Re:Balance -- Jim Peterson

Lessons from the Classroom: How Trump Worked His Advantages – Which We Allowed

When and how can the looting and pillaging inflicted by Trump’s malign version of government be arrested?

It’s not only that the damage already done is incalculable, under a barrage of attacks so sweeping as to make clear that the MAGA intent is that our national future will be more fearful, sick, poor, dirty and stupid.

Or that vital institutions are under relentless and escalating attacks - the agencies responsible for our health and welfare, scientific research, and global security and stability; the financial foundations of the world’s interdependent economies; and the core values of universities and law firms and museums and art centers.

It’s also that the quality and extent of engaged resistance has yet to provide either broad grounds for optimism or effective strategy and tactics.

I posted my anxiety and concern right after last November’s election. If anything, the impact of the last months leaves me feeling worse. Now more than then, it is tiresome and dispiriting that so much of the commentary is dominated by hindsight hand-wringing from those presuming to have substantive insight. (A saddening recent example was the May 1 Opinion from the editorial board of the New York Times – a great mound of platitudes attempting without success to provide original thinking or actionable suggestions.) 

That outburst now aired, here is fair warning that this contribution to the dialog will invoke several layers of academic research.  

I’ve just finished my law school teaching for the spring. This non-traditional course takes its theme and title from the pioneering 1974 article by Daniel Kahneman and Amos Tversky, Judgment Under Uncertainty. The goal is to unpack the sources of bias, influence and misdirection that inhibit optimal decision-making, at all levels including personal and societal. Bright and curious young students explore the ways by which they can acquire and develop the skills and tools to provide advice and counsel to their clients, firms and companies.

The syllabus has a section relevant to the so-far bewildered public perplexity: “Why didn’t we know?” and “Why wasn’t he stopped?” and “What can we do now?”

Punch line first, with explanation to follow - the academic literature offers a lesson in two parts:

• That the dangerous behavior of a malign personality will often start at a modest level which – unless stopped early – may be successively leveraged upwards.
• That society’s in-built sources of bias mean that early chances to intervene or interrupt can be missed or ignored, under a failure to recognize the potential gravity of the threat.

Start with the early signals and predictive signs of opportunities for high-level positive achievement – an important context given the basic bias in the American psyche in favor of optimism and success.

There we see the importance of “early incremental advantage”- what may be detected as a slight early-stage competitive edge, subtle perhaps and difficult to discern, possibly random in its presence, which over time can build and escalate to become highly consequential.

Landmark research in Toronto forty years ago solved the question why the team rosters in professional Canadian hockey were dominated by players with birthdays in the first quarter of the calendar year.[1] The light-bulb flash revealed the phenomenon not to be based on astrological influences or peculiar seasonal timing of infant conception in the prairie provinces. Rather, boys first introduced to organized hockey were assigned to teams at age six. Thereafter they were evaluated and promoted such that high performers graduated to premier or all-star levels, while average players were grouped together, and de-motivated lower performers gave up the sport altogether.

At each level, upper-tier players received the benefit of preferred rink times, superior equipment, more extensive and focused coaching, and extended playing time at a higher competitive level. A self-reinforcing cycle favored their further promotion to successively more elite levels, while opening up a gap with the average players whose “catch-up” prospects became increasingly difficult and unlikely.

All this, to emphasize, was based on the randomly distributed physiological reality that a boy with a birthday in the first quarter of his sixth year is that much bigger, faster, stronger, and more visible than his teammates younger by six to nine months or more.

Decades on from this Canadian scholarship, the principle has been extensively fleshed out and can feel familiar. High school students assigned to “advanced” or “AP” classes enjoy extra attention, favorable evaluations, and reinforced expectations by which their superiority comes to be assumed – ultimately with consequential impacts as they compete for university admissions.

Likewise, a new employee’s distinctive performance on an early assignment sets a pattern: “Jones did a great job on that project - let’s give her another and expect the same” – from which will flow recognition, promotions and increase in stature. Children raised with the advantages of high-performing parents will have both access and reinforcement to support their skill and interest. (Spanning broad sectors, see as examples the sons of Tiger Woods and LeBron James and the senior Bill Gates, and the daughters of Bernard Arnault, Michael Redgrave and Blythe Danner.)

Those not so fortunate are competing in a world where the metrics can be brutally and publicly obvious, measured by a stop watch or a stock price or a ballot box. Only a tiny fraction of early competitors reach the pinnacle of success – a national team or an Olympic gold medal, a firm’s partnership or an Academy award - while the vast population even of those equally well qualified are relegated to the sidelines of the unsuccessful and the vast and invisible pool of those failing to be in the competition at all.

Without that advantage, what ways has an aspiring competitor to “level the field?”

In the law firm where I spent my early years, the leadership applied a recognizable if unfair bias - young lawyers who were tall received better assignments and higher levels of recognition. Those so favored by random genetic chance needed no more than to enjoy the benefit. To solve his well-recognized disadvantage, a perceptive young colleague who stood not more than 5’6” searched the partner list. There he identified the firm’s shortest partner, with whom he could look eye-to-eye as he offered his services – a tactic that was foundational for his extended and successful career.

Moving to the current context, a trajectory of socially harmful behavior can also be built on the exploitation of an early advantage.

That is, a violently rogue policeman or an abusive priest whose early violations are tolerated and unchecked will be reinforced to continue. Schemers from Charles Ponzi to Crazy Eddie to Bernie Madoff may have started small, but they were reinforced and allowed to flourish, financed by their early results and fueled by the unrelieved credulity of their later victims. 

Here a reminder, that for the most part, those so favored with early and consequential advantages did not ask for them or in any moral sense “earn” or “deserve” them. Nor would they be expected to renounce or forswear the opportunities so presented. Quite the contrary.

Their principal challenge in achieving their ambitions, instead, is to make choices and pursue strategies that preserve their footholds on the upward ladder. That challenge is risky and not easy to maintain, it being a basic if under-appreciated principle in career development that a necessary aspect of maintaining momentum is to avoid the events that lead to failure. 

To stay on the upward path, in other words, requires avoiding the conduct or the impacts that would be disruptive. For an aspiring young athlete it could be a season-ending injury, or a family relocation away from a league schedule, or a career-destroying personal choice resulting in a failed drug test or an arrest for abuse.

Observing that early incremental advantage is built into our social systems by way of incentives and rewards on the positive side, a look at those falling off the upward graph toward elite status reveals a lesson in symmetry for addressing the problems of bad actors as well.

That is, the best time to stop a schoolyard bully is with an early punch in the nose. The metaphorical equivalent for an extortionist or a fraudster, or a malign narcissist bound on a path of social wreckage, would have been at the earliest evidence of his destructive intentions. In Trump’s case, that would have been as he first emerged from Queens as a bigoted real estate developer, with a bankroll and a business ethos underwritten by his father and schooled by the notorious Roy Cohn in the legal tactics and ethics of delay, deflection and denial.

Enablers of early-stage non-compliance will only encourage further and expanded bad behavior. As reflected in the stunning rate of recidivism among those charged with repeat incidents of white-collar criminality, the well-intentioned if ineffectual recitals that “He deserves a second chance” and “He’s learned his lesson” serve to foster rather than deter or prevent the predations of a budding young criminal.

To do no more than to re-assign an abusive priest or to slap the wrist of a violent police officer is to encourage and invite further and expanded levels of harmful behavior. Yet there is a through-line in our culture that not only tolerates but perversely elevates and admires the conman – from P.T. Barnum to Elmer Gantry and the Wizard of Oz and the Music Man, to Ken Lay and Jeffrey Skilling and Sam Bankman-Fried.

To be effectively deterred, just as with expulsion from a police force or de-frocking an abusive clergy, a novice in white-collar criminality can be knocked off a felonious pathway at an early stage – e.g., conditioning a reduced prison sentence on a permanent prohibition from access to investor funds or a corporate treasury. The would-be criminal whose potential never ripens is the flip side of a young skater’s failure at age eight to make the all-star team.

It cannot be claimed that “nobody knew.” Instead, and fully consistent with the American character that can perversely find something like bemused admiration for the rascality of a conman, Trump was treated early on with a patronizing mixture of disdain and derision, instead of being shunned and shut down for his disregard, disrespect and abuse of the rules and guardrails of well-ordered society.

Even in an era when the prevailing evaluation of client acceptance and retention was “Will Work for Food,” my old firm only purged Trump as a client - for his pattern of unreliable disclosures and his disdain for the niceties and obligations of fee payments - after the bankruptcies of his New Jersey casinos.

Instead, maxims in our cultural vocabulary demonstrate how late-arriving is the reluctant American readiness to grasp the scope of abusive or fraudulent conduct. Only when the damage has been inflicted is heard, “fool me twice, shame on me” or “once burned, twice shy” or “too good to be true” or “never play cards with a man called Doc.”    

Recognizing even so belatedly the understandable if unfortunate biases that inhibited any effective intervention to thwart Trump’s ability to leverage and expand the toxicity of his early advantages, then, the lesson for the present moment is that the next best time to act is right now.      

 

[1] “Hockey success and birthdate: The relative age effect”, Canadian Association for Health, Physical Education, and Recreation Vol. 51(1985) Barnsley, Roger; Thompson, Angus; Barnsley, P.E. – picked up and popularized by Malcolm Gladwell in Outliers (Little, Brown and Company, 2008), and subject to much discussion, research and commentary.

 

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KPMG’s Family Planning – Good Luck!

Last week I was pleased to guest-post on The Dig, Francine McKenna's Substack. For those who missed it there:

On March 10, 2025, Stephen Foley reported in the Financial Times that “KPMG is aiming to slash the number of ‘economic units’ that make up the international network to as few as 32 by next year, from more than 100 two years ago…”

A reader’s comment quickly followed:

“Consolidating audit entities across jurisdictions? That worked brilliantly for Arthur Andersen – right up until it didn’t.”

Because little enough is known, much less understood, about the organizational genius that made Andersen the profitability leader and structural envy of the profession for the last quarter of the 20^th century, the reader’s intent was presumably sarcastic.

And wrong. From one who was there – if intended as snark, the comment is unironically correct. Each of its two parts requires scrutiny in assessing what KPMG is up to.

If Andersen could not survive Enron, despite being the most cohesive and profitable of the large firms, what are the prospects for KPMG’s aspirations?

Some background will help.

In the early 1980s I moved from private law practice to join the Andersen organization, in its newly formed in-house counsel group. It was my privilege to be a partner in the Andersen Worldwide Organization until my retirement in 2001 – fortuitously enough, just months before the pervasive misfeasance at Enron triggered Andersen’s rapid disintegration.

As Andersen was collapsing, a fellow member of Big Audit’s in-house legal fraternity gave a more nuanced version of the FT reader’s comment, in a combination of jealousy and schadenfreude:

“The Andersen global structure was brilliantly designed for success; unfortunately it was also ill-suited to manage failure.”

In the mid-1970s, as it was extending its global footprint, Andersen with the assistance of a Washington-based international lawyer (RIP 2024), had adopted its unique global structure. At its core was an obscure form of legal entity peculiar to Swiss law - a Swiss “Société Cooperative” or S.C. for short - which provided that while country-level firms retained their separate legal forms and identities to comply with local laws and regulations, they along with individual country personnel – both accountants as well as consultants and others like myself – joined and made up its partnership.   

The ownership flexibility of an entity that was not an accounting firm, supported by internal accounting and book-keeping of eye-watering complexity, made it possible to capture costs at the global level for aggregation and re-allocation, so as effectively to enable true profit sharing among the worldwide partners.

Put more simply – unlike the approaches of the other firms, then and since – the financial fortunes of every entity in the Andersen organization had a direct impact on my compensation, for better or worse. It was to my benefit as a worldwide partner, housed in the headquarters function and with a world-wide remit, if the French practice had a boom year; if Italy or Mexico slumped, I felt it; if Brazil required global support through a rough patch, it came out of my pocket.  

It can be inferred from the FT’s reporting that at least for the moment, KPMG has a lower level of ambitions:

“KPMG is also insisting that, in any mergers, the profit pools for partners be at least partially shared across the countries involved, with the aim of moving to full profit-sharing over time…”

Or not. Let it be clear – without common commitments of financial skin in the game, it’s at best only a “merger” for optics and a level of administration. Andersen not only required world-class treasury and information management, across countries with dramatically different economic business models and costs of living and working. It was required to solve the logistics and the politics of multi-national engagement referral and performance, while achieving broad and acknowledged fairness in partner compensation, employee salaries, practice opportunities and career development.

With the incentive to cooperation created by common financial interests, referred work was not begrudged, but was recognized for the common good; training and quality initiatives were for shared purposes; personnel secondments strengthened both sides of a transfer. Democratizing and leveling followed from shared information – locally maintained fiefdoms and cookie jars were exposed, and closet doors were pried open to reveal long-concealed skeletons.  

Andersen was in funds for investment, in part but not entirely with the stunning profitability of its consulting practice, which acted to blunt the edge of the other challenges. That is, by definition, half of Andersen’s practices would in any year have earnings below the global average – but with earnings booming along, time and mutual support would give room and resources to turn the fortunes of a country needing support.

And with complete information sharing about both the financial results of the country practices and the individual ownership units allocated to the partners under a plan disclosed to and voted for approval by all the global partners, potential squabbles were swept up in the celebration of shared success.               

These were all achieved not only with the stunning quality of the people at the heart of its infra-structure, but because of shared commitments in the form of trust, transparency, patience, and a level of profitability that fueled an operation like no other.

“Until it didn’t.”

It was crucial at Andersen to centralize both the costs and the culture of practice quality, ethics and independence, and compliance including related insurance, litigation and law enforcement. The Andersen/Enron debacle provided the proof – when its leadership allowed a local office to sideline and evade centrally-provided expertise, the integrity of its once-robust and complex tapestry was revealed as frayed and tattered beyond repair.    

“Until it didn’t.” The FT comment is right – and rightly fingers the skunk at KPMG’s party. Which is, even if achieved with real profit sharing (as may be but is not disclosed), the KPMG “mergers” will have embedded at least two fatal flaws.

The first is the questionable extent to which firms with dominant profitability will sacrifice to sustain their brethren. The growth orientation in the years of Andersen’s expansion lasted only to the turn of the millennium, and the recent signals are to the contrary – the trust-busted Accenture divorce, the failure of EY’s Project Everest, and the arrival of third-party equity capital with the questionable alignment of its strategic objectives for the mid-tier firms.

The second is the unsolvable weakness that was fatal to Andersen - as emerged with the corrosive and ultimately fatal consequences to its accounting practice of the divorce with the practice that became Accenture – namely that there is nothing in the strongest contractual commitments or optimistic year-on-year results that will sustain a global network under the imposition by a legal system of a multi-billion dollar litigation or law enforcement impact.

Even though uniquely cohesive and the envy of its fellows, Andersen blew apart in weeks in the tempest of Enron, as its separate national practices disavowed their contractual obligations, voted their local interests, and left the US firm alone, isolated, and financially bereft.

Lest I be charged with misleading by incompleteness, brief mention here of what I hope is the diminishing myth that Andersen was killed by the Justice Department’s indictment over the destruction of documents in its Houston office. As laid out at pages 56-60 of my book, Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms (Emerald Books 2d ed. 2017), the large firms are not organized nor do they have the financial resources to withstand claims from misfeasance on the order of Enron’s $67 billion bankruptcy. Andersen was like a terminal patient on life support in an ICU. Its demise was inevitable – DOJ was just the nurse that pulled the plug.

This is neither a prediction nor a voice of doom. KPMG deserves credit and respect for its aspirations, and may indeed make it happen. Andersen’s run of success, after all, extended across a generation.

There is however a corollary to movie mogul Sam Goldwyn’s attributed view that an oral contract is not worth the paper it’s printed on.

Which is that under stress, neither are the written versions.    

 

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The CPA Pipeline – How It Looks From Here

 

A drunk scrabbling on his knees under a street light tells the inquiring policeman that he lost his keys in the dark alley.

“So why are you looking here?” asks the cop.

“Because the light’s better.”

Here is why not to be concerned over the so-called “pipeline” problem with the future supply of new CPAs – what KPMG’s US head Paul Knopp recently called a “brewing crisis” that “calls for urgent reforms to halt the slide in the accounting ranks.”

Because much of the current discussion is both exaggerated and misguided in its failure to reach the core issues, its distractions pull attention away from two basic topics, usually treated separately but in fact deeply inter-twined. 

That is, the concerns hand-wrung by Knopp and his colleagues in practice and academia mistakenly treat as two issues a single problem with two related parts – both to be resolved by the market, to allay any concern over the future stock of new entrants - namely the adequacy of qualifications, training and competencies before the rookies are unleashed in a way that will do minimal harm to the capital markets, and the adequacy of the incentives in their compensation plans and career paths.  

To start, the supply issue is not profession-wide. That was made plain with EY’s postponement last fall of starting work dates for the cohort of hires for its strategy advisory practice in the US.   

EY’s six-month pushback was procured with a lagniappe of between twelve and thirty-five thousand dollars, on the heels of delays for the prior year. The newbies will appear when summoned, at salaries flat to 2023. As put by a recruiting consultant, “’there is strong enough demand for consulting roles that it is still heavily outweighing supply’… meaning big firms do not feel the need to raise pay to attract students, particularly since starting salaries remain subdued in competing professions, such as banking or technology.”

In other words, on the consulting side the hiring strategy appears validated, that “if you pay them, they will come.” Human nature being what it is, the same should hold for the entry-level ranks of the audit practices as well. Or, in any event, it would seem hard to reconcile the existence of truly fundamental resistance to the “lifestyle” demands of an audit’s busy season, in favor of the non-trivial salary gap with young lawyers and bankers. The well-known brutality of the working conditions for Big Law associates leaves no time to enjoy their fatter pay packets, and suggests that young auditors are not by comparison actually suffering all that grievously.

No - it’s the audit practice itself – not just at the cannon-fodder level, but at its very heart.

Nor is it new. I’ve been saying for years that challenges to the legitimacy of the audit model are fundamental: clients and information users are happy to welcome the optimistic support of the consultants, but nobody is eager for the arrival of the auditors – looked on with distaste and disdain, as the proctologists of the professional services sector, poking around in dark places, exposing questionable behaviors and dirty little secrets, delivering cold and limited comfort before washing their hands of another year’s annual examination.

Simply put, money for staff won’t solve that perception problem, nor will proclaiming the importance of the audit function. That’s because it’s a circular claim, that investors should value a professional’s audit because it is performed by professionals. That fails to grasp a client’s real need - not that its audit be staffed by young CPAs, but that it should be performed, at least cost, to the level necessary to comply with the regulators’ requirements.

That is, the profession has no right or entitlement to insist on the qualifications of its assurance workforce, whether 150 hours of credit to qualify for the exam, or some variable amount of work experience. So long as clients get their reports, it’s a matter of indifference. Value in the marketplace cannot be achieved or demnded as of right, but is earned and legitimized by the choices of the consumers.

That being so, the “audit pipeline problem” elevates up from one of trends and head-counting to an existential level.

That is, the capital market most emphatically will have some forms of information assurance. That role that has figured in human society since the invention of trade, and the inscription on clay tablets by Sumerian merchants of contractual obligations for measures of wheat and bolts of cloth and herds of animals. Whether the future suppliers of that service will have emerged from the “pipeline” now decried as running down to a trickle, or bearing any designation resembling today’s credential as a “profession,” however – those questions remain very much to be determined.

At which point, the sadly-neglected analysis done by Sir Donald Brydon in 2019, his Independent Review of the Quality and Effectiveness of Audit, deserves a re-visit. For if the standard audit opinion whose origins trace to the Victorian era has indeed reached beyond its useful life, to be supplanted by company reporting on the full breadth of business activities embraced by the capacious rubric of Sustainability, that will require skills and competencies beyond those of today.

Which in turn requires the public dialog to be re-written. The expanded scope of skills required to staff an assurance function fit for future purpose exposes the profession’s reticence in the opening of its ranks, and in the practice-narrowing vision of, for example, EY’s proposed consulting and audit practice separation under its aborted Project Everest. “Shrinking to success” is a failing strategy, when the demands of the market go exactly the other way.                 

Because, as Brydon put it, “it is far from clear that an accountant is best placed to opine on many of the variables involved,” and while “only some would need to have an accountancy qualification as known today,” the implications for the market are clear: salary scales offered to graduates of traditional audit curricula will be obsolete and irrelevant, for the two symmetrical reasons that the needs for such staff will be steadily diminishing, while those qualified to become the auditors of the future will both require and respond to differently-scaled inducements. 

Which means no “brewing crisis” – instead, the emergence of new pipelines.   

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