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 20th 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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