What I’d Do: Part 2 – First We Focus On The Client

Late last week, I gave you a survey of the actions being taken at the largest audit firms to address what they see as a downturn in their business and a “necessary” cutback in staffing and expenses needed to realign their workforce with current economic conditions.  

Readers of this blog know that I have pushed back hard when journalists and commenters swallow whole the whale of a bull-oney sandwich the firms feed them about their “deteriorating financial condition”.  

A commenter remarked:

…The point of the firms is to make the partners money. Making less than previous years would be considered “losing money”.

If we lose clients or clients cut budgets, then there is an excess of supply. Partners are going to make a lot less money this year and some employees are losing their jobs to make up the difference.

I still fail to see why Big4 should retain more staff than they have project time to book. So far the people I have seen let go were the bottom performers at their level. That’s what happens in a down economy.

I responded:

It’s a partnership, guy. Who in the world died and told you that constant growth was a given? Making less money than prior year in a partnership or anywhere else is not “losing money”. The problem is the skewed way you look at “profitability” compared to the rest of the world and your clients. And you’re the ones we’re counting on to be the watchdogs, the guardians of the public shareholders?

The “point of the public accounting firm is to make the partners money” ? You’ve lost it. The purpose of the audit practice in a public accounting firm is to serve the public trust. That’s why you get to make any money at all. If you stop doing that, you don’t deserve squat.

I’m disgusted.

What can the audit firms do to improve scrutiny of public companies – the ones governments have invested so much taxpayer money in – now when we need it the most?  Can it be done:

  • Without reductions in force?
  • Without betraying the trust of otherwise very loyal employees?
  • Without losing the confidence of key clients?
  • Without endangering quality and integrity in the work they’ve been enfranchised to do under the exclusive licensing of various federal governments and public/private bodies such as exchanges?
  • Without risking new lawsuits for negligence and complicity on fraud and malfeasance?
  • Without completely abdicating responsibility to their true client – the shareholders and investors in the public companies they audit?
  • I think so.  Starting at the top, at a strategic level, I  recommend significant changes in two main areas:

    • Refocus on the true client – the shareholders and investors of the public firm, and
    • Reform the business development process with an emphasis on meeting client needs, where they need it, how they need it, and with the kinds of resources required to do the work in a quality and risk-managed way.  

    Refocus on the true client – the shareholders and investors of the public firm

    I am amazed at the number of times I have to explain the following basic premise to those both inside and outside the audit firms:

    The auditor’s client is the shareholder and investor in the company, not the company’s management.

    …By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public. This “public watchdog” function demands that the accountant maintain total independence from the client at all times, and requires complete fidelity to the public trust…United States v. Arthur Young & Co., 465 U.S. 805 (1984) U.S. Supreme Court

    It’s so easy to get confused. Much has been written about the inherent conflict auditors have because they are engaged and paid by those they are supposed to be auditing.  And it’s a very old and tired story, one that makes the rounds each time a scandal or “crisis” occurs.

    A similar conflict has been laid bare now in the case of the ratings agencies, as a result of the “financial crisis.” From the New York Times:

    In recent months, Moody’s Investors Service and its rivals, Standard & Poor’s and Fitch Ratings, have been prominent in virtually every account of the What Went Wrong horror story that is the financial crisis.

    The agencies put their seals of approval on countless subprime mortgage-related securities now commonly described as toxic. The problem, critics contend, is that the agencies were paid by the corporations whose debt they were rating, earning billions in fees and giving the agencies a financial incentive to slap high marks on securities that did not deserve them.

    When I was in college, we were taught that our profession, the accounting profession, was more like a vocation, calling only those who could do the right thing under pressure, stand up for the shareholder, and take the heat and sometimes severe consequences for speaking up against management.  This is how “professionals” managed the auditor-client relationship conflict.

    How that message has been diluted! Just listen to the leadership of the Big 4. 

    Mr Quigley said that as the profession moved away from rules “someone’s going to need to exercise judgment to apply those principles”.

    “If you want to then make that transition, you have to put in place a framework for actions that a preparer [company] or auditor can take – a layer of guidance that would sit on top of a set of principles-based standards.

    “You could then start to build a base for defence if someone challenges your judgement,” he said.

    Last week, the SEC’s committee – on which Mr Quigley sits – discussed the idea of a “professional judgement framework” that would provide companies and auditors with “comfort that the chances of being second-guessed have been sufficiently mitigated”.

    We need to reaffirm the message of the true auditor-client relationship.  Let’s start in the universities, then the entry-level training in the firms, all the way to the way the practices, offices, and countries are run.  Unfortunately, since the Big 4 are profit-making partnerships with an unlimited government sanctioned franchise to make tons of money with impunity it’s a tad difficult to keep those who rise to the top of the firms from becoming masters of self-serving self-preservation. Do you realize that in the largest four audit firms, the top producing partners have sold out shareholders, employees, and their souls for less than the top bonus paid at infamous AIG

    Granted, this would not be an easy conversation to have with Big 4 senior partners.

    Dear Barack: The most obstinate among them may have to be ousted like Rick Wagoner at GM. 

    But they might, with some tough talk, realize their audit firms could be taken over by the government too, if they don’t start paying attention to the true client. Perhaps they’ll listen if I focus on the cost to the bottom line of a declining overall market and increasing litigation? Shareholders and company managements with integrity are sick of poor service. 

    Putting fewer professionals who are less qualified, less supervised, and less willing or able to speak up on audits and other engagements is killing the Big 4’s bottom line. Crying poor and having to cut thousands of professionals does not really speak well of the audit firms’ ability to keep settling or potentially paying out judgements of multimillion and billion dollar lawsuits. But if we can’t see their financial statements, who’s to really know for sure how “poor” they are?

    Going along with corrupt, self-serving corporate management is hurting them in the public eye and with their own professionals and future recruits.

    Failing to advocate for the interests of the true client, the shareholder, is now threatening the oligopoly.

    The client, the shareholder, is often now the taxpayer. 

    And the taxpayers are mad as hell. 

    In my next post, I will detail the actions firms could take with regard to my second point; 

    -Reform the business development process with an emphasis on meeting client needs, where they’re needed, how they’re needed, and with the kinds of resources required to do work in a quality and risk-managed way.

    Image Source



    137 replies
    « Older Comments
    1. fm
      fm says:

      @The Facts

      If there’s a selection bias in the writing it’s because I write the blog and I get to choose what I write about. Me , myself, and I. As I’ve said a million times before, including in my disclaimer on the “About” page, I write about what interests me and what I know. What I know happens to interest me and to be interesting to quite a few more people than I ever imagined.

      If there’s a selection bias in the readership, well, that’s as it should be. I don’t need no stinkin’ namby-pamby, goody-two-shoes, Big 4 defenders that live life with their head down and their eyes closed. Like the work, like the folks you work with, even like your clients, but don’t like those that exploit you and don’t like those that are allowing rogues, criminals, and idiots to cheat your family out of their future.

      Yes, the audit firms are supposed to play a role in the capitalist system: Provide audit opinions that assure publicly available financial information is complete, valid, and prepared according to applicable standards. These audit opinions are supposed to protect shareholders from dependence on incomplete, inaccurate, and invalid information when making their investment decisions. As another commenter said earlier: They’re getting paid while doing a very crappy job of it.

      Citing studies from 1988 and 2004 about “audit failure” is irrelevant. Have you counted the number of settlements that each firm has paid and the amount that is pending? You can’t you say? Why? Because the firms don’t disclose those numbers. I’m the only one who’s not a regulator or the Treasury or the firms themselves counting them up and keeping any kind of tally and it kills them.

      The litigation in the US is not severe enough. The Private Securities Litigation Reform Act of 1995 (PSLRA) said that investors cannot proceed with a case unless they already have facts in-hand that strongly suggest a deliberate fraud. Prior to the PSLRA, a case could proceed with minimal evidence and use pre-trial discovery to search for more. Now, you need such evidence just to begin, which may be difficult to obtain. So the cases that do proceed against auditors have been the strongest ones and there have been lots and lots. That were settled. Never went to trial. No one can say that they were without merit because first they passed the stricter tests post-PSLRA and second the auditors are unwilling to fight them on the merits.

    2. The Facts
      The Facts says:


      I agree that what you write about is interesting that’s why I am here now and why I read your posts on a daily basis. I also agree that those partners that exploit employees and act criminally should not be defended. However, I do believe that partners that act criminally do so because the firm’s incentive structures are not perfectly aligned with the firm as a whole. The pressure to bring in sales means that partners are encouraged to take on very risky clients that can ultimately ruin an entire firm. One bad client ruined Laventhal Horwath in 1991 and Andersen in the 2000’s. I don’t believe that the Andersen was a bad firm as a whole but the Houston Office was. Krishnan made this argument with pretty convincing evidence in the Journal of Contemporary Accounting Research in 2004.

      When it comes to litigation I imagine we will disagree about what is an appropriate amount of risk that audit firms are exposed to. The United States has more lawsuits filed against auditors per year than all other countries in the world combined. However this does not mean that we are getting better audits as audit failure rates are similar around the world. Does this mean that higher risks will get better audits? I don’t know but it appears like you believe this to be the case. Do you have a theory why lower litigation risk abroad does not provide better audit quality? Are partners more honest abroad or are there systems in place that make audits better than what exists in the US.?

      Finally, I am not a Big 4 defender in general. Certain firms do preform bad audits and this is a great forum to point out those mistakes. Sometimes it does feel like you generalize one audit failure to mean that an entire firm is corrupt. I feel like that is not a fair assumption to make. I will change my name in the future so that it does not seem so confrontational.

    3. Anonymous
      Anonymous says:

      @ The facts.

      Did you ever read the PCAOB reports? You should, and you should try to get access to the parts they don’t disclose to the public as well. I can tell you about this, if any of these non-disclosure parts leek to the public, you would see the Big4s disappear from the face of earth in a few months.

      I don’t know how you define an “audit failure”, but I certainly don’t believe that is less than 1% as you stated. Typically you wont really find out that auditors did a bad job until 1) a client gets in trouble and is being investigated by regulators, 2) you reperformed the audit. My friend, have you ever performed an internal practice review for your firm? I did that every year, and I can tell you, for more than 50% of engagements I reviewed, the quality was bad. What is the biggest problem? There were no thoughts behind those work papers. You could tell the auditors did not put any judgment on what they were doing. They were just rushed through it without truly understanding the client, their business, and it risks. So whose fault it was? The partners. Why? They never set the right tone from the top. THERE IS NO SUCH CLUTURE IN BIG 4 TO ENCOURAGE THEIR STAFF ASKING QUESTIONS. The staffs were treated like machines. It was not a cool thing for them to challenge their managers or partners, of course, the client. They did not get proper training, but got put on the team to “get things done”. The only goal of engagement team was to complete the work under the budget.

      Finally, Francine is not bias. She just asked those good questions that we are not allowed to discuss in the firms. Just read the article above, could you imagine any of big 4 partners would say to you that auditor’s client is actually the shareholder and investor in the company, not the company’s management? Of course not….

    4. Anonymous
      Anonymous says:

      @98 – no one said you are a poor performer… the statement was that crying foul isn’t good enough… you need to provide some evidence and arguments to support that foul. Otherwise the cry is meaningless to anyone but you and your therapist (which you really seem to need if you do not have one).

    5. Anonymous
      Anonymous says:

      @fm — seems you are just as greedy. You write things to incite people so you can get food for thought and more emotionally charged accusations in an effort to promote yourself and your opinion. As you say – it is about you and yourself. What is it really about — finding ways to self promote which will hopefully turn into ways for you to make $$$. Seems you intentionally write things to get an argument going — and you do want those that disagree to join your blogs. You are no more pure than those you criticize… not because you are evil — but cause no one is that pure.

      Hey — does this count for the kind of drivel that will get you excited… will this one incite your loyal followers who can’t think for themselves. If so — that is my point. That this kind of language serves no purpose. Just watch the drivel that comes back.

    6. fm
      fm says:


      I’m afraid I’ve raised your expectations too high. I am still working on the post which is Part 3 to “What I’d Do..” However, you should be looking to your own firm leadership, regulators, congress, the standard setters, and people with much more influence for “solutions.” My primary focus for the blog is to educate, raise awareness. I will offer “solutions” because I have worked in two Bg 4 firms and other professional services firms and seen what works. But I’m not the one you should be talking to if you’ve got a serious complaint.

      Other stories sometimes supersede, such as the Satyam update. And I do have client work. Yes, I have clients and, no, to a previous commenter. I do not make the majority of my income from the blog, although that would be nice given the time I spend on it. I write, speak, and teach/train for others and I am a consultant. So, like others, sometimes real life intrudes on my desire to write all day and night.

    7. J
      J says:

      @The Facts

      This captures my thoughts exactly. Right on

      @FM – maybe us “stinkin’ namby-pamby, goody-two-shoes, Big 4 defenders ” would take you more seriously if your writing wasn’t formatted similar to hate group propaganda. Your website has the front page look and feel of a newspaper but your articles read like sensationalist alarmism from someone who puts tinfoil on their ceiling to keep the government from brainwashing them with radio waves. Pull your references to old articles outside the body text and stop italicizing and bolding everything like your readers are too dumb to see the point without all the formatting. I can almost see you outside one of our offices with a bullhorn and some birkenstocks.

    8. Anonymous
      Anonymous says:

      The system happens to be morally and likely, financially bankrupt. I seriously doubt the long term viability of the partnership system at this point.

      It needs to be reformed pretty much no matter what. I think that deep down, the partners themselves probably know this. When you can pay for a stamp of approval that says that we feel that this company has followed GAAP (even when it has not) there is a problem. Sadly, accounting firms themselves are not farsighted enough to see this (or we would never be here), so someone else has to fix it.

    9. @ANON-105
      @ANON-105 says:

      Don’t change the topic:This forum is not about FRANCINE! that is not why anyone reads it.

      This is about 4 oligopoly’s that a re FAILING at their mission and screwing everyone whilst they are at it.

      It is OK to be a cheerleader for BIG 4 audit,but if you really LOVE it that much,you would be open to hearing about how the inherent problems can be fixed-the future viability and survival of BIG 4 AUDIT depends on this-the firms can only f**k up that many times,the jig will be up eventually.

    10. Tenacious Truman
      Tenacious Truman says:

      Anony @103 — spot on post. It’s not the known audit failures that measure success or failure, but also the unknown ones hidden because of audit process flaws. One of the biggest problems is that the culture actively discourages independent thought and questioning of the status quo.

      The Facts @ 102 — I don’t care what an academic article says about Andersen. Was it Duncan, the audit partner? Was it the Houston office acting rogue? Was it the move from a central partnership to decentralized regions/divisions? Was it management overrides of firm risk control processes? Was it an overzealous prosecutor bent on solving a political problem? Was it a judge whose jury instructions were improper?

      Doesn’t matter. What does matter is that Andersen is gone, and its employees now scattered to the winds. Once Andersen was the gold standard of independence and objectivity, and now its reputation is tarnished forever. I was in the Big 5 when Andersen imploded, and I remember quite vividly that the leadership of the other firms made it absolutely clear that there should be no gloating or bad-mouthing of Andersen. Why? Because Andersen was not too different from the other firms, and what happened to Andersen could have happened to any of the other firms at any time.

      In fact, it could still happen to any of the big accounting firms at any time. There have been few, if any, fundamental changes at the firms since the Andersen implosion. For example, when EY was being sanctioned by the SEC, it employed the same internal and external spin tactics that Andersen used (to similar effect). The same could be said for Deloitte with respect to its “rogue” insider trading senior leadership partner in Chicago, or for PwC’s India or Japan debacles, or for KPMG’s tax shelter litigation, etc…… If this blog has an overriding purpose (and only Fran knows if it does) — it might be to raise awareness that the same fundamental circumstances that took out Andersen still exist today … and the firms are just as vulnerable (if not more so) as they were in 2002.

      — Tenacious T.

    11. fm
      fm says:


      Birkenstocks are not my style. Today I’m wearing Prada. And a pair of Louboutin patent leather pumps are in my suitcase. And I hardly need a bullhorn. My voice carries.

      I’m still working with the format on this new WordPress site. Lots more to learn to make it easier to read and easier for me to review and edit. That’s why the site says Beta. I bold and italicize because, in a long post, I am trying to make sure you see certain points. Many of my readers are not as well versed in the inner workings of the firms and need have points emphasized. I’m gratified that instead of turning folks off, the long posts cause them to stay on the blog longer. Average time on the blog is > hour.

      I choose the magazine format because a multifaceted resource is my goal and objective. I have a variety of different sources of information, opinion, and resources for readers. No other format seemed to accommodate that as well. Plus I like the photos, music, and video clips. I like it. And for those who need to have this material made relatively stimulating and entertaining to read, as well as made relevant to their business and personal life, the combination of words and pictures seems to work to capture their attention.

    12. Sceptical
      Sceptical says:

      As a Big 4’er myself who can see both the good and bad side of the job, it seems to me that in order to make things better it is all a matter of time:

      More time for partners to be involved in all aspects of the audit, especially risk assessments and face time with managers and client staff. Ditto managers with seniors. Ditto seniors with assistants

      So, to avoid working 24 hours a day we need more partners and managers to spread the load and allow this coaching and effective review of work to occur…

      But, as we all know, time = money so either firms pay more for their audits or senior Big 4 staff get paid less, neither of which is gonna happen IMHO, and which also assumes there are enough capable people to be partners / managers in what is an intellectually demanding job (when done right).

      My personal opinion is that partners probably are overpaid – spending so much time trying to mirror the executives of the companies they audit they seem to think they should be paid the same (which is too much also, but that’s another story altogether)

      On the other hand, I think audit committees (acting for shareholders i.e. The Client as FM started off) should not be looking for cheap audits, but quality. And another truism is that you get what you pay for Again, in this climate that ain’t gonna happen, but now is the time when audits have to be done right… Cue fee reduction negotiations by audit committees and layoffs by the Big 4 to maintain partner income and resulting lower quality audits right at the time when the capital markets need all the reassurance they can get.

      I’m afraid there is no solution, as audit is effectively a public service run under a profit making business model. If it became a true public service and we were all on the government payroll and civil service salaries, I predict a mass exodus and we end up at the same point – overworked / underskilled staff.

      So, looking forward to FM’s ‘solutions’!

    13. fm
      fm says:


      Quick question, as I am supposed to be working at a client, not responding to comments today… But this will help me with some other writing I’m doing.

      The government (i.e. taxpayers) now owns, both in US and abroad, significant portions of large companies that are important to smooth functioning of the capital markets. (Treasury Secretary G’s and Fed Chairman B’s words, not mine…) And I have proposed that the government, as a start, at least for those investments, should cut out the middle man and audit/monitor these investments directly. (After all, the audit firms that were “on the job” when companies like AIG, Fannie Mae, Freddie Mac, GM failed are still their auditors. How screwed up is that?)

      This proposed move takes such a large chunk of work out of the private sector (Big 4 firms’ audit universe.) And as we have seen, even without this change the audit firms feel that their audit business is declining so they have to cut people to save their profits… And there are now quite a few audit and accounting professionals already looking for a new job and more to come…

      Exactly where would all the “good” people work instead, if not for the government? Don’t you see the shift from private firm auditing to auditing on behalf of the taxpayer? Do you really think you will have a choice of where to work if this shift continues?

    14. Sceptical
      Sceptical says:

      @ FM

      Well, I think it would be a brave partner who would leave his / her position in a Big 4 to be at the behest of a democratically elected government which is liable to change it’s mind on such issues on a whim…

      I suppose that it could be forced, by passing laws that required public auditors to do this work (in the UK we have the National Audit Office which does a really good job on checking up on government spending from what I read – not sure if there is a US equivalent) who could be given the budget to lure away Big 4 staff.

      However, it would be a huge operation to get all the necessary infrastructure, risk management, quality control, technical support etc etc etc systems up and running, with a risk you would spend a hell of a lot of money creating a Big 5, with the same people and same problems at the end of the day, just under a different roof. The public sector (rightly or wrongly) doesn’t have the best reputation for managing change, and everyone knows how expensive these things are…

      For the Big 4 employees who don’t like the thought of working under a new regime, there is always the option of leaving practice altogether and getting a real job in the real productive economy (or what’s left of it) – with the experience you get at Big 4, I think any good senior / manager / partner would have very little trouble getting alternative employment, and for those of us below partner level, probably for at least the same money…

      Unless you just go the whole hog and nationalise each of the Big 4, I don’t see practically how this could work. As I said earlier, there is a fundamental mismatch between the public sector service and private sector profit motive in auditing which makes this an intractible problem – and its not just in audit – think healthcare, public transport, public libraries – all areas which have become a disaster area when the profit motive has been introduced, in my country at least.

    15. Tony Rezko
      Tony Rezko says:

      To J, Capitalism, others:

      Up to this point, I’ve been an unapologetic capitalist, but if the only response to terrible leadership and treatment of the lower ranks in the B4 is to say, “it’s a business, deal with it,” I hereby proudly declare myself a commie. I’d like to think displaying a little humanity is not mutually exclusive to running a business.

      I can understand the impulse to defend your firm(s), and it’s a good impulse if you occasionally take off the blinders and see the blunders being made. Big picture, a lot of what’s happening is panic, and does more harm to the respective firms’ image to the generation of professionals currently entering the workforce. They’re capitalists, too. But I suspect many talented people will look elsewhere to make their mark, and we’ll be worse off for our short-term thinking.

    16. Anonymous
      Anonymous says:

      @110 – some of us do read it exactly for the reason of trying to learn about how people think and how they grow up… including themselves and including FM. As FM said herself — this blog is all about her. @J in @108 had it right.

    17. fm
      fm says:


      Interesting you are in the UK. I had a feeling…

      Yes we do have a comparable office to National Audit Office, the General Accounting Office. There are also Inspector Generals for each department that have some audit responsibility but as we have seen with the SEC, usually only spring into action when they have to criminally investigate something.

      My point about working in the public sector is that there really isn’t a choice and may soon be no choice, even for partners. Two firms here, Deloitte and EY are cutting them and the others demoting them or cutting their draw. The opportunity cost of “leaving” may be diminished soon and is already nonexistent for some.

      The infrastructure to audit/monitor government and taxpayer investments is already in place. Just needs to scale, which I admit may be harder than it looks. But the existing regulatory, inspecting and auditing organizations need to to start hiring folks out of school and setting up the infrastructure to train them. The Big 4 is not going to be doing much spoon feeding recruits to them anymore.

    18. Anonymous
      Anonymous says:

      @116 — I believe that the capitalism argument is not that drastic. I believe we all understand there are deficiencies in the B4 whether we defend them or attack them. I have been a defender on this blog — but I have plenty of gripes about the work environment. I am just not convinced that the scathing attacks in this blog are generally constructive or even appropriate.

      So let’s talk about what doesn’t work. There is a culture of hierarchy to the point of disrespect (at times). People gain respect simply by the title they have and not by the work they do or the value they add. People do not work well in teams because they feel the hierarchy is what matters and not good teaming in which there is upward/downward/sideways and inside out communication — in which all team members are valued. I have created a very different team (not audit) where we do those things. I empower the junior staff to take ownership and even ask them to manage me — by giving me status, bringing the appropriate issues to me and knowing that I am juggling 10 jobs whereas they are juggling 1-2. I have them giving a shout out to each other before they go to me… and problem solving amongst themselves. I hold regular brainstorming meetings, I hold them responsible to QA each other first and then I QA — and we hold peer review meetings. But, I feel like this team is an island at the B4.

      What else doesn’t work — the way they schedule people — asssign them to jobs. It is totally dysfunctional. Also, the recognition procedures are out of whack. We get extra bonuses sometimes — but they are not given out based on consistent criteria. People who worked a ton of hours but F’ed up the job may get the bonus $ just cause of the hours. People who work a lot of hours on 1 job may get it, but do that across 5 jobs consistently and no one job thinks you are a superstar. Managers focus on engagements rather than a team that can be spread across many jobs. Managers are so shortsighted to their engagement that the practice development is staggeringly deficient.

      All that said — I cannot blast the B4 for raping and abusing people (yet I haven’t gotten home before 11 pm for weeks and also had to work the weekend)… it doesn’t happen all the time like this. The excessive hours are not because people were laid off — no one in my practice and office was laid off — and we are crazy busy with work… no end in sight. That is a good thing right now — if that gives me and my teamjob security… abuse away..

      Some people here are trying to get constructive and look at solutions… I think we should all try to go there now — let’s let go of the emotion and get constructive.

    19. Anonymous
      Anonymous says:

      With your approach and attitude, there would be no audits done as no audit firms would exist because you would never retain a client. If one firm acted as you suggest and the other Big 4 didn’t, the firm that acted as such would have no business at all.

      I find all this bashing on the Big 4 intriguing, especially related to AIG. Did PwC make the decisions to enter a boatload of credit default swaps? No. Does PwC run the risk management of AIG? No. Are there risk factors in 10-K’s that investors can read? Yes. Auditors only make sure the financial statements are not materially misstated and that the disclosures meet the minimum requirements of the SEC. Stop pretending PwC ran the business transactions of AIG or had any responsibility for telling them not to enter certain transactions. If there wasn’t enough info for investors, blame the SEC for not having rigorous disclosure requirements.

      Why is it so shocking that the Big 4 is still the same on AIG, Fannie Mae, etc…(although I think there actually have been switches with Fannie/Freddie)? These weren’t botched audits. You act like PwC, EY, DT, KPMG were supposed to issue press releases on these companies with negative news. Management is responsible for disclosing key business items, auditors just make sure they meet the SEC requirements.

    20. J
      J says:

      @fm 112

      The layout on the front page is decent. My gripe is more with the style of writing — it reminds of 9/11 truthers and emails that claim Obama is secretly a Muslim terrorist.

      If you have noticed I have garnered some support among your commenters. I think if you took a more serious tone in your writing the big4 defenders would take you more seriously. I put you closer to a 9/11 Truth website than the New York Times I think playing a little more to the middle would actually generate *more* support for your cause rather than less.

      Fortunately I am not an accountant or an auditor or I wouldn’t even be able to afford to type out the word Prada.

    21. fm
      fm says:


      “If you have noticed I have garnered some support among your commenters.”
      That’s pretty funny. This is a blog… My blog. Not the New York Times. It’s more or less an open forum, but a mediated one, and I am the mediator.

      Your commentary, any commentary, is at my pleasure. I appreciate constructive discussion of the issues I’m presenting, pro and con, and constructive critique of how I can make the information clearer and more complete. I also like to hear about other issues and stories that readers would like me to write about. Many email or call me off line to give feedback. Actually, many more than comment do so, if you can imagine. The feedback comes from all kinds of people. Most who contact me off line are at senior levels in the firms, industry, journalists, and law firms. They are not comfortable commenting. So actually the commenters are a skewed set of either the fearless or those that believe themselves immunized from any retribution. A few are independent enough to sign their name. Those who choose or have to remain anonymous, even off line, are at a disadvantage in my mind. I can’t judge age, experience, perspective, agenda, etc even though all of those things about me are fully on display for you.

      My style of writing, and the point of view, won’t be changing. Not by a long shot. I’m not interested in the least convincing Big 4 defenders to “take me seriously.” Perhaps you should ask the Financial Times, the Wall Street Journal, Compliance Week, and all the others who’ve linked to me if they think my writing sounds like a “9/11 truther” or anti-Obama rant?

      You are welcome to start your own blog with a tone you feel is appropriate to the subject matter. Let me know when you do.
      I’ll leave some comments. 😉

    22. J
      J says:

      @fm 123

      This is a disparity between your comment and presence of this site. If you didn’t care about swaying opinion, you wouldn’t spend time developing this site, which is clearly a major time investment.

      I’m not sure why anonymous comments would invoke fear of retribution in anyone.

      I don’t have time to blog and I don’t care that much about the topic. I actually only added this to my RSS feed to use a second source to confirm any layoff rumors that come up. There hasn’t been much content like that lately (perhaps since that is not the intent of the blog) so perhaps I will unsubscribe.

      I wouldn’t expect you to change your point of view. But I think my advice to play more to the middle would generate more readers and productive conversations about the topics you are clearly passionate about.

    23. J
      J says:

      Do you have a post that explain what you think the responsibility of the Big4 is. One of your articles seems to indicate they are responsible for the financial meltdown. Not being an accountant myself I thought their job was to certify the financial statements were accurate to published standards, and not to advise companies how to run their businesses.

    24. fm
      fm says:


      Maybe you weren’t aware of the settlement PwC paid for it’s involvement in AIG’s previous misstatements? http://www.reuters.com/article/americasDealsNews/idUSTRE4928XR20081003

      Maybe you weren’t aware that they were sued by shareholders of AIG for the current problems?

      Maybe you were not aware that there was an auditor switch with Fannie Mae because Fannie Mae’s shareholders are suing KPMG and KPMG is suing Fannie Mae over its audit?

      I don’t buy the “I was duped” defense.

    25. fm
      fm says:

      I do care about educating and raising awareness of the role and responsibilities of the audit industry in the financial system, the capitalist system. It’s an underreported topic unless there’s a crisis or big lawsuit. I’m happy with the readership, both in depth and breadth. I will probably hit 1,000,000 page views in the next month or so.

      I don’t have a post, that I can recall, that lays it all out in a nice neat package. That’s why there’s over 700 posts and why I’ve been writing for more than two years with no end in sight and no problem finding examples that illustrate my perspective. It’s a complex subject and a long discussion, which is why my original objective was only to build up an audience for such a book. But if you’re tired of my voice, look at this post and try some of the other linked-to authors. I’m not alone in my opinions.


      As far a swaying opinion, I have few ways to measure that. I can measure impact in terms of how many read the blog, what kind of people read the blog, how involved they are, and what kind of feedback I get. But that’s a measurement of awareness and understanding of my point of view and the information I present, not of whether I have changed their hearts and minds. As an accountant and auditor, a CPA, I do what can be measured. It’s ingrained.

      I appreciate your thoughts and hope you keep reading. I’ve written so much about the layoffs, it’s starting to feel repetitive to me. The cuts continue and I did not set out to focus on staffing issues alone. It happened and it provides a prime example of the mismanagement for the firms on so many levels. And it’s the issue many readers are interested in right now, since it hits them close to home. But the issues are bigger than any particular staffing action in any firm. Those kinds of short-term, reactive measures will continue if the larger issues are not understood and addressed constructively.


    26. fm
      fm says:

      @Billy Bob @J

      I’m a Gemini. I’m an over-communicator. A blog, ideally is a conversation, not a one-sided lecture. That’s why all the comments are interesting and gratifying to me. I just wish some commenters would read the older posts. I seem to have to keep repeating… Oh well…



    27. Billy Bob
      Billy Bob says:

      Dear FM: My comment was directed to J. I get a kick out people defending the indefenisble (such as the Big 4’s way of conducting “business” these days).

    28. @fm
      @fm says:

      You are doing a great job here…or rather, you have provided a mechanism to expose the underbelly of the big 4 more specifically of deloitte partners, managers/senior managers who until now discreetly went about their nasty business with people not figuring out what happened and why…now we are all aware and can see through those pathetic folks….

    29. m
      m says:

      @ J

      “Fortunately I am not an accountant or an auditor or I wouldn’t even be able to afford to type out the word Prada.”

      Re: That comment is uncalled for.

      “Do you have a post that explain what you think the responsibility of the Big4 is. One of your articles seems to indicate they are responsible for the financial meltdown. Not being an accountant myself I thought their job was to certify the financial statements were accurate to published standards, and not to advise companies how to run their businesses.”

      Re: While it is true that auditors are not there to advise companies on how to run their business, my understanding is that auditors issue a going concern statement. In theory, that should involve some analysis of a company’s risky activities. It seems logical to assume that since auditors by principle should be professionally skeptical and that auditors are responsible for going concern, the financial crisis is well within the scope of their jurisdiction. Correct me if i’m wrong.

      I don’t know if the audit model is broken, but at the very least, it’s damaged. I’m sure this has been discussed, but when an auditor becomes dependent financially on a client to remain solvent and pay its fees, how can true independence exist? How reluctant would a firm be to issue a qualified opinon? Isn’t that almost like shooting your revenue pipeline? Sure, you can argue that firms won’t take on excessive risk for reward. But short-term thinking and greed takes over in some instances.

    30. Anonymous
      Anonymous says:


      Correct – in the short term mistakes are often made for the sake of immeidate cash/revenue. In the long run protecting one’s reputation will generate a stable and profittable business. I think you have struck another point that adds to the only major comment this post has really produced… the point being that the people paying the bills are not the true client and that this compromises independence. If you add that point to the fact that short term thinking (which is more likely in financial downturns) results in short term decision-making (i.e., not producing the quality work that will maintain your reputation)… then you might have the basis of the “broken model”. This combination is deadly if placed in the wrong hands. This comment is interesting to me.

      Once again though – as I am not in audit, I do not see this as broken in my practice area.

    31. m
      m says:


      I agree. In theory, in the long run protecting one’s reputation will generate stable and profitable business. That’s a line the firm keep throwing out there. There’s still that inherent risk that partners will ignore it. My limited understanding of what goes on in the upper levels is that partners are actively encouraged to generate business.

    32. Anonymous
      Anonymous says:

      @m – they have to generate business. They cannot live solely by reputation. Reputation helps maintain annuity clients, repeat (yet not so regular) clients, and via word of mouth bring in new clients. But the growth of that model isn’t particularly fast. Most entrepreneurs seek faster growth and growth beyond the stable and sustainable. They want to “expand”. True expansion requires actively generating new business while still maintaining that reputation.

    33. Ex-DT
      Ex-DT says:

      In my experience, keeping the client happy takes precedence over being the bearer of bad news. Not to stop the news totally but at least to water it down significantly…….

    34. Anonymous
      Anonymous says:

      In my experience it is my job to listen to the client and to find ways to tell them when they are making mistakes or applying a poor methodology. However, once I’ve said my peace, it is their decision to make and it is time to step back and let them run their business. In my experience the client with any integrity want me to tell them the truth, as I see it, good or bad. That is what makes clients happy — if and only if you are right or at a minimum present valuable insight for them to consider.

    35. ex-DT
      ex-DT says:

      @136: I totally agree. However often short term and longer term goals do not align. Long term, hearing and learning from an independent (in a general sense) view of the cold hard truth should make the client stronger, short term it takes on a more personal and troublesome tone for those involved if the news is not good. Telling the client things are getting better while justifying internally why something isn’t a big audit issue (when it should be) is not the right way to do it – but it happens….and just happens to keep the client feeling better about themselves.

    Trackbacks & Pingbacks

    « Older Comments

    Comments are closed.