Update: Auditors and Consulting: Claims Of No Conflict Strain Credibility
Update: See bottom of post for update and comments from KPMG International re: their engagement with Siemens in South Africa.
Big 4 audit firms are focusing on growth in their global consulting businesses. But the conflicts that drove three out of four of the firms to sell those consulting businesses after Enron are a bigger problem than ever before. Deloitte was the only Big 4 firm that held on to its consulting arm after all the large firms abused the privilege of providing consulting services to clients. In that latter role, they abdicated their public duty to be financial auditors first in favor of higher consulting fees. And it was because of the obvious conflicts of interest when an audit firm “does it all” for an audit client like Enron that the Sarbanes-Oxley Act of 2002 limited the scope of services auditors could provide.
Between 2000 and 2002, in response to the new rules, the IT consulting practices of four of the Big five accounting firms were either sold to public companies or spun off and IPO’d.
– In February 2000, Ernst & Young Consulting was sold to Cap Gemini.
– In February 2001, KPMG Consulting (later BearingPoint, Inc.) was floated with an IPO. (This IPO was delayed and re-priced several times in order to wait until more favorable market conditions after the millennium change, but finally took place and then went nowhere.)
– In July 2001, Accenture (known as Andersen Consulting before its split from Arthur Andersen) also went through an IPO.
– In October 2002, PricewaterhouseCoopers Consulting was sold to IBM. (They failed on their first attempt to sell to HP.)
Only Deloitte Consulting did not, in the end, separate from Deloitte & Touche.
Since the end of 2006, however, the audit firms have been rebuilding their consulting businesses. All the largest accounting firms, including Deloitte, are making acquisitions and hiring to expand consulting practices. Fee increases from advising companies on Sarbanes-Oxley started slowing down significantly in 2006 and other regulatory changes such as IFRS and XBRL mandates have seen repeated delays. M&A went into a slump that only now looks to be recovering slightly and the financial crisis caused significant contraction in the population of large financial services audit clients.
Global highlights via CPA Trendlines and International Accounting Bulletin
The report found that fee pressure is still widespread, but easing, and this has hit the audit sector hardest. However, revenues from audits have actually increased for most networks, with PwC taking the lead and Deloitte following.
Tax was the strongest performer, buoyed by a strong demand in transfer pricing work and international tax advice and PwC led the way in this sector too. The mid-tier are starting to make more noise in the sustainability services market, which continues to grow, but corporate finance, IPO services and transaction support remain flat
- Only four networks failed to grow revenue, a complete turnaround in fortunes from last year
- Deloitte takes the mantle as the world’s largest professional services network for the first time in history
- Deloitte reports $9 million more global revenue than PwC, the slenderest margin
- Consulting growth alone (12%), including major acquisitions in the US (Bearing Point) and UK (Driver’s Jonas) help propel Deloitte to top spot
- PwC is still the largest global audit firm and has the largest tax business. The steady growth in these core businesses in comparison to Deloitte places the network in a good position for 2011
- Fee pressure still widespread in the developed economies although it is easing
- Audit the hardest hit by fee pressure although audit revenue from most networks increased. PwC is the top audit firm followed by Deloitte
- Tax was the strongest performer, buoyed by a strong demand in transfer pricing work and international tax advice. PwC leads tax followed by E&Y
- Advisory/consulting was a mixed bag with some networks growing particularly well and others losing out. There is healthy demand for risk management, internal audit and due diligence services
- Sustainability services continues to grow and the mid-tier are starting to become more involved
One of the selectively booming non-audit businesses has been workouts or bankruptcy advisory. PwC’s huge long-term engagement with the Lehman bankruptcy in the UK is a prime example. Some of PwC’s financial services audit clients JPMorgan Chase and Bank of America also grew because of acquisitions during the crisis. Combined with their audit of Goldman Sachs and involvement in Treasury TARP activities, non-audit revenues are growing for PwC. But revenues and profitability are distributed unevenly by geography and service line in all the firms. Although Deloitte overtook PwC as the largest global firm in revenue this past year, those rankings are not only based on the firms own un-audited, self-reported figures, but show a definite emphasis on consulting and advisory services as a growth engine versus audit.
The financial crisis and companies concerns over costs have driven audit fees to flat or down in all the firms, on average, worldwide. However, the independence issues that led three of the four to sell their consulting businesses by 2002 still exist, even more so with the contraction in the number of firms available in many markets to take on larger and more complex non-audit projects and engagements.
At the same time, the audit firms are behaving as if the requirement to be independent at all times is an annoyance rather than an impediment. That may be because auditors are not strictly prohibited from consulting in the UK, for example, as long as the company isn’t listed in the US. But since the PCAOB only recently gained inspection access to UK firms, we may find lax compliance once they catch up on inspections. For non- Sarbanes-Oxley companies, UK firms accept consulting engagements for audit clients at will and with only honor to guide them.
In the United States, in spite of prohibitions on a list of advisory services that can be performed by auditors of companies subject to Sarbanes-Oxley, the level of enforcement of these independence prohibitions is practically nil. Not only are the regulators loathe to single out a firm for large transgressions, they have limited time and budgets available to track them down at all, especially because of new the volume of matters generated by the financial crisis.
We only have to look at the spate of insider trading cases involving Big 4 partners to see that even though individuals who have crossed the line in an egregious way are eventually caught, the firms themselves, even when there are repeat transgressions by senior professionals such as in the case of Deloitte, are being let off the hook.
Services such as internal audit, one of the first to be put on the prohibited list for a company’s auditors under Sarbanes-Oxley, have more frequently been proposed by the external auditors in the UK. It’s as much the fault of the clients themselves, more focused on cost savings from “integrated audits” – a term used to justify the Arthur Andersen service model at Enron – than on independence, objectivity, and controls.
In India, for example, the Satyam’s internal auditor is accused of being complicit in the fraud perpetrated by executives and allegedly supported by external auditors PwC. But in their misplaced desire to strengthen controls in Indian companies…
The Economic Times of India, July 9, 2010: Accounting regulator ICAI has asked the government to make outsourcing of internal audit functions mandatory for companies to prevent a Satyam-like fraud from happening again.
The suggestion is part of the recommendations by a high- powered committee of the Institute of Chartered Accountants of India (ICAI) to the Corporate Affairs Ministry in the aftermath of a Rs 10,000-crore scam in Satyam Computer and is intended to strengthen the internal audit system of companies.
"We have recommended that internal audit should be outsourced rather than in-house because internal audit in-house is always dependent on the management of the company. Internal audit from outside will always be better, and then it should be given to chartered accountants," ICAI President Amarjit Chopra told.
The large audit firms in India and the UK, as well as in the US, would like nothing more than to add stronger mandates for internal audit functions and additional mandates that require provision of these services by an outside firm. Even better, eliminate any prohibitions on having the external audit and the internal audit functions performed by two separate firms. There is sensitivity worldwide to the cost of excessive regulation and mandates and audit firms will be able to sell this “integrated audit” easily in this economic environment.
Just like Arthur Andersen did at Enron.
The hunger for more consulting revenue also causes the audit firms to forget they are audit firms first and foremost. Aggressive sales activities and “relationship building” tactics common in the systems integrator business are tolerated by the audit firms for the sake of winning major long term engagements with prestige clients and realizing the return on big acquisition and practice-building investments.
Outside the US, the prohibitions in some countries on foreign ownership of their audit partnerships is breaking down and the international firms are taking control of everything else away from local partners who “cannot realize the growth potential.”
PwC’s purchase of BearingPoint’s commercial business and heavy emphasis on reestablishing their SAP and Oracle implementation business once the non-compete with IBM expired in mid-2007 has led, according to sources, to a “winning is everything” attitude. That attitude, in turn led to mistakes like using the firm’s relationship with Satyam, an audit client, as a selling point for its outsourcing and systems intergration services. It’s also led to the scathing indictments of selling practices found in a recent United nations Inspector General’s report of PwC’s win of a multi-year, multi-million dollar SAP engagement.
“…Van Essche and UN procurement officials committed “serious breaches” of UN rules to favour PwC over other bidders, the report says.
The report says PwC’s approximately $16m contract bid was nearly $11m higher than the lowest bid and exceeded the $11m the UN had allocated for the project, a redesign of the UN procurement, human resources and financial management computer systems.
PwC wasn’t awarded the contract on its overall financial bid but on a proposed day rate. But PwC procurement files do not show the final agreed number of days needed to complete the project, making it impossible to determine the estimated cost to the UN, the report says.
“It is inconceivable that the estimated duration of a project should not be factored into the commercial evaluation of a proposal to determine the projected cost,” says the report.
In violation of UN rules, PwC was given more time to study the proposal request than other bidders, including one with a higher technical score than PwC. This resulted in a “material alteration” of the UN’s proposal request that favoured PwC, according to the audit…The U.N. has hired PwC numerous times in past years. In 2007, the firm was employed to confidentially review the financial disclosure statements submitted by U.N. staff. In 2005, the company donated 8,000 hours of staff time to investigate any abuse of donor aid following the Indian Ocean tsunami of the previous year.
Sources have told me that this UN procurement is used as a case study to train PwC consultants on “how to win an engagement”.
Another recent case, Deloitte’s consulting work at Kabul Bank in Afghanistan, shows how the consulting side of the house can divorce themselves from the reality of massive fraud and corruption while charging millions of dollars to implement the systems and controls that will supposedly prevent such waste, mismanagement, and illegal activities.
The New York Times, January 30, 2011: While Afghan and U.S. officials depict a crisis far worse than has been made public, State Department cables released by WikiLeaks show that Afghan and Western regulators were aware of many of the problems, but were most focused on the problem of terrorist financing, rather than the elaborate fraud scheme that was the main problem at Kabul Bank.
A stream of complaints about the bank’s practices – many of them the problems that now threaten the bank’s survival – are dutifully recorded in the cables, but diplomats, at least in 2009 and early 2010, seemed not to have realized the profound effect they could have on the financial system as a whole.
Although other banks here have had questionable loan practices, so far it is only Kabul Bank where what amounts to an enormous fraud scheme was conducted over a period of years and whose troubles are sending tremors through the Afghan business community and worrying Western donors.
Deloitte, a top U.S. accounting firm that had staffers in the Central Bank under a United States government contract over the last several years, either did not know or did not mention to American authorities that they had any inkling of serious irregularities at Kabul Bank. Deloitte was not responsible for auditing the bank’s books; a spokesman for Deloitte did not respond to requests for comment.
All news accounts clearly state that Deloitte was not the external auditor of Kabul Bank, but isn’t an audit firm always an audit firm, first and foremost, even when consulting? Doesn’t the client expect a higher level of quality, expertise, and ethical conduct from an audit firm, especially when implementing financial systems and controls? Shouldn’t all of the firms’ employees and contractors have to perform to a higher level of standards and care?
Finally, in South Africa we have the case of a project gone wrong by Siemens, a systems integrator that works often in conjunction with the Big 4 firms like Deloitte to implement software such as SAP for government agencies. I raised the issue a few years back regarding Deloitte’s independence with regard to Siemens when they helped Debevoise conduct an investigation of their massive bribery scandal. I questioned Deloitte’s independence because they were an alliance partner with Siemens and a joint project had gone wrong with South Africa’s port authority.
This time it’s South Africa’s Department of Labor that’s upset with Siemens and their performance on a long term project to implement SAP. They’d like to end that relationship and, possibly, recoup overbilling and the costs of project delays. But which firm did the South African government ask to review the project and Siemens performance?
KPMG, Siemens’ former auditor during the period of the bribery scandal.
KPMG was relieved of their duties as auditor in 2008, as a result of preliminary accusations of possible negligence in preventing or mitigating the scandal. The attorney who conducted the internal investigation on behalf of Siemens, Bruce Yannett of Debevoise, had this to say regarding the results of their investigation of KPMG and any ongoing matters between KPMG and Siemens:
“We looked at KPMG’s role over the years in question and reported our findings to the Supervisory Board. Those findings are not public. Siemens’ public statement at this time is that certain investigations are ongoing and Siemens will not comment.”
So why did KPMG take on this investigation of Siemens given the obvious conflict? Who anywhere in the world in KPMG would not have known their firm was the infamous auditor of Siemens during the scandal?
KPMG’s proprietary system, Sentinel™, facilitates compliance with these policies. every engagement entered into by a KPMG member firm is required to be included in the system prior to starting work. the system enables lead audit engagement partners to review and approve, or deny, any proposed service for restricted, publicly traded, and certain other audit clients and their affiliates wherever in the world the proposed service is to be provided and wherever the member firm is based.
There is no enforcement of the engagement acceptance and continuance policies the firms are so proud to publish in their new global transparency reports. If a local member firm, South Africa in this instance, either ignores, lies, or acknowledges but does not seek higher approval when a conflict such as this presents itself, neither the global firm nor a regulator will likely catch it.
Certainly given how ravenous they all are for revenue, no self-respecting local partner will turn away work unless he has to.
KPMG’s US spokesperson was seeking a response from their EMEA counterpart at the time this was published.
Update March 1, 2011: KPMG South Africa and KPMG International responded to my queries for comment on the decision to accept an engagement from Siemens in South Africa given their history with Siemens.
My concerns were that the client acceptance and continuance process did not go far enough – or outside the borders of South Africa – to determine whether there may still be an open issue with Siemens that could present the appearance of a conflict of interest either to their client, the South African National Treasury who engaged Siemens as part of a long term public private partnership, or to the public.
One of the beneficiaries of this partnership was the Department of Labor. The Department of Labor became dissatisfied by Siemens project delays, apparent overbillings, and use of subcontractors, according to sources. KPMG was engaged to investigate the overbilling, use of subcontractors and options for ending of the contract.
A KPMG South African spokesperson told me that that the member firm followed all internal policies correctly and that the engagement was approved within South Africa. South Africa is now part of the KPMG EMEA business unit and I wondered why, for a global client such as Siemens where everyone in the firm must be aware of KPMG’s history, the member firm would not go outside the boundaries of South Africa and make sure thee were no ongoing legal matters, adverse interests, or other conflicts that would inhibit independence and objectivity on this engagement. Just checking a database and confirming Siemens was no longer an audit client, given the history with Siemens, did not seem to be to be enough. I was as surprised as they may be to see that Siemens attorney did not close the books on further findings definitively, in my opinion, in his statement to me regarding KPMG.
A KPMG International spokesperson gave me this statement in response to my concerns:
· There has been no determination following any investigation in relation to the Siemens audit work carried out by KPMG member firms that such work was performed other than in accordance with the appropriate auditing standards. Statements which suggest otherwise are false and misleading.
· KPMG has a global system that facilitates compliance by member firms with auditor independence requirements. This system is also used to identify potential conflicts of interest and is required to be used by all member firms across the network.
· We believe our system is adequate. In addition, we have no reason to believe the decisions made by KPMG South Africa were not appropriate.
· KPMG’s engagement as auditor to Siemens AG ended in 2008. Importantly, this fact was disclosed by KPMG South Africa to its client.
Just a small correction to history. AA did not divest of Andersen Consulting voluntarily or because of SOX. Andersen Consulting partners did not want to be part of AA ( a very good decision in retrospect) and wanted the split. In the settlement, Andersen Consulting lost the right to use the Andersen name as part of the split and changed its name to Accenture. The divestiture took place before Sarbanes Oxley and was the result of several years of in-house battles between Andersen Consulting and Andersen. It was a stroke of very good fortune for Andersen Consulting that they were split for Andersen before everything came apart.
To regard these clowns as true professionals is the joke of the century.
Diogenes with the Green Eye Shade
OK what is your recommendation? The way things are set up today, the Audit firms need to make money to attract the best and brightest. They need to provide methodology, training, and insight for their employees and clients. I agree an individual Partner/employee can put winning over doing the right thing but doesnt that happen in any industry? You seem to pick on building non-audit services like It consulting. How independent is the Partner in chargre of a big audit like Federal Express or Microsoft? They will probably do most anything not to upset their $15 million audit cient. Even if there is no consulting work going on. Not saying they are breaking the law but how independent are they? The same can be said for bankers, government officials and probalby Blog writers! Other than having rules, quality assurance checks, policies and oversight I’m not sure how to get around this. Are you proposing that our audit firms be government run and paid for? So perhaps “revenue” will not be an issue. I would think even with a government run audit (like the IRS) we still would have independence issues.
We tend to see differently on many areas, but for this subject, I’m 100% in agreement that there needs to be separation. There are countless business conflicts and ethical conflicts that abound. At least the so called Green Paper from the European Commission raises this as a serious topic. With respect to business conflicts, many of the Final Four consulting practices actually compete with their attest clients for market share, which should at least raise an eyebrow or two. I’m sure that PwC and D&T have substantial practices trying to grab market share with the US Government, including the Department of Defense. Then there are the consulting practices that hire client personnel and vice versa, so how do you ever know if there is some of quid pro quo going on at the middle levels. Finally, most of the Firms are run today by consulting minded people and there is insufficient time and attention placed on the audit practice. People in the firms are rewarded for growth and lets face it the audit practice is not growing anywhere. And, don’t let anyone tell you there are “synergies” with the business lines and one practice helps another, because in my many years of experience that rarely happened before 2003, and after SOX that argument is dead on arrival. The time has come for the SEC/PCAOB to act and reset the rules, because the Firms are out of control..
Perhaps, at some point, the people in the US will wakeup to the fact that they, like the Egyptians, do not run their own country. There is only an illusion of democracy staged by the true mafiaso syndicate run by organizations like the PCAOB, a perfect example of facism in action.
The crimes continue to mount, but, the elected representitves of the people refuse to enfore the law and only make excuses as to why their cronies in the public accounting field are not resonsible for propagating the very lies that their profession dictates that they eliminate.
@David. I agree Andersen Consulting wanted to be separate from Arthur Andersen. It was mostly about money. But also about access to cleints and account control. Consulting is more about the deal where audit is more about the long term relationship. sometimes a conflict but not always.
Francine: I am just curious if you know why Corporate Finance practices (essentially investment banking) of the Big 4 never really picked up, as opposed to their European counterparts, who are leading players in the middle market and top the league tables in number of transactions? Are they trying to rebuild these businesses in the U.S. now?
I don’t know. I’m not that familiar with these practices since, as you said they never really took off. My off the cuff take would be that the Big 4 can not compete for talent with traditional investment banks. Whether MBA grads or experienced hires, there is no profile for those practices here. When the Big 4 in US say they advise on M&A they mean tax.
Maybe one of these days you’ll get your wish and the government will take over auditing public companies. After all, the best and the brightest always go to work for good ole Uncle Sam.
If I really got my wish, it wouldn’t be called an audit and it wouldn’t be done with a lot of mind-numbing, repetitive, manual, check-boxing.
Been a long time since you audited if you think it’s a lot of mind numbing, repetitive, manual, check-boxing.
I know it’s easy to blame the Big 4 for the financial collapse, they’re an easy target. But in reality it was the perfect storm of corporations and individuals failing to understand risk. There were a lot of very smart people that never saw this coming and to lay it all on the feet of the audit firms is nothing but a cheap shot and a cop out. But then again, you don’t really have to think to blame the auditors, they’re the easy targets and nobody is going to question that. So you get to act as a holier than thou guardian angel of the financial system when in reality you’ve taken the easiest path you can take. How many people lost how many billions in the various ponzi schemes that went on while the SEC had its head in the sand? Where were the regulators of these giant financial institutions? There is no more regulated industry than the banking industry, yet I don’t remember the regulators raising any red flags on these institutions. Some of them failed due to an old fashioned “run on the bank”. How exactly is an audit firm supposed to predict that?
It’s pretty dang easy to give a going concern opinion when a company is about to blow a debt covenant. But it’s something else entirely when you are at the beginning of a global meltdown that nobody knew would be as bad or as long. I wonder how many people were out there screaming at the end of 2006 that there was a financial meltdown coming. You love to play Monday morning QB and point and place blame on the audit firms when something goes wrong, but I’ve noticed that you never seem to place any blame on the companies themselves. I notice that you love to talk about “box checking”, but you never find fault with the Universities that are producing students that can pass a CPA exam but don’t know the first thing about how to audit or understand our complex financial system. How many times do the audit firms get it right? Most of the time, but I wonder why you never mention that. You love to point at two rogue partners at Deloitte and scream from the rooftops that the whole firm is corrupt. Of course that fails to consider the thousands of other partners that are absolutley disgusted with what happened. As with any Company, internal controls can be circumvented, but when it happens at a Big 4 firm, why by god the whole damn place is a bunch of crooks.
You come off as very petty and vindictive in your constant attacks on the Big 4. I have no doubt that you once worked for at least one of the firms and got your nose out of joint about something, but that doesn’t mean that the entire industry is corrupt as you like to imply. The ability to write well does not always make you right.
Arthur Levitt, remember him?
I think you’ve missed the point of my writing here and in Forbes. I do not blame the audit firms for the financial crisis, exclusively. I have been writing since the end of 2006 after I left PwC. So although the seeds of this latest crisis were already firmly planted, I first wrote about backdating, the tension between auditors and clients as a result of the Sarbanes-Oxley law, my experiences working for JP Morgan, KPMG Consulting, and BearingPoint outside of the US primarily in Latin America, and my work auditing the firm at PwC. Although I have an accounting degree and passed the CPA exam, I am not a licensed CPA since I have never been an external auditor and had no reason to be licensed. My intertest and aptitude is the busienss of the firms. When I write about technical topics, I check it with others who do know that area and it’s to illustrate the impact on the firms’ clients, the profession, the regulation of the firms, and the accounting industry.
My interest in writing about the firms is to raise awareness of their role in the capital markets and financial regulatory system. I worked a long time at two firms, on the client side at the beginning of my career, in internal audit, and in partner/MD P&L roles at the firms and other professional services firms. Combined with extensive work at the international level I had a head full of experiences, stories, and opinions when I left PwC that had nowhere to go but, perhaps, a book. And so I started a blog to get it all down.
In early 2007 we started to see the subprime issues which morphed into a credit crisis. At the end of 2008 the credit crisis turned into the financial crisis. To say that this series of events was a gift to my work is an understatement and somewhat disingenuous. No one wishes a crisis so that people will pay attention and, in fact, the auditors were pretty much immune from any focus until the Lehman bankruptcy examiner’s report identified EY as part of the problem not part of the solution in early 2010. Until then, I was talking into the wind, with mostly only the converted listening. But I kept my sanity because there were many out there trying to do the same thing – bring attention to the role and responsibilities of the firms – and my consistency and independent stance I think helped coalesce some other critics to become more vocal and more public. Plus, the tools and media landscape matured and blogs and independent non-professional journalist subject matter experts were able to gain much more attention from the general public than in the past.
Why am I so critical you ask? It’s not because I’m vindictive, petty, angry, disgruntled, or any other dismissive characterization that has been made including dried up childless prune who needs to get laid. On the contrary. I’m not petty at all and I have no bone to pick with any particular firm. I write critically for two reasons: 1) No one else was. It’s called finding your niche and narrowcasting. 2) After all my years of experience I had enough examples and enough knowledge to credibly comment on the industry business model and the actions of its leadership. I think the former is broken and the latter are mostly selfish, self-serving, short-timers that don’t serve their employees, fellow partners, or most importantly their clients – the public company shareholders and overall financial system – very well anymore. The audit firms have a public duty first, before their private goal of making a profit. They have forgotten that and no one is holding them strongly to that.
So, I have almost 1000 posts here, more than that if you count all the work I’ve done for Forbes and other publications. There’s a lot there about many different subjects including the historical basis for my opinions, my experience in the past and others’. But there’s not a lot of positive news there. There are other places you can find that. This is not a general news outlet. I do not try to react immediately to every breaking news story. I focus on the ones that have an industry-wide impact and that interest me. But first they have to be on a subject I either know well and can be comfortable writing about competently or where I can count on others to support me and provide opinion and analysis where my experience is lacking.
Thanks for the backhanded compliment that I write well. I think what I write is also right. But you are free to disagree and I welcome your comments and feedback.
Well said Steve!!
Steve says “How many times do the audit firms get it right? Most of the time, but I wonder why you never mention that.”
How are the audit firms getting it right? By default? Or does their presence cause all of these other companies not to have audit failures? Is the real test whether anyone catches a problem when it exists and when the signs are apparent? Yes, I know, nobody knew this was coming, etc.
“Been a long time since you audited if you think it’s a lot of mind numbing, repetitive, manual, check-boxing.” Heck, it was that way when I left work Friday.
This is why I’m switching over to advisory. We auditors are a bunch of excuse making candyasses. We ought to own up, man(woman) up, and get better at what we do. Or charge a heck of a lot less if we really can’t do anything substantive for the stakeholders.
@ Tony Rezko…I think we actually need to start charging a heck of a lot more so that we can audit with a fine-tooth comb. The criticism of auditing always seems to come from a mindset that 100% detection is the goal. As anyone with external audit experience knows, this is impossible. The risk-based auditing approach was designed to keep fees competitive. Lowering fees is absolutely not going to solve anything.
@ Bob – agreed on fee reductions, they actually make audit quality worse (as should be expected, although the companies we audit don’t seem to care about that possibility). My concern is that we are too quick to say we can’t be 100% failproof in our audits, and I don’t think it’s an all-or-nothing proposition. We hide behind that, and there are cases (some of them pointed out on this blog) where we auditors should have done more. If we miss something, fine. If we f*ck it up, we should acknowledge that, even if only anonymously on a blog so as not to get sued, imprisoned, etc.
I’ve been on large SEC clients where you knew damn well we weren’t going to call out a SD or MW in internal controls, but we would write memos galore to explain the problem away. I really do think more people have to go to jail or be held accountable along with their clients before they will start sticking up to clients.
@Moto – The Corporate Finance function for Big 4 never picked up in the US due to independence requirements. As you can probably guess, advising your clients on acquisitions/financing needs/divestures/strategy would directly impair your independence. The independence rules in Europe are less strict in that regard. Also, expand (correct) Francine’s note, the investment banks in the US were able to establish themselves as the dominant players in the market through strategic relationships. In Europe, the banks have less of a dominant practice. Further, the role of the accountant is more highly regarded in Europe where we are viewed as the most trusted business adviser (referencing a financial times articles I read a few months ago) vs in the US (strategy consultants, investment bankers, etc).
@Francine – Although I would agree with the majority of your reviews and this is your blog, I can’t help but notice you tend to write to demonize the accounting profession. There is a lot of talk of “conflicts of interest; however, it needs to be highlighted that the “firms” are national firms with an international network. Revenues are not “shared” between the firms and instead, there is an agreement to bill each other at agreed upon rates for any work needed in their respective countries. Therefore, the KPMG South African firm did not share any revenue with the German firm. Besides sharing a name, audit methodology, and marketing plans, the two firms operate fairly independently. Employees are not shared resources unless they are on secondment. I wonder if the consulting work at Kabul bank was performed by Deloitte Afgan or Deloitte US. Assuming that the firms are one gigantic firm demonstrates serious lack of understanding of how the big 4 operate.
Additionally, your persistence that because the firms audit several key companies within certain industries would allow them to understand the overall risks in the industries is misguided. There are strict non disclosure agreements in place and the partners are not holed up in a room discussing the health of their clients to determine if any particular company needs to take additional AR reserves due to the deteriorating health in another.
Thanks for your comments. They seem to be well-informed.
With regard to your specific comments to me:
I would not characterize my point of view as “demonizing” the accounting profession. On the contrary. My purpose is to raise the bar and raise the frequency and volume of discussion about the accounting industry. I’m generally critical because I think the industry is ruining the profession. Just go to any of the speeches I have given to students recently to see why I think that is. I decided to fill a news and analysis void with a critique of the business model and many of the industry’s practices. There are plenty of outlets for the industry point of view, such as the AICPA and CAQ missives in the US to the general media which lacks knowledgable journalists who can evaluate claims the industry makes in its press releases and other PR.
There are now revenue sharing models across borders. You might read up on some of the European tie-ups and Asian and Middle Eastern moves by the UK firms. Borders between legal entities are crumbling. What has not changed is that no one will tie up on the audit side with the US. The legal liability is too great and the power balance is to be maintained between the US and the key European member firms. One interesting joint venture you may want to learn more about is PwC Consulting’s ownership of the service delivery centers in India. The BPO operation was recently taken over by the US in conjunction with Australian and the UK because of the weakness of the India firm after Satyam. The operation serves both internal and external needs.
Finally, it’s not true that engagement teams and senior partners don’t share information about clients and engagements. It’s part of the business necessity of managing the practices and their legal exposure as well as maintaining consistent (you would hope) treatment of technical issues in that set of clients. I have evidence of these types of discussions and am not afraid to pull them out if it becomes necessary. So while casual sharing of engagement information between individuals and definitely sharing of inside information with outsiders is of course discouraged, no client contract can restrict the firm from using client information to manage the engagement effectively and to mange the firms own risk and quality.