The Button-Down Mafia: How the Public Accounting Firms Run a Racket on Investors and Thrive While Their Clients Fail
This was my first post at Huffington post on March 16, 2009, and the only one not a reprint from something published on this site. I am reprinting it in full here, given the uncertainty presented by their acquisition by AOL.
There’s a popular Sicilian proverb: Cu è surdu, orbu e taci, campa cent’anni ‘mpaci.“He who is deaf, blind, and silent will live a hundred years in peace.”
Enron, WorldCom, HealthSouth, Tyco, Parmalat, Adelphia, AIG…You would think enough lessons had been learned. The financial markets are a mess and the capitalist system threatened. The systems in place to anticipate and preempt market risk failed completely. Financial firms leveraged their capital to an unprecedented extent with no checks and balances. Companies took on enormous risks with minimal disclosure to their shareholders.
And the largest global public accounting firms — KPMG, PricewaterhouseCoopers, Deloitte, and Ernst & Young — again failed to prevent, warn, or mitigate the desperate financial situation, the national crisis of significant proportions we now find ourselves in.
“…There were systematic failures in the checks and balances in the system, by Boards of Directors, by credit rating agencies, and by government regulators…”
Even the US Treasury Secretary doesn’t hold the public accounting firms accountable for the problems we now face. The Big 4 public accounting firms haven’t yet been asked the hard questions by governments, legislators, or regulators.
They’re getting a free pass.
The global public accounting firms have worldwide, government-sanctioned franchises as market watchdogs. They are supposed to be working to protect shareholders’ interests. Financial statement audits are required by most global exchanges — to provide a seal of approval on the financial disclosures of public companies. The accounting firms employ accountants, licensed by local authorities and trained as auditors. These “professionals” audit the financial statements of public and private companies, governments, and not-for-profit organizations worldwide. Public accountants must express an opinion on those financial statements.
In the United States, certified public accountants are the only authorized non-governmental type of external auditors who may perform audits of financial statements and provide reports of those audits for public review, submission to the SEC, and to comply with exchange listing standards. In the United States, the firms and their licensed professionals are required to be independent of the entities being audited.
The Big 4 public accounting firms are very big business themselves. As an industry, the top firms generate more than $100 billion in total revenues globally and employ hundreds of thousands of people. As auditors and advisors, they work inside the banks, brokerage firms, auto manufacturers, mortgage brokers, and homebuilders. They’re “in the know” about every public company and most large private companies, earning millions of dollars in fees, for audit opinions that have ultimately proved worthless. They were right there in the boardrooms when the US government took over Fannie Mae, Freddie Mac, and AIG. They are still at executives’ right hands, earning more fees helping the US federal government under TARP to organize and control the taxpayers’ new investments in subprime loans, non-liquid assets, and exotic financial instruments. The public accounting firms make money whether companies thrive or whether they fail. The Big 4 firms are now charging billions to advise each other’s clients as those companies file for bankruptcy protection.
According to a study by David L. Carter, Ph.D. at Michigan State University’s School of Criminal Justice, the basic characteristics of organized crime are:
• Profit accumulation• Longevity• An organizational structure that facilitates criminal activity• Efforts to corrupt government officials, police, and corporate official• The use of violence
Profit accumulation Big 4 firms continued to see significant double-digit growth in top line revenue during 2007-2008, even though the recession had already started. Who else besides pimps, loan sharks, and illegal gambling had such a great year last year? Such monopolistic growth and profit is due in large part to the lack of competition within the industry. The largest four global public accounting firms audit almost 99% of public company revenue in the United States and all but one of the UK’s top 350 companies.
Since the passing of the Sarbanes-Oxley legislation in 2002, public companies have complained that audit fees have tripled or even quadrupled. They are still increasing, albeit at a slightly decreasing rate. But the combination of mandated audits and the addition of Sarbanes-Oxley requirements prompted many companies to use words like “extortion” and “protection money” to describe their feelings regarding the cost of pieces of paper that seemed to provide so little tangible value to shareholders. Paying for an audit, defined as broadly by the auditors as they chose, became an “offer you can’t refuse.”
Longevity The Big 4 public accounting firms are loose confederations, combinations of firms, many of which started all the way back in the late 19th Century. Firms have merged and grown, some dying along the way, and others becoming predators of the weaker ones. The largest four firms compete on paper, yet coexist in a cooperative manner — much like the five New York City crime families: the Bonannos, the Colombos, the Genoveses, the Gambinos, and the Luccheses — in order to achieve common objectives via industry lobbyists such as the Center for Audit Quality.
An organizational structure that facilitates criminal activity The public accounting firms are organized as partnerships, like law firms. They recruit and promote less like a business, based on merit, and more like a secret society or fraternity.
“Becoming a made member of La Cosa Nostra requires serving an apprenticeship and then being proposed by a Boss. This is followed by gaining approval for membership from all the other families.”
Acceptance and success in the Big 4 public accounting firms requires selection based on university credentials, referrals from professors, family background, and business ties, as well as having political beliefs and economic philosophies that are aligned with firm values. Internal operations are conducted in a secretive manner. Financial results and common business metrics are minimally disclosed to the outside and on a “need to know” basis internally.
There’s a type of Big 4 omertà, the extreme form of loyalty and solidarity in the face of authority usually attributed to the Mafia. Once initiated into firm culture, survival requires adoption of this informal oath of allegiance that makes it shameful to betray even one’s deadliest enemy, your competitors, to legal and regulatory authorities. Examples of this extreme sense of loyalty to even those who’ve disgraced the profession can be found when partners that have been sanctioned by the SEC, forbidden to audit public companies, are later reinstated by the SEC. Deloitte, for example, maintained the partners responsible for Delphi and Navistar on their payroll during their SEC suspension and they lived to audit another public company another day.
Efforts to corrupt government officials, police, and corporate officials All the public accounting firms spend a lot of time and money publicizing their good works. There’s a ton spent on volunteerism and donations to foundations. There’s a press release a day about some or another warm and fuzzy diversity initiative in spite of the documented lack of progress in getting women and minorities to partner positions in proportion to their numbers in universities and entry level positions. They spend a bucketful of money to erase the fact that they’re otherwise sucking money out of the economy for essentially worthless audit opinions.
There’s also a big spend on political campaigns. For example, all of the US based public accounting firms like US Senator Christopher Dodd. It’s not the man, his party, or his politics, but his position that attracts the dollars. The Chairman of the Senate Banking Committee has significant influence over the legislation affecting the Big 4 public accounting firms.
Another big recipient of the audit firms’ largesse is US Senator Charles Schumer. Early in the subprime crisis, he was heard demanding action from, of all people, the accounting firms. This is comical. After all, the public accounting firms pay Schumer to protect their interests, not the other way around. Ernst & Young is one of his all time career big donors. Deloitte is one of his largest campaign contributors. As a matter of fact, E&Y and Deloitte are in his top 20 all time greatest contributors.
The use of violence Violence is the only thing left that the firms haven’t depended on to accomplish their goals. That we know of… However, their labor practices have been the subject of class action lawsuits in the US and Canada during the last few years. It appears they do not pay overtime when they should and work their professionals like the interns on TV’s ER.
We’ve all seen what sleep deprivation can to do the quality of medical care. Imagine what being overworked and underpaid does to the quality of accounting and audit work performed by thousands of new college graduates hired each year. These are the foot soldiers doing the hands-on work to insure the accuracy of the financial information published by your employer or the companies in your 401k. There’s even a case from 2007 when a poor young woman in Romania working for Ernst & Young died from exhaustion. She was working long hours without rest under pressure to keep her job.
The Ratings Agency Circle Jerk Controlling and making money from all sides of a transaction is another potential sign of a criminal organization at work. In the aftermath of the financial crisis, the press, global legislative bodies, and regulators all got sidetracked by concerns over the issue of culpability of the ratings agencies. What they missed is the unholy alliance between the rating agencies, the auditors of the ratings agencies, the companies whose bonds were being rated, and the auditors of those bond issuers.
• The public accounting firms certified financial statements and gave clean audit opinions for companies that issued mortgages and mortgage-backed securities.
• The ratings agencies counted on these audit opinions and performed no further due diligence to ascertain those opinions were justified.
• The public accounting firms audit the ratings agencies. The three largest ratings agencies, Standard & Poor’s (part of McGraw-Hill), Moody’s, and Fitch (part of Fimalac, a French company) are all public companies that are required to have their financial statement audited by KPMG, PricewaterhouseCoopers, Deloitte, or Ernst & Young.
• The public accounting firms audited the failed companies that issued the mortgages such as New Century, Countrywide, Northern Rock, and American Home.
• They also audit the firms such as Bear Stearns, Citibank, Bank of America, and Merrill Lynch that created, marketed and invested in the packaged mortgage securities — many of which ended up off balance sheets. And they audit the monoline credit risk insurance providers MBIA and AMBAC.
The public accounting firms and their hundreds of thousands of auditors should be an investor’s first line of independent defense. But these firms turned a blind eye to the excesses, mismanagement, and fraud of executives managing their client firms. The public accounting firms issued clean financial opinions for all of the firms that eventually, most less than a year later, failed, were taken over, or nationalized. And the regulators slept.
There’s something about the Big 4 public accounting firms, and to a lesser extent their next tier firm colleagues, that allows them to make money, to thrive, in spite of failure all around them. They continue on, oblivious to accelerating rates of litigation against them and the realistic threat of a catastrophic lawsuit.
Their solution to the legal threats resulting from their clients’ frauds and failures? Liability caps.
Governments all over the world are protecting and shielding the public accounting firms from failure under any circumstances, even in the face of repeated failure on their part. The current business model for global public accounting firms no longer promotes the safeguarding of shareholder interests in the modern publicly traded multinational. Shareholders, and other stakeholders, are being shafted. The firms and their partners may be corrupt. They are unequivocally self-interested.
When it comes to the Big 4 public accounting firms, the official word is still, “Too few to fail. Too powerful to call to account.”
Enron…..KPMG, PricewaterhouseCoopers, Deloitte, and Ernst & Young
So which of the 4 are you blaming Enron on?
Nice article. Prominent use of the phrase “circle jerk”. Classy.
Great artilcle in the post! The big 4 definitely need to be brought up on charges of extreme negligence.
Back when I first started in public accounting I said that I should stuff my retirement money in my mattress based on the crap I saw. If only I had listened to myself.
And yes, I did find the use of the term “circle jerk” to be rather peculiar as well.
@Anonymous ex-KPMG 2:33
If you liked the use of the term “circle-jerk” you’ll really like this post.
I manage to squeeze it in as well as the terms “bend over,” obscene, and pornographic.
The post is about directors and their role in setting executive pay.
I feel some of you have not being paying attention until now.
I hang on nearly every word you say. My dad has been saying the ‘good ol boy’ country club of board memberships for years.
@John 3:38 Thanks, John. That means a lot to me.
Well said. Vocab too.
Fabulous post and I like your vocabulary. Congrats!!
circle jerk: (Adult / Slang)
1. A circle of (adolescent) males masturbating individually or each other, often in a contest to see who ejaculates first. Synonym: sewing circle.
See also: dealing; double jacking; dual masturbation; jack off party; jack-off session; M and M; mutual masturbation; playing chopsticks; pole vaulting; Swedish culture; swordfighting.
2. In military terms, a meaningless activity, a waste of time.
You thought there were some readers unfamiliar with the term? Boy, you guys really do not get out much. LOL
I read the article today, and it is clear that the accounting industry, the Big 4 in particular, have some issues. However, many of these issues are the same that are pervasive to the rest of industry for similar reasons. The reasons many of these things go on the way they do is because of the incentive structure. The industry concentration doesn’t help anything; when you have misaligned incentive structures, it exacerbates the matter.
At the end of it all, what do you propose as a good solution to the problem? The article only seems to indicate increased legal sanctions. Will more legal consequences mitigate future problems or just make us feel better for punishing bad guys? Do we just let the government take it over and run it so well as they run everything else (then there will really be no legal recourse for mistakes)? Do we make changes in industry regulation to increase competition among accounting firms in an attempt to lower the market concentration? What would you do?
External Audits are a recession-proof comodity.
The conflict of interest is totally obvious. Companies PAY their own auditors. But what is the solution? Create a new government agency to audit these companies? Just what we need, another inefficient government regulatory body. Or, should the government pay the auditors (thereby eliminating the inherent conflict, but also eliminating the profit structure that attracts professionals to the industry in the first place)?
Don’t forget, in the post-Enron world the auditors are also audited – by the PCAOB. Has the PCOAB also failed the shareholders?
hey look – It’s Ariana Huffington…who’s got a camera phone? Since you are now writing for her blog, maybe you could lobby for a better picture. Or use photoshop.
@ Current Big 4: I really hope you’re a first year and can just plead ignorance on how the audit business works. Audits are NOT recession proof (although they are a commodity). While audit will lag the economy due to fixed fees which are contracted for a year, now that auditors are negotiating next year’s fees clients are pushing back and want their auditors to “share the pain.” How much in audit fees do you think a Company that blows up and goes under pays? The answer is zero. When Bank A, which has a $100 audit fee acquires struggling Bank B which had an audit fee of $100, how much do you think the new Bank AB pays? Its not $200. That doesn’t even count the extra fees audit firms get above their base audit fees for overruns due to transactions, growth, etc, which completely dry up during a recession.
fm seems to have an awful lot of 20-20 hindsight. Seems to be armed with lots of problems and zero solutions. It is too easy to complain. Take the challenge – try solving a problem. See if you can change anything with a magical pill, or find an overnight solution. Or maybe your solution is to anger the populus and hope for a revolution. Destructive solutions rather than constructive solutions may work, the question is how to balance short term pain with long term gains. I’m curious what the grievance is really all about — seems like a lot of excess baggage comes along with all these opinions.
Much of the accusations require a proof of “intent” — while there are clearly problems with the system… is there really “intent” by every auditor, every audit firm partner, etc, etc?
I’ve had a lot of coffee today. And it was a busy day. So I’m a little tightly wound. Talking to FT ad WSJ about KPMG/New Century, too. So I’m just going to laugh at your mention of my 20-20 hindsight. Maybe if you’d been reading since October of 2006, you’d see that I’ve been talking about the same things for the last two and a half years. And if you know anyone who knows me, you’ll hear them say I’ve been talking about the same things for the last ten years of my twenty-five years in the business. I’m a frickin’ broken record. I’m not complaining. I’m informing. I’m not the one responsible for developing solutions. The legislators, regulators and, in the end, the professionals themselves are. At least now they’re actually feeling some heat to do so.
I’m very satisfied with the level of attention that the inner workings of the audit industry is now getting. I’m very happy with discussions of the potential for culpability on the part of audit firm leadership and certain partners for the failures of companies and the loss of jobs and wealth by shareholders and other stakeholders.
I may be carrying more pounds than my Latin America days but I have no baggage.
I know. You’re just a little touchy since you work for KPMG. Bad day today, huh? Ex partners going to jail. $1 billion dollar lawsuits. And still so many more potential hits like Fannie Mae, Citigroup…
Don’t want to depress anyone. 🙂
Here’s something to cheer you all up.
Francine congrats on being quoted in the WJS today! (http://online.wsj.com/article/SB123860415462378767.html)
Keep up the good work.
@18 — from where do you get KPMG? If KPMG partners are guilty of the allegations — jail is fine by me. Nothing about KPMG makes me “touchy”. Inflammatory language decorated with colorful terminology intended to rile up the emotions of those that want to be lead around by the nose — that is not a good way to make a living. Colorful language is good in a novel, usually fiction — in journalism and efforts to report facts and news, it is irresponsible. I’ve seen very insightful, responsible, constructive and useful messages from you — stick to that.
We have a Big 4 Kool aid gulper in the room *cough* #17/20 *cough.
On a side note, since when has an author of his/her own blog not been allowed to challenge someone’s opinion in the form or delivery he/she chooses…provided he/she still gets his/her point across effectively?
Kool-aid comes in many flavors. Seems the flavor you have choosen contains the poison. Seems the author of this blog is pouring that Kool-aid out to the naive.
@22 – the naive being those who do not hold units in a public accounting firm – like yourself? Has partner unit value gone down for you 🙁 Are you upset that that Francine and her readers are telling it like it really is? What an impediment it must be for the Big 4 to continue to manipulate? Never fear, that’s why you guys get paid the big bucks.
@23 — you really are making assumptions that not only are incorrect, but are none of your business AND are completely irrelevant to the discussion. Francine’s messages are academically intriguing – they are not upsetting. What I find a sad commentary on the world is that people follow a zealot who uses language to incite and targets emotion. Extreme-ists of all kinds exist and their input is worth listening to – but be careful who you give God/Goddess status to. Blindly following is what I do not respect. It is why so many cults have been lead to their death. Francine is just a different extreme. Remember — reality is an illusion… people perceive reality differently and while it would be really nice if we had a concensus that there is one true reality that is “the way it is” — that just isn’t the case. Even when the economy comes back and we are all happy again… the perceptions of what happened will all be different. I merely encourage you and everyone else to examine ALL sides of the story and know that Francine’s opinion is an extreme. Don’t believe things on face value and don’t allow yourself to be dragged into a philosophy just because you are upset about something. That applies to a partner’s opinion as well as Francine’s opinion. The language used in these blogs is very cult like… a ton of ‘group think’ rather than honest debate and discussion. A person with a differing opinion is called an ahole, and attacked for having an opinion. While the economic situation is scary and the politics of business are often corrupt and scary too… what is more scary is a world in which group think and cult behavior can create the next Hitler. Be a little rational — think for yourself. Listen to a variety of opinions.
The part you should consider is the idea that ALL partners are bad, that the ENTIRE motivation of the B4 is corrupt. Words like “ALL” are generally incorrect. Should we shoot ALL the partners because a few are bad — what is the real percentage — 10%, 70%? Is it the partners that are causing the problem or are they just another part of the system that was put in place that has loopholes some people will take advantage of? Is it the partner at fault or is it the system? Is the profession one that is reactive rather than proactive? Can one compare the job of the auditors to the job of police? Do you blame the police for the crime that was committed, for not solving the crime, for not preventing the crime? Are there corrupt police — sure… are they all currupt? Would it be better if the government played the role of police rather than the B4? Would the government be immune to corruption (doubt it)?
These are all good questions — an attitude of blaming all partners for issues that are relating to a few partners or to the system which has loopholes… that attitude is what is scary.
This article is really unfair. The mafia runs various illegal operations that harm people, like running drugs. The public accounting firms perform a public service, ensuring that accurate financial information is provided to investors and other stakeholders. How is public accounting any more like the mafia than investment banking, lawyers, sports teams, and hollywood? Plus many people go into public accounting because they can remain independent and not have to take a client advocacy position like lawyers and bankers. What type of message are you sending to young people who may want to get paid a decent wage to work in the financial industry in a positive way? By cherry picking the inevitable failures in a profession that overall works hard everyday to maintain a level playing field you are really coming across as vicious. And how does the fact that the public accounting firms audit the credit rating agencies and their clients have anything to do with their audit performance? That’s like saying because all the CEO’s eat breakfast everyday breakfast is the problem. I’m all for trying to improve the system, but you seem to be arguing for something else here.
Oh, and when you find yourself throwing Lynn Turner under the bus for not being nasty enough you know you have crossed into uncharted territory. This is amazing. A guy with, if nothing else, an unimpeachable record of standing up to the firms, and you throw him to the lions when he says the firms weren’t the cause of the current crisis. Why would you do that? It reminds me of the French Revolution or Stalinist Russia where if you weren’t quite revolutionary enough you’d end up getting executed by the very process you had set in motion and supported… I’d hate to live in a country run by FM–would anyone be safe?
Accountants, especially licensed accountants, are a profession just like doctors and lawyers. You are supposed to be an advocate, to stand in your client’s shoes in front of management, your client being the shareholders of the companies you audit. Or don’t they teach that in school anymore?
With regard to Lynn Turner, well, you must not subscribe to his newsletter. He sent out my post about the problems with PwC buying BearingPoint to his readers week before last. https://francinemckenna.com/2009/03/is-a-big-4-firm-buying-bearingpoint/
I don’t think Lynn Turner needs protection from some pushing from little old me.
1) a person or group that uses the professional advice or services of a lawyer, accountant, advertising agency, architect, etc.
2) a person who is receiving the benefits, services, etc., of a social welfare agency, a government bureau, etc.
3) a customer
4) anyone under the patronage of another; a dependent
Interesting that the definition (from dictionary.com) covers both the company paying the audit firm and the share holders.
fm has a point that there is an inherent conflict in the fact that the firm’s paying client and those the audit firm serves (shareholders) may not have the same needs, and the incentives of the audit firm can become confused. This is the reason why audit firms require independence from their clients – in order to reinforce the perspective that they work to serve the shareholders. Moving to a government auditing agency will not change that fact unless the agency is paid by taxpayers and not the companies being audited… and in that case the government agency will still be vulnerable to bribes and the like.
Seems like an arrangement where the shareholders are actually the paying client is the better plan. But the logistics of a true arrangement of that nature are challenging. The average shareholder is not that involved in their investments, especially if they are mutual funds. So the question is how do we get the exchange of money (which causes a conflict of interest – even if the auditors are independent in their investments) between the party being served and the party serving them?
Anonymous @ 24
Congratulations on confirming Godwin’s Law! You do understand that is generally understood to mean “Thread Over,” right? I.e., once Hitler or Nazism is invoked, rational discussion is no longer possible.
I had a lot more to say about your post, especially the parts such as “Remember — reality is an illusion …” but I decided to save the bandwidth. I’m going with Godwin and saying that rational discussion is no longer possible on this thread.
— Tenacious T.
Glad to see your leftist credentials are official now.
Congratulations on making it to the HuffPo!
MoveOn.org is next I’m sure to compliment the ACORN membership.
Well! Where have you been? I think this was no secret to you. I am what I am . Read or not. Whatever.
Incendiary unfair comparisons invite incendiary unfair responses. I’d like to heard what FM would do with the accounting firms she so hates. I’d also like to know how she thinks people get promoted at them, if not based on hard work and smarts. It seems like the firms are much more meritocratic than most employers.
@29 – point simple — no 2 people will ever agree on what the actual truth really is. They may get close, but everyone on this earth perceives reality differently. Who is to say what is an absolute truth? Are there any real “absolutes”? Seems the only people who believe there are are, generally live in their own reality which no one can enter into unless they completely agree with them on all things… examples include religious extremists of all faiths, and unfortunately regimes such as Nazi Germany. It isn’t thread over — it is something to consider.
@32… while the fact that the firms offer a road to promotion is a good thing (as opposed to waiting until the person above you dies or retires in corporate accounting), I wouldn’t say its 100% based on “hard work and smarts.” If it was truly based on that, the firms would evaluate each person every year to determine if they should be promoted. That’s not how it works. Instead, you need to put in X years at a certain level, THEN they’ll look at you for promotion. And guess what? it’s not just the hardest working and smartest people who are going to get that promotion, the promotion is the default decision, unless you’re completely incompetent, don’t have your CPA, etc. You don’t earn the promotion, you just try not to lose it.
I’d liken the promotion process to some of the worst public grade schools, the firms practice social promotion. If you have the same # of years as everyone else who’s getting promoted, and they’re nothing glaringly wrong with you, you get the promotion.
@34 – I have observed these promotion tactics in some offices, by some partners and by some practices. I believe you are correct and it is more the norm than the exception. I too disagree with this way of giving people promotions — it should be based on some kind of assessment of talent, value, intelligence, successes/failures, etc. That said, recognize that it isn’t just about being smart. Smart people often lack the ability to time manage, people manage, client manage, or other softer skills like facilitate brainstorming. Smart people often believe they know better and are less open to listening. On the other hand, those with better soft skills may market well but not manage people well and all kinds of other things. Commonly they are feel threatened (due to insecurity) by the smart ones — and that makes them pretty nasty leaders. In the end, it is a trade off between all these various talents that matters and not everyone can/should be promoted for the same reasons.
I also caution — the B4 tend to promote people way too fast. In the model you present, I see people making manager in 4-5 years. This puts young people around 28 years old in a management position. You should recognize that some skills simply do come with time because they are a matter of experience rather than a matter of something you can study and learn. For example, you should work with 4-5 different managers (not the B4 idea of a manager — but a real manager who runs a practice or a division) before you really can assess what styles work for you, which ones you can implement, which ones you really do not want to emulate, etc. I believe that 10-15 years before manager is more realistic in order to be a good manager. So, that means that the B4 idea of what a manager is — really isn’t a manager in other companies where it takes 4-5 years to become a team lead, and 10+ years to be a manager.
And finally, my practice area does not promote based on years served. It is taken into consideration, but as a general rule, it is the minimum requirement to get promoted. So we are not on the plan you describe. There are exceptions. The problem is that those in my practice/region have a lot of resentment towards others who are promoted on a time basis in the practice but in a different region. But, on the other hand — those in my region generally succeed much better when they are promoted. Pick your poison I guess.
We are all to blame practitioners and academics. Public accounting in particular has lost credibility with the investing world. I am in academics, and you can’t publish anything in the top journal the criticizes the profession in anyway, even when you have empirical data to prove it. The journals are in business with the big accounting firm. They get most of their funding from public accounting, so they can’t bite the hand that feeds them.
You seem to do a great job of bashing the B4 but seldom offer any solutions to make the process better. Accounting firms are so worried about litigation today the auditors are afraid to offer real advice and just go through the audit checklist. It may be a broken system but typically it is not criminal. Hell, no one seemed to see this coming. Im not sure why. My retirement was managed by a large financial institution. They sat there and let my money drop in value. Did they see it coming? Should they? Are they criminal for not pulling my money out of the market?
You always comment on how much partners make like it is a sin. Sure there are some bad apples. But what do you want a Government run audit process? Yuck.
You must be new.
I’ve written quite a bit about what I think should be done. I’ve even said what I think to those with the power to change things. But my interest here is raising awareness of the role and responsibilities of the firms. I am not responsible for changing things. That would be the firms themselves, the regulators, the legislators and, finally and most importantly, investors as consumers of financial information.
And I can not think of anywhere I’ve ever criticized how much partners make. I believe in fair pay for a an honest days’ work. I have fond memories of my days at KPMG Consulting because I believe, at that time, it was a meritocracy – the best and brightest rose to the top. Nowadays, I think it’s mostly the conformists and politicians that rise to the top of the firms. Those that want to improve the firms’ performance of their public duty are squashed down or forced out.
Here’s a few other things for you to read. If this post, which was written a while ago, is your introduction to this site, I understand your reaction. But that’s not all there is.
Faulty CPA auditors told the world that the financial statements of numerous
debacle companies were OK.
So far, no state Board of Accountancy has started an investigation, let alone
penalized these CPA auditors for the damage done.
Here is just a sample of wrongdoers:
1. PricewatershouseCoopers — AIG, Freddie Mac
2. Deloitte & Touche — Merrill Lynch, Fannie Mae, Washington Mutual, Bear
3. Ernst & Young — Lehman Brothers, IndyMac Bank
4. KPMG — Countrywide, Wachovia
CPA auditors have been protected by by state Boards of Accountancy for too long.
In California, there are less than 5 investigators for 70,000 CPA licensee. No
wonder no big firm is investigated.
CPA auditors have a malpractice insurance rate of about 15% of revenues — paying out years after the damage is done.
We need political action to enlarge the investigatory staffs, so that this back door is slammed shut.
How about this: The CPA auditor for Bernard’ Madoff’s Ponzi scheme David Freihling had not yet been disciplined by the NY BOA as of six months ago.. I had filed the complaint in the month the story broke years ago. No answer ever received. You can read the non-action on their website.
@40: “Accounting firms are so worried about litigation today the auditors are afraid to offer real advice and just go through the audit checklist.”
Exactly! But that is why I support FM’s efforts. We are reactive rather than proactive in our audits, so we won’t catch anything and aren’t really geared to find anything. Rather, we’ll fill out a checklist designed by people with good intentions but poor judgment. “The PCAOB commented on this area a ton last year, so let’s put 10 page memos in the file to anticipate past comments.” It’s designed to cover our rears. We are more concerned about answering questions than asking ourselves if we have perofrmed a quality audit.
Where’s the time and support to exercise any actual judgment? Why would junior partners want to bother when senior partners won’t shut up about the checklists? We’re going about it ass backwards. I didn’t want to agree with Tracy Coenen on the worthlessness of an audit, but it’s staring me right in the face.
Unfortunately, the only way to reform the profession is to get rid of or threaten to get rid of the requirement that public companies be audited.