It’s A Race To The Finish – But There Are No Winners
Not so long ago, Dennis Howlett and I went public with a bet:
Which Big 4 audit firm is the next to fail?
This may seem like a dead pool – a quite depressing and morbid fascination with something that will add pain and misfortune to so many. I have been accused of being so totally negative that I strain credibility. After all, isn’t there anything good to say about any of the firms?
Isn’t some audit failure natural? Isn’t some error and omission in the audit process the result of a rational cost/benefit formula at work – one that determines how much more testing, sampling, investigation, questioning, and verification work should be done to reduce risk of material misstatement to an “acceptable” level?
Isn’t everyone cutting staff in this recession? Why can’t the audit firms run a business like any other capitalist and make a profit? Why are auditors any more responsible for the public interest than lawyers?
Aren’t plaintiffs’ lawyers too aggressive and going after audit firms only because they have “deep pockets” ? Aren’t auditors responsible only for certifying based on what management tells them? Can anyone hold them responsible if they were “duped” by bad guys?
The litany of crybaby defenses goes on and on.
Frankly, it’s getting a little tedious.
Let’s face facts. Dennis may be right. It may be EY that’s next.
Even before the conviction this week of four current and former partners of Ernst & Young for criminal tax fraud involving tax shelters, EY had a bundle of other trouble. They were the auditors of Lehman Brothers and are being sued for their role in that failure. They have Madoff exposure. They are also co-auditors for Societe Generale and auditor for UBS – two problem children, for sure. There is speculation about EY in other quarters, and although I don’t agree with their reasoning, the conclusion is the same.
Dennis believes that I’m betting on PwC as next to fail. I don’t honestly remember committing to that, but I’m willing to go with it for the sake of argument. This is in spite of the fact that the other Big 4 have plenty to worry about and the next tier firms are in no way ready for prime time. Wishful thinking that BDO can somehow win their appeal in the Banco Espiritu Santo case, that Grant Thornton won’t get hurt by Refco, or that McGladrey is innocent in the Sentinel case is trumped by the fact all have additional exposure to Madoff.
KPMG, of course, has New Century, Anglo Irish Bank, Citi, Siemens, and others.
Deloitte, well, too many to count. And the Parmalat case is a potential model changer. And a very embarrassing insider trading scandal. Then there’s the loser consulting gigs and a declining demand for consulting, all of which makes for never ending cuts and a not so rosy outlook.
And yet, for my money, PwC is still the closest to the precipice, if only now because of Satyam.
Think about it. It’s their third strike (at least that we know of) internationally after Japan and Moscow. Two of their Indian partners, for God’s sake, are still in jail – thrown to the prosecutorial sharks by the Indian Central Bureau of Investigations. The Chairman (soon to be retired ) of Pricewaterhouse International Limited, Sam DiPiazza, has pulled out all stops in investigating what occurred in India, sending US and other professionals to “assist” colleagues in India with comprehensive audit quality reviews, and personally meeting with Indian government officials and others worldwide to try to repair the “lost trust.”
And then there’s PwC’s Madoff exposure.
And the lawsuit for wage and hour violations in California that they’ve already lost on the facts but are vigorously appealing. They completely flubbed the administrative responsibility test in this case and will lose the licensing argument. Why? Because the fear mongering they’re trying to stir up through proxies (there have been friend of the court briefs filed by business organizations sympathetic to PwC) are just that. Empty threats. The law firms have nothing to be afraid of if audit firms are required to pay overtime to not-yet-licensed associates. The law firms exposure is minimal. After all, you pass the bar and are a licensed attorney in most states by late fall of the year you graduate. Most law firms don’t tolerate a delay or a failure to pass the bar the first try, especially for top graduates. Contrast this to the audit firms. You can work for five to seven years, eighty hours a week during busy season, before making Manager level, the typical cutoff for future promotions without a CPA.
And there are still questions lingering over their role in Northern Rock. And their forays into gambling audit have not been so successful all the while they’re advising the US to open up online gambling in order to reap the tax revenues.
The rumbling has also started in the comments on this blog over PwC’s stealth “reductions in force” and their broken promises over start dates and starting salaries to graduates. It’s fully expected that additional staff cuts will come soon and be of such a volume that it will be hard to hide behind the “didn’t fit with our performance culture” excuse.
Finally, there’s the strategically disastrous purchase of BearingPoint’s Commercial Services practice. Sources tell me due diligence has been non-existent, it’s solely an ego-trip for current leadership, and there’s a shell game going on in public statements regarding their interest in full blown systems integration services. The probability that integration of the operations, financials, staff and infrastructure will be smooth and trouble-free is in the low single digits.
Yep. Of the Big 4, my bet is with PwC US to fail in the next twenty-four months.
I guess the correct term would be oligopoly, not monopoly, but the point still stands. With the current model it’s probably not a question of if a firm goes down, but when. Sure there’s going to be a lot of pressure to save them, but at some point their luck (and other people’s patience with non-value added audit opinions) is going to run out. For those who say that the people here don’t present solutions just the problems, people here are seeing a sinking ship. They may not know how to save it or what the best course of action is, but they can at least tell that the water level is rising.
This might be a rant but here it goes…
@45 “What have you been drinking? Was it the strawberry twist-ed cool aid? Skyscrapers (cough, cough) … hmmmm … Wasn’t the last song and dance about how easy it is to outsource work to India? Now, its like building skyscrapers, and no one else can do it. Gotcha!”
It’s pretty obvious that you’ve never run a WW engagement, if you think that can be outsourced to India, go and try, and then write a book because I’m sure every Big4 employee in the world would like to know how. I’m sure management would just love to have to deal with calling someone in India to walk through those questionable contract terms or possible adjustment, have you ever called a multinational customer service hot line asking for help? That comment is a joke, on tax returns yes, an audit no. Case closed.
“iI’ve got a red pencil, some paper, brains, and actual experience. You’ve got new college grads with red pencils, some paper, brains, and no experience. Don’t even try to say that someone reviews their work, because we know that isn’t true. But you do have your leverage model, which serves to add cash into your pocket.”
You talk about the inexperienced as if they were doing the most highly technical accounting areas, the whole point of AS5 is to nail down the RISK areas, which are then concentrated on by the Partner/Manager/Senior. The associates are stuck doing associate work, which to me the risk of material misstatement isn’t there (don’t comment on cash at Satyam because there aren’t any concrete facts in the case). So yeah they are pencil pushers for the first couple of years they are at a firm, but everyone has a learning curve. Do you have any idea how expensive all experienced hires would be? Do you know how long it would take them to train on an individual firms policies and procedures, systems? Let’s see how much that would add to the cost of an audit, the cost to investors. You say you have experience? In what? How did you get that experience? All from school? This model is not unique to accounting, it’s basically utilized in every single business in the world, you leverage to the less experienced while the more experience plan and conclude. Law, consulting, basically any service model does this.
“Your post exemplifies public accounting BS. Well, it works when you are in a room with an underling, using your position to intimidate the other into accepting your view. It doesn’t work so well here.”
Not even worth a comment.
@ 46 “And you have exactly the kind of mind the big 4 attracts…ugh…enjoy the kool aid. Without blogs like these, how else will we know about the layoff status of each of the big 4 firms (since firm leadership has decided to can its employees without prior news or forewarning)? How else will we know what stealth, unfair practices are going on? How else will we know the direction this profession is actually heading (or are you going to believe what firm leadership tells you)?”
Who cares about layoffs, that is just business economics, nothing more. If you are laid off at a big 4, you probably deserved it and I have no sympathy for you. Sometimes an industry tanks or a client goes away, but most of the time its because you are a mediocre performer that has skated by this far because they needed you and now they don’t and there’s someone better to take your spot. Less fee’s equals less work, less money to pay staff, thus less staff. I don’t care what you did or didn’t do, the point is that you didn’t make your case clear enough to whoever was above you, your fault, deal with it. These companies have AT WILL employment agreements and have no duty to report to the public about layoffs, so why would they? To help you? You think all these other companies in the news like reporting layoffs? It’s part of the business cycle and the big four is no different. I’ve seen too many people that don’t cut it pass through the ranks and it’s about time they are out on the street. If you count on your firm leadership for your future you need to get a clue, your career is your career.
P.s The PWC staff in California are a bunch of p*ssies and should all be fired. PwC shouldn’t pay overtime just like they don’t in the rest of the country, I hope they lose their case and have no job at the end of it.
“The author of this blog is suggesting the firms to revamp their model. How can a firm truly serve investors when they operate under a profit-making model only meant to further the interests of those in charge? As far as solutions on this blog, have you visited the threads “Hey Big 4! Here’s what I’d do (instead)” and “Here’s what I’d do Part 1 – First, we focus on the client”?. Some possible solutions are talked about in those threads.”
Same argument as wall street/CEO pay. Let’s knock out all the profit in the industry so you can no longer pay talent. So then what do you get? Ohhh yeah you get the government/union employees, a bunch of non motivated employees that are looking for their 9-5 and done. How do you expect to keep a person working 60-70 hours a week with government pay and dismal raises? So let’s extend that audit? Nope that doesn’t work either, because there is a need for timely reporting. I’ve read the posts and quite frankly haven’t been impressed with anything I’ve seen. But I welcome you to lay them out here because I guarantee there is a counter argument for every single one of them. Hence why this is still being discussed and the big four are the big four.
There is no denying that there are improvements to be made, but those improvements have to do with PEOPLE, because in every single case that is on this blog, its the people that failed not the model. It’s the partner at Enron, Ernie Ebbers, Bernie Madoff, SEC, CEO of Lehman, Satyam CEO, the basics is that all the failures in audit are usually due to human error/greed and fraud, someone going against the model. THERE WILL NEVER BEEN A PERFECT MODEL, so the real question is how to prevent bad apples from ruining the system, after all it is these so called “investors” fail to respond to their proxies and let the greedy SOBs head the companies their retirement is invested in. They are the ones that are voting on directors that vote on the incentive models for executive pay. MAYBE there should be some more investor accountability. Like hey, you voted for this guy (or didn’t respond to your proxy), you demanded the high profits and returns, he took the risks, this is what you get. It’s a viscous circle. If you want control over your money, put it under your mattress or better yet use it to start a blog and write a book.
Sure there’s going to be a lot of pressure to save them, but at some point their luck (and other people’s patience with non-value added audit opinions) is going to run out.
Maybe that’s the issue, is that people don’t see them as value added. Maybe I should tell the investors of the companies I audit how much revenue I have deferred because of contract terms the company missed or don’t understand, or improper revenue recognition practices and risk seeking rev rec directors. Maybe that will get their attention. There are good things about an audit too, people just don’t see value because it isn’t presented to them. I’m guessing you don’t see the value in your electricity provider either, but I am sure you do when the lights go out.
@51, like moving deck chairs on the Titanic
When you say, “It’s fully expected that additional staff cuts will come soon and be of such a volume that it will be hard to hide behind the “didn’t fit with our performance culture” excuse.”, is this a personal opinon or what you hearing from people inside PwC?
Anony @ 52 —
From my perspective, with roughly a decade in the world we now call the Big 4, you are mistaken in several respects.
1. “You talk about the inexperienced as if they were doing the most highly technical accounting areas, the whole point of AS5 is to nail down the RISK areas, which are then concentrated on by the Partner/Manager/Senior.”
AS5 is nothing new. For many years, the audit model has focused on risk areas. Areas perceived to be high risk received more attention and transaction testing, whle areas perceived to be lower risk received less attention. For a while there (late 1990’s), the “risk-based audit approach” was considered a differentiator and marketing tool when the firms competed with each other. As we have come to learn, using a risk-based approach is now the rationale the firms use to cut hours and thus audit fees (including SOX fees). Moreover, as we all know, partners and most managers are too busy juggling multiple engagements, practice development, mandatory meetings/calls, and firm-required learning to actively engage in the details, which is a prerequisite to effective audit management.
2. “Who cares about layoffs, that is just business economics, nothing more. If you are laid off at a big 4, you probably deserved it and I have no sympathy for you. Sometimes an industry tanks or a client goes away, but most of the time its because you are a mediocre performer that has skated by this far because they needed you and now they don’t and there’s someone better to take your spot. Less fee’s equals less work, less money to pay staff, thus less staff. I don’t care what you did or didn’t do, the point is that you didn’t make your case clear enough to whoever was above you, your fault, deal with it.”
I would tend to agree with you if I hadn’t personally experienced, and heard about, so many arbitrary cuts that came down from the top in terms of quantity of heads or flat percentage of headcount. I’ve posted about those experiences elsewhere on this blog. Suffice to say that I could not find the logic you articulate within the RIF decisions. Moreover, the overarching driver appeared to be maintenance of (a) senior partner compensation, and (b) senior leadership position(s) within the firms, and was not obviously connected to cost cutting as a prudent management decision. Moreover, if (say) Deloitte and PwC have less money to pay staff, from where do they get the funds to acquire BearingPoint assets — and to add the staff payroll they just acquired? No, I’m afraid you articulate the business case as it should be, not the way it actually is.
3. “How do you expect to keep a person working 60-70 hours a week with government pay and dismal raises?”
Well, that’s a really good question. (I’m ignoring your unwarranted slam on all government employees, which is based on ignorance and completely contradicts my first-hand experience.) I wonder if the Big 4 leadership teams ought to be asking themselves that same question, right about now?
4. “P.s The PWC staff in California are a bunch of p*ssies and should all be fired. PwC shouldn’t pay overtime just like they don’t in the rest of the country, I hope they lose their case and have no job at the end of it.”
The issue here is not whether the hours should have been worked, because the staff worked the hours. The issue here is whether PwC broke state law. If a judge decides PwC broke the law, then the firm has to pay. Why is that a problem for you?
Here’s a hypothetical. Let’s say you’re a PwC audit partner in California. How about we call the PwC staff in question “whistleblowers” and we call your attitude “whistleblower retaliation” and we let another judge decide whether your attitude violates the law against such retaliatory practices?
Or here’s another hypothetical. Let’s say you’re PwC HR or a PwC ethics officer, and a staff person from California uses the firm-approved ethics hotline to voice concerns with potential violations of California employment law. Do you (a) call in an outside attorney to see if the concerns are valid and the firm has any risk exposure from possible litigation, (b) report the call to the Office Managing Partner who takes it into account at year-end reviews, or (c) call the staff “whining p*ssies” and fire them? Answer (b) is typical. Answer (c) is possible. What do you think the effect of any answer other than (a) is on future staff who want to report issues and concerns to the firm ethics hotline, or want to engage in reforming the firm from within?
5. “There is no denying that there are improvements to be made, but those improvements have to do with PEOPLE, because in every single case that is on this blog, its the people that failed not the model. It’s the partner at Enron, Ernie Ebbers, Bernie Madoff, SEC, CEO of Lehman, Satyam CEO, the basics is that all the failures in audit are usually due to human error/greed and fraud, someone going against the model.”
Let’s start with the first two in your list. How convenient to blame Andersen’s failures on rogue individuals. It was Duncan’s fault at Enron. It was Ebber’s fault at MCI/Worldcom. Well, sir, you are mistaken in those two instances. At Enron, it was an Andersen leadership override of risk management controls, coupled with decentralizing quality control to the local partnerships. The system failed. At MCI/Worldcom, the external audit team used a “risk-based audit approach” and never, ever, detected the problem — but the internal audit team identified it easily and reported it. The audit failed. There were no rogue actors to point the finger at; the problem in both cases was systemic.
Let’s skip Madoff, because the jury is still out.
The SEC is not a person but an entity (a political one at that) and, while I’m sure there are people problems there, the SEC does not actually perform audits of publicly traded companies so it can’t be the rogue actor in your scenario. I guess we could agree that we need to better fund the SEC so that it can more quickly identified audit failures and go after the wrong-doers. Is that your point?
Lehman has not, to my knowledge, been indicted or convicted, so not sure how to respond to you there about the CEO’s actions or inactions.
Satyam is your final entry and, while we don’t know everything about that case yet, what we do know is that two PwC audit partners are in jail and cash balance confirmations failed to detect missing funds of a material amount. Looks like an audit failure, but we don’t yet know root cause(s) and don’t know all the facts. I, for one, am withholding judgment until we learn more.
Granted, no model is perfect. But a model that permits such spectactular failures is one that needs to be fixed. Right now. Fixed by people who do not have a vested interest in maintaining the current model.
So, to sum up: if you are a troll I give you high marks because I fell for it. But if you are sincere in your positions, I can only shake my head and suggest you start reading books, articles, and media reports other than firm-sponsored or firm-published ones, because the truth is out there. The problem is, you won’t find it from inside your firm.
— Tenacious T.
It’s what I’m hearing from numerous people all over PwC, in client facing functions and support functions and at high levels. It’s already happened/happening to people I know personally. You have to realize, I get phone calls and email mail and Twitter DMs every day from people that are afraid to post comments (especially from PwC) that are only reflected in my comments and the posts.
It feels like this blog breaks into four camps: 1) those who work at the big 4 and are “successful” – accused of drinking the kool-aid 2) those who work at the big 4 and don’t feel like they have a path to being “successful” – they say things like “partners pick favorite people who go with the flow and don’t question their superiors” – while I think that healthy discourse is good for a company and to get actual, tangible change and the absence of such discussion is bad for a company, the truth of the matter is that every company operates this way to some extent. The big 4 is so siloed into “camps” that it exacerbates this issue. 3) those who were fired from the big 4 – this is when you hear how horrible it is and how there are no long term prospects and this is a failed business model, etc. etc. etc….you didn’t work out here, so it’s the business’ fault and not your own. While this is true in some cases, it is a rationalization that everyone does 4) those who never made it into the big 4, either because they never wanted to or couldn’t crack it – we are your competitors, so why would you have anything productive to say about us? Not to say your thoughts don’t contain some nuggets of truth, but your self-serving agenda seeps through your comments. In the event I get fired, I’ll probably drop from camp 1 to camp 3 – it’s just how people are.
Systemic change from the inside is difficult, but I agree that it needs to occur for the big 4 to be a sustainable model. But to say that the big 4 provides no value to companies or shareholders is bullshit – in some cases, maybe they do go with the flow in order not to lose business, but I’ve been on plenty of projects that have actually identified issues and proactively worked to resolve them, even in the face of management resistance. The key is to hold individual partners accountable, either through the legal system or internally i.e. if someone does something wrong, do not just ship them to corporate and let them sit out their two year ban; instead, fire them and go after some or all of their partner share.
@anon #52 – yikes – I’m sure I look like a big 4 apologist but my god – they should call you the Kool-Aid Man
I actually do appreciate the value added for my electricity, that’s why I don’t mind paying for it. Do you actually think the majority of companies feel the same, that they don’t mind paying for these audits since they get great value in return?
I’m sure the companies would feel just fine about not having auditor’s asking a bunch of questions, disturbing their staff, and making a big fuss when a projected error doesn’t fall in line with their expectations or something isn’t fitting exactly into the GAAP framework. They care about their bottom line and that operations are effective and efficient. Investors care about the actual strength and health of a company (both of which audit opinions have not been helping with) so they can eventually get a return on their money.
This blog and some of these comments are painting a very broad stroke over a lot of very good, highly-qualified people. Are some things going wrong? Yes. Can improvements be made? Probably. But the article and a good majority of the comments are downplaying the acts of people working hard everyday just to get by. It makes me feel like we have thousands of people with giant approval stamps, just approving anything that is sent there way and moving on to the next one. When in reality, people are working hard doing the things that they think they should be doing and doing their job effectively. How about we celebrate some of the successes? Nothing buy doom and gloom is depressing, and no one wants to read a depressing blog everyday.
“Who cares about layoffs, that is just business economics, nothing more. If you are laid off at a big 4, you probably deserved it and I have no sympathy for you. Sometimes an industry tanks or a client goes away, but most of the time its because you are a mediocre performer that has skated by this far because they needed you and now they don’t and there’s someone better to take your spot. Less fee’s equals less work, less money to pay staff, thus less staff. I don’t care what you did or didn’t do, the point is that you didn’t make your case clear enough to whoever was above you, your fault, deal with it. These companies have AT WILL employment agreements and have no duty to report to the public about layoffs, so why would they? To help you? You think all these other companies in the news like reporting layoffs? It’s part of the business cycle and the big four is no different. I’ve seen too many people that don’t cut it pass through the ranks and it’s about time they are out on the street. If you count on your firm leadership for your future you need to get a clue, your career is your career.”
Yes, everyone that got laid off definitely deserved it. You are 100% correct, because you’ve personally met and watched the performance of everyone that was laid off. I’m glad you set everyone reading this blog straight.
It’s was pretty bad going to work every day during my last 5 months of employment with the assumption that I really couldn’t trust anyone I passed in the hallway on a daily basis. Prior to those last 5 months, I was consistently rated at the top of employees at my level. It’s really tough performing knowing that there’s probably layoffs coming after the coming busy season, knowing that it’s tough to trust anyone in your workplace, knowing that you probably have to outperform everyone at your level to avoid being part of the layoff.
There are fewer jobs out there than a normal market, obviously, but considering that I am a CPA and have about 2.5 years at a Big 4 on my resume, yet I personally, as well as recruiters I’m working with, seem to struggle to even get me an interview by presenting my resume, hmmm, maybe I haven’t exactly had the learning experiences that everyone assumes I would have from a Big 4.
So let me know when you find a blanket statement that is 100% true. I’ll check back and read when you have one.
I agree with your points to some extent. Those who abuse are not held accountable, while the innocent are thrown to the wolves (like pawns in a chess game) when it suits the abusers’ agenda. You may work hard and do so with integrity, but do you realize it is just a matter of time before you will be put in a compromising position (because of someone else’s errors) and be forced to compromise your integrity? Perhaps at this stage, you are single, have no mortgage payment, have no children, etc. One day you will. Just ensure you are not in such a position when such days comes that you can say “no.” Personally, I would not invest my time and career in these types of organizations. Did you read Fran’s article in the Huffington Post comparing the Big 4 and the mob? As you ascend in a mob like organization, what do you think you’ll have to do to continue to advance?
The job market is awful. If you are employed, try to stay employed. When the first chance comes to leave and work for a legit organization, you should seriously consider it. Do not let the free meals, sports events, and other lavish activities lead you astray.
Another thing to consider about working in a “mob” like organization – the more you compromise your integrity, the more they’ve got you. Those above you and beside you know what you’ve done. They’ve got the goods. In the Mafia, once you front a non-legit organization, do the organization a favor, lie to a judge, take the fall, you become captive. Then you have to keep doing it because they know you’ve done it. And they make you do it because you have no choice. What are you going to do? Tell on them now and implicate yourself in past deeds? I don’t think the SEC puts folks in the Witness Protection Program.
Think about the strip club example that was mentioned in another comment and that I have written about in relation to Enron. Once you go along on these outings, seeing them expensed, billed back to clients, you realize that you are part of that charade. You know something about an illegal billing practice. You were there. You’ve been flipped.
Maybe you actually entertain clients this way. Because Big 4 partners can expense these things and their clients can’t anymore. So the Big 4 partner pays, expenses it, bills it back to client with their full understanding. An inappropriate use of shareholder money as well as a questionable practice that has gotten other large organizations sued for harassment has been washed clean as snow. You think anyone is going to listen when you suddenly want to fly straight, do the right thing in an audit or a tax return?
“Wink, wink, nudge, nudge, say no more.”
“I don’t care what you did or didn’t do, the point is that you didn’t make your case clear enough to whoever was above you, your fault, deal with it.”
After reading that comment I feel like the Jodie Foster character in The Accused.
I need to take a shower.
This comment is probably too belated but I agree that the business model of PwC stinks. The partners are like puppets. Even they are afraid of voicing out their opinion if it contradicts the leadership. just in my market alone, our “supposed” leader always say we are in this together but utter something that is contrary to what he thinks should be and you will be given a hard time……..very subtly…..but still a hard time…..even when you are a partner.
24 months for PwC to fail……seems harsh at first but in retrospect……maybe it is indeed a bomb ticking!
@49 = Big 4 HR Troll. It is amazing to see how many HR people troll this site and respond to the dissenting opinions. Honestly folks anyone and I mean ANYONE who thinks everything at ANY service firm is 100% right and defensible is simply incorrect.
Bottom line is the economy is making people stick around. Just wait until it picks up and we have viable options. We will not forget how we are being treated and we will leave. The bad news is there will be 50,000 undergrads willint to take our places.
I think Francine is 1/4 right. We need to go further. I believe that all four firms will fail but not how you think. I believe they will be nationalized. Think of all the revenue the government can syphon off of corporations on top of taxation.
I am already fashioning a nice letter to Mr. Obama, Senators, and Congressmen as we speak regarding the matter. I can’t wait for the announcement!
Payback is a bitch!
All this complains and condemnation of the Big 4 is so worrisome.. I just work in one of the Big 4 and got nowhere else to go, mouth to feed etc. If all your wish comes true, it means i will be jobless. True, I definitely dont agree with how the partners treat the employees but its not like a lot of us got choices in these economic times.
re 70: I will agree with you that the news and commentary is very sobering. But keep in mind this isn’t what people “wish.” Rather, people “wish” that the Big 4 would straighten up, fly right, and adopt more sensible business models.
What people *fear* is that if they do not, then this could have rather adverse consequences, such as lawsuits or a collapse. This will be bad for everyone, so that is why we hope the Big 4 will get their acts together…but if they do not and if the worst comes, it will be terrible for all of us in the public accounting world.
I don’t know much about the other big 4 firms but, as an employee at KPMG, I can definitely say that KPMG half way through digging their graves. In addition to former employees filing a lawsuit against the firm, KPMG is probably the only Big4 firm that’s accumulating a crowd of people that were not promoted last year and/or this year. As it it they laidoff too many people in their Advisory practice (to the extent that their IT Audit practice is almost half its size); once the economy picks up I doubt many people will stick around. I know I won’t; It was my worst decision ever to work for this Big4 firm.
Real reform would start with eliminating the competitive bidding process that currently causes many audits to be underpriced. These audits are then viewed as “loss leaders” that must lead to additional work, or the business model breaks down. If audit fees were derived from a formula that took into account a multitude of factors, but which essentially guaranteed the firm a decent economic return, then this would take a ton of pressure off the audit partners. Combine this carrot with a stick of more vigilent policing of failed audits, and the industry could see a renewal that would be a real win-win, for the big 4 and shareholders.
The way you speak makes it sounds like these policies are firm-wide. In any widespread corporation, there are pockets of poor management and collusion to circumvent documented policies/corporate behavior. How can you make such accusations of firm wide collusion, especially for each and every big 4 company… especially since you are an outsider yourself? Don’t use the, “I’ve get much of my information from my bloggers” because @ Disappointed 58 is exactly right. Most of the people you read from are from Camp 3 and 4 as said so eloquently. Every partner @ big4 firms are not going to strip clubs, nor even 1% of all mangers/partners.
This is not a defense of big 4, because as with all business they surely have their prob lems… some more than others. I understand that in order to get a following you must be extreme, but really? Use such broad paint strokes to label four completely different firms over entirely different areas into the same bucket? Get serious.
Perhaps you have not read my bio or many of the posts where I discuss my experience in the Big 4. I’m about as inside as you can get for someone who actually now can talk freely on the outside. I won’t repeat it here. It’s on the “About” page as well as many other places. Suffice to say that your firm, KPMG, as well as BearingPoint and PwC are on my CV as well as senior positions at JP Morgan and Jefferson Wells. It’s rare that someone who has been a Managing Director (I made “partner” after KPMG Consulting became Bearing Point and in the Latin American practice) and has seen a firm like PwC from the highest levels inside as an “internal” internal auditor has the luxury to talk about what they saw, heard, and did in an independent fashion. I am not beholden to the firms, I will never work for them again by choice, and I have nothing to gain from seeing them fail. On the contrary. What I want is for their leadership and those who still want to work for them, to wake up, smell the coffee and recommit to their duty to the public.
Due to my years of experience and involvement in professional serivces at an executive level, I have many frineds and former colleagues who still work at these firms as partners and professionals and stil talk to me! I have obviously developed many more contacts in and out of the firms who are willing to tell their stories to me and on the blog in guest posts, privately, and in comments. Most bloggers and mainstream media who now write about these subjects get their stories and tips from me, not the other way around.
In fact, there are so many stories I can not tell on the blog because they are even more “extreme.” I will not tell them until I write the book and have the opportunity to “source” them under those standards. But many of them I experienced myself or were experienced by close friends and former colleagues. There are many more stories in this “naked city.”
Why or how have I engendered such good fortune?
By being a straight shooter.
A person who left a comment about everyone “deserving to be laid off” sounds very arrogant. From my experience, people like that usually reap their own “benefits” later on. Anyways, I was curious of why would people who are laid off deserve it? Is it because they were not hanging around seniors, managers or partners offices in order to show off and fit in? Is it because they were not constantly kissing their a*? Because from my almost 2 years experience with KPMG, I noticed that this kind of behavior is usually rewarded. This strategy usually works in earning excellent reviews and getting on the clients that you desire. So if you happen to be a normal person, who comes to work to do the job, and become upset by sitting around and billing empty client hours, you may just about deserve to be discarded.
@77 — I don’t believe any “deserves” to be laid off. But let’s think about some different angles to this story. Try these:
1) it is hard to “fire” someone for cuase. While we live in an “at will” employment world, the truth is that all the litigation in this country makes it really difficult to fire someone. So — when lay offs come about for economic reasons… it is a time when those that might be fired can be let go more easily. These are the people that do not do something blatent such as embezzling… it is the people who do an adequate but not good job, or people that perform OK but have attitude issues.
2) whenever there are layoffs, the decision on who to let go is ALWAYS made based on performance first. The criteria used to measure performance may be something everyone on this blog will argue about, but it is leadership’s view of performance that is used to make the decisions. Only after the poor performers are gone are other criteria brought into the picture.
It may not be that anyone deserve to be let go. But it is often (maybe usually) true that those who are let go find a better place in this world and in the end they were the right ones to let go.
POST #10: The Big 4 are scandalous. They would be in trouble if they did basic audit work. They fall into trouble because the hide the fact that they know about fraud and look the other way. Paper shredding is evidence that known misstatments and fraud exists. There’s too much money and not enough independence at this level. There all crooks.
@79 — an amazing generalization. So in your opinion 100% of the B4 partnership are criminals. Do you know 100% of them and have witnessed their crimes? Have you even witnessed one and have irrefutable evidence of the crime? If so, why haven’t you gone to the authorities? Seems to make you equally criminal if that is the case.
Does it seem reasonable that with a good, moral class of recruits that ethical thought could prevail in these cases? You all make it seem like the downfall of the auditing industry is its lack of social responsibility. Schools around the country are teaching ethics courses in their business schools…it’s not too irrational of an idea. Truly making a person understand that it’s more than just what your salary is can certainly impact scores of students. My opinion is: it’s about being able to live with yourself in the long-run. I know I’d have trouble sleeping at night if my employers were acting fraudulently and I was benefiting at the bane of hard-working individuals.