I first met Professor Tim Louwers, my host, at the American Accounting Association (AAA) Public Interest Meeting in Chicago last March. He is President of the Fraud and Investigative Accounting (FIA) Section of the AAA. (I’ll be speaking on a panel this March 30 at the midyear meeting of the AAA FIA, also to be held in Chicago.)
Professor Louwers and Professor Sandy Cereola took me out for dinner to the wonderful Joshua Wilton House. If you are ever in the Shenandoah Valley near Harrisonburg I high recommend it.
Professor Paul Copley, the Department Head for School of Accounting as well as several other faculty were kind enough to share their research and their feedback on my writing with me. James Madison University School of Accounting offers a Bachelor of Business Administration (B.B.A.) degree and a Master of Science (M.S.) degree in accounting. Most students choose to receive both degrees and thereby satisfy the 150 semester hours of education required in most states to be eligible to sit for the CPA exam. It seems that this is a significant trend – obtaining a Masters in Accounting to meet 150 hour requirements rather than lengthening the undergraduate degree.
According to the 2011 National Association of State Boards of Accountancy report, the 2010 edition of Candidate Performance on the Uniform CPA Examination ranked JMU as the No. 1 school with the top overall pass rate for first-time candidates with an advanced degree. The report covers testing information collected for the 2010 calendar year and details examination candidate performance from nearly 2,000 colleges and universities. To see how JMU compares to other schools, visit http://bit.ly/tGIwrA.
I spoke to both students and faculty about the advantages and disadvantages of this strategy for students and schools, especially in light of the overtime lawsuits against the Big Four audit firms.
Here’s the text of my speech to the Beta Alpha Psi initiates. If you would like me to speak at your school, please contact me at email@example.com
Thank you so much to Professor Louwers, Professor Cereola and James Madison University for asking me to speak. It’s enormously rewarding to me to be here amongst accounting students and accounting educators.
I’ve worked a lot of different places over the years and I’m no different than you in finding the world we live in a constant professional challenge.
I think you will face more than one ethical dilemma during the first year of your career at a large public accounting firm, corporation, or in a government office. In public accounting firms, which are my primary focus, the land mines are everywhere.
You may have to decide whether to check a box for a test or review that wasn’t done. You may be asked to create or backdate a workpaper, add evidence of reviews and signoffs, insert documents after the fact, or change conclusions or recreate analyses in preparation for a quality review or PCAOB inspection.
Rule of thumb: If a partner or manager uses the word “backdate” it’s pretty certain he or she wants you to do something you may be famous for later – and not in the good way. If you hear the word “backdate”, run as fast as you can in the other direction to your firm’s Ethics Hotline.
You may be pressured to falsify the timesheet to stay under budget for your part of the engagement. That’s called “eating hours” or sticking to the budget.
You may see something and want to say something.
Will you? Should you? Can you?
Some of will make the difficult decisions to speak up. Some will go along to get along. Keeping your head down and your mouth shut is self-interest and career survival. The pressure to succeed, to make those in your life proud, to maintain physical, financial and job security can chip away, day after day, at your self-esteem as professionals and your ethical resolve.
So, what are the standards accounting professionals must acknowledge and adhere to?
First, let’s differentiate between an “accounting professional” and the accounting or audit industry where many professionals practice.
Those of you who are CPAs and teach can attest that I’m talking about two different things. Accounting professionals work in industry, government, politics, journalism, academia, and other vocations in addition to public accounting firms – the accounting industry.
What does it mean to be an “accounting professional”?
The AICPA Section 50 Principles of Professional Conduct starts out:
- By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.
- The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.
- A distinguishing mark of a profession is acceptance of its responsibility to the public.
There’s more but that’s the gist of it. If you work in client service, if you are a CPA, your first obligation as a professional is to your client – not your firm, your partners, or even your family.
If your client is doing something illegal, then your obligation shifts to society and to law enforcement. That may seem harsh, but it’s the code that’s supposed to insure that lawyers and accountants, for example don’t cut corners out of their own self-interest and to the detriment of their client’s interests.
Martin Luther King Jr. said “Morality cannot be legislated, but behavior can be regulated. Judicial decrees may not change the heart, but they can restrain the heartless.”
Regulate bad behavior. Restrain the heartless.
The audit model is intended to provide a critical public service meant to protect shareholders (the purpose of the audit report). It’s done via a profit making private partnership that can encourage “behavior that must be regulated”. In the United States, that’s the job the PCAOB was charged to do after Sarbanes-Oxley.
Many of you will go to to work for public accounting firms. 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 state-certified, licensed professionals are also required to be independent of the entities being audited.
Public accounting is an industry that employs many accounting professionals, as well as lawyers and other professionals. Each group has its own set of standards and a code of ethics. As a regulated industry, all employees of public accounting firms have an obligation to behave within laws and standards governing that industry that are intended to protect investors and serve the public’s interest.
Look at the four largest global public accounting firms. They officially operate as a loose confederation of separate private partnerships for legal reasons and to insure secrecy, but their size and complexity makes them look more like corporations to the outsider. They manage by consensus, but in reality a limited number of partners lead the firm and make decisions on behalf of thousands of “partners” who are more like highly paid executives.
The top four firms – Deloitte, Ernst & Young, PwC, and KPMG – generate more than $100 billion in total revenues globally and employ more than 600 thousand people. As auditors and advisors, they work inside the banks, brokerage firms, auto manufacturers, mortgage brokers, and homebuilders.
Here’s an example:
KPMG audits Citigroup, Wells Fargo – who now owns client Wachovia – GE, and GM. They used to audit two big mortgage originators before they blew up – Countrywide and New Century. They also used to audit Fannie Mae and Moody’s before they were fired and sued. They also audit the US Treasury.
PricewaterhouseCoopers audits JP Morgan Chase, Bank of America, Goldman Sachs, AIG, the Federal Home Loan Banks, and Freddie Mac. PwC is also responsible for Satyam, Northern Rock in the UK, Glitnir in Iceland, and Russia’s Yukos.
Deloitte, who is now Fannie Mae’s auditor, was also auditor of four other housing related companies that had issues: Taylor Bean & Whitaker, Beazer, Novastar, and American Home. (The bank that TBW bankrupted, Colonial Bank was audited by PwC.) Deloitte audited three no-longer-independent large firms sunk by bad mortgages: Merrill Lynch, Bear Stearns, and Royal Bank of Scotland. Deloitte used to audit Washington Mutual before it was taken over forcibly by JP Morgan. They also audit the Federal Reserve Bank and Buffett’s Berkshire Hathaway.
Ernst & Young, everyone knows, audited Lehman Brothers. They also audit Groupon, Facebook, Google, and Zynga. Don’t forget alleged fraud Sino Forest in Canada. And also UBS and Societe Generale, home of the “rogue” traders, and Anglo Irish in Ireland. EY also audits News Corp of the phone-tapping scandal, and S&P, the ratings agency.
The revenue model of professional services firms is based on hourly rates and that means people. More people equals more billable hours assuming there’s demand, but more fixed expense. If demand goes down or the market contracts as it did when some firms lost clients through failures and acquisitions like Deloitte, they start laying off. And they have less people work more hours. They’re on salary, after all, not hourly. And they replace higher paid professionals with lower paid professionals. They even cut partners.
That’s called the leverage model.
One legal case that demonstrates the leverage model in action is the class action in California, Campbell v Pricewaterhouse, a lawsuit about overtime.
Several overtime lawsuits are pending against some of the major accounting firms doing business in California. These suits were filed by non-CPAs, non-licensed associates (entry level college graduates), who believe they were misclassified under California law as exempt professionals and are due overtime and other benefits due to non-exempt employees.
A few states like California, Wisconsin, and Massachusetts – and Canada where similar suits were settled with very little notice here – have wage and hour laws that are perceived as more employee-friendly.
I have mixed feelings about these lawsuits. In twenty-five years of working as an accountant, consultant and internal auditor, I have never been paid time and a half. When you choose to work in a profession, you don’t expect it.
Many college graduates, these days, don’t see the point in working eighty hours a week during the busy tax or audit season for a fixed salary. When they calculate their hourly rate, even given the fairly generous salaries, signing bonuses, and benefits the best and brightest get as new Audit Associates, many question the total cost of the sacrifices they’re making.
All they see are strained relationships with family and friends, excessive stressful travel, late nights spent performing mind-numbing “monkey work” on laptops, non-stop scanning and photocopying, fewer partners and opportunities for promotion, and very little use of the ambition and brains they thought they were hired for.
Although the state and federal wage and hour laws governing eligibility for overtime pay are complicated, the public policy issues they present for audit firms are not.
The largest public accounting firms want entry-level accounting graduates to feel like professionals, by virtue of their university degree, the potential to take the Certified Public Accounting (CPA) exam, and their eligibility to be licensed eventually. But when it comes to eligibility for overtime – or rather exemption from overtime – it’s not who you think you are or where you came from but what you actually do that matters most.
The education of accounting majors consists, in the worst case scenario, of being “taught the exam” and, in the best case, of four to five years of head-down, hard-core study and rote memorization of facts with rarely any time for other outside reading, enrichment, travel, or world view development.
If some of these lawsuits are successful, universities that provide their states’ CPA hour requirements without the necessity of a graduate degree may doom their graduates to status as “para-accountants” until licensing.
There’s an economic argument at play here: In this environment more work produced for less pay is both tolerated by labor and a business model that rewards firms with higher profitability.
The goal of today’s Big 4 private partnerships is, primarily to increase partner earnings (total cash compensation, unit values, revenue per partner, etc) and preserve the future of the partnership so partner pension, profit sharing, and other funds upon which retired and retiring partners depend will remain intact (and funded). Everything else – employees, clients, and more often these days integrity – is secondary.
There’s also a practical regulatory issue at stake when the firm uses the leverage model to the extreme: Can the regulators allow audit firms – who play a role as critical regulatory cogs in the financial system wheel – to delegate more judgment and decision making over financial reporting and disclosure to the lowest level of staff because they are the per-hour cheapest?
Individual assimilation and success in a Big 4 public accounting firm starts with 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. This process now starts in some universities in freshman year, with some students having two or three internships before they graduate.
For some students it starts even earlier. One or both parents work for the audit firms and the career is one that has always been considered a safe choice. That’s especially true if the apple doesn’t fall far from the tree in talents and personality.
Auditors often marry other auditors or accountants because in school or in their early career they have no time to date anyone else!
We’re often furiously trying to join something, enroll others or keep people out. The more exclusive a country club, society or nightclub the more desperate we are to gain entry…
Or avoid being kicked out.
Professional services and, in particular audit and consulting in the Big 4, are not for everyone. Audit is, in my mind, a vocation. So in addition to the client service aspects, which require you to do things on their timeline, based on their needs, given their requirements and your commitments, you are also serving a broader set of interests, shareholders and the capital markets system.
Big job, but somebody does it and it takes, at times, long hours, unpredictable schedules, and long hours. Did I mention long hours? I won’t get into the issue of “face time” and bad budgets, and squeezing more work on less people so you can hoard chargeablity…
For another day. But in general, the nature of professional services is that it has peaks and valleys of activity.
The difference between now and when I first started working for KPMG Consulting in the early 90‘s is that there’s no predictable payoff. When I worked for KPMG Consulting/BearingPoint from roughly 1993-2001 (not necessarily PwC 2005-2006) I felt that if I put the time in, did well, and asked for extra – went the extra mile – I would be rewarded.
I put my name in the hat for not one but two tours of duty in Latin America. I was rewarded as the first female Managing Director in Latin America. I had much more people responsibility and P&L authority than most any other partner/MD in the US except the national leaders.
Nowadays, however, it’s more of a crapshoot. I get email and comments every week from those who did everything right, 150%, only to realize it’s not what you do or what you know, but who you know at the right time, and that sometimes there’s a “what have you done for me lately” mentality that can be demoralizing.
In spite of the fact the firms are doing well in the consulting and tax practices and different practices and some firms are doing better than others, in general, the audit practices are not bringing in the dollars they used to. That’s due to no more Sarbanes-Oxley windfall and a number of things that put the ball back in the client’s court. At this point, the client controls the relationship and the fee structure, with many clients requiring competitive tenders and fee cuts or more work for the same fee every year.
Does that mean that the experience at a public accounting firm is all bad? On the contrary. There’s the training, the chance to work with big companies and very smart people in the firms and at clients and, eventually, the alumni network. But your experience, and what you get out of it, is very dependent on the firm and the people you choose to work with.
I was fortunate to have great mentors, coaches, people who took their job and my career seriously when I was at KPMG and BearingPoint. At PwC, not so much. But even at PwC I met very smart people like Richard Chambers who is now CEO of the Institute of Internal Auditors. He and others are still friends and contacts and very supportive of what I have been doing since. Good people are everywhere.
How do you choose which firm to work for, assuming you have a choice?
Look them in the eye. Are these people you trust, you can learn from, that you respect? Do any of them look like the guy or gal or would hit on your boyfriend or girlfriend when you weren’t looking? People don’t change. That type in college is that type at work – the one who will tell the manager you screwed up or forgot to staple the stack of documents with two parallel staples in the left hand corner or used the blue pen instead of the green one just so their friend can get the billable hours or hang out on the client site with them instead of you.
Cliques and cabals form in the close knit working environment of the late night team room, when you’re all supposed to be sharing the workload, while eating pizza or Chinese food and swapping life stories.
The firms are managed locally and the strength of the client list, partner personalities, and culture of an individual office is more important to your professional development and future choices in the first five years than any secondment program or diversity program or even which firm it is. They all have great people and they all could go bust with the next big lawsuit for a fraud you didn’t see coming.
Internal operations of the public accounting firms, especially the largest ones, 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 even internally. Once initiated into firm culture, survival requires adoption of an informal oath of allegiance that makes it shameful to betray even one’s deadliest enemy, your competitors, to legal and regulatory authorities. It’s a Big 4 type of omertà, the extreme form of loyalty and solidarity in the face of authority usually attributed to the Mafia.
Examples of an 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. Deloitte, for example, kept the partners responsible for Delphi and Navistar on their payroll during their SEC suspension and they survived the sanction to audit more public companies.
Many accounting professionals who work for the audit firms write me to ask about their “true client.” They have either never been taught this concept or had it beaten out of them by the reality of which behavior is rewarded at their firms.
The client for audited financial statements is the shareholder, not the company management. The Audit Committee of the Board of Directors hires and is supposed to manage the external auditor. The Audit Committee represents that shareholder client but has a legal duty to the corporation not the shareholder. Other stakeholders include bondholders, lenders, employees, vendors/customers who depend on the continued viability of the company, and regulators (whose role is to protect investors and overall capitalist system.)
When professionals forget or suppress acknowledgement of their true client, an auditor loses the ability to properly structure decisions with moral and ethical implications, let alone those with serious legal and regulatory ones. In the face of potential legal implications of a decision, they seek to avoid personal liability. In the face of a moral or ethical dilemma, they look at costs/benefits of looking out for their own financial self-interest, at an individual and at a firm level rather than shareholders’ and society’s interests.
When was the last time you heard about a whistleblower from one of the Big 4 firms?
It’s not easy for an individual external auditor to step up and do the right thing. The model of providing audits, a critical public service meant to protect shareholders via a profit making private partnership, often encourages “behavior that must be regulated.”
I believe auditors demonstrated a profound lack of professional skepticism and professionalism during the crisis. They ignored the possible motives and motivations of their audit subjects.
Rather that assuming executives, and possibly the Board of Directors, are self-centered and human, they accorded them the highest form of deference. In the interest of maintaining financial and social relationships, in my opinion the auditors did not sufficiently challenge and expose the survival instincts and financial incentives of corporate executives and board members. That may be because the firms, paid by management, have their own financial incentives to stay quiet.
Whistleblowers and those that push unpopular ideas or try to report on wrongdoing often lose their jobs, are vilified by the former employers and sometimes their former colleagues, are often disbelieved and laughed at, attributed with bad attributes and intentions such as revenge, anger, payback, whining, mercenary goals, bitterness, spite, Don Quixote-like tilting at windmills, unreasonable idealism, and impractical expectations.
Whistleblowers are often very right, but often end up being right all alone.
Sometimes, when raising concerns or questions about lack of segregation of duties, improper expense reports, lack of proper authorizations for stock options or shady compensation decisions, an external or internal auditor hears the following:
“He’s a man of integrity. He lives this company. He is a pillar of the community. He donates to charity. He is an elder statesman of the industry. He has unquestionable, unassailable ethics and cares about this company.”
Speaking up can be a career-limiting move, threatening your own livelihood in addition to the success of your office, your practice, and your firm.
But auditors, who are inevitably almost always CPAs, have a higher responsibility. Making the type-two error of being right in your suspicions of illegal activity and potentially enormous harm or loss and not acting on them is completely unacceptable.
Don’t let anyone ever tell you again, after Madoff and the rest of the cases of hubris we have seen during this ignominious year, that any man or woman is above suspicion.
Professors: Please teach your students the principle of professional skepticism.
Students: Never stop questioning authority.
The PCAOB, under the leadership of new Chairman Jim Doty, is raising many of these issues and speaking frankly and consistently about them.
We can wait for regulation to change. But we can also act every day to promote positive change in the profession. Your attitude, your actions, and your focus on independence and integrity can force change, too.