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.
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.
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:
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.