I've been thinking this week of the impending fate of the large accounting firms -- after watching the CEO’s of GM, Ford and Chrysler, who slouched home empty-handed from Washington after flying in separate corporate jets to plead for rescue from the industry’s history of mismanagement and reality-avoidance.
There are plenty of similarities. Come this winter, after Barack Obama takes office amid another couple months of disruptions in the financial markets, attention is going to turn back to the perilous condition and doubtful viability of the Big Four and their franchise to audit the world’s large companies.
I’ve suggested before that in this environment nobody really cares – here – at least enough to act.
But if we could mark up the carmakers’ talking points – what might the auditors learn to re-frame their so-far unsuccessful case?
They have this in common: just as failure of one of the auto companies would quickly envelop the others, so too the collapse of another large accounting firm will unravel the remaining international networks, leaving large companies with no available source for their obligatory audit reports.
The carmakers argue the ripple effect of their impending failures: not only their own workers, but the galaxy of suppliers and dealers and peripheral blue-collar workers country-wide.
No such argument for the auditors. Professional and support staff in their people-driven business would be dislocated by the tens of thousands, to be sure, but nobody else’s jobs are at risk. And most of the casualties would re-locate, to fill the needs of industry or to re-build the new niche firms that would emerge from the wreckage.
The Big Three also have the alternative of Chapter 11 reorganization, as familiarly done by the airlines. No similar plan is feasible for the Big Four, whose very structures would evaporate with the mobility of their highly-trained and migratory partners and staff.
Given the bankruptcy chance to do a real re-engineering, the Big Three might actually bring cars to market that would be models of technology and efficiency. Again, no such opportunity for the auditors, who under their present model are locked into obsolete reporting and assurance – the standard auditors’ report – in part through their own failure to escape the leaden hand of regulation and compliance.
Tellingly, perhaps, the carmakers’ rescue balloon deflates with the reality of excess capacity: those dinosaur companies have lost their edge to the lower cost and superior quality of their more agile foreign competitors, who can make profits by winning the battle for consumer loyalty right on US soil.
By contrast, the auditors’ clients have nowhere else to go. Failure of the Big Four audit franchise confronts a stark proposition: unlike the migration to other auto brands, with the sales and jobs and peripheral economic benefits, it would require a complete post-collapse re-tooling to replace the present but out-dated assurance model.
The auditors do have a miserable record of bringing their message of peril to the public – partly lacking the clout of a unionized labor force, but also because the public at large has difficulty developing the passion for audited financial statements that it has about the family car, truck or SUV.
Still, although seven-figure per-partner compensation may have eroded their tradition of eye-shaded modesty, the accountants are not known to travel by private jet, and look positively threadbare compared to the bankers and hedge fund managers paraded this fall through the halls of Congress.
Finally, there’s the contrasting economics of government support. Nobody really believes that $25 billion will rescue the Big Three, who would only be jetting back to Washington next spring for another re-fuelling of their empty fiscal tanks.
By contrast the auditors don’t need and aren’t asking for money. Here is their message – and it needn’t cost the public purse a single dollar:
“As calculated – here – we just don’t have the money. To survive, we’ll have to give up public company auditing.
“Or else, there has to be a de-coupling of our survival as firms from the threat to our existence from the PCAOB, the SEC and especially claim for shareholder protection by way of class action lawsuits.
“This won’t be easy, and it’s definitely not the same as the “litigation reform” of liability caps previously touted. But models are available – here. And we’re prepared to do our part.”
Unlike the Big Three carmakers, who won’t live to get new models off their drawing boards that anybody wants to buy, the Big Four have re-tooling potential. It’s not about rescue money – but only the vision, cooperation and leadership needed to get there.
One last thing. When the Big Four auditors go to see their Congressmen – take the bus.
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