PwC’s results: is it going the same way as Arthur Andersen?

It’s sometimes said that when the economy suffers, the profession prospers. And so it seems in PwC’s case. It’s last year’s results are surprisinglly healthy, despite the fall out from the financial services industry. Per The Times Online:

Auditing fees fell by 1 per cent to £861 million, providing about a third of the firm’s turnover. Fees from its tax practice fell 4 per cent to £650 million, hit by a decline in income from mergers and takeovers.

The fall in these divisions was offset by a 5 per cent rise to £737 million in fees from advisory practices, which include corporate recovery, management consulting and fraud investigations and other forensic services relating to legal disputes.

On viewing the report, you have to admire the brass neck of the marketing department in titling the annual report: Doing the Right Thing. Excuse me? When and where might that have been when Satyam was falling apart? And that’s just for starters. Successive chapters bear titles such as: Winning in the market, The Right Stuff…you get the gung ho picture. You have to give PWC kudos for successfully marketing into the recession and reaping the rewards but as always with these things, the devil is in the detail.

First up let’s give them a big hand for maintaining recruitment levels. That’s good for the long term and the profession as a whole though I imagine they managed to cherry pick at very affordable prices. Second let’s also give them a hand for being proactive on sustainability. Reducing the carbon footprint by reducing air travel 20% and making greater use of video conferencing are firstly economic measures but they all add to the mix.

What will worry some of my colleagues is the change of service line mix. Assurance and tax on the way down, a trend likely to continue for some years, while they maintain a renewed emphasis on consulting. This is about a long term restructuring of the business that reflects the way things are changing in the professional services market but does nothing to shore up the tarnished reputation of so-called independent auditors. At a time when the profession is under the cosh, PwC can be forgiven for doing what it has to in order to maintain brand positioning but that counts for nothing when you’re on the hook for massive lawsuits. Which brings me to Note 14 in the annual report, page 51, Provisions:

“The charge for the year in respect of client claims is £8 million. The note explaining this says: “The client claims provision is the estimated cost of defending and concluding claims. No separate disclosure is made of the cost of claims covered by insurance, as to do so could seriously prejudice the position of the Group.”

What does this mean? Does it mean for instance that their captive insurance arrangements are inadequate? If so then why are there no general provisions? Especially given that in another Times interview it was said of Ian Powell, PWC’s senior partner:

Colleagues say he will have his hands full, juggling growth in the Middle East with fire-fighting round the rest of the central region. He has already overseen the suspension of PWC partners in India because of their involvement in the Satyam scandal. There is always more litigation during a downturn.

Oh – so it wasn’t all down to DiPiazza (former global CEO) or Nally (current global CEO)? Let’s not forget though that Satyam has a long way to run before it is concluded. Even so, I am genuinely surprised at how little the UK operation and group has chosen to provide. PwC UK has been intimately involved in the affairs of its Indian operation to days that go back to the Raj. As an aside, in the same Times article, Powell gets as near a free pass as I’ve ever seen on PwC’s aggressive stance on tax avoidance:

Popular guy? Not quite. Powell has been the subject of a long-running campaign by Christian Aid to persuade the big four accountants (PWC, Deloitte, Ernst & Young and KPMG) to rethink corporate tax avoidance.

“And, you know, we have met with them. I think we’re the only one of the big four to have done so. We gave them guidance. They just didn’t listen to us.”

Powell, a lithe 53-year-old with sandy hair and snaggled teeth, sighs. And yet maybe Christian Aid has a point. It wants international accountancy rules rewritten so schemes that damage Third World tax take are stopped. It also asks why multinationals can’t reveal how much profit they make, and how much tax they pay, in each country in which they operate.

And yet maybe Christian Aid has a point. It wants international accountancy rules rewritten so schemes that damage Third World tax take are stopped. It also asks why multinationals can’t reveal how much profit they make, and how much tax they pay, in each country in which they operate.

As the global economy resets itself after last year’s collapse, it is the right time to be asking these kinds of questions. Powell, however, argues that it is not that easy.“You are looking at the realignment of tax regimes around the world and, while we have a view, it needs many governments to resolve it. And while we appreciate the sentiments of what Christian Aid is doing and acknowledge the strength of its feelings . . .”

Please stop sending the cards? No, he says, the campaign — launched last spring — died down some weeks ago. His point is simple. “We are not the policymakers.”

…and then the article moves on. PwC may not be the policymakers but they are not coming to this debate with clean hands. Far from it.

One has to wonder what would have been the outcome if PwC had NOT been awarded the lucrative Lehman’s administration deal. Apparently there are some 620 partners and staff working on this job. And while in the last year, PwC earned some £100 million from this source alone, it has, in recent times seen the critical writing on the wall. Massive claims and counterclaims look set to tie up the administration for years, continuing to earn PwC huge fees but at what value to investors who lost out? At what cost to its long term reputation?

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. Watch for a potential break up a la Arthur Andersen in years to come. Especially if they get nailed on Satyam.

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