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?
Technorati Tags: audit
PCAOB slaps Deloitte with $1 million fine
December 10, 2007
It’s about time. After years of criticizing the Big Four, only to have them come back and disagree, PCAOB have called time. They’ve slapped Deloitte with a $1 million fine for serious deficiencies in audit quality related to Ligand Pharmaceuticals. PCAOB has also barred former partner James Fazio from being associated with a public accounting firm for two years, after which he can petition to get his place back at the trough. According to Financial Week:
The PCAOB alleges that Mr. Fazio “failed to perform appropriate and adequate procedures†relating to Ligand’s revenue recognition practices and also failed to ensure that others performed such procedures.
The PCAOB also found that after Deloitte determined Mr. Fazio was not performing his work adequately—ultimately asking for his resignation—it did not remove him as engagement partner on the Ligand audit. It also did nothing to assure the quality of the audit before issuing its opinion on Ligand’s financial statements.
While it is sad to see the profession brought to this position, I hope it will be a wake up call to the Big Four but more important ICAEW. The Institute focuses a lot of its attention on the smaller practitioner yet with this action, PCAOB is signaling that real attention needs focusing elsewhere.
As an aside, Jeremy Newman, managing partner at BDO has long argued that firms like his own can do just as good a job as the Big Four. Without wishing to muck rake, it seems to me that if BDO and Grant Thornton (as examples) want to take some of the Big Four business, they need to be thinking about operating at a higher level of competency than the Big Four. Much higher. With that in mind, I’ve left Jeremy a note on his blog. Any response could be interesting.
