance on their reports and deliverables by anyone other than the client that paid for it.
But then, that begs the question… Who should feel “assured” when an auditor writes a report if not everyone that needs to use that information to make investment and other critical decisions?
Who is an unauthorized third-party? Someone who would take the words, “no exceptions”, “unqualified opinion”, or “significant deficiency and material weakness” out of context?
The consulting arms of the Big 4 having to live under the extreme risk management policies of a Big 4 accounting firm? Well, as I have said many times before on this blog – You made your bed…. The audit firm and its concerns come first and they have to, as long as the firm has even one public company audit and is registered with PCAOB for that purpose. The consulting practices of the Big 4 are revenue generators, exercises in ego gratification, and portfolio diversifiers for the partners, not true consulting firms.
From someone who works in the consulting arm of a public accounting firm, I can relate to Francine I can relate to some of her comments. The consulting arm is ancillary to the real meat of the business. We have strict policies that may not really fit well with consulting. It’s a tug of war. I think there’s a lot of synergy and dissynergy. That may also explain why consulting arms are created, built up, and then sold only to be recreated. I am a CPA who works with many non-CPA consultants. I frankly get peeved when they scoff at firm policies designed to protect the audit arm. You work for an audit firm. Read the company tag line, “audit-tax-advisory”. We’re in last place, deal with it.
I do agree with anon that sometimes these practices go over the top. You see them building wall, after wall, after wall for some risks. Having your disclaimer on every page of every deliverable when you are not opining on anything? On the other hand, some risks are totally uncontrolled! I’ve worked on a few internal projects myself to see how disorganized things can get.
As far as lawyers and accountants, lawyers are the big brothers in terms of age, prestige, and pay. The most well paid lawyers are paid more than the most well paid accountants. Although, if you graduate from a 2nd tier or 3rd tier law school, good luck getting a well paying lawyer job. You will probably be stuck in public interest. There’s some statistic that there is one job in law for every three lawyers.
I have often wondered why the average partner at a large law firm gets paid more than the average partner at a large accounting firm. I don’t understand the economics of it all, but it appears that auditors, the supposed guardians of the capital markets, aren’t valued as much as lawyers. Accountants and auditors are part of the cost of financial information. That cost needs to be balanced against the value of that information. I know the gap in pay is narrowing. However, I don’t know how you can fundamentally change the value mix.
Anon1 here. Fran and Chicago Accountant: thanks for the replies.
I feel the need to clarify: I’m all in favor of proportionate risk management policies that protect the firm from potential liabilities. The key word, though, is “proportionate.” We make a great deal of money explaining to our clients how to develop risk rankings in terms of both probability of occurence and estimated risk impact. We’ve all seen the cubes and heat charts. We tell our clients that risk management protocols should be commensurate with risk ranking(s).
But we don’t do that ourselves. As far as I can tell, based on conversations with several partners, our attorneys have advised us to establish the most rigorous and onerous controls possible without any comparison of the cost of the controls versus the estimated liability based on the risk ranking.
We simply don’t do what we preach. It has little to do with audit liability or potential litigation. In my view our position is based on the senior partners abdicating leadership and decision-making responsibiity to their attorneys, in the name of “risk management.”
And remember, our engagement letter contracts already protect the firm. We’ve got indemnification and other limited liability provisions, in any case.
We create risk control after risk control without anybody asking whether it makes any sense. Nobody actually questions the attorneys’ advice or the business rationale for the resulting controls. Which leads to a check-list compliance posture based on “gotchas” when any nonsensical risk control is violated. And as Chicago Accountant pointed out, the other outcome is a “form over substance” environment where it is fanatically important to comply with the nonsensical controls while real risks go unchecked.
Anybody ever read the Andersen book on Enterprise-wide Risk Management? I have. Enron was the featured company, the best practice leader for how it was to be done. No kidding. And as we know with 20/20 hindsight, Enron was the classic form over substance entity.
I don’t necessarily mean to compare {insert Big 4 firm name here) to Enron, or even to Andersen. But if the shoe fits …
Francine:
Funny story. Texas CPA, the Texas Society Journal, had a story about the best finance department in a Texas company about three months before Enron filed for bankruptcy. You’ll never guess which company it was. Hahahahah.
Thanx for your valuable information.
Why do attorneys get paid more than accountants? Attorney-Client priviledge. There’s real value in being able to communicate freely, in complete confidentiality. Accountants don’t provide that, we’re actually the opposite because we’re representing the public. At least theoretically.