BDO International CEO Jeremy Newman is a little concerned about the trend of lowball audit fees out there. Now, those aren’t his exact words, in fact he calls it ‘‘extreme downward pressure on fees’ which still seems far more than honest than “my US colleagues call ‘fee compression.’”
He’s worried because he thinks that all this slumming around for any little opining job will lead to shoddy audits:
There is increasing evidence that fees are being forced down to such an extent that one worries this will encourage audit firms to ‘cut corners’ to reduce their own costs and thereby reduce audit quality – particularly given that the buyers of audit services (ie clients) do not monitor or determine audit quality which is a role taken on by regulators who are not involved in the pricing discussion between the client and the audit firm.
Yes, the man has evidence, courtesy of:
Canadian Public Accountability Board – “CPAB has learned that certain audit committees are pressuring firms to significantly reduce audit fees. This stance may be incompatible with the audit committees’ important role … in helping to ensure the integrity of financial reporting.”
Australian Securities and Investments Commission – “We will also focus on audit quality for new or existing audits where audit fees appear low or appear to have been reduced for reasons other than changes in the underlying business of the entity being audited.”
And he rounds it out with a quote from a speech given by Stephen Hadrill, the Chief Executive of the UK’s Financial Reporting Council, “There is a role for the market in setting higher expectations of auditors. So far the market has not played that role. Quite the opposite. It is more likely to applaud lower audit fees than higher quality.”
So if you’re desperate to retain some business or provide “client service” through the Wal Mart method, you’ll be on your own. As long as Newman is running the ship at BDO, they will be choosing quality over quantity, “despite the pressure on us to reduce costs,” no matter what other firms (read: Igbay Ourfay) are doing.
A Bizarre Market [CEO Insights]
Truth 1: Leadership was close to another deal prior to the ESOP deal but had to do the ESOP deal when the other deal fell through at the last second. The interest rate on the loan for the ESOP deal is sucking this firm dry.
Truth 2: A partner who sold in the ESOP deal told me that his equity was worth $100 per unit, for example, prior to the deal and he sold $40 of it. Leadership told the partners that they could earn the $40 back in value appreciation on the retained $60 in 3 years. At the end of 3 years, his $60 per unit was worth less than $62 per unit. Leadership either lied or was just that stupid.
Unfortunately, this is kind of frightening since BDO was prolific on the M&A. A partner who believed in 3 years that the ESOP stock would be worth more than at the transaction date had to have been shown that the ESOP debt would be paid off. Is that possible? This is how all the PE deals are structured with massive debt structures in place where no debt existed before. The non-ESOP firms are being sold the same bill of goods. I guess the firms will all be going public like CBIZ.
Let’s go public BDO! LOL.. probably wouldn’t be the best option but fuk it.. Why not? If bdo goes public, maybe we’ll be acquired down the rest of road and it’ll pay off!? Haha.. I have a better chance of winning the lottery.
The value of the ESOP stock is not a 1-for-1 relationship with the debt. Company performance, which debt is paid down as expected (life is far more than 3 years), is the primary driver of the stock valuation.
If you’re looking for ammunition for concern, I would look to revenue growth. Are they growing as fast as expected when the ESOP began? No.
Wait, so are you not allowed to take an EBITDA addback for potential billable dollars in under-utilized staff? Weird.
I, for one, am shocked. I am utterly shocked at this announcement. Shocked, I tell you. I just can’t imagine how many Benjamins Mr. Berson used to wipe the tears from his face upon hearing this news.
Gotta feel good to get laid off a week before your company completes a $300M acquisition.
It’s all about optics.
Wait BDO is suing you guys?
From what I’ve seen the esop wasn’t really a true esop deal. BDO took out a shit load of debt with really high interest rate and are now struggling. ESOP can work but you can’t straddle the company with this much debt at such a high rate and expect things to go well. Clients are gonna start paying more because the company borrowed all that money.
sounds like a typical esop deal to me. the problem with their structure is they can’t pay the debt down fast enough to increase the diminished stock value after the debt was placed on the firm. i still wonder what kind of projections were shown to the partners that showed how the firm would perform to increase the value of the stock that given out.
Will BDO send you a strongly worded letter for reporting this?
Related to the esop the non big wigs aka “regular” partners were sold a false bill of goods. We were told a bunch of stuff was “easily achievable”and we were pretty much lied to on metrics that could be achieved.