Happy Times for the Big Four Accounting Firms? It's All in Whom You Read

The familiar formula for measuring forward-looking attitudes has an update:

The optimist sees a glass half full.

The pessimist sees a glass half empty.

Whereas -- the consultant sees a glass that’s twice as big as it needs to be.

Varying spins are given to the report just issued by the flagship firm of PricewaterhouseCoopers in the United Kingdom, for its year ended in June – 72 pages of sunshine about its £2.25 billion in revenue, profitability that works out to a 34 percent profit margin, and £770 thousand average profits per partner.

The Lex column of the Financial Times cheerily bought in – here. The pink color of the FT’s pages infuses the lenses through which it sees two themes:

“First, firms and their auditors have become more conservative since the Enron and WorldCom debacles. Second, Sarbanes-Oxley in the US and harmonized reporting standards elsewhere have forced greater disclosure requirements.”

The always-acerbic blogger Dennis Howlett begs to differ – here - with a link to the PwC report itself. His focus is on the structural impact of the decline in PwC’s audit and tax revenues, as offset by its rise in advisory practices, with notable emphasis on the £100 million derived from PwC’s work on the Lehman administration: 

“PwC UK may be doing very well at the moment but you can see where it is going. I anticipate that over time, it will continue to reduce its dependency on assurance services as the engine for growth but with it will come renewed criticism of its conflicted advisory position.”

The FT manages with a straight face to say that “the most important asset the accountants have maintained in this recession is their reputation” – a rosy view, not even shared by Floyd Norris of the New York Times (here), and suffering two-fold difficulties:

First, it is hard to see the recent years as a Goldilocks era for the accountants, post Enron and Sarbox, with the lengthy list of financial institutions that have fallen to collapse, shotgun mergers or government control – all of them flagging clean reports on their financial statements and their controls even as they plunged over the cliff to ruin.

It is more likely proved once again that the capacity for scandal-driven public outrage is both limited and finite, the only variable being the number of targets at which insults are sprayed.

That is, the energy and attention demands of the various stimulus and rescue efforts, and the related demonizing of the institutions and their high-bonus leaders – screeched by politicians, regulators and media alike – have in effect given the auditors at least a temporary pass from hostile scrutiny.

Second, there is the FT’s remarkable proposition that “the downturn has not notched up a big accounting scandal.” That’s as may be, but only if from its London base the vision stops at the shores of the sceptered isle.

Because the rest of the world will not disregard the inclusion of auditors in claims directly associated with the collapsed financial institutions (tracked and summarized by Kevin LaCroix at the D&O Diary), the massive claims involving the audits of the Madoff feeder funds (here) or the existential threat posed by the Satyam fraud in India to PwC’s practice in that country or the on-going criminal prosecution of its personnel there – the last flagged by Howlett although ignored by the FT and indeed by the PwC UK report itself.

Solutions to the multi-faceted antagonisms that ensnare the Big Four and put their survivability at risk will not be brought forward under the dewy pandering of the Financial Times. But it’s not that Howlett gets a complete pass either.

Howlett may be signaling that PwC is his entry in the commentators’ pool on the next of the Big Four to catch a fatal bullet – here. The near future will test the marker he puts down, to “watch for a potential breakup a la Arthur Andersen in years to come. Especially if they get nailed on Satyam.”

But he is experienced, skeptical and critical enough of the large firms’ exposed position to contribute above the unhelpful one-dimensional finger-pointing ordinarily delivered by the profession’s usual cast of critics. The sharp point of his pen could constructively jab at an issue much more challenging than the Big Four’s public relations exercises – such as this:

“If the large-company audit structure collapses, what takes its place?”

That’s a discussion yet to start.   

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Comments

[Alvaro Sedlacek]

Dennis Howlett is right, but what he cannot see is the real thing. Consulting business are going to be more and more profitable, while assurance is more and more seen as a legal obligation and no shareholder trusts anymore whatever auditors say. The truth is the business got more and more complex and a thorough audit process would take more skills and manpower than any assuring firm (Big 4 or not) could ever provide without going bankrupt.
The problem though does not lie on the conflict of interests - and this is not what led deceased Andersen's to the collapse.
Prior to that sad Enron chapter there was a more significant one: the goodbye of Accenture's consultancy revenues. Accenture had less partners and a far bigger profit margin per partner than Andersen's. The relationship became bitter because of money and only because of money.
Without Accenture, Andersen had to push the remaining businesses to increase profit margins - assurance included. This meant accepting clients and procedures that were absolutely out of line and ended just where it had to end.
Now, the question is, with the consulting businesses generating more and more profit while assurance businesses suffer to maintain its financial performance, how long will it take for other consulting arms of the big 4 to claim for "independence"? Not that long, I believe. And the history will repeat itself. Again and again, until companies learn to pay less for their executives and put them to work instead of using external consulting services to every and all of their not "business-as-usual" moves.

[Jim Peterson]

Don't disagree.

On Sep 23, 2009, at 8:13 PM, [email protected] wrote: