Re:Balance -- Jim Peterson

A Summer Lull for the Accountants? Sez Who?

We ought by rights to be in the summer doldrums – those still doing real jobs are taking a break in the country or at the beach, and the rest are hunkered down till the headhunters come back to town in the fall. But there’s a sudden flurry of attention and activity around the world of the large accounting firms.

And while human societies are good at generating coincidental events that don’t really add up to a pattern, a little reflection indicates some possible common threads:

Item: Joining the expanding list of observers giving scrutiny to the business models and exposures of the large audit firms, comes the launch of Breaking Media’s new blog, “Going Concern” – dedicated, says its introduction, to “making accounting sexy.”

Well, maybe. Many of the large firms’ wounds are indeed self-inflicted. Still, snarky tabloid gossip that trades on the displays of venality and shortness of leadership vision will not advance the search for solutions to the profession’s lessening relevance and doubtful survivability. The issues are too nuanced and multi-faceted for that.      

But if it is facile to deliver easy jabs, even the kings of lore and legend engaged their court fools, so that hard truths could be wrapped in the wisdom of a laugh or two.

So welcome to Caleb Newquist’s new effort. Godspeed, and let the dialog expand. 

Item: The incongruous conjoining of “sexy” and “auditor” in the same sentence does seem like an effort for the scriptwriters of Monty Python -- proved again by the publicity last week around the presentation by Audit Analytics, “Accounting Professional Liability: Scorecards and Commentary.”

Variously describing the large firms’ litigation exposures as “a serious and growing problem,” or more gravely as “a breathtaking number,” the data for the Big Four firms should be a splash of cold water to awaken on the gravity of their exposure threat -- but in fact have yet to reach the level of public consciousness sufficient to kick-start a serious debate on the threatened viability of the large firms’ basic assurance franchise.   

Not that life is any more pleasant beneath the Big Four level:

Item: Up in the normally understated Scandinavian territory of Minneapolis, the McGladrey Pullen firm’s attempt to extricate itself from its entangled business venture with H&R Block and the RSM network was promptly met with a retaliatory lawsuit (here).

Among the more subtle lessons learnable from the break-up of the Andersen organization and the departure of its consulting practice to become Accenture was the potential for the distraction of management time, focus and strategy.

In that case the cleavage between practices made for at least reasonable clarity in the allocation of personnel, systems, methodology and real estate. Whereas in the McGladrey/RSM context, by contrast, reverse-engineering their constituent practices into separate and discrete post-divorce portions will be a little like manufacturing tomato juice by starting with V-8.    

Item: On the BDO front, where the Seidman firm in the United States faces the survival challenge of the adverse jury verdict of $521 million in the Bankest matter in Miami (here), the network’s UK form, Stoy Hayward, announced last week its process for making redundant a full 10% of its partners (here).

Even in good times the strategy is fraught with peril of “shrinking to success.” And here, a decimation of the crowd whistling past the litigation graveyard might be thought to leave the survivors even a little more lonely and anxious. Although BDO’s international firm has been relieved of legal exposure to the Bankest verdict, it is hard to see how an organization in down-sizing mode is thereby made more robust against the business challenge of a devastating financial shock to its US firm.

Item: And back at the biggest firms, the announcements of shortened work weeks, employee furloughs and deferred job offers continue apace – hardly the brightest news for anyone concerned for the gold content of the litigation eggs sought for gathering by investor plaintiffs from the Big Four geese.

Much ink is being spilled in the search for trends and indicators in the profession’s lawsuit case count – noted above – but the exercise in fruitless and misleading. The profession itself has consistently mis-analyzed its fundamental risks, by taking the approach of “we dodged that bullet, and we still do lots of good work.”

The inductive flaw is basic: it’s not the average settlement amounts or the successful engagements that are deadly, or the close calls that are survived. So long as worst-case auditor exposures are measured in the billions of dollars, by legal and regulatory systems that pit unachievable standards against the firms’ inevitable lapses in performance quality, the Big Four and their smaller brethren as well will be hostage to the one last explosion that will start the final destructive chain reaction.

So let the media commentaries roll on. But let at least some of it treat serious issues with the gravity deserved. 

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What To Read (Two): How To Know Today, "That's the Way It Is"

In a time when channels for the distribution of news and commentary are mutating faster than can be tracked, may I offer this suggestion:

The news feed of the Securities Litigation and Enforcement Group -- here -- gathers thirty sources giving concentrated attention to issues involving securities law, regulation, enforcement and litigation in the United States. It was developed and launched as an extension of the group's base on LinkedIn by Bruce Carton, who goes from strength to strength with his blog, Securities Docket, and his series of always-informative webcasts (latest, here).

The feed is a knowledge tool that would have been unknowable in the world of the old media. I am pleased to be included as a contributor -- and even more enthusiastic to recommend its breadth and depth as a vital resource.

(Note for non-US readers: the on-going deterioration in mainstream ex-US media coverage of these matters in that country makes this compilation all the more valuable for your benefit.) 

Being obliged this weekend to say a sad farewell to Walter Cronkite, those of us presumptuous enough to issue our thoughts for public consumption owe his memory the respect of a pause to consider the standards he set and against which we strive.

The gravitas of early broadcast journalism as led by Fred Friendly and Ed Murrow has given way to the bombastic posturing of Lou Dobbs and the politicized ranting of Rush Limbaugh and the sarcastic smirks of Rachel Madow. Just try to picture Walter Cronkite tracking the count of his Facebook friends, or Eric Sevareid reduced to Twitter. Imagination fails.

So -- that's the way it isn't. And we are the poorer.    

   

What To Read: Catch 22 -- The Ultimate Management Manual

Always stimulating, Francine McKenna last week posted at Re:The Auditors her advice to young professionals, "Recommendations: Great Books to Read at Any Stage of Your Career."
Her list being of recent vintage, my own preferences tend to sources that have withstood tests of time -- Niccolo Macchiavelli's "The Prince," published in 1532, for example, or perhaps Sun Tzu's "The Art of War" (c.400 BCE) -- and for pedagogic purposes, I also favor the wisdom available from sources outside the field under scrutiny.
So -- slightly updated from the original as it ran in the International Herald Tribune for January 24, 2004 -- if you had only one guide on corporate behavior and management strategy:

“It's a Catch-22 situation.” Those words, spoken by a French banker at a conference for European business leaders and received with understanding all around, reminded me how deeply Joseph Heller's 1961 novel has penetrated the global business environment.

I have long relied on Heller, and his vision of a military comprising equal parts corrupt self-interest and naïve idealism, as an extended guide to life in any complex system, including business. Periodic re-readings have had more value for me than any of the so-called team-building exercises and mission statements that pass for motivational management these days.

For those unfamiliar with the story of Yossarian the bombardier and his World War II comrades on the Italian island of Pianosa, Catch-22 goes like this: Only a crazy man would fly the murderous late-war missions demanded of the pilots, and flight surgeons had to ground anyone who was crazy. But asking to be grounded showed proof of sanity, which required denial of the request and continued flying.

Caught in an endless loop of twisted logic and bloated bureaucracy, Heller's characters cope as best they can. A testimony to the universality of their experience is that to this day, the same characters can be found at business enterprises, university faculties and professional partnerships the world over:

•    Major Major, the persistent but hopelessly mediocre administrator, promoted by those eager to be rid of him. Once made squadron commander, he loses access to his mess hall and basketball buddies, and then makes his isolation complete by ruling that visitors wait outside his office while he is in and be allowed in only when he is out.

•    Doc Daneeka, the flight surgeon who refuses to ground anyone who is sane enough to ask for it and who keeps up his combat pay by forging entries in flight logs. After being listed erroneously as a casualty of a plane crash, he lurks unacknowledged outside his own medical tent, losing his pay, his PX privileges and his wife, whose grief at his untimely loss is tempered by full collection of his GI death benefits.

•    Colonel Cathcart, pumped with aggressive insecurity and conceited ambition. He indulges his taste for power by continually raising the number of missions that must be flown - often just before a pilot has attained them.

•    General Peckem, the noncombatant expert at turf expansion, whose successful ambition to bring bombing operations within his purview at Special Services turns to ashes when command changes to the sycophantic General Scheisskopf, who was promoted from lieutenant on the sole strength of his meaningless memos announcing the postponement of Sunday parades.

Even more than Heller's personalities, the bizarre interactions replay endlessly in corporate corridors and boardrooms - and find eerie echoes in recent events:

The questionable Cayman bank balances of Parmalat or the non-existent securities of a Madoff or the kerfuffle of "mark-to-market" would have been child's play to Milo Minderbinder, the entrepreneurial mess officer who could make a profit on fresh eggs bought in Malta for 7 cents each and sold to the mess halls for 5 cents. (Message to Bob Herz at the Financial Accounting Standards Board: the lowdown on how he did it can be found in Chapter 22.)

The debacles at AIG or Bear Stearns or Long-Term Credit Management could easily have been Milo's operations. The demise of the latter was a hedge fund set up by its Nobel Prize-winning managers, running their highly touted models into the ground with a wrong-way bet on Russian debt. That tracks the universal acclaim the military heaps on Milo's business acumen - until he corners the market in Egyptian cotton that nobody wants, bringing his black-market syndicate to the brink of ruin.

The antics of the equities analysts through the bubble years of the 1990's or the sub-prime mortgage originators of this decade are echoed in the treatment of Chief White Halfoat and his Oklahoma tribe, who have such an affinity for petroleum products that everywhere they seek to settle, the oil companies hit oil, requiring the forced relocation of the tribe. At some point geologists and engineers begin to guess where they will settle next and drill before they arrive, kicking them off the land before they can unroll their blankets.

Heller's characters, at least some of them, survive the insanity by finding ways to stay alive until the end of the war. Corporate managers seeking to cope with a dysfunctional organization may not be so fortunate. But they can at least save the huge fees inflicted by outside gurus and facilitators just by going away for a weekend, each having read "Catch-22" as a homework assignment, and recasting the novel's plot and characters out of the people and events well known to all.

I've done it. It works. As a way of placing the absurdity of the workplace in perspective - and as a starting point for finding solutions - "Catch-22" is an indispensable tool. Or, in the words of Doc Daneeka, "It's the best there is."

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OK -- It's Agreed: There's a Crisis in Audit. So When Do We Get Down To It?

The city-bred sportsman hires a local fishing guide, who promises great results as they anchor in a remote spot. From the tackle locker, the guide pulls out a stick of dynamite, lights it, and throws it over the side. A huge explosion, and dozens of stunned fish float to the surface. As the guide nets the fish, the tourist begins to rant about poor sportsmanship and illegality.

The guide calmly lights another stick of dynamite and hands it over. “Are you going to keep running your mouth?” he asks as the fuse sputters. “Or do some fishing?”

Readers here are well advised to invest an hour catching up with last Thursday’s webcast, “2009 Mid-Year Review – Securities Litigation and Enforcement” (archived and available here).

This edition of Bruce Carton’s valuable extensions of his vital news source, Securities Docket, assembled four of the bloggers on my must-read list – Lyle Roberts (10b-5 Daily), Tom Gorman (SEC Actions), Francine McKenna (Re:The Auditors) and Kevin LaCroix (D&O Diary).

It was barren times for the subject indeed, back in 2002 when the Paris newspaper launched my financial and accountancy column. But since then the family of commentators continues to grow, who contribute substantially to the consensus of crisis in the entangled relationships among issuers of financial statements, their auditors, and the hyena herd of regulators, politicians and hostile lawyers.

Along with those noted above: Edith Orenstein (FEI Blog), Dennis Howlett (AccManPro), Tom Selling (The Accounting Onion), and Broc Romanek (CorporateCounsel.net) – and, with apologies, some I’ve surely missed.

The webcast is useful, on a variety of relevant fact-gathering and predictions; so too all the other increased attention. But concerning the on-going threats to the survivability of the large-company audit function, the discussion has yet to go past voyeurism, scape-goating and finger-pointing.

Here it is, seven years since the collapse of Arthur Andersen and the infliction of the ill-considered Sarbanes/Oxley law and its malign effects -- and two years and counting into a financial markets crisis of epic proportions. And not a constructive word is heard on the shape of the future.

Calling the dis-honor roll of those accountable:

The large firms’ leaders are handcuffed to a business model that they are powerless to change, under the combined constraints of the securities compliance regimes and their own partners’ appetites for the status quo of short-term profits. 

Their most vocal critics, among the commentariat, bay the cry of the profession’s self-serving venality, without taking even a first step down the path to re-design an assurance system now presumed (but not proved) to be important or worth working to save. 

The noisiest and most enthusiastic reader comments, meanwhile, range unconstructively from the punitive (“let them fail” and “jail them all”) to the self-destructive (“break up the Big Four” and “up with the little firms”) to the wildly impractical (“mandatory rotation” and “let the government do audits”).

Traditional debate platforms are empty. Former Treasury Secretary Henry Paulson’s Advisory Committee dissolved into insignificance without a trace, a year ago, behind a thin veil of posturing and animosity. The PCAOB, successful at least in perpetuating its own existence, is dribbling on the conflagration with an eye-dropper. Business lobbyists and academics alike are pre-occupied elsewhere.

And with no sign of a politician or a regulator in Washington or London or Brussels having either the vision, the interest or the initiative to take a lead, neither are there any other jurisdictions having the maturity or the salience to provide any influence.

The requirements for a useful forum ought to be within the grasp of the expanding collective of New Media mavens.

Ground rules and administrative questions should be modest enough: on-site or virtually distributed – freely accessed or modestly moderated to minimize the bickering and partisanship – live and real-time or via postings and dialog threads – open only to the credentialized or anonymous – sponsored or subscription or wide open.

Here’s the challenge: If this dynamite stick explodes, it will sink the boat and all in it. So it’s time to fish.

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Independence Day: On The Freedoms to Choose, Use and Abuse Great Personal Wealth

The national celebration this weekend in the United States, and the coming Bastille Day celebration in France, serve as platforms for scrutiny of issues of public policy and private conduct.

Two recent personal experiences provide the context for this question: As a society how should we judge, concerning the balance between private wealth accumulation for personal consumption and its deployment for the public good?

The issues are emotion-laden and politically divisive, not least around the regulation of executive compensation. There, a pigs’ breakfast of policy choices includes salary limitations, bonus caps, use of bail-out funds, and director and shareholder responsibility – and the loftier themes of norm setting and coercive codes of conduct.

(For helpful background on the current state of play in Washington, the always-informative Edith Orenstein had this post last week on her FEI blog.)

Last Saturday I was curbside in search of a taxi when accosted by a waif-like beggar. The dollar I peeled off generated a persistent plea from the wrinkled crone, that she needed eight dollars for a bed in the shelter that night.

Influenced by reasons shortly to be told, I handed over a fistful of small bills – and was rewarded by a rainbow smile and effusive thanks when she realized that her daily quota was made. For the price of a stop at the nearest Starbucks, I had enabled a poor woman to spend a night in the safety and security that her life otherwise lacked.

The stimulus to my altruism was the party we had just left: the conclusion of what had been the most elaborate and costly family ritual ever to cross my vision. We had declined and not attended the main events -- a week of feasting and partying in a far distant venue -- said by guests to have set back the patriarch on the order of $ 8 to $ 10 million.

Recalling all the weddings and bar mitzvahs and sweet sixteen parties that at the time seemed over the top -- on the scale of this extended festival, they reduce in comparison to tea at the Ritz.

To transport the guests, private jets had filled the trans-oceanic skies. Public buildings had been closed – private castles had been opened – platoons of hostelers and caterers and entertainers had exceeded their annual revenue goals. Couturiers and florists and photographers and heavy-weight security guards had all worked overtime. Even on the pale evidence of the slideshow and videos, the maligned notion of “trickle-down” had been a frothy and multi-colored cascade. 

Thinking of the number of homeless shelters that could be supported by the cost of this extravaganza, it would be tempting to point the bony finger of self-righteous indignation – to turn up a censorious bluenose at the questionable morality of such an ostentatious display of personal consumption. 

All the more, since the paterfamilias ranks in the low digits on the Forbes scale of his country’s self-made wealthy. Only exceptional naïveté could believe that he had moved in one generation from pushcart and sweatshop to chateau and polo grounds, unless with the considerable application of both grease and muscle.

And yet: he is a reverent and devout practitioner of his religious faith, generous and philanthropic at a level beyond common contemplation. His annual benefactions are many multiples of the one-time cost of this family celebration, even at its lavish scale. As a percentage of his wealth, the outlay for this week-long party was several orders smaller than the impositions willingly incurred for a typical middle-class wedding or baby shower or graduation ceremony.

And in the end, the entrepreneurship by which he achieved the status to stage such a display of largesse would be untouchable by the debatable constraints of “say-on-pay” or narrow bonus limits – exercises in small-bore legislative vision that are of doubtful effectiveness but only stimulate hypocrisy, evasion and misdirected incentives.

The evidence of society’s broad range of behavior is far too complex and ambiguous to support facile condemnations – that the ownership classes are unexceptionally venal and corrupt, or that every bonus payment is an incentive to greed and over-reaching. Neither, symmetrically, is there any necessary correlation of virtue or magnanimity with the poverty of the ghetto or the favela.

More importantly in the quest for guidance, skepticism is certainly indicated about the potential for leadership from the politicians. In the degraded atmosphere that extends from the tawdry antics of a Berlusconi or the soap opera of a Palin to the expense fiddles of the British parliamentarians and the parade of Republican “affairs of state,” restraint is indicated in expectations for legislated morality.

Does a tithe for the poor excuse the gaudy display of the other ninety percent? Must the owner of two coats yield one to the unclothed? And is it the business of the state to compel the answers? Or if not, then whose?

Those wrapped in the luxury of this extraordinary celebration enjoyed hospitality at an unmatched level. How well they’d have slept in their silks and linens, if mindful of the beggar scratching out the price of a bare cot, is more ambiguous.

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