Do As I Say, Not As I Do – Whistleblowers In The Big 4
On the way to looking for some background for a related story I’ll write next week, I found this article in Compliance Week (subscription only). An excerpt:
When Investigations Hit the BRIC Wall
August 26 2008
Massive in land size, population, and economic power, the BRIC countries—Brazil, Russia, India, and China—are global giants in every sense of the phrase. That includes the potential to give compliance executives giant headaches. Like it or not, Corporate America is stuck with doing business in the BRIC nations. They comprise 40 percent of the world’s population and have a combined gross domestic product of $15.4 trillion. (By comparison, the U.S. GDP in 2006 was approximately $13.1 trillion.)…
All that means compliance executives at U.S. companies have no choice but to learn the cultural differences, and obstacles, to conducting investigations and enforcing compliance in BRIC nations. A quick world tour of those obstacles and differences follows.
Employee Rights
An investigation can succeed or fail depending on how much protection a country gives its workforce…the example of Brazil: Employee rights are extremely favorable in investigations, he said. “It would be incredibly difficult to terminate somebody for cause in Brazil.”
While Brazilian law typically does allow companies to conduct employee investigations, most union agreements prohibit any type of employee surveillance. In addition, “people tend to be very loyal to the chain of command,” Phillips said. As a result, getting employees to rat out a senior manager who is the focus of a crime investigation, for example, may be difficult.
Chinese culture, steeped in communist history, also operates along very pro-employee lines and makes corporate investigations or surveillance difficult. Employee rights in Russia, however, are more lax.
Perhaps least like the other BRIC countries when it comes to employee rights is India, where surveillance is typically allowed and few privacy laws exist, Phillips said. That said, Indian culture does value humility—so don’t expect employees to blow the whistle on fellow workers. “You can be blackballed for that,” he said.
Phillips also noted that only 8 percent of fraud is uncovered through whistleblowers, which means that companies will need to have ”better detection methods than just relying on tips from outside individuals,” he said.
Beyond employee rights, family ties can also bring investigations to a halt. Going against family, tribe, caste, or clan will often strike a BRIC citizen as simply unthinkable, no matter what threats or demands for cooperation a company might make. In China particularly, “The importance of family cannot be overemphasized,” Grayer said.
Like China, business in Russia depends on relationships. “Russians typically see themselves as members of some form of group,” whether they are part of a certain circle of family, friends, or an association, Grayer said. “Within the group, they can call upon each other for almost anything.” It’s an insider versus outsider way of thinking, and loyalty may come before the laws and regulations, he said…
I thought it would be interesting to look at how the Big 4 firms address their own internal ethics and compliance issues in the BRIC countries, in particular. I was especially interested in the availability of ethics/independence hot lines in these countries. Given the experience of Satyam and PwC in India, you have to wonder whether anyone on the PwC audit team suspected any inappropriate activities by the client management, the PwC partners now accused of allowing the alleged improprieties to occur, or both. If anyone had seen or heard any wrongdoing, could they have reported ethics, independence, or risk and quality concerns to anyone locally or internationally without risking retaliation or worse?
I saw that KPMG, one of the firms (with Deloitte) who has been asked to restate Satyams accounts had actually discussed the Satyam case on their global firm website.
Pretty “in-your-face” competitive of them!
A board of directors is expected to oversee the company’s operations, to set its strategy, to set high standards of conduct, and to provide oversight over management’s activities. Independent directors are expected to be able to objectively critique management quality, yet corporate governance failures show that all of this is not always effective.
Why is this? First, finding a truly independent director is challenging in India where corporate CEOs tend to be a ‘clubby’ community and family-promoters are firmly woven into the corporate fabric.
Second, if the role of independent directors is to ‘direct’ (i.e. guide and support) management with their expertise gained in other companies and industries, can they be truly independent of management? Third, there is a danger that promoter-led groups have imperious CEOs who extend invitations to independent directors to join their boards and then expect their full support without criticism. The practice of appointing an independent chairman or lead independent director is not widespread in India and tends to be found only in multinational companies.
So, Compliance Week tells us that, “…Indian culture does value humility—so don’t expect employees to blow the whistle on fellow workers. “You can be blackballed for that,” he said…” And KPMG tells us that in India it is challenging to find truly independent Directors, given the clubby atmosphere that is woven into corporate life.
So how internally clubby are the Big 4 firms operating in India? Do they value independence, integrity, and willingness to blow the whistle on superiors of there is illegal, unethical, or activities violating independence rules that are identified?
PricewaterhouseCoopers has an extensive Code of Conduct on their Global site.
Under “Behaving Professionally” it includes, for example:
- We deliver professional services in accordance with PwC policies and relevant technical and professional standards.
- We offer only those services we can deliver and strive to deliver no less than our commitments.
- We compete vigorously, engaging only in practices that are legal and ethical.
- We meet our contractual obligations and report and charge honestly for our services.
They include a response form on the Global site to enable anyone – an employee anywhere in the world, a vendor, a client, or interested party – to submit a comment or inquiry regarding business practices. It can be submitted anonymously. On their India site, a tab under the About Us section labeled “Code of Conduct” leads back to the Global Code of Conduct page. There’s no hot line or 800-number in India from what can be seen on the website or on the Global page, such as is available for the US firm on their intranet. I guess it’s too hard, even though these services are readily available and part of the GRC-type recommendations made by PwC to their multinational clients to insure Sarbanes-Oxley compliance.
So…Did anyone submit any comments, complaints, or questions about Satyam or the Indian partners accused of wrongdoing to the Pricewaterhouse Global Ethics and Code of Conduct people in the last few years?
Inquiring minds want to know.
Nota bene: A commenter asked me to provide a place to tell your stories of unethical/illegal behavior at the audit firms. Here you go. What would you tell the hotline if you could?
Isnt asking people to post unethical/illegal behaviors that they have seen anonymously kind of a cop out from doing actual investigative reporting for your book? I mean, I am sure saying 1000 times over in the book “from an anonymous source” will be really cool, but I do not think it will carry much weight. Please see the newest book of allegations against A-Rod for steroid abuse. The book was so littered with anonymous accounts that it was actually laughed about on ESPN and SI. I know you have first hand knowledge, but you are 1 or a great many that have worked for these firms. While I am sure there are unethical behaviors going on, they are most likely very few and far between.
This post has nothing to do with PwC, but is a general comment about audits. Auditors “test” and choose what they “test.” Specialists (such as tax) are brought in to “test” certain areas. Time budgets are forced upon them. If you identify a risk, the biggest concern is whether you will go over budget.
Lots of games are played to ensure that you do not go over budget. Some examples include challenging your competency, your integrity, and your reputation. You aren’t allowed to look at everything you need to render a conclusion, but it is your ASS on the line. The people holding you to the budgets have no expertise in your area. They just want to make sure that their ASS is not on the line.
So what to do? Do you eat the time? Do you go against the partner and request the additional information from the client? Will the client give you the information you need, or try to get out of it by involving the partner? Most just provide a heavily caveated memo and not look at everything that they should have.
If you really push the envelope, they make up lies about you and get you fired. Anyone else experience this?
@Chris of D&T I’m responding to readers’ requests to have a place to post and discuss the ethical challenges they face every day. I am not copping out on research and validation of any ideas or leads that may come of it. Anything used for the book will be vetted. That is then. This is now. I am sure an editor and publisher will make sure that any examples or allegations I may make then will be fully verified. And I will do so first. But this is the blog. I’m just trying to provide the forum for discussion. I think it has been very helpful to many with regard to the challenges presented by the reductions in force.
Francine
I find it interesting that Fran asked for comments regarding PwC, and “D” is the first one to try to censor any comments. Anyone seen Flanagan lately?
@ 4
Actually, my suggestion to post ethical and independence as well as risk and quality challenges here was not intended to be limited to PwC. Far be it from me to single them out…;)
Francine
Not really on topic, but still on the ethical side of things … the number of times I was dragged to strip clubs by DT partners while on the road is absolutely appalling. Of course, every dollar spent was run through and billed to our naive clients. How they manage to get those charges through the DTE police, I’ll never know.
your cover is blown..now we know you work at DT..its all about “client service”..need people who can negotiate the hours with the client, not those who bow down to client fee pressures and do less work or sideswipe needed work or reduce scope drastically…
Geez, Chris. You’ve scared little old me, and now, I am afraid to be too specific. Well, let’s take a supposed scenario and evaluate the likelihood of such an event occurring at one of the Big 4 — let’s say, Deloitte. Tax partner tries repeatedly to sell tax work to audit client and has no success. Audit client hates the senior tax manager on the audit engagement because he asks too many questions. Audit client agrees to give tax work to tax partner, if the tax partner would call off such senior tax manager and ask less questions during the audit. Tax partner loads the senior tax manager with other projects and then, conveniently removes the senior tax manager from the audit engagement. New senior tax manager is placed on the engagement, with a whole new team. No transition (i.e., information download) is undertaken. Tax partner becomes conveniently busy and is unable to participate at all in the process. New senior tax manager, with new team, is given a reduced budget to sign off on the engagement. Result — tax partner generates tax fee and audit fee and does less work. Could this happen? When there is a bust, who would be held accountable (i.e., thrown under the bus)? The tax partner or the tax senior manager? Take a guess.
Yes, Flanagan at 6. Your lip service regarding quality holds a high place in my heart.
I worked at a big 4 firm that implemented an “ethics hotline”. I called the ethics hotline to report that the internal services partner whose job it was to negotiate the telco and office rental contracts nationally paid most of the phone & rent bills on his personal credit card, took the points then expensed them. When other partners queried the practice he would cut them in — give them a bill or two to pay. I wondered where his interests then stood — in getting the rates down for the firm or in having them nice and high to keep those Diners points rolling in. (and using the internal resources he was charged with operating efficiently in processing expenses he only incurred for the points)
I was allowed to stay anonymous (a plus). But people close to the action kept me informed: years later he’s still at it. What can you do? They’re partners. They’re entitled. But those joints are not for me.
One thing I’ve experienced is the practice of “smoothing” earnings. Meaning revenue recognized in a period other than the one it was earned. Saw this a lot a couple years ago when we were blowing plan away, so as the end of the fiscal year approached, partners were instructed to hold back processing credits in order to “not go into the new year bare”. In other words, we were already so far ahead, we should save some of the revenue recognition for the new fiscal year as a cushion. Just the sort of thing we are supposedly looking for when auditing our clients’ books. Made me lose a lot of respect for the senior partners that I heard sending this message. Now that times are tough, I’m sure this isn’t an issue, but I’m sure there are elements of the reverse happening (although I haven’t personally experienced them).
@ 11
Since the firms are partnerships, they do not follow GAAP. But their revenue recognition principles must have to follow some consistency or IRS rules. Whatever is reported as cash flow flows right through to individual tax returns, right? Tax experts: Help me out. What kind of integrity do the firms owe the IRS for their internal revenue recognitions policies?
Francine
anon @ 5. In no way at all am i trying to censor any comments. I just do not trust anyone who will come on here, bash their company (with true or untrue statments that cannot be verified), not give their name. The amount of new and tenured staff in the big4 that is afraid of their company is ridiculous and in my opinion, there are afraid for no reason. Let me remind you all that you have a duty to REPORT unethical or illegal activities you see to your ethics office. If you continue to see these activies, you are responsible for communicating this to the highest levels. Do not tell me you are afraid of being let go for this. It is very easy to get picked up by another big4 company, especially if you give that as a reason for leaving.
Francine:
If the firm is a cash basis taxpayer it does not matter what it shows in accrual basis revenue. The only way a cash basis partnership could manipulate its earnings would be to fail to make deposits of cash receipts at year end. Since the accrual and cash basis books are tied together through M-1, the IRS in all likelihood wouldn’t look at a cash-basis taxpayer’s accrual basis revenues.
13: What’s your first, middle, last name, and office location?
@15 — good question.
@13/”Chris” — so why don’t you put your money where you mouth is?
@10 – not sure I understand… was this person putting business expenses on a personal card, charging them through appropriately and earning points on the card? If so, what is wrong. Companies do not earn points – individuals do. To my knowledge we are encouraged but not obligated to use the corporate card for business purposes. So, if I fly a lot and earn a lot of frequent flier miles – they are mine not the company’s… what is different about credit card points? In fact, to my knowledge our corporate cards earn points that the individuals get (should they pay to enroll in the reward program)… because here the corporate card is really the person’s individual card and the firm isn’t responsible for it.
Maybe I don’t understand your example. If this individual is charging non-business stuff through… now there is an issue. Or is the issue that office expenditures unlike travel are required to go on a purchase card. I don’t know the rules there, but it seems like a gray area upon first read.
@ Chris… you are living in an fantasy world if you think another big four firm is going to snap you right up if you tell them you left your previous big four job because you felt something was unethical. Sure they say that they would in all their PR info. But in reality they’re going to see a giant warning sign flashing when you tell them that. It’d be one thing if you left because of something like massive fraud or gross negligence on an audit, but my feeling is the majority of unethical things people are bring up are along the lines of X partner expensed X to a client. X partner inflated our hours by X to support a higher fee. The firms are going to take one look and ask “Who’s team are you on?”
@ 17 — You should read #10 more carefully. The person in question paid the office telephone and rent bills through his corporate card. This same person was responsible for selecting the teleco vendor and negotiating pricing. This same person was responsible for negotiating facility lease contracts. The higher the prices negotiated, the more points get run through on the card. At a point per dollar, that person must be receiving literally hundreds of thousands of points each year … points that can be redeemed for “same as cash” gift certificates and other valuable goodies.
Go back and read the post again. Put on your auditor hat when you do so. Think “kickback.” At the very least, that is a clear conflict of interest. It could also be a violation of firm policy since such expenses are clearly overhead (operating expenses) not client-advanced expenses or personal out-of-pocket expenses.
Oh, and I liked this part: “When other partners queried the practice he would … give them a bill or two to pay.” Nice ethics there, team. Reminds me of the time when our practice leader called an offsite meeting at a luxury hotel. Three nights for each of the 20 or so folks in the practice. He “graciously” paid for our rooms by putting them all on his corporate card. Good lesson about tone at the top, that was.
— Tenacious T.
I know of 2 “ethics” situations when I was at PwC
1. The billings and collections reports are not sent out until AFTER Sept 30, so as to reduce the partnership income on a cash collected basis- then everyone is instructed BIG TIME to CHASE ALL OUTSTANDINGS AND CLEAN UP THE UNCOLLECTED…… totally managing the revenue collection process, in fact when one overzealous manager sent out the billings schedule to help her team collect bills faster the REGIONAL RISK MANAGEMENT PARTNER sent an e-mail instructing her to not send out such reports and hold off on collections until October……
2. I know of a case where the HR person called the ethics hotline with a question about a partner- so guess what they did, called the partner up and told him- anytime you “ask Dennis Nally anything” in that e-mail response button he sends around or call that hotline, its never anonymous UNLESS you THINK to point out the fact and phone up from a “hypothetically” view point- NEVER give out your name- you truly cant trust that line it ruins your career if you call it or ask Dennis a controversial question (they only forward it to your local HR)
Is anything really wrong with not chasing collections? Its not like they had the cash and held off on depositing it. How is it any different from and individual selling down stocks, making charitable contributions, and contributing to an IRA during the last week of December to manage their own taxable income. No one calls individuals unethical, they call it wise tax planning (hell, Turbo Tax even tries to help you plan strategies like that out). I don’t see how its wise for an individual but unethical for a firm.
why would giving you my information matter at all? As you post from an anonymous ID, I at least give my first name and firm. I am not bashing any firms and not making any claims about how a firm is performing illegal activities. You all take tiny instances you see or heard of (or in most cases something you think you saw or heard without totally understanding the circumstances around what was going on) and assume entire firms are like this. My guess is that you also think all priests are pedophiles (even though less than 1% of catholic priests were even accused) I am guessing most of you are big 4 rejects who couldnt handle the politics and hard work that is a big4 firm.
Thanks Truman — you said it well.
To all the anonymous people asking why others remain anonymous — well they probably stay that way for some of the same reasons that you did! —
For my part, even though I’m now out of [Firm 1 of 4] and [Firm 2 of 4] I am notionally bound by clauses in my employment contracts with both, that forbid me from revealing information that I received in confidence thereby causing them commercial harm.
Do I think they could successfully enforce those clauses? Nah, not really.
Do I want to find that out for sure the hard way? Not at all.
Did I ever meet partners at [Firm 1 of 4] or [Firm 2 of 4] that would be sufficiently motivated by spite to try and enforce them anyway? Absolutely!
Partner X to a colleague of mine leaving [Firm 1] for PwC: “If any information about [deal at Client X] ends up at PwC before this deal closes I will sue you so hard your grandchildren won’t get a mortgage”. Those are the sort of promises you remember!
@22 – Chris from D&T:
I’m sure most people on here could handle the work. If I didn’t work hard and ended up getting laid off, I could easily blame myself, but that wasn’t the case.
I think most people on here couldn’t “handle” the politics. Here’s my guess why: People are working their butts off, but something ridiculous and out of control as politics and playing favorites may have cost some people their jobs.
Personally I became pretty close with a lot of people that I spent more than a year working with, but they had no control over my schedule or anything HR-related to me once I was done on that engagement. It was however, definitely controlled by people that had met me maybe once or twice in my first year and a half with the firm. They probably saw me as a source of income to throw on a job to be chargeable and really couldn’t have cared less what I learned.
I guess I just “couldn’t handle the politics”.
I like how you come on here and say people are just bashing their former company when maybe we didn’t have all the information. Did you think you might be bashing a lot of good people who worked hard, more than likely without knowing all the information about each person’s situation?
Any one working at any of the Top 4, or any other large corporation or partnership, who doesn’t understand how much politics, PC and initiatives can and do affect their employment standing is more than just naive. Spite is another big factor, both during and post employment that has a large affect.
Before working @D I worked at a small company where the two individuals who had the most direct responsibility for my status spent 3 months after I left the firm looking for something to get back at me with. And I left under what I thought were good conditions. They just didn’t like that I left and had been so important to the organization. Kinda weird when you think about the fact that I left because they had lied to me about the expectation of a rate increase based on my year end review, and they knew that was the reason for my departure.
My first year @D everyone who interacted with me knew I’d be on a fast track. My first problem was my Sr. Manager also knew it and didn’t want me to get further than they had. My second problem was that I did not fit within the definition of the, at the time, current prevailing initiative.
I could have sat around and cried about it, I could have vented my anger at every opportunity (admittedly I did occasionally in non-work venues), or I could have chosen the path that I have: Live with it and continue my performance at the level I had always done because that is who I am, that is how I define myself, to myself.
This is now the 4th firm I’ve worked for in the past 15 or so years. It’s been the same at every single one of them. If you are a top performer you run the risk of being marginalized and overlooked because you are best serving your management in the role you currently hold (meaning: you are the person getting the job done so why would a manager of marginal qualities ever consider promoting you).
Do not misunderstand me. I hold no animosity to the people I have worked under. I understand the drill. I just find it unfortunate that more senior people don’t recognize the realities and do something about them. But, it seems from what I’ve read here that maybe those senior people aren’t any smarter than I.
One thing for certain is that they are better at playing the politics.
Why are you even arguing about the Big 4, Chris, your firm will probably be gone eventually in my opinion. Regulating bodies are not designed to compete, and that is exactly what we do with the Big 4. Only in the US would we try to let regulating bodies compete for business.
Gone anyways – Most likely, these firms will eventually cease to exist, but saying we shouldnt debate behaviors by their employees is just idiotic, IMO. Should we not debate a president’s actions because in 8 years we will have a different one anyways? And while, at this time, all big 4 are assurance companies, which is obviously a regulating activity, do not forget the consulting/advisory side of these firms, how much they have grown and will continue to grow. I heard that in 2008, PwC had 51% if their revenue come from non assurance activites, I have not had this confirmed, nor do I really care to do the research, but if that is true or even close to being true, it brings up a few very interesting questions. But, nevermind, since eventually those firms wont be around, ill just forget about them…………………