How Satyam Supported PwC’s Schizophrenic Strategy To Reenter The Systems Integration Business

Forgive my alliterative title.  I was inspired by the best:

Sonnet 30                                           

When to the sessions of sweet silent thought
I summon up remembrance of things past,
I sigh the lack of many a thing I sought,
And with old woes new wail my dear time’s waste:
Then can I drown an eye, unused to flow,
For precious friends hid in death’s dateless night,
And weep afresh love’s long since cancell’d woe,
And moan the expense of many a vanish’d sight:
Then can I grieve at grievances foregone,
And heavily from woe to woe tell o’er
The sad account of fore-bemoanèd moan,
Which I new pay as if not paid before.
But if the while I think on thee, dear friend,
All losses are restored and sorrows end.

–William Shakespeare

Independence is one of the most important standards for an auditor of a public company.  Before the technical debates, before the decisions about classification of transactions, before the methodologies, checklists, and workpapers, before any mechanical pencils are pumped with lead, you must decide whether to accept the client, and every subsequent engagement for that client, based on the codified standards for independence and objectivity. 

The Big 4 audit firms have struggled with independence expectations before.  EY lost the right to take on new audit clients for six months over its relationship with PeopleSoft.  PwC and EY professionals have been convicted of insider trading recently and now Deloitte is suing one of their own Vice Chairman over insider trading. The firms have had issues with alliances and PwC got caught taking kickbacks from alliance partners for government work. They do strange and mysterious work that muddies the waters over whose side they are really on. They have cozy relationships with their travel services providers. They join their audit clients pre-retirement in senior positions. They are asked by the government to work with assets from failed financial institutions they audited.

Heck, you know why PwC has a such huge compliance and independence monitoring operation in Jersey City?

  • Widespread violations of independence rules going back to at least 2000, 
  • Exacerbated by significant violations identified when Price Waterhouse merged with Coopers and Lybrand resulting in a consent decree and government monitoring of required improvements in their compliance culture, and 
  • Continued issues with independence violations and cultural resistance to compliance at least until the PCAOB started inspecting the firms, as evidenced in their inspection report of audits from 2003.

The firms may call these situations all anomalies, and “all in the past,” but they add up to real pathology – a case of incorrigible ingratitude for a government-sponsored, highly lucrative franchise to provide audit opinions for public companies.

The independence standards are not new.  They did not appear suddenly post- Sarbanes-Oxley, although additional restrictions were the direct result of Arthur Andersen and its no-holds-barred approach of accepting any and all work with Enron. Some of the strongest “critics” of the accounting profession, such as Arthur Levitt, have been vocal about conflicts of interest and the need to strengthen both actual and perceived independence of auditors for a long, long time. Levitt has, unfortunately, mellowed with age and his own self interested pursuits.

Recall the debates in early 2000, prior to Enron, as the Big 6 accounting firms sought to overcome the commoditization of the audit product and, at the same time, capitalize on trends and opportunities in technology by competing with traditional consulting firms.

“…from the excerpt of an interview with Chairman Arthur Levitt in 2000…

In April 2000, you proposed reforming the accounting industry. What happened? What was the industry’s reaction?
The number of cases of financial fraud that we were seeing at the commission had absolutely exploded. Managed earnings became the regular way of going rather than the exception. So I went to the leaders of the Big Five accounting firms. And I said that we have got to change the rules, and that means the conflicts that exist have got to be eliminated.

Two of the firms, Ernst & Young and Price Waterhouse, said that they would try to work with us on trying to change those rules. Three of the firms, KPMG, Deloitte, and Arthur Andersen, at a private meeting that we had, said, “We’re going to war with you. This will kill our business. We’re going to fight you tooth and nail. And we’ll fight you in the Congress and we’ll fight you in the courts.” …

What kind of clout does the accounting industry have on Capitol Hill?I guess I learned over coming months that they had enormous clout; that their contributions to members of Congress who never thought about an accounting issue or an accountant and suddenly picked up the cudgels for the profession…” 

As a direct result of Enron, and what was seen by many as triple dealing by Arthur Andersen to the detriment of the integrity of their actual audit – AA was external auditor, internal audit outsourcer and significant technology consultant to Enron – the rules did change.  They are quite lengthy, and have been refined since, but basically…

“it shall be unlawful for a registered public accounting firm…that performs for any issuer any audit required …to provide to that issuer, contemporaneously with the audit, any non-audit service…

Federal securities laws also require that financial statements filed with the SEC be certified (audited) by independent public accountants.  Rule 2-01 of Regulation S-X is their standard for accountant  independence. The general standard in Rule 2-01(b) provides that:

The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant’s engagement.

Rule 2-01(b) further provides that:

In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission…

Revision of the Commission’s Auditor Independence Requirements, 65 Fed. Reg. 76008, 76059 (Dec. 5, 2000). As part of this guidance, the Commission also cited numerous prior no-action letters …the Staff has examined whether the firms are associated entities by considering such factors as whether (1) the accounting firm has any ownership interest in the consulting firm; (2) there are restrictions on the use of the accounting firm’s name by the consulting firm; (3) the firms’ corporate governance structures are separate; (4) there is any revenue sharing between the firms; (5) there are any joint marketing agreements between the firms; and (6) there will be any on-going shared services between the firms.

The Commission’s interpretations of Rule 2-01 also are collected in Section 600 of the Codification of Financial Reporting Policies (the “Codification”), entitled “Matters Relating to Independent Accountants.” Section 602.02.e of the Codification addresses business relationships—such as joint ventures, limited partnership agreements, and investments—that may impair an auditor’s independence. That section provides, in part, that:

Direct and material indirect business relationships . . . with a client . . . will adversely affect the accountant’s independence with respect to that client. Such a mutuality or identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client.

All this text to set up the current scenario: By 2005, PwC wanted back into the consulting business as soon as their non-compete with IBM expired. PwC, KPMG and EY had become skittish after the new Sarbanes-Oxley rules came out in 2002. To avoid the most difficult independence issues, they decided to sell out and focus on audit and to a lesser extent tax and then internal audit.  

Deloitte did not.

Deloitte has had some success at staying out of trouble, other than the kind you can get into for project failure, while hanging on to a lucrative consulting practice that includes heavy systems implementation and integration services.  The other three firms later reexamined their precipitous decisions and PwC, in particular, began devising a strategy to get back in. Only one problem.  They had a five year non-compete with IBM that prohibited their involvement with anything anywhere near approaching systems integration work until the summer of 2007.  

PwC skirted the issue of the non-compete for a while by developing Advisory (consulting) engagements focused on managing risk and internal controls. Their Advisory practice during the greatest period of SOx demand, 2002-2005, existed largely to service Sarbanes-Oxley engagements.  Small moves to align with former in-house technology vendors such as Versa and alliances with SAP, Oracle, and Microsoft gave PwC a taste again of the bigger fees.  Unfortunately, almost anyone who knew anything about selling or managing a consulting project longer than a year or with fees over a million, especially if it touched on anything technology related, had left for IBM or other true consulting firms.  

When the decision to go back big was made, primarily because of the pressure on Sarbanes-Oxley fees after Auditing Standard 5 was enacted, PwC had to find a way around their own weakness in technology leadership, lack of experienced resources, and the constraints of the IBM non-compete agreement.  

Enter Satyam.

In July of 2008, Gartner recorded PwC’s triumphant comeback to the world of full project life cycle technology consulting as:

PwC to World: ‘We Implement’ 

At the PricewaterhouseCoopers’ Analyst Day, senior practice leaders emphasized that PwC delivers services across the full project life cycle, including implementation. 

The non-compete with IBM expired in 2007, five years after their sale of the previous consulting practice to IBM. PwC was now ready to showcase proof that they were back in the game. Only one hitch:  They continued to play coy about their true strategy with their own partners as late as March 2009 when they explained in an email their desire to purchase BearingPoint’s consulting business. Sources have told me that Dennis Nally (US Chairman) and Juan Pujadas (Global Advisory Leader) told partners then:

“This transaction, if it closes successfully, represents one more step among many that collectively advance our strategic agenda – namely our commitment to help clients create and sustain lasting change. In short, we expect to expand our strength in areas such as strategy, planning, operations and technology – particularly with regard to SAP and Oracle expertise. While we are not getting back into the large scale IT implementation business, those IT credentials are essential, in some cases, for PwC to advise our clients in their successful undertaking of a large scale business transformation project…”

The statement is couched in enough semantics to make it unclear who will draw the line, and how and where it will be defined, when proposing and executing systems implementation or integration engagements, especially ones that require technical architecture and coding activities.  How did they get here – a place which seems to me to be a little bit of a backtrack from their summer of 2008 statements to analysts and, yet, still a bold statement for an audit firm? 

The two case studies used to win over analysts in July of 2008 are exemplary of not only the practice pieces PwC played during the period up to the expiration of their non-compete with IBM but of the arrogant, egregious, and in-your-face disregard for independence standards, if not in fact then certainly in appearance.

Again from Gartner’s report:

In 2002, PwC sold a large part of its consulting practice to IBM for $3.5 billion. For five years thereafter, PwC was prohibited from engaging in most IT system integration projects. Since 1 October 2007, when the non-compete agreement expired, there has been speculation as to whether PwC would get back into the IT implementation business. At the PwC’s Analyst Day, U.S. Advisory Strategy Leader Joe Duffy ended the speculation, stating, “We are full scale in the implementation and integration business.” 

PwC clarified that its implementation stops short of coding for large-scale customization of business applications. The firm offered an example wherein its India-based operations performed the coding for a client’s financial data warehouse, but a system integration partner coded the business application customization. 

To demonstrate the range of its capabilities, PwC offered two case studies with clients and engagement teams: 

Idearc, a $3 billion Verizon spinoff, which had to break free of the parent’s shared services and stand up its own systems within a year 

Microsoft, for which PwC helped manage the transition of acquired companies’ systems to Microsoft ones 

With Idearc, PwC was engaged through the full project life cycle leading to the one-day flash cut- over to Idearc’s new systems. Much of this engagement occurred while PwC was still under the IBM noncompete agreement, and Satyam Computer Services did much of the system integration work. PwC also helped Idearc shift to an IT strategy heavily dependent on outsourcing, which saved the new company millions of dollars. 

The Microsoft engagement demonstrated how PwC can partner in an ongoing program. Implicit but unspoken was that PwC is well-positioned to play a part in the Yahoo acquisition if that should happen. 
So… What’s wrong with this shiny, happy picture? How do they flout the rules?  Let me count the ways…

1) PwC is denying to its own partners the kind of work it’s getting ready to do for clients and the additional risk the firm will be exposed to. PwC leadership is soliciting their obeisance, in the end, for the glory and enrichment of a few partners for only a little while.

2) Potential “Advisory” clients are being told by analysts and via other public relations efforts that PwC is a viable choice for systems integration/implementation projects.  PwC is now actively recruiting SAP, Oracle, and other technical specialists as well as planning on acquiring them from BearingPoint. This is despite the fact that PwC still isn’t being honest with itself about whether it’s in the systems integration business or not, to what extent, and for how long.  

This is the second time around. Will another regulatory push or a big litigation loss push them to reverse course again and sell the consulting practice as soon as they’ve fattened the calf?  And what of the potential exposure to a client  who chooses a Big 4 systems integrator given the quite uncertain economic landscape in many industries? Your Big 4 audit firm systems integration partner today may unexpectedly become your auditor by acquisition or default tomorrow.

3) Satyam was, until the scandal broke in December of 2008, Price Waterhouse India’s audit client. The analyst report implies that Satyam was a strategic partner to PwC, globally enabling them to bypass both the constraints of their non-compete with IBM and to provide a viable solution for their lack of technical expertise and technical bench strength. If true, this is abhorrent, especially given subsequent events that occurred at Satyam 

PwC appears to have had at least a strategic relationship, if not an ostensible prime/sub relationship with Satyam, for Idearc and perhaps other projects while at the same time enabling via negligence or worse the humongous fraud that is Satyam.  The two Price Waterhouse India partners responsible for Satyam’s audit are still in jail.

Satyam was a global engagement for PwC by virtue of Satyam’s presence in the US via US-based operations and clients and issuance of their ADRs on the NYSE.  Satyam’s management, promoted by PwC as a strategic partner for systems integration engagements and a recommended choice for IT outsourcing, is now being called thieves and liars by PwC’s Chairman.  

On the Satyam scam, DiPiazza said: “What we understand is that this was a massive fraud conducted by the (then) management, and we are as much a victim as anyone. Our partners were clearly misled.” 

Did the strategic importance of Satyam as a systems integration partner and technical resource cause global PwC leadership to overlook, look the other way, or not take action on reports of poor quality or lack of independence by Price Waterhouse India partners and others? Did PwC leadership –  US, global, and Indian-  enable and perhaps promote complicity in the fraud called “India’s Enron” for the sake of their consulting business strategy? Did Satyam pay PwC for the privilege of being included in these deals by agreeing to exorbitant, higher than market audit fees as has been reported?

The IT outsourcer chosen by Idearc, after the project was completed by PwC-Satyam was – Satyam! Were there other incentives, financial and/or strategic, for PwC to encourage this choice with their client?

Remember also, The PCAOB inspected several Indian firms and their clients in the Spring of 2008.  Per reports by the FT, PwC and Satyam were included in this list. PwC’s leadership would have known well in advance of this inspection that their audit client was going to be part of the inspection.  They would have known before this meeting in July of 2008 if there were issues with Satyam that would embarrass them later if they used Satyam’s name in an Advisory sales piece.  Their Advisory leadership did it anyway.

4) Idearc is now in Chapter 11.  One of PwC’s major activities during the project was to advise on the complete design of Idearc’s financial and accounting function, both to enable independence from the Verizon infrastructure and to meet the requirements for a new public company.  Obviously, a Chapter 11 within a few years, casts a shadow over PwC’s recommendations to Idearc for financial reporting technology, finance/accounting policies and procedures, and the necessary qualifications and number of staff supporting these activities.

5)  Yahoo is a PwC audit client. Gartner reports that PwC implied it would be well positioned to support their Advisory client, Microsoft, in the potential acquisition of Yahoo, their audit client. If true, this is sheer arrogance. It’s another example of the disregard for auditor independence that permeates public statements and private ones by PwC’s about its plans to re-enter the systems integration business. 

Given all of this, why are the PCAOB and SEC allowing a firm like PwC to buy BearingPoint and position themselves even deeper back into the systems consulting realm? Well, one reason is that, according to the PCAOB’s spokesperson, the Sarbanes-Oxley law, as a general matter, did not give them the authority to stop acquisitions that are clearly not in the public interest. They have no authority to stop any acquisition by the audit firms.

PwC chose to boast back in July 2008 about two consulting engagements, of all possible engagements, that provide the best example of their supremely arrogant DNA.  They don’t expect to be called to account when intentionally ignoring the most basic expectation investors have of an auditor – independence and objectivity, in fact and appearance. 

This attitude dares you, and the regulators, to say, “Enough is enough.”

“In discussing the operation and character of the grid within the general field of modern art I have had recourse to words like repression or schizophrenia…we speak of the etiology of a psychological condition, not the history of it. History, as we normally use it, implies the connection of events through time, a sense of inevitable change as we move from one event to the next, and the cumulative effect of change which is itself qualitative, so that we tend to view history as developmental. Etiology is not developmental. It is rather an investigation into the conditions for one specific change–the acquisition of disease–to take place…”

38 replies
  1. Anonymous Auditor
    Anonymous Auditor says:

    FM, thanks, this is very informative. If PwC in fact had a strategic partnership with Satyam (rather than their joint involvement on projects being the sort of coincidental relationship that is inevitable when multiple service providers are involved on a project), that could be quite troubling from an independence perspective. However, I think a couple of clarifying points are in order.

    1) You note that the Reg S-X independence rules are quite lengthy (which they are), but your use of elipsis implies that any non-audit services for an audit client are prohibited. In fact, S-X Section 210.2-01(c)(4) sets out ten specific prohibited services, four of which can be provided if they meet a “not subject to audit” test. While there are certainly advocates of audit-only practice by the Big Four out there aside from you, I think it does your readers a disservice to imply that current regs establish that audit-only requirement.

    2) Among other services that are not prohibited, most transaction-related services can be provided without incurring independence violations (with the exception of broker-dealer type services). Therefore, PwC’s proposed involvement in a transaction in which one audit client acquires another is not necessarily troubling from an independence perspective (assuming their conflicts are appropriately managed via separate team firewalls and so forth). From what you’ve quoted, I don’t see anything that suggests PwC stated that it was going to impermissibly blend the Microsoft and Yahoo teams, or necessarily provide integration services in such a transaction (which I agree at some point could become problematic).

    3) Blaming PwC’s system implementation for Idearc’s Ch.11 filing seems like a stretch. Everyone who has watched the telecom / directories industry has been expecting distress in the printed directories subsector for years. I think folks were caught off guard by how precipitously Idearc’s revenue dropped, but barring info to the contrary, I have to assume that’s a market phenomenon rather than a system failure.

    FM, it’s your blog, and obviously the tone is yours to set. I would suggest that from my perspective as a reader, it is most valuable when there are more facts and less incendiary speculation. The facts are pretty interesting on their own, and often look quite bad – I don’t think more color is required.

  2. fm
    fm says:

    @2 Anonymous Auditor
    Thanks for your thoughtful comment.

    “Coincidental relationship” – You must be joking… Nothing is coincidental at this level. They used Satyam’s name in a sales piece.

    1) I debated including the list of prohibited services, but it’s a long list, I’ve provided a reference to the regulation, and I’ve detailed them in other posts. It was a question of length, which I always have a problem with.

    2) I’m sorry, but I have a stronger take on the Microsoft/Yahoo issue. You mention “assuming conflicts are managed,” “integration services…which could become problematic” and I see trouble. I don’t see a good record on this at PwC and I see their consulting leadership being very aggressive about stepping on the toes of audit clients and audit relationships if it suits their purpose. Sorry, it’s just my skepticism. Where there’s smoke at PwC I see big fires.

    3) I’d love to kow more about PwC’s actual work at Idearc, see the contract and relationship between PwC and Satyam on paper and in reality, look at scope, including scope of responsibilites for picking an IT outsourcer. But I chose to go ahead without those documents, because I thought there was enough in the public realm without taking that risk. I am not blaming PwC for Idearc’s Chapter 11. I’m just putting the information out there for others to judge. It’s curious, you have to agree, that so many got so much money out of this company and it failed anyway.

  3. Tenacious Truman
    Tenacious Truman says:


    Thanks for an illuminating post!

    I had heard that PwC was frantically trying to get back into the ERP implementation business, though I had no clue as to how it was going to be done, other than by raiding Oracle & IBM & other firms for bodies. If it’s true that PwC partnered with an audit client as part of its strategy, that would be, shall we say, poorly thought through.

    I agree with the three points Anonymous Auditor made in Post #2. And I applaud the reasonable tone of that post.

    I’ll add one more point to those previously made by Anonymous Auditor. You make much of the lack of consistency in PwC’s messaging, going so far as to assert that PwC leadership is misleading its own partners. Well, that would be nothing new, and those of us with significant Big 4 experience have learned to ignore most of the “strategic” planning that goes on. Usually there is precious little strategy involved and much hot air.

    I previously posted on how self-dealing affects such strategic decision-making (on the original Bearing Point for sale blog entry) and this would seem to be no different. Mr. Nally and Mr. Pujadas need to be seen to be in charge, making bold moves in a time of crisis. That’s their job function — that’s what figure-heads are for. (And where is Mr. Pate in all this strategic discussion? There’s a reason he’s not quoted on this issue. …) Moreover, Mr. Duffy would seem to need to figure out how to keep his job, given the results associated with PwC’s strategy over the past few years (post-SOX). Pushing implementation would be in his best (individual) interest. So long as he has Mr. Pate’s blessing, and by the way delivers results (revenue to replace lost SOX fees), he probably can ignore what Messrs. Nally and Pujadas say with some impunity. If he truly delivers the revenue promised by his strategy, he can probably count on moving up in the firm, perhaps replacing Mr. Pate as he replaces Mr. Pujadas.

    What I’m trying to say is that the “coy” and ambiguous messaging from PwC leadership is understandable (given the circumstances) and is nothing new, and doesn’t really carry that much weight internally. I don’t feel that the situation you outlined rises to the level of actually misleading the partners. Even if it did mislead them, in terms of strategic direction or necessary economic investments to get there, I don’t see any partners complaining about it. Complaining about firm leadership decisions is the kind of thing that keeps people from making it into the partnership, and also keeps partners from getting the kind of positions that generate mega-compensation. Complainers don’t prosper, even if (or especially if) they are right.

    — Tenacious T.

  4. fm
    fm says:

    @Tenacious Truman

    Thanks! Yeah, Carter Pate is probably sulking over the fact he couldn’t buy BearingPoint’s Government Services business too. That’s his interest area.

    I’ve heard from very reliable high level internal sources that PwC Advisory is off by more than 30 percent from where they planned to be at this point. They planned to be 15% ahead of last year and instead are 17% behind. They’ve taken to desperate measure such as pre-recording (and billing) hours for next month to this month. Can anyone say “revenue recognition”?


  5. Tenacious Truman
    Tenacious Truman says:


    Not to belabor, but I was wondering whether the current PwC Advisory plan includes Internal Audit (IAS) or not? I had heard that PwC “realigned” IAS out of Advisory and back into Assurance (where it was located pre-SOX) in April. I wonder whether Advisory “realigned” the plan as well, to show the IAS revenue moving to Assurance? It would not surprise me to learn that did not happen, which would then account for some portion of the 30 point revenue shortfall.

    Also — the original plan to grow Advisory 17% while cutting headcount? Three thoughts: (1) It’s likely the growth that Mr. Pate needed to promise leadership in order to get his position, (3) Likely based, to some extent at least, on Mr. Duffy’s ERP implementation strategy paying-off in the current year, and (3) About as achievable as any other Big 4 annual plan (i.e., zero percent chance). If my guess (2) above is correct, then Mr. Duffy is not alone; there are a LOT of newly hired PwC Advisory Sr. Managers/Directors in the Technology practices who are sweating right now as the fiscal year ends.

    — Tenacious T.

  6. fm
    fm says:

    @Tenacious Truman

    Who knows how they handled realignment of PwC IAS back into Assurance internally. I doubt it was contributing that much. Unrealized potential. I’m gone. Richard Chambers back to IIA. Dick Anderson retired. LOL, any thinkers/innovators they had have moved on. For sure from an external perspective, they will use whatever revenue it has to prop up Assurance numbers in their “Annual Report”.

    Transparency a la Mr. Di Piazza’s puffing in the FT today? ? Blech.

  7. Jr Deputy Accountant
    Jr Deputy Accountant says:

    *ouch* you weren’t kidding when you said you had a doozy up your sleeve, Francine.

    *biting my tongue* You know how badly I’d like to jump in on this one but alas, can’t. Oh well. You did a wonderful job, congratulations. If this doesn’t have them running scared, I’m not quite sure what will…

  8. Anon123
    Anon123 says:


    IAS moved back into Assurance. I’d guess the revenue dollars continue to flow to the line of service in which the engagement partner resides.

    I saw IAS moving to advisory as a poor move honestly, and don’t really think a full-outsource model is provides alot of value to an organization. Co sourcing for specialists when one needs them on the other hand is probably good bang for the buck so to speak.

    The emerging interest to get back into the systems implementation space has been well known even amongst the staff levels. I guess when one is part of the organization one learns to read between the lines of the firm’s various messages. Of course I for one don’t see it panning it out well at all.

  9. Ex Deloitte and PwC consulting
    Ex Deloitte and PwC consulting says:

    The other shoe drops. And it’s full of lead. I was staying unconvinced on whether PwC were victims or perpetrators in the Satyam audit fiasco. And when faced with a choice between conspiracy or stuff-up, go for the stuff-up every time. But all of this strategic partnering stuff is heavy context indeed.

    I think that Anonymous Auditor and Truman make a fair point that in your fire-seeing amongst all that smoke, you may have over reached here and there. But I think there’s one thing above that I want to address specifically. It’s this whole “Deloitte chose not to get out of consulting” stuff. Francine you appear to believe Deloitte’s post-facto justification of what looks now like brilliant strategy. But I wonder how many ex Deloitterers like me have at home the “Braxton” lap top bag, the “Braxton” matching pen and pencil set, the “Braxton” lapel pin, the box of “Braxton” business cards. I have lost the “Braxton” temporary tattoo but I’ll swear you a stat dec I had one.

    As Truman said: “Usually there is precious little strategy involved and much hot air” when it comes to big 4. Deloitte were in fact getting out of consulting as hard as anyone else. Only thing is they’d left it too late and the only people who wanted to buy Deloitte Consulting were the DC partners themselves. Despite the fact that they couldn’t afford it, DTT/D&T tried their darndest to offload it. When they couldn;t make the numbers stack up they sighed and said “let’s re-integrate, and put the best face on it we can”. Nowadays of course, it was all part of their brilliant “zig when the others zag” strategy. But at the time? In Australia, only 3 or 4 DC partners made it across as partners in the big firm. That’s how much they wanted back into it!

    Don’t believe the hype Francine. I can’t believe I’m giving you that advice though…

  10. Independent Accountant
    Independent Accountant says:

    Thanks for this post. I had never considered the PWC-Satyam strategic partnership angle. I have followed the Satyam case closely and concluded PWC could not possibly have done as incompetent an audit as to have overlooked $800 million in fictitious cash. I now think the two PWC India partners are PWC’s scapegoats. I was never comfortable wth DiPiazza’s visit to India. I now suspect his real purpose there was to make a deal with the local “warlords” and offer them the two PWC India partners as part of the continuing concealment of PWC-Satyam malfeasance. Who knows what else PWC gave the “local warlords”?
    I’ll never forget when PW and C&L merged. The SEC found over 2,000 independence violations by PWC. Imagine if a non-Big 87654 firm did that. The SEC would bar it from auditing SEC registrants forever.

  11. fm
    fm says:

    @11 Ex Deloitte and PwC Consulting

    I don’t believe Deloitte is brilliant because they are the only one who didn’t sell their consulting practice. I remember Braxton. (Like I remember “Monday”. Ha)
    I know they ended up keeping the practice by default not grand design. In fact, I wrote a tongue-in-cheek post called “Is Deloitte the Perfect Firm?”

    It was my way of telling everyone on August 25, 2008 they were going to start cutting staff big time. It was the one and only time I got statement from Deborah Harrington on staff cuts,

  12. Krupo
    Krupo says:

    Hmm, the point on complainers from TT is a downer. But not really – I mean, given that the job is all about uncovering truth – if you’re doing it right – then if they don’t want to hear the truth, do you really want to be part of their club anyway?

    Maybe I’m lulled into another delicious false sense of security but I’ve had some chances to delicately-but-pointedly point out things that could’ve been done better, and have usually be pleased with the sagely nodding heads. Maybe I’m just talking to the right people (those who agree with the point) rather than people who would get all upset and angry.

    Regarding this whole consulting/audit thing, I remember this being huge 9 years ago… never thought we’d see the 180 flip. And with such drama too. Who said accountants are boring?

  13. Anon123
    Anon123 says:

    Of course many of us in the big 4 assurance practices wait for the “consultants” or “advisory” groups to pull their own weight.

    They’re paid more than attest service staff.

    Their staff utilization tends to be in the 40% range (manager/partner utilization is the most USELESS metric ever…as these guys/gals control the damn budget and thus fatten their own schedules as needed). Where as attest staff remain in the 80%-90% range.

    In fact we all refer to them as benchwarmers. They get mighty angry when a lowly attest manager books one of their manager offices. Since they camp out in them day in and day out they might as well be permanently assigned offices as they seem to want.

  14. small2BIG4
    small2BIG4 says:

    I am not too shocked that some of the partners will “work the system” to get things cleared. I did work at PwC in WFP until March 2009 and the assurance partners I worked for were very strict with our JBRs/sub and if anything looked sunny then they would boot the firm/person. This system could be “worked” if the partners winked at each other I am sure, but not positive.

    WFP is now a pure Advisory practice and they are looking to become a BAH, BP/Delottie, etc to the Federal government. Most of the leadership now in WFP are from BP and when I departed my friends and I would call us BP Jr since we were structured just like them. They never stated why the transtition was made, but I am sure it was for $$$. Some Advisory jobs would be about $170-$190/hr, but a lot of them would be $90-$140/hr. Now that it is a big range, but they would price to win and to gain a “walking pass” to look for more work. The goal was to “penetrate and radiate”. Our Audit/Assurance clients would range $125-$150/hr with one at $200/hr. We passed on many audits and other work b/c Advisory had a 50K lead. The best is we passed on something that was geared for us $2.0M in fees for 500K of short term work… well we lost the 500K work and then the Advisory partner said what about that $2.0M job we should go after that… time had already passed. My friends that are still at PwC WFP are looking to move to other practices b/c leadership is looking to move away from controls type work and more pure consulting work… more growth and less quality… good way to grow a business.

    As for IAS, it is now in Assurance, SPA has been disolved for the most part and split in two, audit/assurance support and IT advisory.

  15. Tenacious Truman
    Tenacious Truman says:

    Anon123 @ 15,

    Consider the other side of the equation, which is realization/margin. Those “benchwarmers” may be running at 40% utilization, but they are also running at 90% (or more) realization. As a general rule, consulting revenue expressed as fees per labor hour is dramatically higher than the same assurance metric. Moreover, consulting jobs tend to be T&M not fixed-fee, so the more hours charged to the job, the more fees the firm bills (if the client agrees to pay, of couse). Finally, let’s acknowledge that assurance work carries a downside risk in terms of potential litigation, and firms pay exorbitant premiums (“practice protection”) to cover some of that risk — whereas consulting jobs (other than ERP implementations) rarely, if ever, lead to litigation. All in all, I would say that a healthy firm would want both sides working, not just one or the other.

    small2BIG4 @ 16,

    My friends at PwC told me one of the key issues facing the Washington Federal Practice is conflicts. Let’s say PwC takes on controls or even audit work on behalf of the U.S. Navy. That may conflict the firm out of audit or consulting work on major defense contractors who work for the Navy, such as Lockheed Martin or Northrop Grumman — or so I’ve been told (not sure if that’s actually true). In addition (as you noted), the controls/audit work tends to conflict with potential consulting work for the same government agency. FYI, just today, President Obama signed into law legislation that increases controls over contractor “conflicts of interest” — which will likely make it even harder to do both contols/audit and consulting work for the same government client.

    — Tenacious T.

  16. Ex Deloitte and PwC consulting
    Ex Deloitte and PwC consulting says:

    @15 The consulting offices I worked in always ran pretty good utilisation. 80-90% was not uncommon for months at a time (and the rates, especially at Deloitte, massively out stripped all but Corp. Finance).

    But you’re right about Partner utilisation. That number wasn’t worth the pixels it was displayed in.

    Scenario 1: When setting up my job at Client X, Partner Y says to me “put me in at $1 an hour”, but don’t bill me to the client. Partner Y turns up to Client X for 1 hour a week (status meeting) and books 8 hours a week to job, at $1. (Partner makes utilisation target). Partner then writes off $8 per week on job. However, I have entered my rate into the system at a lower price than contracted, generating negative WIP which “eats” that small amount (as well as a bunch of coffees with clients and a team dinner at the end of the engagement).

    Scenario 2: A 2 week job required 4 hours of Partner Z’s time as an SME at a workshop. Partner Z is put in system at a real rate, appears at workshop, then books 15 hours to the job because they “spent a couple of days thinking about the workshop and preparing for it. Hapless manager (that’s me!) finds the only hours that can’t be reversed in the system are partner hours. Manager has 15% write off as cannot bill 11 hours of partner Z to client which he apparently “should have thought about”. Partner makes utilisation, but (as it’s not his client) doesn’t wear write off. Partner Z is senior to client service partner, who does wear the write off.

    In both scenarios partner utilisation was inflated. I only had scenario 2 happen once (you live and learn), but I ran scenario 1for more than 1 partner.

  17. James
    James says:

    PwC gets court approval for BearingPoint assets:

    “NEW YORK (Reuters) – PricewaterhouseCoopers PWC.UL said on Thursday a U.S. Bankruptcy Court approved its purchase of significant portions of bankrupt computer services firm BearingPoint’s (BGPTQ.PK) North American and Shanghai, China assets.

    The business advisory firm said it has agreed to buy BearingPoint’s unit in Bangalore, India in a separate transaction that did not require approval of the U.S. Bankruptcy Court.”

    So now it is a business advisory firm?

  18. small2BIG4
    small2BIG4 says:

    Tenacious T @ 17 – When I was first at PwC, DoD was the big thing for audits (2004). That ended when DoD could not figure out what to do so WFP decided that DoD would be Advisory only. We did audit one DoD client Army Corps of Eng. GAO did allow us to audit them as long as no one who did Advisory work for DoD worked on the audit. This was going to be the plan since all firms some how some way would be conflicted out, so it was not going to be based on the firm, but the individual. Plus I think DoD OIG was going to sign the opinion (we were the hired worker bees)… they did this for Army Corp and some SAS 70s we did.

    As for the conflicts, the Yellow Book (GAGAS) has clear guidlines for the firms to do. I have been leading performance audits while others were doing some Advisory work. We did have to work with the OIG to have the work approved before the Advisory team could bid/work. We also did this at other clients and the way this was going we were doing non-financial type work and the two teams would never cross. For one client the audit and other attest work was about $12M and the Advisory work $8M.

    We had our audit clients all five of them and rest of the gov’t was for the advisory crew… so when you say conflicts it was not really an issue. As for conflicts with teaming partners that would be identified during the JBR.

    I am at KPMG now and it is good to see a balance between audit and advisory…. CPA firms would not have advisory without audit and most of the partners here understand that. At PwC, most of the WFP partners did not work at a CPA firm so this was all new to them… especially independence.

  19. small2BIG4
    small2BIG4 says:

    @ 5 Cater Pate would not be the only person mad about not getting BP Public Services, but Scott McIntyre who is former BP.

    I did not read the other post about Carter and I can say he is overall nice, but if you do not perform then you are SOL. Same goes for Scott.

  20. RE:Anon123
    RE:Anon123 says:

    @15…Anon123 on May 28th, 2009 at 12:54 am said:

    Of course many of us in the big 4 assurance practices wait for the “consultants” or “advisory” groups to pull their own weight…the advisory groups are the most profitable part of the firm…although firm leadership has lost sight of this, I still believe in profits over revenues.

    They’re paid more than attest service staff….because there are boutique firms that drive up the salaries in the consulting industry…you picked the wrong career…unless you make partner

    Their staff utilization tends to be in the 40% range (manager/partner utilization is the most USELESS metric ever…as these guys/gals control the damn budget and thus fatten their own schedules as needed). Where as attest staff remain in the 80%-90% range…yes…in the 80-90%range…at 15% realization…some advisory jobs run at near 200% realization. When was the last time assurance billed an associate at $325/hr for every hour worked and got paid for it? One hour at those rates equals 10 of yours…and my utilization has never been below 75% in 8 years

    In fact we all refer to them as benchwarmers. They get mighty angry when a lowly attest manager books one of their manager offices. Since they camp out in them day in and day out they might as well be permanently assigned offices as they seem to want…you must be refering to the ones leaving recently due to “performance related issues.” they should be out doing something or sellling something.

  21. Anonymous
    Anonymous says:

    @15 – advisory utilization may be lower because we charge for hours actually worked not hours we happen to be present. Let me be more specific — if our staff searches the web they cannot charge for that time. If the computer is crunching the numbers for hours on end – the staff cannot charge the hours. Also note, that when there is a large job we are there 24/7 as necessary. We do not have a busy season – all seasons are busy. More specifically, we do not have a slow season when taking vacation time and working sane hours is possible. More importantly – the firms impose all the same practices on us as they do on the audit teams. For example — camping out in our permanently assigned cubes… given most of our work is performed in the office we need those permanent cubes… and while my practice has mostly gotten them — we have staff we cannot find because they are roaming around in a different cube everyday. For example — recognition and promotion is based on the same measures as audit rather than the measures that make sense for our practices. For example — we cannot get the equipment we need without jumping stupid hoops that relate to audit where all you need is a lightly loaded laptop. For example — perks the firm gives are designed towards audit and we rarely can take advantage of them.

    And be careful what you say — as Advisory has for years carried their weight and even more weight than audit. A team means that we carry each other and work with each other. At this moment in time you might be real careful as the odds are high that if the two groups separate it will be advisory that survives the economy and advisory that doesn’t get sued for audit failures and such.

  22. Peoplewhochange
    Peoplewhochange says:

    Well. let me share a more informed perspective, truth be said it is not known to many that PwC India has substantial technical capabilities in the technology field. I know this as I have many friends there. The fact is that after the IBM deal the technical capabilities of PwC India in the software space were intact because one of the few countries which held out partially from the deal if I am informed well is India & Israel. I believe a compromise was worked out which allowed PwC India to service all technology related contracts of US$400mn and below were allowed to be pursued by PwC India and that for them was almost there entire practice. So my guess is that in ERP and other space the capabilities of PwC India in the technology space were similar to or more enhanced than that of Satyam. Therefore i feel there is little substance in trying to link up any strategic partnership between PwC and satyam for any reason for audit failure. In fact i understand PwC India Technology Advisory Practice heavily competes with Satyam, Infosys and Accenture for consulting contracts in the technology space. So , if there was some linkage with Satyam it must have been with another member firm of PwC outside India like say PwC US which is run independent of PwC India.

    The other thing which may come as a surprise to some of the readers of this blog is that my understanding is that PwC India folks are pretty distressed with being viewed as having some substantiality commonality of interest with PwC US as they have no common ownership and often the relationship between the two firms can be strained as they pursue there own respective economic interests/goals. The only thing that is probably common is that they hold out to the world that they operate under one common name with some governing structure which ensures commonality of standards.

    The real reason why the Audit failure probably happened and may happen again in India is that due to the competitive nature of pricing by local firms the general level of audit fee in India is quite low, vis-a-vis the risk being carried. The audit fee for satyam was on the higher end from an Indian standpoint but still i guess would not even cover the salary compensation cost of the team. When you consider that other audits that the firm would be carrying would be even more unprofitable you will proabably reach to a conclusion that Audit arms of Indian Big 4 firms are bleeding and that means, there staff and partners are grossly overworked, probably underpaid vis-a-vis other comparable jobs like strategic consulting. I did a dip stick survey a typical manager in a Big 4 assurance firm in India is paid around INR 1.5 million (US$30K) while a similarly experienced Manager at Bain&Co or Mckinsey in india is paid INR 7 million (US$150K). What do you think all the auditors in these firms are doing trying to focus on enhancing personal skills and running through interview processes through the year to be accepted by a White shoe firm or PE fund or an investment bank to make real money. The real problem in India is to increase salaries in audit firms to be competitive with the well paying consulting, PE fund type jobs once that happens you will attract better talent, the audit teams will have more interest in their jobs and audit will be a sought after career, the issue are systemic its just that it has come up in one case, but my guess is that it will happen again either with PwC or some other Audit firm Big 4 or otherwise..

  23. Francine
    Francine says:


    Thanks for your insight.

    The article tells the story of how PwC US used Satyam to rebuild its systems integration practice and possibly teamed up with PwC India and Satyam to sell Satyam’s services to their clients, audit and non-audit, outside of India. Any kind of business relationship like this is forbidden under US independence rules under the SEC, given the fact that Satyam was a US listed audit client. PwC US technology skills were pretty much on-existent, save a few people and practices, after the IBM sale and they were forbidden to provide any “technical” services until after the IBM non-compete was up, summer of 2007.

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  1. […] was circumspect in responding to Doshi’s questions – in particular about hypothetical future findings of collusion on the part of PW India or its partners – but he was emphatic: “The statement you are […]

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  5. […] Finally, I have identified more examples of potential independence violations on the part of PwC with regard to Satyam like the one I described in the PwC/Idearc/Satyam engagement. […]

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  11. […] Thomas has said his client may appeal the verdict but it is hard to see on what grounds. Thomas’s claim that BDOI has perpetrated a fraud on the public sounds meritorious but the jury has effectively said: ‘So what?’ Even if you argue the jury got it wrong, there would have to be a slew of new facts the jury did not hear about for this case to have a reasonable chance of being directed in favour of BES. However, none of this will provide relief for the Big 4 which are facing mounting litigation. PWC has the threat of Satyam hanging over it. As Francine says: Interestingly enough, word on the street all over the world, is that PwC, in particular, is scared witless of these suits given the inevitable suit against PwC International that will be filed in the Satyam fraud. In fact, one of their inside counsel subscribed to the Courtroom View Network coverage and has been listening every day.  Sources have told me that more than one of the PwC firms of both the “network” and SEI (shared economic interest) variety, and there are both, are seriously evaluating options including dissolving and splitting off to avoid the potential liability of a catastrophic Satyam verdict. […]

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