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.

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  1. shi an de
    shi an de says:

    What are accounting grads supposed to do in the next few years if the major firms seem to be sinking ships and the next tier aren’t safe either? granted, I’m not studying audit (I’m tax) and I am not so far in the process (2011 graduation), but news even for the tax side isn’t encouraging (EY tax shelter fraud, etc)

  2. HereNow
    HereNow says:

    Currently employed as a consultant (MBA, no accounting degree) in one of the PwC specialty area practices for the past 10 years as a Director, I see first hand the change in corporate culture. The partners have attempted to adapt a “Japanese” style of management where PwC is your family and your life, and anything not PwC initiated or approved should be secondary (inviting everyone in a market group to join the partners at the local tavern for drinks on Friday night so we can “connect” is an example of the warped thought processes by the partners. Most of us have worked long hours during the week and would rather join our family on Friday evenings. I prefer to be at my kid’s soccer game without AOB from the PwC alcoholic get together on a Friday eve). It appears they could be starting the staff cuts at higher levels by marking down the annual evaluations of Managers & Directors who were too involved in servicing existing clients and did not expend enough hours marketing to add new clients. Corporate atmosphere is that client service is to be performed by senior associates and below. Manager and above is supposed to market. One senior partner actually mused that anyone can do the work once it’s sold. You wonder why they have this large team of sales persons who are supposed to be responsible for marketing the firm’s services (and are being paid a salary + commission), if they are putting so much pressure on the Managers and Directors to do the same function. Wonder when the clients will wake up to the fact they are not receiving the level of consulting they are paying for. It’s a glass house waiting to shatter. Question, will it be from inside or outside”

  3. a
    a says:

    Tax isn’t safe, big 4 is trying to outsource this to india. My advice, get an engineering degree, the big 4 are ruining this industry.

  4. 007CPA
    007CPA says:

    I agree that the big4 are not the patron saints of business that they are supposed to be, but 24 months is a very short period of time. You may be on to a lot of good ideas that can potentially lead to the downfall of one or more of the big4, but 2 years is not enough time for these problems to take down a whole firm.

  5. Tenacious Truman
    Tenacious Truman says:

    007CPA @ 5 —

    You say “… 2 years is not enough time for these problems to take down a whole firm.” Your conclusion lacks evidentiary support. Please redo the working papers.

    So, how about a counter-example? Let me ask you, Mr. Bond, just how long do you think it took Andersen to go from “Houston, we may have a problem here” to “closed for business”? Five years? Ten years? Want to try for more?

    I’ll tell you, since you asked so nicely: October 2001 to June 2002. That’s nine months — max. Nine months to take out the most successful of the Big 5 firms and reduce it to the punch-line of a Saturday Night Live joke.

    You kinda may want to rethink your position on the whole timing thing….

    — Tenacious T.

  6. Anonymous
    Anonymous says:

    I put my $$$ on DT (the most disgusting of the bunch). DT is actively shedding partners as we speak. The organization is full of Flanagan’s. If you trace DT culture, you’ll learn that the disgusting way in which it conducts itself is part of its history.

  7. Big 4 Guru
    Big 4 Guru says:

    This is fear mongering at its worst.

    There is absolutely no chance that the any of the Big 4 will fail within 24 months. Do you really think these lawsuits are relevant to companies in the U.S. that require audits of the size that only the Big 4 can perform. Do you think the audit committee’s of Exxon, Wal-Mart, GE, etc. are going to say “gee, there were a couple international lawsuits this year, let’s use a local CPA firm as our auditors this year.” No way. The size and scope of these audits would be incomprehensible to even the regional firms. Whether audits are perceived as a value added service or a necessary evil, the fact remains that audits are, in fact, required.

    For all the students and graduates reading this, DO NOT be fooled into thinking that you should pursue a different career. The Big 4 are not going anywhere and, even if they did, a career in accounting would remain one of the safest and most secure. There is absolutely no need to worry.

    The Big 4 Guru

  8. Allan
    Allan says:

    Francine: 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? The very questions you ask “rhetorically” are liegitimate – and must be answered; thus, audit firms cannot – and should not – be held to standards higher than those to which other licensed professionals are held!

  9. fm
    fm says:

    @Big 4 Guru

    You assume a few things:

    1) That audits wil continue to be required by regulation in the form they are now delivered.
    2) That the firms can afford to continue to settle these large lawsuits rather than have the facts decided at trial. Do you have a view to their balance sheets and funding sources?
    3) That the two international cases that will go to trial, BDO and Deloitte Parmalat, will be won by the firms.
    4) That more internaltional suits will not be brought, such as Satyam, further stengthening the case that the firms’ business model must change since it serves two masters, neither well.

    You who pooh-pooh my ideas and assume that both clients and recruits will continue to be able to choose the Big 4 are delusion promoters. I see dead people.
    The next tier firms are not a viable option, I agree, to audit large companies in the way it’s being done now. But that is the point. The way it is being done now serves no one but a limited number of each firms’ partners.
    Francine

  10. 007CPA
    007CPA says:

    @fm and @TT,

    The reason why I said that 24 months is not long enough for the whole big4 world to get turned upside down is that there is not a solution of the problems put forth. If one of the big firms go down that would leave 3 big, a corporation could use one for audit, one for tax, and one for consulting but leave no other options if they had to change one for whatever reason. Having 4 big firms solves this problem. This is why I say that it would require a solution to these problems and an alternative to the big4 before one of them can fail.

    and to fm in #11.
    “1) That audits will continue to be required by regulation in the form they are now delivered.”
    I have read where you have said that the audit requirements will change, but I see this as a hard pill to swallow because this will be sold as getting rid of SOX legislation. I don’t see how the public will be able to understand this. CPAs wont like it but they may understand the change. My fear is that “Joe Investor” thinks that SOX protects him from financial fraud, and since he does not see the Big4 as the big bad wolf, will not support this change.

  11. Big 4 Guru
    Big 4 Guru says:

    Place yourself on the audit committee of a large public company. Who would you turn to to provide you with the assurance that your company’s financial reporting is legit. Something will always serve as a check to management. True, there is always room for improvement in the audit model, hence the increasing number of audit standards. But to say that the entire model is flawed and destined for failure is only making the opposite of all the assumptions that you claim I am making.

    Someone e-mailed me saying “did you see the latest post on retheauditors?” He is considering switching career paths because he is afraid that the Big 4 will not be around long enough to support a career. That is absolutely not the case. I might be a little worried if I was a current partner in one of the firms being sued, but would have absolutely no reservation of starting a career there now.

    What do you think happened to all the Anderson staff? Do you think they are all unemployed? No, they were absorbed by the other firms. If by some insane twist of fate one of the Big 4 went under, the same would happen. The market would absorb the employees and the regional firms would get bigger. Your argument seams to be that the audit profession is doomed, which I have to say is totally off base.

    What do you propose as an alternative? Until there is a viable and supported alternative there will be no end in sight for the Big 4. From what I’ve heard you’re the only one painting such a dire picture and even you don’t have a solution.

  12. fm
    fm says:

    @Big 4 Guru

    I have never told anyone publicly or privately to not work at an audit firm or to leave. I may have helped them decide which firm, or if a particular job is not right for them anymore or meeting their needs. I may have helped them see if the path others set out for them is really the one they want for themselves and the options if they are forced to change course unexpectedly. My purpose is to inform and open the eyes of all involved as to the risks, rewards, processes, business practices, model, threats, opportunities… I want young and mature professionals to go in with open eyes, and for clients and others dependent on the work of the firms to be informed so they can receive the service they are entitled to.

    However, the current model is not protecting shareholders. It is obviously not making a lot of employees happy, either, as well as disappointing some other stakeholders such as vendors and communities. When I say that one more will fail it is not a wish. It is a lamentable fact, based on reality.
    I don’t wish it on anyone but it can not be avoided or mitigated unless those responsible act, for a change, not out of self interest. That includes new recruits.

  13. openyoureyes
    openyoureyes says:

    @big4guru, A lot of top students are not going to public accounting anymore. They are going to govt agencies and private. They see whats happening, and they don’t want their career outsourced and or their firm to fail. Professors and top universities are starting to lose trust in these firms in my opinions, especially since they have been altering signed offer letters. Go to greendotlife.com a underground forums of deloitte employees. The morale at this firm is abosolutly terrible based on their discussions.

  14. Anonymous
    Anonymous says:

    @fm and @ HereNow

    I know someone who “lost” a good friend to the debacle at Deloitte and I only wish someone had opened his eyes to this disingenuous corporate culture…

    “…style of management where PwC is your family and your life, and anything not PwC initiated or approved should be secondary (inviting everyone in a market group to join the partners at the local tavern for drinks on Friday night so we can “connect” is an example of the warped thought processes by the partners… alcoholic get together on a Friday eve).”

    Insert “Deloitte” and you have the same picture. Family, friends and life outside The Firm ceased to exist for this “newbie” and by the end of busy season, he was definitely a changed person: self-important, fearful, sarcastic and happy to feel better at the expense of others. In some instances, a layoff may be a blessing.
    .

  15. openyoureyeswider
    openyoureyeswider says:

    dont be fooled by DTs propaganda…the very things that Barry Salzberg said were “non-negotiable” were negotiated…either on the sly or through “performance” and “personal” issues. There is no more diversity anymore in my offices that I used to see…I always thought they were at client sites working hard..Today I heard they were periodically “separated”…either Barry hasnt a clue or he feigns ignorance… they do reductions in force due to lost clients and reduce employee’s budgets due to cuts from clients, how come there isnt any significant cut in partner compensation??? wasnt there supposed to be a risk involved in being a partner?..by the way, if you are thick with the partners, your budgets arent cut and you will get the best clients and land up with the best utilization at the end of the year and the best rating and the most money…..the morale is just sadness, helplessness and bewilderment everywhere….no one trusts the ethics line to make any complaints either…what a mess…sadly, clients have started to read these blogs as well….just heard that a laid off ex-DT employee committed suicide…cdnt take it well…so all you folks out there, take it easy…this isnt the end of the road and you deserve better than give up..so hang in there….you owe it to yourself.

  16. Anonymous
    Anonymous says:

    Question number 1, what if I asked you, in 2001, that you believed Anderson would collapsed in one year, would you think I was crazy? Question number 2, what did the Big4 really change the way they perform audit, conduct business, treat their employees? Question number 3, what is a big deal if big 4 suddenly disappear from the world?

    Big4Guru, tell you friends that they don’t need to change their career. The world needs good accounts and auditors, and the world will be just fine without any, or all of the big 4s…

  17. Anonymous
    Anonymous says:

    @17 — until you experience it (as I have), it is incomprehensible that a firm like DT could commit the practices it does (illegally) and get away with it — over and over again. The insecure partners are using the layoffs to target those that threaten their positions, making up lies to substantiate the layoffs, and trashing people even after they leave. At the same time, the Deloitte alumni machine is spouting BS about assisting laid off employees with jobs and the Deloitte website is giving advice on layoffs during economic hard times. These partners need to be thrown in jail, not for just being bad leaders, auditors, tax professionals, and consultants, but for lying, slandering, and undermining people’s careers.

    fm — could you open up a blog for us to post illegal/unethical practices that we have witnessed at Deloitte? I bet Obama’s team would like to take a read.

    Given Obama’s new anti-trust legislation, someone please ask him to extend it to Big-4 non-solicitation and non-compete provisions. The Big 4 layoff and hold people to these provisions in this economic environment. How is this fair competition?

  18. fm
    fm says:

    @Anonymous #19

    I can open up a new post regarding illegal /unethical practices and we can collect comments. Good for my book and the lawyers I know will love this. I will do it tomorrow.

    Non-solicitation, non-compete clauses are always able to be contested. All it takes is time and money. And some huevos. But it’s possible to break them because most of the time, in most circumstances, they are unenforceable and actually illegal in some states. Universities should protect their students more and tell the firms to stop putting these clauses in the employment offers and contracts or they can;t recruit there.
    Francine

  19. Anonymous
    Anonymous says:

    @17, you mentioned that “just heard that a laid off ex-DT employee committed suicide”. Can you give more info about that? This is so horrible.. I am sure we wouldn’t find the news on DeloitteNet…

  20. ClownCollege
    ClownCollege says:

    fm:

    An offer for people to tell their own “illegal” stories is an offer to get a lot of whiney, unsubstantiable stories from former employees. I’d tread very, very lightly when including any of these allegations in a book.

  21. fm
    fm says:

    @Clown College

    It’s just a way to collect ideas, leads, and things to follow up on. The challenge of a book is my desire to get interviews and to research and verify any examples and stories that are included, more so than I can do now. I do my own research and try to limit the blog to what I know and what I can verify. But the requirements of a book, as you rightly point out, are much greater. Time and money. That’s all it takes. 🙂

  22. Anonymous
    Anonymous says:

    @21 – understand the need for info -but sorry, cant reveal more info.. want to respect the individual’s family’s need for privacy…the info was provided to discourage the negative.

  23. Anonymous
    Anonymous says:

    look into what larry summers had planned for AA after its demise. resurrect the giant in the fashion AA himself could have been proud of: an audit firm, nothing else, not tax, not consulting, nothing but audit, zero conflict of interest. hold its people to the highest ethical standards, take no crap from anybody, not boards, cfos, ceos, or even congress, and do audits better than anyone else. the cost to the accounting firm? actually, larry was thinking of charging a hefty premium…

  24. Independent Accountant
    Independent Accountant says:

    FM:
    If a Big 87654 firm fails my money is on PWC. I admit, I have a special dislike of the PWC, the most arrogant of the Big 87654. Why PWC? It “audits” both AIG and GSG. All PWC needs is one smart Congressman or Senator at some public hearings about AIG’s failure and AIG’s revenue recognition practices are exposed with respect to CDS. Next the Justice Department picks up the football, and the E&Y tax fiasco will be relegated to ancient history. Why? Pat Buchanan’s pitchfork brigade is furious with AIG and its $173 billion bailout. What better way to keep the masses happy than feed it a few PWC partners and the whole firm to boot? PWC gets my vote.
    I have followed the Satyam story closely and can’t believe the PWC “party line”. Who does Sam think he is kidding?
    I would be surprised to see BDO win its case on appeal.
    There is so much Big 87654 questionable behavior. It’s a veritable cornucopia of crime and incompetence.

  25. Anonymous
    Anonymous says:

    I was telling my partner i am working with today that the world would be much better if the Fortune 500 was audited by 500 different CPA firms. Of course, you can expect her reactions and response…

    This is just my dream…

  26. not sustainable
    not sustainable says:

    Big 4 is not sustainable, the business model does not work, paying a company to attest that you are in compliance and than trying to win business from that same business. Get real… Public accounting won’t look the same in a mater of time in my opinion.

  27. Tony Rezko
    Tony Rezko says:

    Agreed with # 28 – and for you libertarians out there, this is a great time for “creative destruction.”

    The model cannot continue as is – those firms who get this, and adapt, might survive, if someone smarter and savvier doesn’t build a better model first. And if they don’t change their way of thinking? Chances of survival are slim and none. But that’s how the “stop complaining” cabal likes it, right?

  28. HereNow
    HereNow says:

    Whoever posted a note regarding “independance” practices of the big 4 hit the nail right on the head. It doesn’t matter if it’s an audit client, if they need a project performed that is prohibited by the independance rules, someone in the internal independance office will know how to word the proposal letter to get around the problem. My favorite is “the Firm will suggest to management possible corrective actions. It is management’s responsiblilty to determine whether the suggested actions are appropriate in the specific instance”. Give me a break. If management were able to make decisions, they wouldn’t be hiring a Big 4 at exhorbitant prices!!! The Big 4 do anything for money, they will do whatever is necessary (I emphasize that!!!) to make sure that a competitor firm is not selected to perform a non-audit engagement at an audit client. Big 4 obviously contributed significantly to the Wall Street mess. All of the banks and brokerages were audited by SOMEBODY…even Madoff!!! We’ve reaped what’s been sown…Forgive me if my terminology is not exact, I’m not an accountant, but a specialty area consultant who sees some really interesting stuff from the “inside”.

  29. Disappointed
    Disappointed says:

    I am disappointed in what this blog has become – you don’t really care about whether or not the business of auditing becomes better, but rather you are just being mean-spirited and actively rooting for companies to fail. These same firms you rail on and bash are the same firms who employ many of your “spies” (for lack of a better term). You are helping to dig their graves by posting unsubstantiated stories that seep out into the market place.

    To Anonymous #19 – if you witnessed illegal or unethical practices, why did you not report them? Why couldn’t you talk to the ethics hotline or even a newspaper reporter if you had concerns about bad practices? Why? Because it’s easier to post unsubstantiated rumors on websites – you can bypass the middle men, post anything you want, and now it becomes a problem of “guilty until proven innocent.”

  30. @31
    @31 says:

    While I can appreciate your frustrations, and perhaps agree in some small way to the tone of the website, I would call into question your integrity in thinking that merely because a Firm employs thousands of workers that the employees should refrain from voicing their concerns.

    Think about it this way – If a staff accountant had an issue – would he tell the manager. Probably not. The manager would label him a whiner and give him a bad eval. Would he tell the senior manager. Ditto. Senior manager would be afraid to raise it to the partner. Who does the staff tell – his peers both inside and outside the Firm.

    Said another way – You go to a restaurant and have a crappy meal and bad service. Do you tell the waiter? No – he gave it to you. Do you tell the manager? No – he’ll stick up for his staff. You tell your friends it was crap and post about it on internet forums. Welcome to the Y generation knowledge sharing process.

  31. Anonymous
    Anonymous says:

    Disappointed — there are lots of intelligent ex-Big 4 and current Big 4 people who read these blogs. Once these unethical/illegal stories are posted, people can concur (or contest) the reality of these events. I’m willing to bet that it will be the former.

    Things witnessed that once did not make sense will make sense. Leadership will have a harder time spinning lies. Isn’t that what you are really afraid of?

    Big 4 hire straight out of school because it is easier to manipulate the minds of young students (although the Gen Y’s are giving them a run for their money — HA!). If everyone knew the games and can spot the games, it makes it harder for those playing the game.

    As for the ethics line, are you claiming that this is a trusted venue?

    Read the stories, then decide for yourself. With all the partners being kicked out the door, there will be lots of stories.

  32. Tenacious Truman
    Tenacious Truman says:

    Disappointed @ 31,

    I too am disappointed I am disappointed in the leadership of the top 4 and other mid-tier firms, who have had every opportunity — and every incentive (except personal) — to make strategic and operational changes, and yet continue to fail to do so. They blame the “crises” on the marketplace, the regulators, the clients, the statf …. anybody and everybody except themselves. They RIF and demote and throw loyal employees to the wolves, in order to protect their compensation and their leadership position. Anybody calling for change — and pointing out the perfectly logical business case for doing so — is silenced in one way or another.

    This blog is the only forum I can find where (a) staff can voice their experiences without fear of retribution, (b) the truth about the failings (and liability exposure) of the audit firms is available without firm-controlled spin, and (c) there is a place for discussion of what should be done. You don’t like Fran’s tone? Fine, create your own blog. Maybe you’ll do better. You can root for the Big 4 firms to survive and even thrive by staying the course.

    The sad truth is that the firms will never change if such change is left in the hands of the entrenched leadership, whose positions (and compensation) is solidly tied to maintaining the status quo. They control the internal messaging, staff (and partner) compensation, and promotability. No, the needed changes will be forced on the firms from the outside, either through regulation or through litigation. Saying that’s the case is not rooting for the firms to fail, it’s pointing out the truth.

    I could rebut most of your other points, but why bother? You would just see my points as more rooting for “companies [sic] to fail.” The fact is, I don’t want the firms to fail, and I don’t believe Fran does either. I want them to hold their leadership teams accountable and get to work generating high quality audits, which would include (for instance) timely “going concern” opinions and accurate confirmations of cash balances.

    — Tenacious T.

  33. I wrote #36
    I wrote #36 says:

    In post #36, I wrote: “If PWC’s efforts to avoid being indemnified in this particular case (HA!) is thwarted, your chances of being right may increase.”

    I meant this statement to read: If PWC’s efforts to achive indemnity in this particualar case (HA!) is thwarted, your chances of being right may increase.

  34. J@Syd
    J@Syd says:

    I’ve been reading with interest (and horror) the sorts of things that occur in the US offices of the Big 4-a lot of it is just unbelievable in the way employees have been treated. Although I don’t think the Australian partnerships of the Big 4 treat staff in such a manner Im not qualified at all as a trainee just out of uni to comment at this stage.

    Though I sure hope that it won’t be EY’s roof crashing on top of my head!

    Keep it up Francine-the truth needs to be told.

  35. Ex-AALLP
    Ex-AALLP says:

    re: #12/007CPA

    24 months is certainly MORE than enough time for PwC or EY to go down. It didn’t even take Arthur Andersen LLP 12 months. You have to understand that for every headline scandal (Satyam, AIG, Parmalaat…..) there are literally dozens of other scandals/re-stated earnings/demoted partners going on at any given point in time that don’t make it into the headlines.

    I seriously would not be surprised to see the Big4 implode and Obama nationalize the entire attested-financial-statements industry into a new government entity a la SEC & IRS.

  36. Anonymous
    Anonymous says:

    The Big 4 is a monopoly. All public companies are required to have their financial statements certify by auditors. In general, these companies chose one of the Big 4 to perform such task, because using the Big 4 lends some amount of creditability in the market place. If the Big 4 were to fail, it may undermine the integrity of the U.S. financial system. Thus, the government has an incentive to ensure the success of the Big 4.

    Here’s my proposal, why not force the Big 4 to rid itself of any non-attest function, so that these companies can focus solely on attest? Why not remove the stringent non-solicitation and non-compete provisions forced on employees of the Big 4, so that these individuals are free to change firms without being harmed financially. Why not let individuals start their own business and tax consulting firms to create more competition in the market place?

    Fran, in response to your earlier post, the non-competes do hold in many states. Even if they don’t, the Big 4 has enough resources to keep you in litigation and drain your resources. The games they play are not always ethical, but they are big enough to play the games and keep you under.

  37. Anonymous
    Anonymous says:

    None of these firms will “fail”, the only reason that AA failed was because it was convicted of a felony (which was overturned later by the Supreme Court) and had to give up their license. I second with “Disappointed” , this blog truly sucks, it’s not really helping anything or anyone but just posing hypothetical what-ifs about Big Four firms and complaining about the process. Throwing out that multi billion dollar company’s are going to fail is sure helpful to your website advertising, it’s almost like a tabloid. People act like the Big Four force corporations into choosing them, but to be honest they are the only ones that can actually do the job, its not a monopoly its business. It’s like asking your local contractor to build a new skyscraper, it’s not going to happen. So because they can’t do it, it means that Gilbane, Pernini and Suffolk have a monopoly? The big four have superior training and resources provided to their staff. I don’t care what you say, but a Big four associate/senior/manager/partner knows multitudes more than their equivalent at a regional firm, its just a fact. The audit model does work and does protect investors, the issue is that you only ever hear about the failures not the successes. I’m not saying there isn’t room for improvement but this nonsense of firms failing, business not sustainable is complete BS. FM, with all this experience you tout, why no solutions? I have NEVER seen a good solution to all these “problems” on this blog, tabloid, whatever you want to call it.

  38. fm
    fm says:

    @Anonymous 43

    You assume that it’s impossible for another firm to be convicted of a felony? You must not remember how close KPMG came with tax shelter mess. They were toast, but the government chose to not indict. https://francinemckenna.com/2006/11/too-few-to-fail-or-something-more/

    Some dumb fear of a “crisis” if another firm failed. Think that’s their biggest worry now?

    The purpose fo the blog is to inform, raise awareness, and move to action those who are responsible for solutions (and contingency plans.) I have my own ideas. Some of them have been discussed on the blog and many don’t like them. https://francinemckenna.com/2009/01/how-will-we-solve-the-financial-crisis-the-answer-is-bigger-than-you-and-i/

    I’m a realist. You can take baby steps. When and if someone who’s responsible for making changes asks my opinion, I’ll give it. Until then you’ll have to be satisfied with more and better information than any mainstream media publication is going to give you about the industry. Or wait for the book.

    Francine

  39. Anonymous
    Anonymous says:

    @43 – 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 skycrapers, and no one else can do it. Gotcha!

    I’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 ain’t true. But you do have your leverage model, which serves to add cash into your pocket.

    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.

  40. Anonymous
    Anonymous says:

    @43

    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)? And about the firms failing…honestly, no one wishes for the firms to fail. 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.

    Actually, I don’t mind anyone singing and melodiously chanting the praises of the firms, but if you really support the firms and want to see them thrive…even you must see the apparent flaws of the model and the need to revise it. Otherwise, the firms and everyone affected are going to learn the hard way.

  41. Zap Branigan
    Zap Branigan says:

    By choosing not to indict KMPG the goverment demonstrated that they won’t indict another Big 4 firm because they don’t want to be blamed for the fallout that would create. They’ll do what they did to KPMG, let the firm off the hook from indictment in exhange for the firm offering up a handful of individual partners as sacrificial lambs. The government gets their trophy conviction and the firm gets to survive. Expect to see a similar scenario play out with PwC and Satyam. A handful of PwC partners will take the heat while firm as a whole avoids indictment.

    And aside from a criminal indictment, which the goverment probably doesn’t have the stomach for after Andersen, the only way I see another Big 4 firm going down would be from some blockbuster lawsuit like the one KPMG is facing from New Century. Could it happen? Possibly, but these firms have armies of lawyers working full time to make sure that never happens. All this talk of the demise of one of the Big 4, let alone all of them, is premature.

  42. Anonymous
    Anonymous says:

    @47, you are conveniently forgetting that KPMG’s ability to operate on the tax side was significantly limited until the latter part of 2008. Frankly, no one saw them in the market place until late 2008.

    The only reason anyone heard about them in late 2008 was because they started to low ball engagements. For example, where one of the other 3 would have bid $100/hour for a large scale project, they would bid half.

  43. I just work here
    I just work here says:

    @ fm 44

    I am an employee of a Big 4 firm. I (like every employee) am responsible for making changes at the firm that I am employed by. I would like to know what your opinions are for improving things.

    I believe that each of us are responsible for improving our own circumstances. All this whining is just incredibly lame. If the grass is so much greener outside of the Big 4, then what are these people doing working here? And I don’t want to hear stories about the economy or how people want to leave but can’t, or how partners are the only ones with power. Its simple… If you don’t like whats going on, change it. If you can’t change it go somewhere else. Don’t wait for someone else to initiate chage.

  44. Tony Rezko
    Tony Rezko says:

    @49- “All this whining is just incredibly lame. If the grass is so much greener outside of the Big 4, then what are these people doing working here?”

    So incredibly lame, in fact, that you needed to comment on a gorgeous Thursday afternoon! I’ll answer your question – most of them will not work here for long. You can oversimplify and tell yourself they “couldn’t hack it,” but had you considered that some of them might have a point? Or that they post here because they have no faith in leadership? I’m an optimist, and I hope a senior reading this blog will have the guts to speak up when he/she moves up the chain. That said, getting a reformer admitted into the partnership is probably as easy as getting Martha Burke an Augusta membership.

    A culture that pays only lip service to listening, that reinforces bad behavior (eating hours, ignoring problems with the audit, not involving a specialist when we should but don’t want to pay for it, etc.) will reinforce itself, because only so many can live with that type of culture. Changing things is not that easy. Especially when (ahem) some people dismiss you as a whiner.

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