PwC Global Board: “Risk And Quality Top Priorities”
From the PricewaterhouseCoopers International Global Board to PwC Partners Worldwide
May 5, 2009
Minutes of April 22-24 Meeting of the Global Board in New York, NY
An excerpt:
Risk and Quality Related Issues
Risk and Quality is at the top of the Board’s list of priority topics. We were updated on developments in India. We discussed with Pierre Coll the ongoing reviews of risk and quality processes, the results of which will be reported to the Board in June. Don McGovern also updated us on territory- and client-focused reviews undertaken by the Assurance Line of Service. The “tone at the top” is critical to all our quality efforts, whether compliance with standards or embedding the PwC Experience and the Network of the Future arrangements now taking effect should enhance accountability in this regard. Other issues requiring attention include the regulatory environment and the implications of recent rulings and settlements in the Parmalat litigation against Deloitte Touche Tohmatsu, Deloitte & Touche US, Grant Thornton International and Grant Thornton US.
Risk and Quality. Territory- and client-focused reviews. Tone at the top. PwC Experience. Network of the Future. Accountability. Regulatory environment. Implications of recent rulings and settlements.
Quite a full plate for this Global Board. And that’s only the first paragraph after the introduction. Granted, this email is for general distribution to all partners worldwide and probably pretty sanitized, given the possibility it could be inadvertently distributed outside the firm. (Tee hee.)
But the message is clear. A hard rain has already started to ruin PwC’s parade. Amongst the four largest firms, they benefited the most from the financial crisis in terms of new and bigger audit clients. But for every client that folded, disappeared or was acquired, a Big 4 firm also lost consulting work. Deloitte was hurt the most, losing both audit clients and significant technology consulting clients. But PwC also probably lost consulting engagements because suddenly they were now auditing the companies. Their existing audit clients – JP Morgan Chase, Bank of America, and Goldman Sachs- got fatter and sassier from meaty bones snatched out of others’ claws and the scraps that fell from the subprime table.
In the end, PwC is as vulnerable as any of the others to clients’ demands to finally, forcefully, kicking and screaming, wean the auditors from the goldmine that was Sarbanes-Oxley. Companies are fed up with the cost and they aren’t sitting back and taking it anymore. Clients exerted pressure, budgets were cut, teams were made lean, and reductions in force occurred, in bigger numbers at the others until now, but at PwC all along. They cut worldwide, like a thousand paper cuts, continuing to claim they were all performance related. This, of course, is truly, in large numbers, more an indictment of management than of any individual. They cut fat, then muscle and they’re now finally cutting bone. (And today I received reports of cuts in both Advisory due to lack of actual implementation/integration projects and the influx of BearingPoint consultants and cuts in Audit.)
According to Ames Research Group, their numbers were not looking so good before the bonanza that was the financial crisis sent so much work their way:
Which is all the more reason why PricewaterhouseCoopers has been planning, plotting, and conniving their triumphant return to systems integration and implementation consulting once their non-compete with IBM, constraining them as a result of the sale of the consulting arm in 2002, expired in 2007.
Now, they’re back… Sort of. As was chronicled in this post, it looks like they took a short cut that may cost them the whole enchilada. They gave an audit client, an audit client that is now considered the “Enron of India,” too prominent a role when executing this comeback strategy. By depending on Satyam to promote and support their strategy, PricewaterhouseCoopers may have taken their eye off the ball, looked the other way, condoned shenanigans, stuck their hands out, lined their pockets, threw shareholders worldwide under the bus, exploited regulatory laxity and legal openings and/or flouted all the rules and standards honorable accountants hold sacred and investors hold dear.
My friend and partner in exposé, Dennis Howlett, gives a roundup of the latest news over at ZDNet. He summarizes the facts to date and explains my most recent post regarding PwC’s huge strategic error when they added a Satyam-related case study to their dog-and-pony show for Gartner and other analysts in July 2008:
In the meantime, Francine has been ferreting around this story, adding color and speculating as to what might happen to PwC. Her view is that PwC is most definitely on the hook. One of the pillars of her argument are the links between PwC as auditors and consultants to/with Satyam. Under SEC rules the consulting links would create major problems for PwC as auditors. Analyst group Gartner is reported to have determined there were business arrangements between Satyam and PwC as consultants, something PwC denied.
And then he tells us about the pièce de résistance of idiocy: PW India denies a business or strategic relationship with Satyam and insists:
No PwC firm has ever sought or created a joint business relationship with Satyam Computer Services. The only relationship PwC had with Satyam was as an audit client of Price Waterhouse.
…while at the same time yesterday trying to weasel out of liability for Satyam by insisting:
…Satyam balance sheets were in fact audited by Lovelock & Lewes and not Price Waterhouse (PW). It is also learnt that the auditing fees, though deposited in the name of Price Waterhouse, Bangalore, was later transferred into the account of Lovelock & Lewes. “It is from here that the partners S Gopalakrishnan and Srinivas Talluri withdrew the money,” sources involved in the investigation of the case told TOI.
Apart from Rajan, other senior partners of PW, from Delhi and Kolkata, were also summoned by the CBI last week. The partners denied any association with PW, Bangalore and said that Gopalakrishnan and Talluri were not entitled to sign any balance sheet on behalf of PW…
As we know from some of my early stories, Lovelock & Lewes is a part of the PW India firm from a marketing and branding perspective and is a member of the PwC Global network of firms.
2) Ramesh Rajan, the man who is making these circular statements to the press now, is the Senior Partner of Lovelock & Lewes and Price Waterhouse and the Chairman of PricewaterhouseCoopers Private Ltd.
The historical, financial, legal, and regulatory relationships are a little difficult to discern for anyone who has not yet read anything I have written, I admit, and are now, probably, a moving target as everyone scrambles to save their own skin. The questions about the Satyam signing partners authority, registrations with regulatory bodies, and actual legal and financial affiliations were the cause of much spinning and bloviating in the Indian press in the early days of the scandal.
One thing we can be clear about, though. The fact that no one except those closest to it understand the structure is not by default but by design. It is designed to accomplish just exactly what they are trying to accomplish now – to weasel out of responsibility and liability when something goes wrong. But it’s not unique to India or PwC. In some countries, New Zealand for example, there may be many firms operating under the KPMG New Zealand umbrella but they are no more aligned financially or strategically than Christchurch is with Tokyo. Separate legal entities with separate partners who share risk and reward with only their own partners is a legacy of how the “global” firms and “national” firms developed for marketing and branding purposes. It does not necessarily imply anything more, but of course should for the good of shareholders and the capital markets, as we have seen with the absurd testimony and result in the BDO International trial.
In addition to the “Who’s Your Auditor” fiasco, there was other bad news for PW in India and PwC yesterday.
The Securities and Exchange Board of India (Sebi), which is probing the accounting scam at Satyam Computer Services Ltd, seems to favour prohibiting Price Waterhouse and its arrested partners S. Gopalakrishnan and Srinivas Talluri from auditing any listed Indian firm or intermediary for a “certain period”. Price Waterhouse is the Indian arm of global auditing firm PricewaterhouseCoopers.Sebi’s interim report, reviewed by Mint, says the auditors had “failed to be vigilant in the conduct of their professional duties”, and had displayed “gross negligence” in the conduct of their audits of Satyam from March 2001 to September 2008. This “led to accumulation of false balances in deposit accounts in the books of the company”, the capital market regulator says in the report.On Monday, the Andhra Pradesh high court dismissed bail petitions filed by Gopalakrishnan and Talluri, saying the investigation into the scam was at a critical stage, according to the counsel for the auditors, C. Masthan Naidu. The auditors have been in custody since 23 January.
On the one hand they strenuously assert they are a network of independent firms for audit purposes but with a global brand. On the other hand they seem so confident of their position that they plan to expand significantly in India. In my world you can’t have it both ways and expect to be taken seriously. More important, if as seems likely, PwC is on the hook for massive damages, what about their long term viability? I for one can’t wait to see how PwC spins this one.
“It makes sense that they want to have a brand just like IBM or Mercedes. But when they get sued, they say ‘that’s not us, it’s someone else’. No-one else gets to do that, why should accounting firms be able to?” says Steven Thomas, the lawyer leading the case against BDO…I put this to Mr Thomas, who pauses, then says carefully: “I believe that there will be direct liability in the US for PwC – and PwC International.”
Hey Ms. Mckenna:
Just curious, does Big 4 share profit between their India/China/America branches? I mean I thought IBM in the above exam woud get profit as well as losses of their India/China etc partners, so if IBM China blew up in their face, all of IBM have to eat it.
For BDO Seidman (U.S), as far as I know, they didn’t share profit with BDO Europe (That Stoy something), so why should Stoy come back and take it when things blow up?
How is the weather over there? It is terribe here in MA with rains…
Mike
I am seeing little if anything in the mainstream press (whatever that is these days) regarding the state of accounting firms as they continue to lose size and money. These are the firms that attest to the financial statements that we, the public, use to make investment decisions.
There are several reasons why this could be a non-story: 1) The events and legislating going on right now are considered much bigger and more important stories than anything to do with accountants, 2) The Press figures that these are not stories of interest to the general public, an audience that does not understand the public accounting industry anyway, 3) The Press does not understand the public accounting industry and therefore does not report on it, 4) The public accounting industry does a very good job of controlling information that gets to the Press ( I tend to doubt it, they don’t seem to be doing a very good job of anything at this time).
Regardless, I’ve got to wonder. Will the big accounting firm part of our industry collapse? Will this be another case of no one paid attention until the whole thing is a massive disaster? Or, will the changes being legislated now lead to the passing of oversight duties away from the public accounting industry to some other agency? No matter what, we need to be ready for change.
All of which, Francine, makes what you are doing all the more important. Thank you.
I think the reason why you don’t read anything about the Big 4 in the Wall Street Journal or the New York Times is that the general public has very little understanding of, or interest in, the public accounting profession. Nobody outside of the profession cares about what happens at the Big 4.
@Phillip J. Fry
Well, that may have been true in the past, but the financial crisis and all the lawsuits have sharpened at least the average business reader’s focus. And I know I have a lot of non-accountants reading my blog. Finally, I did just get quoted in the Wall Street Journal. I agree. Pretty unprecedented, but hopefully the start of a trend. 🙂
Francine
@Phillip J. Fry
Glad to see FT in london picking up on this, I came here via Their link.
Keep up the good work Francine
Francine,
Send out the link to your WSJ quote. I’d like to see it.
Thanks!
True, I also ‘came here’ via FT London. Very interesting article, but I am in the profession …:)
@Phillip J. Fry
Here’s a link with info on WSJ quote re: KPMG New Century.
https://francinemckenna.com/2009/04/mckenna-quoted-in-the-wall-street-journal/
Thanks for asking.
Francine
Hey fm:
Should I start a wikipedia page about you? 🙂
Best,
MG
@Michael G That would be neat. But then I would really be exposed!
Francine
@MichaelG – get that page going!!! I’d add color….
Heads I win, tails you lose!
The story here would be if risk and quality were not the number one priority for an auditing firm. The only story from the above is that a PwC Partner would break his/her firms code of conduct and to provide confidential minutes to a third party.
Going forward why not just rename your Blog to Francine McKenna hates PwC . com? That would be a far fairer reflection of your views than re. the Auditors.
Re: David Zieloni
I think FM’s reporting is pretty accurate. All the firms take their hits, PwC just provides plenty of ammo right now.
PwC, along with all firms, try to sell themselves as global firms when the go out to bid on global clients. This certainly shows the limit of some of those global “capabilities”.
@Roco
Thanks.
It’s quite an indictment of a firm, I think, if their own active partners are fed up and want to provide confidential information to me, unsolicited. Frankly, it’s not just PwC but Deloitte and KPMG partners doing the same.
BTW Take a look here. Plenty of others, with no encouragement or prodding from me, focusing on the most notorious scandal right now.
http://blogs.zdnet.com/Howlett/?p=1037#comments
Francine
@Roco… the firms are global. But as a consultancy the client is really hiring a particular person (generally a partner, sometimes a director or manager). They know that person uses others on their team, but hold that person responsible. The farther afield that person goes to build their team the more risky they get on quality — as they don’t know the team members as well. So going outside your practice, outside your office, outside your country — these things are risky. I do not see much difference if the team includes someone in another country from a “sister/brother” company, of from another practice or another office within the US. The less the responsible partner’s team knows them the riskier the pick. And there are plenty of bad picks within the country. What would be harder to prove, yet very interesting is which areas are historically weaker. Which practices are less talented, which offices, which countries. But really it is about the individuals selected for the team.
@Dennis Howlett
Let me finish the second part of my CPA on the 18th, and we will get started.