Hey Big 4! My Expectations Are Already Low

Call me incredulous, but the Big 4’s public relations professionals may be on to something. Set the bar low, tell us what the Big 4 can’t do, won’t do, want to make you believe they have no responsibility to do, and maybe everyone will leave them alone. Then they can go back to making money the old fashioned way – via a government-sanctioned oligopoly.

It’s a trend that started with the “We were duped” defense, used most recently by PwC in its initial reaction to the Satyam scandal. PwC then piled on to the pity party when, in a rambling, incoherent interview with an Indian journalist a couple of weeks ago, Global Chairman Dennis Nally stated:

“Many times there is an expectation from the investor community that the auditor is in fact fully responsible for the detection of fraud. Now that is not our job, today.”

Gee, Dennis…Have you guys ever heard of SAS 99?

“SAS no. 99 reminds auditors they need to overcome some natural tendencies—such as overreliance on client representations—and biases and approach the audit with a skeptical attitude and questioning mind. Also essential: The auditor must set aside past relationships and not assume that all clients are honest.”

Similarly, the soon-to-be retired CEO of Deloitte Bill Parrett told a reporter at the Globe  and Mail last April:

“…there are limits to what an auditor can detect – and those limits often fall far short of what investors expect from the process.  “We’ve always had this expectation gap between what the auditor really can do and what the investing public wants the auditor to do, or wants the audit to represent,” he said

And the reporter lapped it up with no critique.

Unfortunately, I was drinking coffee and eating a biscotti when I read that quote. There’s so much arrogance, misinformation, and PR speak here.  The shock and awe choked me up, sending raisins, almonds, and a mouthful of latte towards my MacBook Pro.

Deloitte is defending itself against several lawsuits, including their own version of the global network challenge related to the Parmalat fraud, as well as experiencing declining revenues and loss of clients for the first time in several years. Just this week, United Airlines dumped Deloitte as the auditor for EY. Of the Big 4, Deloitte lost the most business from the  “crisis.” Several of their audit clients and consulting clients failed or were acquired. They were screwed from both directions.

Deloitte has terminated thousands during the last eighteen months, including firing or demoting partners. This blog, re: the Auditors, gets thousands of comments, mostly negative,  criticizing their miserable handling of staffing issues.

The audit firms are sweating. The lawsuits and the scandals keep on coming. Just when PwC thinks they’ve got a handle on Satyam, the Huron debacle hits.

How you gonna ‘splain that, Lucy?

The most disingenuous, double-talking part of the Globe and Mail interview is when Parrett says,

“I don’t think there was an economic windfall for the firms,” he said. “On balance, I wish we could all have forgotten about the last five years because it’s been negative for everybody.”

Really?  Record revenues and record partner payouts since 2002 as a result of Sarbanes-Oxley have been a negative?

Well…Fasten your seat belts Big 4. There’s a bumpy ride in store for you in the next five years.

If you last that long.

This article was originally published at GoingConcern.com on August 9, 2009.

21 replies
  1. Robert
    Robert says:

    Wow..seems like you got some interesting commentary on thsi one. Here is my opinion..also posted on the Going Concern thread…

    OK…so namecalling and credential questioning aside…I think there are elements of things that probably need to be explored. Being an auditor at heart, I have to say that the overall posting struck a negative chord with me..even if I can understand some of the frustration that is being vetted. True, there is a disconnect between stakeholder expectations and the overall mission of the external auditing community. This is an education issue. And True, an auditors attestation requirement is for reasonable assurance rather than absolute assurance. One would like to think that large material fraud would be exposed through the top-down risk based financial audit process…and even I would like to believe that this would be the case…but this runs contrary to the very tenets of fraud…that is is by its very nature usually hidden proactively by the perpetrator.

    So much of the quality and depth of an audit is attributable to the audit team and partners overseeing the audit. And each team/partner has its own set of influences, risk tolerances, paradymes, etc that will inherently conflict with those of any given individual or organization reviewing such work.

    To blame entire organizations for the oversight of several, who, arguably, may very well have been acting with professional skeptism in the execution of their duties, seems judgmental.

    Perhaps both parties of this post (commenters and writers) needs to hedge their bets a little to account for the unknown specifics of each accounting case referenced. There is so much I could say on this topic…but I think I’ll leave it at that. Contentious but interesting opinions..all the way around.


  2. fm
    fm says:


    Thanks for your thoughtful comment. Let me absorb it for a while. But I’ll just say this until I have a chance to look over at goingconcern.com… Do you have any idea how pervasive the rot is in the firms when it comes to performing quality audits? Not because of the lack of sincere effort by the rank and file good professionals who try hard but because of the disincentives that are now built in,institutionalized, at the leadership levels and to get to the leadership levels? I’m working on a review of PwC and its history with revenue recognition issues. Care to see how that turns out? Not good.

    Until a little later and the light of day.


  3. Robert
    Robert says:

    I certainly agree on that point…I’ve written several times on my blog about the structure of the industry. Largely, I don’t know how one can expect true independence and objectivity on the part of an audit firm when that organization’s paycheck comes from the very company that they are auditing. It’s a huge flaw in design. And from an internal organizational politics & business perspective, I would also agree that the normal axioms of business (i.e. maximize stakeholder value) are alive and well in the Big Four communities, but that such axioms run contrary to the objective of the audit entity in the eyes of the investment community. Thanks for the reply.


  4. Tenacious Truman
    Tenacious Truman says:

    Robert @ 1 & 3,

    You posted, “True, there is a disconnect between stakeholder expectations and the overall mission of the external auditing community. This is an education issue. And True, an auditors attestation requirement is for reasonable assurance rather than absolute assurance.”

    I like your resonable tone and well-crafted reply. What I don’t agree with is the content. While I agree with you that education is needed, I would assert that it is the CPAs/auditors that need the education. I don’t care what SAS 99 states or what GAAP or the AICPA says about audit opinions. All I need to know is that the Supreme Court of the Unites States has ruled that auditors “certify” the financial statements of the companies they audit, and that the auditor’s first duty is to the shareholders/investors, and not to management.

    The price paid for being given an oligopoly is a stricter professional standard of care.

    The reason for so many out-of-court settlements by audit firms in cases of audit failure is not that they perform a cost/benefit analysis like prudent businesspeople, as some have stated. The reason is that they will LOSE in court, because of the SCOTUS ruling (in U.S. v. Arthur Young) noted above.

    — Tenacous T.

  5. anonymous
    anonymous says:

    If you’re working on a review, and can already say how it turns out, that indicates your bias on the topic.

  6. fm
    fm says:

    @5 Anonymous

    My bias towards raising greater awareness of the significant challenges and issues the audit firms face and towards giving an insider’s rather than a PR view of the audit firm model and business practices is well known. I make no apologies for it. It is the premise for the blog.

    With regard to the review I mentioned, I have already done the research. I’m just writing the words around it right now.

  7. Robert
    Robert says:

    Tenacious Truman…I would agree that BOTH parties probably need some education. But I think that your statement regarding certification just illustrates my point. One can’t reasonably expect that an auditor could say with 100% certainty that certain financial statements and related disclosures are 100% accurate and free from material fraud, can he/she? And if you leave room for that statistical error rate, then you technically deviate from the textbook definition of the word “certify”. And as such, the “opinion” that auditors issue effectively defaults to the word “certify”…but make no qualms about it…it can really only ever be an opinion (as absolute assurance can never really ever be obtained under reasonable circumstances).

    I agree that the price of the oligopoly should be greater professional care….but to my point in #3….I do think the structure is flawed. So while their first duty, in a perfect world, is to the stakeholders…..the duty to their own self-interest will always be in conflict given the current structure. You can’t fight human nature…


  8. Chicago Accountant
    Chicago Accountant says:


    You’re reading too much in the word “certify” by SCOTUS. SCOTUS never said all audited statements need to be free from error. At least, that’s my understanding.

    The AC should hire, fire, and negotiate fees with the auditor. The AC should be independent from management and represent the shareholders. The auditor works for the shareholder. There is no conflict that needs resolution as long as things work as I wrote above. The solution is good corporate governance, not some different auditor-auditee model.

  9. Tenacious Truman
    Tenacious Truman says:

    Chicago Accountant,

    My point is that it DOESN’T MATTER what you and I and the rest of the accounting profession think “certify” means or what protection the language in the audit opinion conveys or what “reasonable” means in terms of financial statement fraud and procedures to detect it. What matters is how lawyers argue in a court of law and how a judge decides a case, then how that case is appealed and decided on appeal. At each stage, some lawyer is going to trot out that Supreme Court decision and say, “See, this is what the standard is.” The other side will argue, “No. That word doesn’t mean what those guys say it means. That was just some obiter dicta and means nothing, really.” Then a judge decides. Nowhere in that process is an accountant saying, “No, wait. This is what GAAP says.”

    That’s my point. Once the matter is in play in court, accountants no longer get to vote.

    — Tenacious T.

  10. fm
    fm says:


    Which is why the Big 4 almost always settle. If you’re BDO Seidman, you can’t afford too, and you bet the farm once too often.

  11. Chicago Accountant
    Chicago Accountant says:

    If you read US v. Arthur Young, SCOTUS acknowledges GAAP and its role in the audit. Therefore, every court in the US needs to acknowledge the role GAAP plays in the audit. It’s true that SCOTUS or any other court could overrule GAAP, however, that would be dangerous and overreaching. FASB receives its power from the SEC which receives its power from Congress. SCOTUS disregarding GAAP, and in doing so inherently changing GAAP, would be tantamount to ignoring a Congressional act.

    When we are talking about audit opinions, we’re more or less talking GAAS not GAAP. If GAAS was somehow in violation of the law, then yes, courts could take issue with it. However, the AICPA is careful in how GAAS is worded so that it is in compliance with applicable laws, rules, and regulations. Saying that your audit complied with GAAS is actually a legitimate legal defense. It’s accepted by the courts–the precedent has been established.

    This is why when a firm is asked about an audit failure, it releases the standard line that its audits complied with GAAS. Why? The courts have ruled that GAAS provides some form of floor for negligence. Above the floor, it’s much harder to prove the audit firm was negligent and therefore liable. If on the other hand the firm did not comply with GAAS, negligence is much easier to prove. The firm is tipping you off to its legal defense. I’m not a lawyer, but this is my understanding.

    Also, has anyone thought for a second that settling would also be in the best interest of the plaintiff in many of these cases? Proving negligence is in fact hard. It’s not an easy thing to do. It takes time to work itself out in court. If the settlement wasn’t in the best interest of the plaintiff, why would they settle? Most of the time, at least I would wager, we’re not talking about average investors suing. Instead, I would wager a majority of these lawsuits are launched by large institutional investors and creditors who can actually wait to see a payout. Settlement, in many cases, is an acknowledgment that there is too much risk in the legal system. The plaintiff can go home with nothing; the auditors could go home without jobs.

  12. anonymous
    anonymous says:

    Oh just great! So I guess all audit textbooks and CPA review material need to be updated…”the benchmark for a financial statement audit to be performed in a competent manner is no longer GAAS…the ultimate standard has been right under our nose for quite some time…it’s just that the AICPA failed to think about this when they went through the trouble of creating their own set of standards. Auditors must now adhere to the standard set by Supreme Court…specifically the Arthur Young case. Students can now disregard what was previously taught about GAAS….”

    I don’t disagree with SCOTUS being ultimate benchmark for competent financial statement audits but it leads me to wonder….how many public accounting firms to this day have truly lived up to this standard if this is the ultimate be all, end all standard?? hmmmm???

  13. Chicago Accountant
    Chicago Accountant says:


    What the Arthur Young case really set out was that auditors have a “public watchdog role” and it reaffirmed that there was no auditor-client privilege or accountant-client privilege. The auditors job is not to be the advocate of its client like a lawyer is to its client. The auditors has a duty to the shareholder, the creditor, and the potential investor/creditor. I think what TT is saying is that GAAS and GAAP are all well and good, but a court will do what a court wants to do. My argument is that precedent has been established by the courts to recognize both GAAS and GAAP. Don’t burn your CPA material just yet. Wait until you pass or fail too many times to care.

  14. Tenacious Truman
    Tenacious Truman says:


    I would assert, once again, that “certify” has a meaning and it means exactly what a judge decides it means. If you think “certify” means follow GAAP or GAAS or whathaveyou, then fine. If you think “certify” means follow the AICPA rules to the extent engagement budget permits and then issue an opinion that is carefully worded to minimize any liability should you have missed something, then I can see where you’re coming from. Roll the dice and take a chance. (Which is exactly what the firms have been doing, anonymous@12.) Pay a settlement if your roll comes out “craps”.

    If you think otherwise, or if you think somebody somewhere with the power to destroy your firm might be thinking otherwise, then you might want to enhance some audit quality processes. You might start with letting the audit procedures drive the budgets, rather than the reverse. But that’s just me and, since I don’t even work in the Big 4 anymore, I don’t really have a dog in this hunt.

    Again, once you’re in the province of lawyers and judges, you’re in another dimension, somewhat divorced from this one, where the people who wrote the regulations and laws cannot opine on what they mean, and only the legal guildmembers have the ability to interpret them. One side will hire teams of accountants (yay for litigation engagements!) who will perform lots of forensic analyses and conclude that the auditors acted reasonably and had a reasonable basis for their conclusions/opinion. The other side will hire teams of accountants (yay for expert testimony engagements!) who will perform lots of forensic analyses and conclude that the auditors were incompetent and/or part of the conspiracy. But the newspapers will have their own way with the story and Fran will have a blog post or three.

    Even worse than that vision is the nightmare where 12 members of a jury, carefully chosen to have no previous knowledge of accounting, GAAP or GAAS, none of whom could find a way to get out of jury duty, will get to decide whether your firm is liable under the judge’s interpretation of “certify” in the context of a civil or criminal proceeding. Your “experts” will argue with the other side’s “experts” and the jurors will wonder what does “generally accepted” mean if the accountants can’t agree on anything? Meanwhle the future of your firm will ride on the jury’s ability to figure it all out before their jury pay runs out.

    In any case, salient quotations from the case in question have been posted elsewhere on this blog. Why not search ’em out and decide for yourself?

    — Tenacious T.

  15. Chicago Accountant
    Chicago Accountant says:

    I think the law, from a high level, is actually quite clear. If you are negligent then you are liable. The idea of what is negligence is what’s unclear. No court has ever held that an auditor is required to find all misstatements per se. That would be a very easy case against an auditor. If the financial statements are misstated, the auditor loses. No plaintiff has ever successfully argued and will never successfully argue that case. Instead, plaintiffs either say the auditor was negligent or complicit in the fraud.

    If you let a budget drive the audit, then you’re not following GAAS and you would likely be negligent. Risk should drive audits which should drive budgets. However, I understand your point TT. Each side will come to the table with their evidence and they’ll try to persuade the court that GAAS was followed or was not followed or that GAAP was followed or not followed. The court system is a mess. That, more than culpability, explains why auditors settle out of court.

    I want to be a lawyer. It’s why I’m starting law school in two weeks. I’ll let you know what I learn.

  16. Underwater
    Underwater says:


    “The auditor works for the shareholder. There is no conflict that needs resolution as long as things work as I wrote above. The solution is good corporate governance, not some different auditor-auditee model.”

    There is always going to be an inherent contradiction within the auditor-auditee model as it currently stands. When things are going good, this is not as acute, because no one cares whether you did a bang up job in the audit, they’re still making 20% year over year returns. When things are going south (insert scandal and accounting mess up) then people are going to look at these audits with greater scrutiny and start realizing all the shortcomings. When you’re getting paid by the entity you’re auditing and when you’re trying to lowball your fees to try to beat out the next guy all while trying to maintain partner standard of living, you’re going to have issues. I know a Senior Manager that was telling me that it’s a buyer’s market, ie the company holds sway and keeping them as clients are paramount- if we lose the client we could lose our jobs.

    People may ask about all the audits that maybe going right, well most people focus on the number of patients a doctor’s killed as opposed to how many he’s treated well.

  17. Chicago Accountant
    Chicago Accountant says:


    I don’t think that’s a structural problem with who pays as much as it is auditors lacking a pair. I think the current, low rate, high utilization model will lead to a number of audit failures and a number of non-frivolous lawsuits. You can’t cut hours and increase utilization when fraud risk is rising, not declining. It makes no fundamental sense from an audit planning perspective. I’ll sit back and laugh when these partners get burned.

  18. Anonymous
    Anonymous says:


    It is a buyers market, and the counter to that is “you get what you pay for”. So therein lies the rub — the payer and the client are not the same… so the payer is getting what they pay for and the client is getting cheated. This argument I can see.

    As for maintaining partner lifestyle that you toss in there — the firms are also trying to maintain employee lifestyle. They go hand in hand. Some partners are getting canned, most all partners are losing a pile of $ in comp this year. Some employees are getting canned, most are losing some benefits… some are finding enjoyment out of new benefits (sabbaticals for example) and few are losing compensation.

    Also — not saying you professed this… but shouldn’t the work be the same regardless of if it is a good or bad year…

  19. Underwater
    Underwater says:


    The reason I throw in the partner lifestyle is simple math. Take a bit of an extreme example, but if you’re trying to protect Partner payouts (which is a paramount concern for these for-profit partnerships) and the client’s are renegotiating audit fees down, then people have to cram audits into smaller and smaller sizes with less resources. This puts pressure on staff to get work done faster (though people will call this “more efficient”) and not upset the client. What a staff may have previously questioned gets a pass because they feel that maybe they just don’t understand so in the interest of moving forward and not rocking the boat, they’ll just plow ahead.

    Bottom line is, with these for-profit pressures and firms competing for business while trying to maintain a return for their owners, there will ultimately be an adverse affect on audit quality at a time when we need it the most. As for your comment “shouldn’t the work be the same regardless of if it is a good or bad year”, well there’s a difference between theory and practice. To assume that auditors perform the same level of due diligence and thoroughness in a good year and bad year regardless of the economic and budgetary pressures is naïve.

    With regards to the employee lifestyle and partner lifestyle going hand in hand, I have to disagree. To a certain extent, this may be true since employees are their only asset and they are needed to do the work, but they are obviously the first in line to get it on the chin. Most employees will turnover anyway so there isn’t a strong incentive to keep them happy in the long run, just certain ones that may make it to manager. Turn and burn has been the modus operandi for many years and the big 4 are the main game in town. You may say, “this is capitalism, deal with it”, which again strikes at my fundamental assertion that the way the model is set up currently is broken. When you put the protection of the public good mainly in the hands of capitalist pressures and profit maximization you get results like Andersen.

    Again, to quote above, People may ask about all the audits that maybe going right, well most people focus on the number of patients a doctor’s killed as opposed to how many he’s treated well.

  20. Umair
    Umair says:

    Hi Francine,
    Great article, i love few questions you asked specifically if i quote:

    “Gee, Dennis…Have you guys ever heard of SAS 99?

    “SAS no. 99 reminds auditors they need to overcome some natural tendencies—such as overreliance on client representations—and biases and approach the audit with a skeptical attitude and questioning mind. Also essential: The auditor must set aside past relationships and not assume that all clients are honest.”

    The bumpy ride for Big 4 is in the Global Network.The trust and confidence of investors is not coming back in the market.2010 is a bleak year with many more jobs being made redundant in global network of Big 4.

    Thank you for such an informative article.


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