Does anyone remember –- or care about -– the collapse of Arthur Andersen back in 2002? If recalled, what lessons might it have for young professionals taking serious stock of their career choices?
Andersen had been by far the most profitable, tightly organized and centrally governed of the large accounting firms that once were the Big Eight. It was nobody’s candidate for rapid, scandal-driven disintegration.
When Andersen crashed, the partners lost their capital, and all their post-retirement benefits. More importantly, all the Andersen employees lost their jobs. Careers had to be re-built out of the wreckage.
And today? Nothing has happened since 2002 to give anyone confidence that the surviving Big 4 could withstand the shock that destroyed Andersen and upset the lives of everyone it touched.
Who should care, and why? Skip for now the senior-level people who should be anxious –- the partners in the firms, the chief financial officers and the audit committees at the world’s large public companies. The “Big Audit” sector is completely owned by the Big 4, but access to audits would be cut off by another collapse, having uncertain effect on the bankers, hedge fund managers and investment funds who are as indifferent to the pervasive issues as they are to the commoditized auditor’s report.
Going Concern readers all have skin in this game too. The sample would include:
- An audit manager surviving on the long partner track, considering whether to make a long-term career commitment and a huge personal financial investment in the current Big 4 model.
- An experienced senior with a quality-of-life choice -– another busy season of Sarbox ticking, or a bail-out to industry.
- A new hire with ink still damp on her CPA, trying to discern what today’s choice between audit and advisory assignments might mean in five years.
- A college sophomore choosing a major, uncertain about what Big Audit might look like when the impact of Big Data will have re-shaped the unforeseeable post-graduation world.
Accounting and audit are as old as human history, since trade was invented at the dawn of civilization. Its practitioners have had central roles to play, since the Sumerians’ earliest “writings” were inventory records of wheat and goats etched in clay tablets.
But just because the audit model invented in Victorian England in the 1850s has remained largely unchanged over 165 years, its structure and methods and the careers it has promised are not entitled to survival, or immune from evolution and radical change.
The disruptive forces are compelling:
- The “pass/fail” audit report in its commodity form is an expensive, unloved and out-of-date document that nobody really wants, but nobody is really committed to change.
- The large firms have not escaped the public’s “expectations gap” around the quality of their work, despite protestations of improvements.
- Hostile critics of the profession continue to ask, “Where were the auditors?” about examples from each of them such as HP/Autonomy, Toshiba, FIFA, Tesco or Petrobras.
- The large firms are in antagonistic relations with their regulators, who are restive and edgy over such issues as Chinese confidentiality, global independence violations, the expansion of advisory services inconsistent with the rigid anachronism of “independence.”
- Most importantly, the Big 4 are exposed to another Enron-style break-up event. They lack the capital and the cohesion to withstand a litigation or enforcement penalty more than (on my calculations, which are not disputed) somewhere between $1 and $3 billion for a Big 4’s US firm.
This last is a toxic topic. Leadership discussions of financial results avoid any mention of financial exposures or fragility. Informative due diligence for a Big 4 employee contemplating a long-term career choice would be to probe my hypothesis that the typical line partner does not even know his firm’s litigation and settlement payment history, much less have a clue what tipping point amount would bust up his firm and empty his bank account.
But this is not intended as a gloom-and-doom message. Even after another large-firm crash, the capital markets and all its supporting infrastructure will still be out there, as will the jobs. When the evolved audit for the 21st century does emerge, it will provide abundant innovative opportunities, leadership challenges and handsome financial rewards for those perceptive and agile enough to survive.
Staff rooms in older days may have been over-populated with teams doing manual bank account reconciliations; today it’s the relentless pressure of time and budget to see that all the paperwork satisfies the gimlet-eyed PCAOB inspectors. Tomorrow, the opportunities will be found in the evolved firms that will be doing the design, installation, reporting and analytics of the capture by Big Data of literally everything about a large company’s operating and financial environment.
With that in mind, some important questions should be asked by those looking towards the future:
- I’m enrolled in a rigid accounting degree curriculum. How relevant will any of that be five years from now?
- Where in my firm’s training can I access the skills to cope with the impact of Big Data as it threatens to make obsolete the work on which I’ve spent the last two busy seasons?
- How prepared is my firm’s leadership to navigate the political and regulatory antagonisms that are hostile to the profession’s reputation and stifling to its innovation?
- What kind of organizations will evolve to deliver Big Audit over my career span –- Big 4 or otherwise — and is my commitment likely to be a comfortable seat at the big table, or a deck chair on the Titanic?
These and related questions all matter. Guided by your reactions and suggestions, I’ll be back to explore them further.
Jim Peterson is a lawyer, teacher and former partner and in-house counsel at Andersen. His new book, “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” is available for pre-publication order and scheduled for release by Emerald Publishing in mid-November. You can email him at j[email protected], read more on his blog and follow him on Twitter.
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