Jeremy Newman, managing partner BDO is fighting hard to break the power of the Big 4 who by any standard have the world’s top companies in an audit lock. In his latest blog post, Jeremy gave a terrific insight into the way this cartel operates. Jeremy has been meeting non-executive directors, especially those that hold audit committee chairs but this has proven difficult. When he has met them:
…they have all said that they are concerned about the personal risk to them and their reputation if they encourage the companies of which they are directors to change audit firms, particularly to a non Big 4 firm
So this is nothing to do with what’s right for the companies they serve, but their precious egos? But it gets worse.
Jeremy perceives:
They accept that there is not necessarily any logic to their position but believe that it reflects “market realities”. I suspect it also reflects the fact that most are Big 4 alumni and they all are members of Big 4 “networking groups” and get significant technical and other support.
So we’ve got a bunch of weak directors more concerned with appearance than substance who can’t keep up to speed but are happy to remain chummy with their ex-masters/colleagues. What about independence? Isn’t the purpose of non-execs that they should serve as a check and balance to those in management positions?
There is plenty of debate about the Big 4 and their world dominance on the audit stage. Why? The ongoing tide of negligence and tax lawsuits is alleged to threaten the survival of at least one of those firms. We can safely dismiss this as a protectionist PR stunt.
Last December, Big Four Blog provided an excellent summary of Big 4 2006 performance. Total revenues $76 billion, profits $20 billion (give or take). More data points: Deloitte recently settled its Parmalet and Adelphia cases for a combined $359 million. KPMG is being sued by Fannie Mae for $2 billion. These are not insubstantial amounts but they’re not enough to bring down the firms concerned. You cannot convince me that after 100+ years of trading, having less than 8 months profits wiped out will kill KPMG off. Even if the firm is forced to settle in full.
These firms are not single entities where liability necessarily spills across all boundaries but networks of firms trading under common partnership names. If, as is alleged, the Big 4 are under threat, then why are we not seeing wholesale defections in anticipation of fallout? Because it’s a charade. That of course doesn’t prevent the Big 4 from pursuing a campaign to convince the rest of us of their anticipated demise. Except now it is getting dirty. According to a recent New York Times report, the SEC has bought into this smoke blowing exercise. Conrad Hewitt, the SECs chief accountant was reported to have said:
…that he had witnessed numerous meritless lawsuits against auditing firms when he was the managing partner of Ernst & Young and that the potential claims against some firms were now so large that they could lead to bankruptcy and force further consolidation in an industry that was already heavily concentrated, audience members recalled.
As James Governor (who kindly provided the link) said in email to me: ‘pure chutzpah.’ It sounds like the old boys network operating in pretty much the same way Jeremy implies. Even if my opinion is baseless then Hewitt’s argument is a ‘so what?’ If the lawsuits are baseless then the Big 4 have nothing to fear.
Jeremy is considering a strategy that uses the same or similar tactics as the Big 4. This is a losing strategy because it is ethically tainted. The Big 4 can always outspend the next dozen firms without missing a beat so he can’t buy his way in. If BDO (and others) are to have a real chance of success, then they should play to their strengths and continue to expose the flaws in arguments put forward by non-executive directors.
Technorati Tags: audit quality, BDO, Big Four, Deloitte & Touche, Ernst & Young, KPMG, PwC
