How we’re screwing up thought leadership
April 25, 2008
Courtesy of Damien Wild, I stumbled across Anton Colella’s blog. For those that don’t know, Anton is president of ICAS. In a surprisingly candid post, he discusses the gap between perception and reality as it impacts reporting:
The discussion about the impact of current “thought leadership” compared to [Making Corporate Reports Valuable] MCRV was revealing. The audience felt that the proliferation of research in the past 20 years has not gone hand-in-hand with a rise in quality. Quite the opposite. It was also felt that the aim of advancing the profession was being poorly served because many of the proactive projects are at best piecemeal and at worst, self-serving.
Most significantly for me, the overwhelming view was that there is a disconnection between the needs of users of financial information – investors, analysts and the wider public – and the people who are shaping the research and recommendations. In other words, current “thought leadership” pays very little heed to what may actually be the big issues that require solutions and development. When a lot of effort is being put into work that is doing little to serve the needs of the market and the public interest, maybe it’s time to ask – what’s the point?
Part of the answer may lie in the fact there is no transparency in the report’s production or dissemination. Try a Google search and you’ll see what I mean. I see other issues.
- At the risk of sounding like a broken record, the continuing problems among the Big Four tax and audit practices do little to inspire confidence. I believe there is a direct connection between the profession’s ability to clean itself up and the confidence it earns among stakeholders.
- Corporations, especially Global 2000 companies, are so complex that it is impossible to know what’s going on without sophisticated reporting systems. The Big Four struggle to understand what these systems do. With the exception of Deloitte, the others divested themselves of their technical consultancies in the post-Enron fallout. They simply don’t have the skills. Without those skills, it is difficult to see how the profession can compete on the global stage in the development of world class reporting systems and techniques.
- The last year has seen a sea change in the visibility and importance of stakeholder interest in reporting around sustainability issues. Organizations as diverse as Business for Social Responsibility (BSR), Transparency International, World Wildlife Fund, the Global Reporting Initiative, Intel, HSBC and SAP are actively discussing issues around materiality in the reporting of sustainability measures. Much of that attention focuses on software but there are wider issues at stake that spill into those discussions. I know the Big Four want a piece of it as they see the assurance element as a natural part of their turf. The fact is, they are barely visible.
In short, the profession is increasingly marginalized around discussions on issues of importance that demand thought leadership.
Next week, I am privileged to be attending a BSR event in Boston where we will discuss issues that matter to stakeholders. Later in the week, I am participating in a panel discussion at an SAP sponsored event on similar issues as they relate to corporate social responsibility. As a former practitioner who has watched the erosion in confidence of professionals, I have plenty to say.
I see the potential for delivering value both to stakeholders and business. It is in understanding and navigating between the two different agendas that solutions will be found. It is necessarily a discussion that focuses on materiality, both financial and practical. Next week will see positive steps taken to move the agenda forward. I have been told that I am free to write about those meetings.
Endnote: The image at the top of this post shows the relationship between materiality from both stakeholder and business axes. It makes for interesting reading.
Disclosure: SAP and BSR are funding my T&E
The cat’s out the bag: Big 4 are Big 4x
March 20, 2008
Richard Murphy has long argued that the Big 4 are not a single entity in the way they market themselves but a loose association of affiliate firms. This, as any practitioner will tell you, is not the same thing at all. This is a question Francine McKenna has raised arguing that:
But how “actual ” is this global network? Do the firms really work together seamlessly, depending on each other without question to do work locally and bring it all together under one global partner for a large multinational? Not exactly.
Now it seems, she has proof positive from Kerma Partners who specialise in advising global professional firms:
Dear Francine,
…I am a London-based partner of Kerma Partners; we are a strategy consulting firm to international professional services firms .
My partner Phil Kaszar and I have written about accounting “networks,” and I agree with several of your thoughts.
First, globally, the larger accounting firms have created a perception of market integration that simply does not exist.
Second, the (dis-)integration is a matter of degree: the smaller the network/affiliation – and the smaller the client – the more this non-existence of integration becomes apparent.
Third, accountants have been guilty of excessive risk aversion and thus have too often let risk management tail wag the dog of driving global objectives – this in turn plaintiffs counsel have managed to exploit as you well know and now the options for a “global” firm have become somewhat more limited.
Francine has long argued that the world’s largest companies need coordinated global coverage. I agree. However, what Kerma seem to be implying is that this is an illusion. It follows that for the many companies not needing that same level of cover, the Big 4 represent little more than an opportunity to associate with a brand. This comes over time and again when you look at how many of the FTSE 350 are audited by non-Big Four firms and the degree of campaigning the Big 4 are prepared to undertake in order to protect their hegemony.
Although some may see this as a tenuous link (for which get ready to be blasted over Big Four failures) I do not believe the Big 4 are unassailable. The old boys network in the City may like them but given the costs companies have had to bear in increased compliance fees the last few years, then it seems so-called Tier 2 players like BDO and Grant Thornton might want to use this revelation as a way to develop competitive arguments and strategies.
I hope Jeremy Newman is taking note. The profession needs a shake up to not only improve standards but to show the world that it remains relevant to business.
As a closer, this is often a topic of conversation with clients which are audited by the Big 4. I cannot tell you the number of times that senior executives have slumped when I’ve mentioned compliance cost and what they (don’t) gain out of the exercise.
Where’s the quality?
January 24, 2008
Last year, Richard Murphy bemoaned the fact he had a compliance visit that didn’t take into consideration the quality of the work he undertakes. This is an ongoing problem because it is difficult to see how the profession, and in particular ICAEW, can claim a certain status without solid quality checks which demonstrate a commitment to standards.
Over the last week I’ve looked at three sets of accounts for a variety of reasons and was appalled at the most basic of errors. I wasn’t looking for problems but they jumped out.
In the first two cases, accounts were submitted to Companies House that in one case contained 10 mistakes. In one case the most serious looks like an overdrawn directors’ loan account hidden in debtors. HMRC take the view that represents salary in some circumstances. The same accounts disclosed unnecessary information for abbreviated accounts.
In the third set of accounts, the practitioner had made a blunder that will cost the client in tax. They’d forgotten to add back depreciation and had no firm basis upon which to agree an add back for PU in motor expenses. They pulled the ‘We agreed it with the client’ trick which of course doesn’t wash. The successor practitioner now has to figure a way of dealing with this mess.
And then to cap it all, last evening an overseas colleague working in France says the acquired working papers for a job he’s on, won from a Big Four outfit that features prominently in these pages, are substandard. Curiously, he’s happy because he knows that he can demonstrate value.
But the real problem is that confidentiality and an antiquated notion of ethics often seems to prevent the conscientious practitioners from shining through. How can they explain to clients they’re doing a great job when much of what they do is ‘hidden’ yet essential stuff for which others continue to lowball?
The argument will always be that the chances of detection are so low that ‘getting away with it‘ as Mark Lee said in comments to an earlier post would now appear to most definitely swing both ways. What professionals have to understand is that any time they are taking these kinds of needless risks, it is clients who suffer. And reputation.
It was therefore sad to see one practitioner on AccountingWEB asking whether he was insane for offering a discount:
I have recently taken on a new client and agreed a fee of £2,500 + VAT. They are extremely happy with this fee, as their last accountant was ripping them off (this would be putting it mildly).
However, having now done most of the work I realise that I have overestimated slightly, and consider that £2,100 + VAT would be a fairer fee. I will be seeing them tomorrow and intend to reduce the fees.
I have an opinion which is in the AW comments but I was particularly pleased to see a different view by Jason Dormer who said:
This is clearly a man who lives and works by values and good for him in not taking the option that the majority in every trade and profession would take.
He’s right of course and I suspect the impact it has had on me is in no small measure due to the fact I have been seeing so much crap in the last few days.
Endnote: I suppose I should name names. I may do so at a later date. But I’m aware that clients are at risk and it is therefore unfair to provide further detail.
Norwich Union fined £1.26 million: where have I heard this before?
December 17, 2007
I had to step back for several hours before working out an appropriate response. This summary from the usually excellent Finextra:
The UK’s Financial Services Authority has fined insurer Norwich Union £1.26 million for failing to protect confidential customer data from fraudsters.
The City watchdog says Norwich Union’s life assurance unit did not have effective systems and controls in place to protect customers’ confidential information and manage financial crime risks. These failings resulted in a number of actual and attempted frauds against policyholders.
Slack call centre security allowed fraudsters to use publicly available information - including names and dates of birth - to impersonate customers and obtain sensitive customer data, says the FSA. In some cases criminals were able to ask for confidential customer records, such as addresses and bank account details, to be altered.
The fraudsters then used the information gleaned to request the surrender of 74 customers’ policies totalling £3.3 million in 2006.
In the scale of things, this is petty cash to a company like NUL. That’s not the point. We’ve seen this kind of thing before - or rather variants stretching back a number of years. Remember the RBS fiasco in 2002 where the FSA said:
There was insufficient evidence to show that the clients were who they had claimed to be, whilst in some cases RBS were unable to supply copies or details of the documents (such as a valid passport, a driving licence, a recent utility bill) it had used to verify identity.
While there was no direct theft involved, RBS caught a fine of £750K.
From an audit perspective, these are relatively easy problems to overcome and test. The fact that the processes underpinning these failures do not appear to have been the subject of any serious review implies that auditors are yet to be adequately trained or even consider the need to have identity tests put into audit packs. Call me naive but since we’ve had anti- money laundering legislation in place for many a year, the risks are well documented and the history is well known and understood, isn’t it about time that auditors stood up to the plate?
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