Big 4 consulting bans
Here’s a David Cay Johnston column on the unaccountability of the Big 4, spurred by the latest scandal flavor of the week: KPMG firing six employees who acted inappropriately with confidential PCAOB information. He rightly notes that the market is desperate for some competition in auditing, but also mentions changing the rules of Limited Liability Partnership structure to discourage bad behavior and banning consulting services as two reforms that are needed. And the latter issue comes with a fun little anecdote:
The Big Four derive much of their revenue from consulting work. The now-retired head of one of these firms once tried to persuade journalists at an off-the-record lunch that without consulting work the Big Four could not be successful enterprises. There just was not enough money in auditing, he said.
“Not true,” I said. Since auditing is required for companies with stock or publicly traded bonds, the fees companies pay would have to rise to the level needed to attract the talent to do the work.
The Big Four chief agreed, then added, “but we wouldn’t be able to make nearly as much.”
That is the very definition of how institutional corruption works. The prospect of big fees for advising firms corrupts the crucial audit function. The answer is to ban auditing firms from doing anything but audits.
I’m sympathetic to this view, even if it’s not entirely realistic. In general, accounting firms don’t want to be told what they can and cannot do, so an outright ban on consulting would only come about after another accounting catastrophe that would make Enron look quaint. That’s not ideal so we’d all be better off if the firms made this decision for themselves. If a majority of audit partners decided they were sick of being in business with all those consulting show-offs, they could spin off an audit-only firm and raise their prices. That’s an oversimplified version of events but in general, that’s how it would work.
Except it probably won’t, for precisely the reason that Johnston’s story about the Big 4 bigwig illustrates. Profits for the partners has long been the primary motivator for firms and I haven’t heard anything about fundamentalist auditors starting tent revivals anywhere. So that means we’re back to the ban, which means we need another Enron which means…oh, screw it.
Nerds turned whistleblowers
If you thought that only insiders could become whistleblowers to win riches from the Securities and Exchange Commission, think again! Reuters reports “two analysts who liked to swap notes on numbers they thought looked odd” are set to win $2.5 million after medical device maker Orthofix settled accounting fraud charges — channel stuffing — with the SEC back in January.
What’s amusing about this story is that the analysts are more like game nerds giggling to each other than two sleuths looking for a mystery to solve:
“I am always on the lookout for something unusual, either just unusually good and under appreciated, or unusually bad,” the analyst told Reuters. “This one showed up as a company that looked like it had the potential to be unusually bad.”
In the spring of 2013, he e-mailed his spreadsheets to a fellow analyst and a friend of more than a decade, with whom he regularly chatted about companies and sectors.
“The way we work together is one person makes a suggestion and the other person challenges it,” that friend told Reuters.
“It is like a war game.”
Although the analyst first sent the spreadsheet to his friend four years ago and they’re only now about to receive the award, it’s still shorter than a game of Risk.
The Accountant 2
Oh, boy. Buried in this article about the AutFest Autism Film Festival recognizing Ben Affleck for his role in The Accountant is this nugget of treasure:
For fans who loved the original, Affleck said “The Accountant 2” was in the works.
Okay, a lot has to come together for a movie to get made, but I still can’t help but wonder: What will the arbitrary subtitle for this sequel be? Things like The Accountant: Month End or The Accountant: Recurring Entries or The Accountant: Disallowed all feel too obvious. Let’s work on this together.
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Previously, on Going Concern…
Marsha Leest wrote about careers at mid-market accounting firms.
In other news:
- SEC registrant number continues to decline
- Accountants Grant Thornton fined £2.3m over audit
- Faye Dunaway felt guilty about the whole Oscars thing.
- Wikipedia founder to fight fake news with new Wikitribune site
- Pre-dirtied jeans.
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