Mo' Money, Mo' Problems - Deloitte And An Unhappy Client

"I don't know what they want from me, It's like the more money we come across, the more problems we see."
Notorious B.I.G

Deloitte is doing very well financially. Although numbers for the US for fiscal year 2007 are not yet up on their website, I did see this article about results in the UK:

Deloitte records 15% revenue surge
Tax leads the way with a rise of almost 20% on last year, while Connolly earns £4.6m for the year's work.

"Deloitte's revenues grew by 15.6% in 2006-7, to just over £1.8bn. The firm announced profits for the year of £572m today, an increase of 17% on the previous year. The numbers were driven by a huge growth in tax revenues, up by 19.2%. The surge saw chief executive John Connolly's pay soar to £4.6m, a 12% rise. Average profit per partner at the firm is now £877,000.

Connolly said: 'A changing tax environment with increasing focus by tax authorities and tax payers on the accuracy, efficiency and timeliness of tax reporting saw exceptional growth in our tax management consulting service line..."

It's interesting that Tax is leading the way. Perhaps Deloitte is enjoying the fact that KPMG, E&Y and BDO are preoccupied with tax issues of another kind.

However, it's always necessary to keep an eye on that pesky Consulting practice. Although Consulting has been a steady ~30% of US revenues for the last few years, bad projects can sometimes make it seem like that's the only thing you're doing and to seem to everyone around that you're not doing it very well. In particular, when you don't do it very well for a government body, the cow pies can really hit the fan!

Looks like a job for Super Deborah!


Gimme Your Wallet, Superintendent Brewer
And let’s withhold the school board’s checks and boycott Deloitte until teachers get paid
"Heads should roll in L.A. Unified’s payroll debacle, now entering its seventh month. Thousands of employees—mostly all-important teachers— of the nation’s second-largest school district either do not get their monthly checks, or they get too little, or, in the cases of the lucky ones, too much...And there are other steps that teachers – and a sympathetic public – can consider. One would be boycotting the worldclass financial and consulting firm Deloitte & Touche. Several busloads of angry, picket-carrying, foul-mouthed teachers stationed outside the firm’s downtown high-rise at 350 S. Grand Avenue would make a bold statement.

We tried to find out how Deloitte is addressing the Category 5-PR-disaster, but the firm’s representative, Christine Brodeur wouldn’t stray from the firm’s unresponsive, prepared statement, the second sentence of which makes it sound like it’s all the school district’s fault. “We empathize with those district employees who have been affected by the transition to a new payroll system. We have been working very closely with district officials to help them resolve remaining issues they face operating the system.”

We’re not here to place blame, but it seems reasonable that the district and Deloitte share it. Instead of hiding, Deloitte should strike a high profile and dispatch 10 limousines to ferry its top-notch systems people to school district headquarters. Call a joint news conference with school officials to announce when the problem will be resolved. And tell the public that you are returning all of the taxpayer money. Do it, even if you’ve done nothing wrong. The firm doesn’t seem to fathom the PR-nightmare on its hands. If this is the best crisis management a world-class firm can muster, public agencies should show caution before signing rich contracts with them. And the rest of us should take our business elsewhere.

Maybe a creative civics teacher could draft a compelling lesson plan about the shortcomings of capitalism, as shown by the handling of this computer disaster by the district and its greedy contractor."

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Al Gonzales - Company Man

Force does not constitute right... obedience is due only to legitimate powers. Jean Jacques Rousseau

Anybody who knows me knows I'm a sucker for the Mexicans. I was sold the first time I went to Mexico City on vacation in 1995 and decided then that I would work there some day. I've spent more than ten years of living, working and traveling around at various times in Mexico and in the Little Mexico we have here in Chicago. I've even become teary eyed as I'm driving recently while listening to the stories on Chicago Public Radio's series, "Chicago Matters: Beyond Borders."

So it's difficult for me to admit that Alberto Gonzales is one first generation Mexican-American I can't like. Now, I don't know him personally, but in any other context I would have been a pushover for his story of being one of eight siblings, the only one to go to college, son of migrant farm workers. In his speech, he said, "I've lived the American dream. Even my worst days as attorney general have been better than any of my father's best days." That chokes me up...

But I have to admit that today's editorial in the Financial Times hits the nail on the head and gives us a lesson in how good, otherwise intelligent people, can end up disgraced, or worse. Beware the company man, the one who does whatever the boss says, without question, in return for favors granted, options, bonuses and, to their dismay, sometimes only vague promises and, later, desertion.

Alberto Gonzales was loyal but, even worse, he was obedient. When because of fear, insecurity, feelings of non-deservedness or blind ambition, a man binds himself with unflinching devotion to the fortunes of another more powerful man, he has sold his soul while swallowing his pride.

Gonzales was unfit from the outset

"To call the resignation of Alberto Gonzales as US attorney-general overdue seems barely adequate. From the outset, he was the most delinquent and incompetent holder of that vital office in living memory...The main criticism to make of Mr Gonzales is not that he put loyalty to the president above his obligations to the constitution. The office of attorney-general calls for a difficult balancing act: the problem of divided loyalties goes with the job. Mr Gonzales’ great failure was in offering his political master not loyalty but blind, sycophantic obedience. ...Yet the departing attorney- general does not appear to be an evil man, so much as one who was utterly out of his depth. This was apparent even before his appointment...As Mr Gonzales dug himself ever deeper into a hole of his own making, affront at his conduct gave way to incredulity and even to a measure of sympathy. The man was entirely unfitted to the office. For what happened on his watch, blame the president who appointed him."

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SOx? We Don't Need No Stinkin' SOx

There's a hole in SOx.

Yes, even with SOx, management of public companies will continue to do the wrong thing.

And recent articles have bemoaned the high cost of SOx, the enforcement of the Sarbanes-Oxley laws by your friendly auditors, SEC, Department of Justice and assorted other global and local criminal and civil authorities.

But the reality is: SOx is no more than the codification of good internal controls, best practices in processes around financial reporting and financial disclosure and various other practices like whistle blower provisions , anti-fraud statutes, and accountability for reported results that already existed in other forms and in specific industries. It would not have been necessary if the auditors and others, like the Boards of Directors and regulators, had been doing their jobs instead of looking after only their self-interest.

The auditors have taken the most advantage of the formalization, under the force of law, of what companies should have been doing all along and what good, well run companies have done as a matter of course. It's also the standards auditors should have been auditing against all along...

But as has been discussed before, the audit firms are caught between the need and desire for the next big thing, like SOx and FAS 133 and maybe IFRS and Basel II, that feeds their oligopoly, their government sanctioned franchise to provide assurance to the public company shareholder and potential investor as well as other stakeholders, and their distaste for being scrutinized themselves by new regulators.

Imagine, if you will, that you had just completed your PhD thesis and been awarded your degree. After compiling hundreds or perhaps thousands of sources and staying awake nights analyzing and developing conclusions from data, you read the day after getting your degree that it was all a sham. Half of the reference works used in your dissertation have been found to be plagiarized or based on false data.

That's how investors should feel when a company announces a restatement. Violated. Taken for granted. Made a fool. Fleeced.

And then there are companies that just keep doing what they do well and lead the way in best practices in their industry and good corporate governance in surprising places. How can a large multinational based in the US or Western Europe instead complain that they have neither the available talent nor the wherewithal to do things right?


How they do it at Cemex

Ian Williams has the story behind this multi-national cement-maker’s IR transformation
March 2004

"The precise chemistry of cement may still be something of a mystery to scientists. But while they wait for more concrete details, Maher Al-Haffar, managing director of corporate finance at Cemex, has been trying to transmute the alchemy of investor relations into a science at the Mexico-based multi-national cement giant...During monthly meetings with the CFO or executive committee, the IR department presents its metrics...This scientific approach to IR provides Cemex’s senior management team with solid feedback. ‘With the contact system we can go to management and say, From the last 100 meetings, these are the major concerns, the major drivers that are causing or will cause investors to buy, sell or hold,’ Al-Haffar says.

He believes the key to successful investor relations is remembering who holds the purse strings. ‘Cemex showed its commitment to do the right things in investors’ minds,’ he continues. ‘Not that we are chameleons, but we cannot forget who we work for.’

Rather than follow the latest disclosure trends in IR, the company follows practices meant to clarify its strategy and financials for shareholders. For example, Cemex relies on old-fashioned Mexican-style accounting guidelines to show the free cash flow it generates. ‘Most American managements want to optimize accounting earnings rather than cash earnings,’ Al-Haffar points out. ‘If they did what we do, many of these recent scandals would have been discovered [sooner].’

The company also pays dividends – and quite big ones – something its original Mexican shareholder base insisted upon. ‘Our dividend payout has been consistently growing about 12 percent a year for the last ten years,’ reports Al-Haffar. ‘It’s been a great help in expanding the retail investor base.’

At the dawn of the new millennium, Cemex’s senior management decided it was time to boost its IR efforts. The company was expanding into new markets and had listed its ADR on the NYSE in 1999. It was then that Rodrigo Treviño, Cemex’s CFO, decided to call in Maher Al-Haffar, a Syrian-born American banker.

‘Our commitment to deliver value to shareholders rests on a clear recognition that, as a public company, we manage and compete for other people’s money in the financial markets,’ says Treviño. ‘As a company that has delivered double-digit Ebitda growth during the past ten years, it becomes extremely important for our growth strategy that we have access to a sufficiently large, liquid and diversified shareholder base. Because of that, and because we firmly believe that investor confidence is built over time on a track record of consistent, accurate, complete and timely disclosure of information, we decided at the beginning of 2000 to enhance and revamp the IR function.’

...With Al-Haffar on board, Cemex decided to do without the external IR consultants it had previously used. ‘[Using them] meant our institutional memory was outside the company, and we have very talented staff in-house,’ Al-Haffar comments. When Al-Haffar initially came on board, the department increased from four to ten IR professionals but is now an efficient half-dozen IROs, each of whom is focused on a particular region or specialization.

Cemex’s IR team carried away a sack-full of honors at last year’s IR Magazine Latin America Awards, including best corporate governance and best communications with the retail market. Still, Al-Haffar isn’t entirely happy with his program’s high standing among Latin American companies. That’s because he benchmarks his IR efforts against international heavyweights like Microsoft, BP, Cisco and Nokia – and is not ashamed of calling them to ask how they do it.

As one of the few Latin America-based companies with a multi-national presence and an international investor base, Cemex has, in effect, outgrown the emerging markets sector. ‘The stock is more closely related to the Dow [Jones] and the S&P because we’re so US-centric now,’ notes Al-Haffar....Canadians now hold 5 percent of Cemex while US investors have close to 40 percent. Mexican investors hold only around 30 percent, but this might change when Mexican pension funds become free to invest in equities.

Overall, Al-Haffar says the successes of his new millennium IR strategy are ‘greater liquidity, greater transparency, and a much broader and more educated investor base. Our 50 biggest investors are top global investors that have put time into researching the industry and economies, so they aren’t going to behave in a knee-jerk way.’

... At the end of the day, you want to make sure you have satisfied customers – who, in our case, are the investors.’

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An Appeaser Is One Who Feeds A Crocodile...

An appeaser is one who feeds a crocodile, hoping it will eat him last.
Winston Churchill

I've recently become acquainted with Jim Peterson and his column in the International Herald Tribune, 2Cents' Worth.

This one and this one have been inspirational recently.

"Billy Rose, the legendary Broadway producer of the 1920s and 1930s, offered a maxim to anyone hoping to replicate his success: "Never invest your money in anything that eats." Rose was referring to showgirls and racehorses, but his admonition could apply equally to accountants and auditors.

In a report released in mid-March, the U.S. Chamber of Commerce, a trade group and lobbyist for American business, advanced the notion that client service by the four remaining global accounting partnerships would be better provided if the accounting firms could bring in outside investors, like private equity or venture capitalists...

But on the issue of outside capital, for several reasons, the report is wrong. It is not a solution. For starters, what would be the real role of venture funding or private equity in a global accounting partnership? The business model is that the firms are capitalized by their partners' collective contribution, and the partners share in the profits. But the Big Four firms already manage to run their global operations today on the modest working capital provided by their individual partners. Simply put, they don't need the money.

And since no capital comes cost-free, the accounting partners would have to vote away major portions of their current personal profits to pay the handsome return on investment that private equity investors would demand.
If the idea is that fattening the firms' balance sheets would cushion a huge litigation charge, then it's doubly perverse. If increased capital acts as a form of self-insurance, a simpler solution is immediately available: New insurance companies might provide the Big Four with the high-limit coverage that is not available today.

The trouble is, the business case goes the other way: Billion-dollar coverage is not to be had at any price. Rational insurance industry decision makers see the accountants as effectively non insurable at levels meaningful to their survival.
And for the other perversity, exposing any additional capital to the hazard of plaintiffs' claims would only feed the beast of litigation. It's basic economics: Prices rise to eat up available subsidies. If dog food costs $1 a can, and for public policy reasons a subsidy of $1 is made available, the consumers' cost immediately becomes $2..."

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Computer Associates and KPMG - Always and Forever

Some folks never learn. Or maybe they have learned - how to deflect attention and keep doing what they want to do, in spite of the obvious need for change and new blood. One of the first posts I wrote, almost a year ago, was about the connections between Computer Associates, (or CA as they prefer to be called now,) Home Depot and the Diocese of Rockville Center on Long Island in New York. There's also a connection to the New York Stock Exchange. What's more interesting is how such different people came together to promote common business and personal objectives. But, I guess, greed has no ethnicity or overt prejudices.

In spite of the recent reminders of what happened at CA not so long ago, their stockholders, or rather their management, since proxy votes are non-binding, have reelected the full slate of Directors and their incumbent auditor KPMG, again.

CA shareholders re-elect D'Amato
"Shareholders of CA Inc., the former Computer Associates, re-elected all 12 directors Wednesday, ignoring recommendations by two proxy advisory firms to withhold votes for former U.S. Sen. Alfonse D'Amato...The two proxy firms had recommended action against D'Amato because he was a member of the board's audit committee during periods of financial irregularities several years ago. One of the firms also recommended withholding votes for director Jay Lorsch, a Harvard professor who chairs its governance committee, for nominating D'Amato.

There was no debate about the directors' re-election during the shareholders session... John Swainson portrayed the software maker...on the road to recovering from the $2.2 billion accounting scandal that recently landed its former chief executive Sanjay Kumar in federal prison to serve a 12-year term."

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Charles In Charge - Not!

Senator Charles Schumer has a lot of nerve. He also has a strong belief that the US public is naive and gullible. At best, it's comical that Senator Schumer is demanding action on the sub prime crisis from the accounting firms. After all, they pay him to protect their interests, not the other way around. Where did he get the idea that they're part of the solution? I wouldn't be surprised to find out that Deborah Harrington wrote the press release.

Sen. Schumer urges Big 4 on mortgage accounting

"U.S. Senator Charles Schumer has asked the big accounting firms what steps they are taking to inform investors holding securitized mortgage assets that they can modify home loans and refinance them, according to a letter obtained by Reuters on Friday.

"One of the most promising solutions to the anticipated foreclosure crisis is the voluntary modification by lenders of existing unsustainable subprime loans," the New York Democrat said in a letter to the heads of Deloitte and Touche USA, KPMG, Ernst & Young and PricewaterhouseCoopers.

In July Securities and Exchange Commission Chairman Christopher Cox said mortgage servicers may modify individual mortgage loans when a default is reasonably foreseeable without breaking accounting rules.

..."To that end, I would like to know what steps you are taking to ensure that your clients are aware of this guidance," wrote Schumer, who said he hoped that the accounting firms were encouraging their clients to modify subprime loans at risk of default."

US Senator Charles Schumer is number 3 on Ernst & Young's list of top campaign contribution recipients for the years 2001-2006.

He's also number 3 on Deloitte's all time 1999-2006 list of campaign contribution recipients.

As a matter of fact, E&Y and Deloitte are in his top 20 all time greatest contributors!

PricewaterhouseCoopers has him a little farther down on their list but still in the top ten. He's number 9 on their list of top federal candidates receiving their contributions between 1990-2006.

From 1999-2004, KPMG was Mr. Schumer's 14th largest contributor overall.

When Arthur Andersen was still around, they gave big money, also. He's high on their list, too.

Senator Schumer has also received money from the American Institute of Certified Public Accountants, the industry trade association, over the last several years.

In general, Senator Schumer was the number 2 US Senate recipient of contributions from the accounting industry in the 2003-2004 election cycle. Only Christopher Dodd and George W. Bush got more money.

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The Topic Is BDO - Discuss

Neil McIntyre, CA-in-Waiting and Canadian boy-wonder blogger, wrote a post recently called, Sucks To Be Seidman. Neil is feeling this crisis personally and, if his picture wasn't so darn cute, I would worry he was verklempt.

Reasonable assurance is neither reasonable nor assured. 

Discuss.

Neil says:

"By now, the verdict in the BDO Seidman lawsuit has been covered by all the major industry blogs. All the heavyweights have registered their opinions in this great swirling mass known as the blogosphere. The mainstream media has tossed it around this way and that. There is near unanimity amongst all commenters: Sucks to be them.

I don’t disagree completely..."

I've joined the discussion between Neil, Krupo and Dennis. A few excerpts:

"Neil,two things:

1) Faked confirmations were the smoking gun in the Parmalat/Deloitte/Grant Thornton debacle. GT excuse? I was duped! ‘Nuf said.

2)BDO has been fighting (albeit successfully) instead of settling because they can’t afford to settle..."

Neil asks me:

"Francine, Is BDO doing the right thing compared to what KPMG did?"

My response:

"Neil,
I think KPMG did entirely the wrong thing for their partners, both the accused and those that remained...That being said, ...(BDO has) been winning (even winning on the same tax shelter case that KPMG paid 400+ million on when they capitulated,) I would say they are very good at choosing very good lawyers, for sure...They are betting the farm every time they choose to fight instead of settle. If they’re in the right, then fight. But if they’re just being stubborn, cheap or irresponsible..."

Go here for more.

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Deloitte and Transparency - Isn't It Ironic?

NEW YORK, Aug. 22 /PRNewswire/ -- Frank Piantidosi, Chairman and CEO of Deloitte Financial Advisory Services LLP (Deloitte FAS), has been elected to the board of directors of Transparency International-USA, the American chapter of Transparency International, a Berlin-based non-profit and non-partisan organization founded in 1993 to curb corruption in international business and development.

Meet Frank Piantidosi
Chairman & Chief Executive Officer, Deloitte Financial Advisory Services LLP
Frank Piantidosi is the chairman and Chief Executive Officer of Deloitte Financial Advisory Services LLP (“Deloitte FAS”). He serves on the Operating Team Committee of Deloitte & Touche USA LLP and represents Deloitte FAS in all key initiatives. Frank is also the global leader of the Forensic & Dispute Services practices of the Deloitte Touche Tohmatsu member firms and their affiliates and, in that role, he has built a global network of sophisticated forensic and technology service offerings.

C-suite executives in leading corporations and top attorneys in the world’s leading law firms regularly seek Frank’s counsel on forensic and dispute matters. He is quoted regularly in media outlets such as The Wall Street Journal, NBC Nightly News, and USA Today on these issues and the trends driving them.

For the last two decades, Frank has led the development of the dispute consulting and forensic investigations discipline. In the late 1980s and early 1990s, he realized that the incidence of complex fraud was growing exponentially worldwide – and helped define the special skill set of investigatory experience, technological skill, and financial acumen necessary to investigate it. His experience in forensic and dispute services transcends borders. In fact, he led the engagement relating to Volcker Commission’s investigation of Swiss banks on behalf of Holocaust victims, which led to a $1.2 billion settlement and the return of hundreds of millions in assets to victims and their heirs.

His first task may need to be investigating why Transparency International thinks Deloitte has a conflict of interest for some work that was done in Lithuania.

The investigations guys in the Big 4 are an interesting bunch. There are actually some women, too. I met some at PwC and they are my kind of women. They know stuff...

Interestingly, Mr. Piantidosi's bio from the Deloitte website doesn't mention that his big claim to fame, working on the Volcker Commission, was while he was with PwC. The firms tend to erase any reference to the other firms in their partners' histories when they poach top guys from each other. The exceptions are the Andersen refugees and their new firms like Huron and Protiviti. These guys proudly reference their AA pedigree. They wear it as a badge of honor and have a hard time understanding why anyone would think this might not always be a good idea. There are still a lot of AA loyalists out there, in the other firms and in industry.

Last month, Frank Piantidosi, a former partner at PriceWaterhouseCoopers who led PWC's role in the Voelcker Commission investigation of Swiss Banks, joined Deloitte & Touche as the National Director of the Forensic & Investigative Services Unit, based in New York.

And from a 1998 article in Cigar Aficionado about Kroll, the investigative firm:

"The Big Six accounting firms are all expanding their investigative units. Price Waterhouse, for instance, more than doubled its forensic accounting and investigative staff in the past two years to 600 members. "White-collar investigations is the fastest growing segment of our practice," notes Frank Piantidosi, a Price Waterhouse regional managing partner."

It's not that typical for a "regional managing partner" to switch firms. But it looks like Deloitte in early 1999 decided to beef up this practice and started hiring all kinds of people. Was it money, power, a difference of opinion with PwC management, some concern about the future of the practice at PwC?

For some reason, Mr. Piantidosi, who lives in Connecticut, wanted to get licensed in Florida in 2005. His request was denied.
MINUTES
DEPARTMENT OF BUSINESS AND PROFESSIONAL REGULATION
BOARD OF ACCOUNTANCY MEETINGMarch 18, 2005
Francis Piantidosi
Deficient an Authorization for Interstate Exchange of Examination and Licensure Information form from New York and a passing score on the Laws and Rules exam.
Motion was made by Mr. Thielen, seconded by Mr. Puissegur, to deny. Upon vote, the motion passed unanimously.

Finally, Mr. Piantidosi is a good Republican soldier, like his boss. He has consistently contributed to those candidates both at Deloitte and at PwC. He even contributed to Giuliani's candidacy for Senate against H. Clinton when he doesn't even live in NY! That's devotion.

Piantidosi, Francis
Darien, CT 06820
Deloitte & Touche/Partner
SHAYS, CHRISTOPHER (R)
House (CT 04)
CHRISTOPHER SHAYS FOR CONGRESS COMMITTEE
$2,100
10/18/06

Piantidosi, Francis
Darien, CT 06820
Deloitte & Touche/Partner
SHAYS, CHRISTOPHER (R)
House (CT 04)
CHRISTOPHER SHAYS FOR CONGRESS COMMITTEE
$1,000
10/19/04

PIANTIDOSI, FRANCIS A MR.
DARIEN, CT 06820
DELOITTE & TOUCUE LLP/CONSULTANT
BUSH, GEORGE W (R)
President
BUSH-CHENEY '04 (PRIMARY) INC
$2,000
primary
05/18/04
Piantidosi, Francis A.
New York, NY 10019
Deloitte./Partner
DELOITTE & TOUCHE FEDERAL POLITICAL ACTION COMMITTEE
$2,500
04/15/04

Piantidosi, Francis
Darien, CT 06820
Deloitte & Touche/PARTNER
DELOITTE & TOUCHE FEDERAL POLITICAL ACTION COMMITTEE
$1,500
02/20/02

PIANTIDOSI, FRANCIS
DARIEN, CT 06820
DELOITTE & TOUCHE
GIULIANI, RUDOLPH W (R)
Senate - NY
FRIENDS OF GIULIANI EXPLORATORY COMMITTEE
$1,000

03/01/00

PIANTIDOSI, FRANCIS
DARIEN, CT 06820
PRICE WATERHOUSE LLP
PRICEWATERHOUSECOOPERS POLITICAL ACTION COMMITTEE II
$600
09/05/97

PIANTIDOSI, FRANCIS A
DARIEN, CT 06820
PRICE WATERHOUSE LLP
PRICEWATERHOUSECOOPERS POLITICAL ACTION COMMITTEE II
$400
10/03/95

PIANTIDOSI, FRANCIS A
DARIEN, CT 06820
PRICE WATERHOUSE LLP
PRICEWATERHOUSECOOPERS POLITICAL ACTION COMMITTEE II
$350
09/23/94

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The Lawyers Get Sucked In By KPMG

Not surprised that KPMG is sucking in the lawyers who helped them with their tax shelter deals. I've mentioned before KPMG and Hogan and Hartson's close relationship.

Two Prominent Attorneys Subpoenaed in KPMG Case
"Collateral damage from the KPMG tax shelter imbroglio has struck Hogan & Hartson and two of the firm's most prominent attorneys -- Prentiss Feagles, co-director of the firm's tax practice, and Paul Rogers, a partner in the firm's health practice..."

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Bloomberg's Jonathan Weil Is On A Roll

Jonathan had another really great article recently that I pointed out here. He's at it again, telling no lies, taking no prisoners. I'll let it stand by itself, with only some emphasis added because it needs nothing.

Photo courtesy of the Chicago Historical Society

At Mortgage Banks, `Going Concerns,' Going, Gone

"You think your job is tough? Think about the poor schlimazels from Deloitte & Touche LLP who blessed the books at American Home Mortgage Investment Corp., mere months before it went belly up.

The Deloitte accountants faced a crucial decision as they finished their audit work in March. Deloitte could resign and walk away. The firm could qualify its audit opinion by saying there was ``substantial doubt'' about American Home's ability to continue as a ``going concern'' through the end of the year -- as many short sellers already had concluded. Or it could give the company a clean opinion, expressing no doubt, which is what Deloitte did.

Five months later, on Aug. 6, American Home filed for Chapter 11 bankruptcy-court protection, still brandishing the firm's clean audit-opinion letter.

There's a reason why you don't see auditors pursuing second careers as tarot-card readers. They wouldn't be very good at it. Yet every time an accounting firm renders an opinion on a client's financial statements, the auditing standards say it must evaluate the company's ability to continue as a going concern, and warn the public if it concludes there's ``substantial'' doubt, a term the rules don't define.

The home-mortgage industry's growing casualty list is a reminder: They're not very good at that either.

You almost have to feel sorry for the Deloitte accountants who drew this thankless task. While in hindsight it looks like they made a bad call, they also were in a pickle.

Dreaded Language

Tucked inside American Home's credit-facility agreement was a clause that said the Melville, New York-based company would be in default with lenders if its auditor tagged it with the dreaded going-concern language.

For the accountants, if they thought for even a second about this, it must have felt like staring into a house of mirrors. Had they made what proved to be the right call, they probably would have inflicted a mortal wound on American Home. Then again, looking back, a self-fulfilling prophecy would have spared investors from the company's April 30 public offering of 4 million shares at $23.75 each, the prospectus for which incorporated Deloitte's audit opinion. American Home's shares closed yesterday at 22 cents.

The auditing standards stress that auditors are ``not responsible for predicting future conditions or events,'' and that a company's sudden failure without any going-concern warning ``does not, in itself, indicate inadequate performance by the auditor.''

Auditors' Judgments

Even so, financial statements depend heavily on auditors' judgments about a company's forecasts. Look at almost any balance sheet, and the asset and liability values hinge on the company's ability to remain in business. Those numbers would look far different if the company were preparing for liquidation, with holdings listed at fire-sale prices.

That's why going-concern evaluations by outside auditors are a necessity. Auditors may not be particularly skilled at making them. When they do bark, though, you can bet shareholders will skedaddle, because then it's clear the problems lack plausible deniability.

Back in April 2002, after the dot-com bubble burst, a Bloomberg News study found that, in 54 percent of the largest 673 bankruptcies at public corporations since 1996, the outside auditors provided no going-concern warnings in their annual audit letters during the months preceding the bankruptcies. Smaller companies got bit much more frequently. The 50 largest companies that filed for bankruptcy protection received going- concern cautions only 24 percent of the time.

No Improvement

The auditors at today's troubled mortgage companies are faring about as badly. One instance where the accountants got it right came in March, when New Century Financial Corp. disclosed that KPMG LLP planned to stick it with a going-concern clause, a month before the company filed for Chapter 11. New Century was the exception.

On Aug. 9, HomeBanc Corp., an Atlanta-based mortgage lender, filed for Chapter 11, still sporting a clean opinion from Ernst & Young LLP. Like American Home, HomeBanc, too, would have been in default on its credit facilities if it ever received a going-concern warning from its auditor. The next day, executives at Luminent Mortgage Capital Inc., a San Francisco mortgage investor audited by Deloitte, raised doubts about their company's ability to continue as a going concern, though Deloitte still hasn't withdrawn the clean opinion it issued in March. Deloitte and Ernst declined to comment.

Management Onus

One group of accountants is thinking of ways to keep shareholders better apprised. In Norwalk, Connecticut, the Financial Accounting Standards Board is working on a proposal that for the first time would place the burden of performing going-concern evaluations -- and warning investors -- squarely on companies' management.

Currently, there is no clear requirement to that effect in generally accepted accounting principles. Auditors still would be on the hook, because the auditing standards would remain unchanged. And while executives surely would suffer from bias, and some would be bent on deceit, at least the people with the primary responsibility for making these calls would be the ones who supposedly know their companies best.

Dan Guy, a Santa Fe, New Mexico, author of several auditing textbooks, says the change is long overdue. ``I don't think any company in America, private or public, should have to look to auditing standards to find out what management's responsibility is for disclosure and measurement in financial statements,'' he says.

It's a wonder no one jumped on this idea sooner."

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The Mother Of All Suits - Refco Does It Chicago Style

Refco Litigation Trusts File Lawsuit Against Legal, Accounting and Financial Advisers for Role in the Refco Fraud

"The Refco Litigation Trusts announced today that they have filed a lawsuit in Chicago charging that Refco Inc.'s legal, accounting and financial advisers knowingly assisted corrupt Refco insiders in looting Refco's assets. The lawsuit, filed in the Circuit Court of Cook County, Illinois, names Mayer, Brown, Rowe & Maw LLP ("Mayer Brown"), Grant Thornton LLP ("Grant Thornton"), Ernst & Young LLP ("Ernst & Young"), PricewaterhouseCoopers ("PWC"), Credit Suisse Securities (USA), Banc of America, Deutsche Bank Securities, certain loan participants, and the corrupt Refco insiders as defendants. The lawsuit seeks over $2 billion in damages and penalties for the defendants' role in committing and aiding in the corrupt Refco insiders' fraud and breaches of fiduciary duty."

Not satisfied to just sue those that the Refco bankruptcy examiner suggested, the Refco Litigation Trusts have sued the whole lot of them, including PwC, whose luck has now run out on this one.

Some choice bits:

"Mayer Brown structured and documented fraudulent "round trip" loan transactions at the end of every relevant reporting and auditing period (and the unwinding of those transactions days later) that were "like a street-corner shell game" solely designed to conceal trading losses and inflated expenses;

One of the underwriter defendants, during its purported financial "due diligence," commented internally that it viewed Refco's Chief Financial Officer as a "pathological liar," yet it proceeded with an LBO and an IPO because of the enormous investment banking fees;

Grant Thornton, Mayer Brown and PWC participated in "conscious editing of SEC disclosure documents to conceal" a massive related-party receivable owed to Refco by a company controlled by Refco's insiders;

PWC wrongfully validated deficient internal controls and, with knowledge of the fraudulent round trip loan transactions,participated in the falsification of Refco's registration statements."

The WSJ Law Blog did an interesting job the other day of summarizing the money and time being spent to litigate Refco. In particular, it's interesting T.H. Lee is suing as well as being sued.

"Thomas H. Lee’s suit against a bunch of former Refco executives: In addition to Bennett, the private equity firm named Tone Grant, the former president of Refco, and Santo Maggio, the former CEO of Refco’s securities unit.

Thomas H. Lee’s suit against Mayer Brown: The Beantown buyout shop sued the Chicago law firm over its alleged role in a cover up at firm Refco. Lee, which owned more than half of Refco when it blew up, is represented by Weil Gotshal.

Trustee’s suit against Thomas H. Lee: Yesterday, the trustee for the Refco Litigation Trust sued Lee, saying the firm should have known about the fraud before it sold stock. The trustee of the Refco Litigation Trust is Mark Kirschner, who is represented by a team of lawyers at Milbank Tweed. Kirschner, who who headed up the bankruptcy department at Jones Day for many years before “he finally saw the light and left private legal practice” (his words), told the Times yesterday that he expected to file more lawsuits."

Who says that litigation and courts are a waste of money? Who else could sort out the egos and the hubris associated with such a set of players?

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A Fellow Traveler

Had the pleasure of exchanging emails a little bit ago with Leon Gettler over at Sox First. If you don't have Sox First on your daily feed, you should. I was fortunate enough to receive a link today from Leon related to my Brocade and Backdating post.

Leon: Greetings across the miles to Australia from a traveler, not a tourist, here in Chicago.

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You Talkin' To Me?

Some recent searches that brought readers to this blog...

bdo seidman executive suicide (Someone at Weil Gotshal, the law firm)

although my breathing ceases (Pointed them to the haiku included in my post about PwC's Japan affiliate folding like a lotus flower...)

deloitte layoffs new york 2007 (We know they laid off in Chicago, I guess they let people go in NY too.)

auditor c.v. starr (Lots of info on their demand for AIG to lose PwC, but no info on who their auditor is...)

deloitte layoffs nyc 2007 (Again, but this time it's a proprietary trading firm in Chicago that's asking...)

mass career customization (Anyone still care about this?)

cyberonics and bearingpoint (Someone from Milbank Tweed looking for this. I feel really clever having written about this. Woo hoo.)

problems uk germany audit merger kpmg (Old news, but the KPMG guys in the UK are nervous.)

nina totenberg wait don't tell me patrick fitzgerald (Someone at Dorsey and Whitney in Minneapolis is a PJ Fitzgerald fan, or maybe a Nina Totenberg fan, or maybe an NPR fan...)

audit standard 5 work of others (Still the Number 1 search item. Some poor schmuck at Deloitte is looking for me to tell him what to do. After the SEC, I'm your next best friend.)

mou among homeland security and irs (Didn't know what MOU stood for until now. I learn something new every day in the blogging business.)

big 4 layoffs (I'm number 2 and 3 here...)

cyberonics v. wells fargo (Alliance Capital Management wants to know. Maybe you guys at Milbank Tweed can give them a call...)

suicide by a bdo executive (Someone from the US State Department wants to know, too.)

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Brocade And Backdating - Gatekeepers Fail

Thanks to this site from Russia for this joke....

A politician, a thief and a KPMG manager died and went straight to hell.
Politician said "I miss my country. I want to call my country and see how everybody is doing there." She called and talked for about 5 minutes, and then she asked "Well, devil how much I need to pay for the call????
The devil says "Five million dollars."
The Politician wrote him a cheque and went to sit back on her chair.
The thief was so jealous, he starts screaming, "My turn! I wanna call the my crew members, I want to see how everybody is doing there too."
He called and talked for about 2 minutes, and then he asked "Well, devil, how much do I need to pay for the call????
The devil says "Ten million dollars."
With a smug look on his face, he made a cheque and went to sit back on his chair.
The KPMG manager was even more jealous & starts screaming, "I want to call my office friends, senior managers and partners."
He called the other KPMG employees and he talked for twenty hours about his Audit files and jobs, he asked about new clients, he talked and talked & talked, then he asked "Well, devil how much do I need to pay for the call????
The devil says "Twenty dollars".
The KPMG manager is stunned & says "Twenty dollars??? Only??"
Devil says:
- Calling from Hell to Hell is considered Local Call

Former Brocade CFO faces civil fraud charges
Regulators tie Byrd to backdated stock options scheme
"The Securities and Exchange Commission filed civil fraud charges today against the former chief financial officer of Brocade Communications Systems, saying "he turned a blind eye" to the high-flying company's stock option backdating scheme.

Michael J. Byrd, a 45-year-old Saratoga resident, is the fourth former Brocade executive to face civil charges. Two of them also have been charged with criminal fraud. Former CEO Greg Reyes was convicted last week in the nation's first criminal trial involving backdated options and is awaiting sentencing, while former vice president of human resources Stephanie Jensen is awaiting trial.

"This case confirms the commission's commitment to pursuing not just those who perpetrate financial fraud, but those corporate gatekeepers who allow it to happen," SEC enforcement director Linda Chatman Thomsen said in a press release."

KPMG has been Brocade's auditors for a while, having inherited this account from Arthur Andersen with the 2002 fiscal year. Andersen was the auditor of record for the fiscal year ending October 27, 2001. In February 2002, the proxy recommended reappointment of AA.

"The Board has selected Arthur Andersen LLP, independent auditors, to audit our financial statements for the fiscal year ending October 26, 2002...Arthur Andersen LLP has audited our financial statements annually since October 1997."

On June 18, 2002, Brocade Communications Systems, Inc. dismissed its independent accountants, Arthur Andersen LLP and on June 18, 2002 engaged the services of KPMG LLP as its new independent accountants for its current fiscal year, ending October 26, 2002. KPMG issued its audit report for the year ending October 27, 2002 in a timely manner, even though they had only been appointed in June.

Brocade first disclosed it had found accounting errors in its stock options granting process in January 2005. A few weeks later, their CEO Greg Reyes was asked by Brocade's board to resign, after KPMG would not sign off on the company's financials if he remained CEO, it was learned during the trial.

The SEC now alleges that Byrd - whom prosecutors unexpectedly decided not to call as a witness in the Reyes trial - was aware of Brocade's backdating scheme and helped devise the plan that enabled the San Jose networking storage products company to grant options before employees had started full-time work. In addition, he received backdated options himself, the SEC alleged.

Byrd signed on with Brocade in May 1999, the same month the company went public. Previously, he had been CFO at Maxim Integrated Products, another company tainted by the backdating scandal, and was a CPA and former partner with Ernst & Young.

"In the complaint filed in U.S. District Court in San Francisco, the SEC claims Byrd was aware of numerous examples of option manipulation. Some involved picking dates in hindsight to give recipients a head start to profits. Some of those cases enabled new hires to receive options dated before they started full-time work.
...Byrd himself benefited from 800,000 backdated options purportedly granted at $20.70 in April 2001, the SEC charged. In truth, the company didn't settle on the number of options he should receive until mid-June, a month after he was promoted to president and chief operating officer. At that time Brocade's stock was trading at about $40, giving Byrd an immediate paper profit of about $16 million."

We still haven't had a trial or other investigation that that tells us what role or culpability the audit firms had in the backdating scandal. With the filing of charges against Byrd, we come a little closer. As a CPA and former audit firm partner, Byrd was a classic candidate for these types of CFO positions and profited handsomely from that profile. Having been involved since the IPO, he was the classic "outside" CFO type versus "inside" CFO type. "Outside" CFOs are the kind that understands financing, IPOs and working with analysts and outside investors. They are also, presumably, the kind that understands SEC reporting, GAAP and other requirements of a fast growing public company with lots of market exposure.

As an aside, here's an interesting article in Financial Week, written prior to the verdict, about what the jury in the Greg Reyes trial didn't hear:

"Gesturing from the bench with a dismissive wave of his hand, the (Judge Breyer)concluded: “[What] these transcripts…demonstrate to me is how incomplete and inadequate and less than forthcoming people are during these calls...Why isn’t the government then entitled to show how artificial and how structured and how incomplete these discussions are which go out to the market in terms of information…. But then it becomes quite a different trial.”

That trial, Judge Breyer went on to explain, would become one concerned less with any specific transgressions that might have taken place with the accounting at Brocade under Mr. Reyes’ watch and more to do with the nature of interactions between executives and their boards, between companies and their accounting firms and between managers and Wall Street. In short, a trial about much that is dysfunctional with procedure in public companies.

“It becomes, why did KPMG insist on [Mr. Reyes’ resignation]?” Mr. Breyer continued. “[Whether] the board of directors was browbeaten…whether or not in these investor meetings the company was forthcoming…and how information was disseminated to the public and so forth.”

And that, the judge seemed to suggest, is not a trial within the court’s scope. But it prompts a question: Is such a trial one that corporate America could survive?

In the end, Mr. Breyer accepted a bargain between the legal teams, if only to keep the case moving: No conference call transcript would be shown to the jurors; out also is the government’s e-mail allegedly revealing an embittered Mr. Reyes damning a cowardly board. Jurors will know that Greg Reyes resigned from Brocade, but they won’t know whether it was because he was pumped to move into a new role or because he was forced to concede his post in shame, and by the same directors who then continued to laud him in public after the fact."


When searching for information about how and when KPMG got involved as the auditor, I was not surprised to find that they inherited the client from Andersen. As we have seen with many others, Andersen had a style and that style has inevitably resulted in many of their former clients representing a disproportionate share of the companies that are in the worst trouble now, in my non-scientific observation and very personal opinion.

In fact, I was relieved to see KPMG's involvement starting fairly recently. It seems that they may have looked the other way when accepting this high flying, risky client from Andersen but they put their finger on the issues and stood hard and fast when they did. They led the investigation which resulted in the restatements and Reyes' resignation as CEO.

But KPMG Consulting had been involved with Brocade in the past, while Andersen was the auditor. Here is a whitepaper they co-authored with Brocade in 1999-2000. This was right before KPMG Consulting spun off from KPMG the audit firm and became BearingPoint.

Well, we all know what happened to BearingPoint. I remember during that heady time how KPMG Consulting leadership tried to flash the dollar signs in our eyes at every moment, attempting to attract new staff and retain existing staff with promises of riches from the stock options we would be getting in the IPO. In fact, one of the main arguments for the IPO of the consulting arms of the audit firms at that time was the need to issue stock options and other stock based incentives in order to attract the technology expertise they needed to compete with the SAPs, Oracles, Scients, Viants, RazorFish and Sapients, the dot-com technology startups that were creating billions on paper for their employees.

I think the expression they used was, “to create currency" needed to attract talent and to make acquisitions of promising firms for
the formerly stodgy consulting arms of the private, partnership managed audit firms that were intent on growing and expanding into global powerhouses. Well, you don’t hear much these days about PwC and their "Monday" firm. It was gobbled up by IBM after screwing up the chance to become part of HP. Then there's Capgemini Ernst & Young. In April 2004, they reverted to Capgemini (the current name). In the summer of 2005, due to heavy financial losses, Capgemini sold its North American healthcare consulting practice, including both payer and provider practices, to Accenture but retains its life sciences practice. They're finally starting to revive after a few acquisitions and other strategic moves.

And then, finally, BearingPoint. Well, enough said about them.

There was also Accenture, the early spin-off of Arthur Andersen and probably the only viable independent one of the bunch. But given their pedigree, after all, all these firms were run by former auditors when they first went out on their own, it may be interesting for the SEC to look at stock options backdating at all of the former consulting arms of the Big 5, circa 1999-2003. I wish I would have been granted some of those backdated, already “in the money” options when I was at BearingPoint. If I had, I may not have ever started writing a blog for only the satisfaction of one hand clapping somewhere in Malaysia

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Update - KPMG, Richard Breeden and H&R Block - It Gets Complicated

See this WSJ Summary of the issues here, today, August 18, 2007. Better late than never...

7/29 Update
As I suspected they would, the Justice Department has told H&R Block management to "go pound salt." They should have hired me. I could have told them there was no merit in this complaint before they wasted their money on lawyers. Who are their lawyers anyway... Another example of why Breeden is needed. These guys are wasting their shareholders' money. And, after all, these are the tax guys that didn't handle their own tax issues correctly!

And they've also had the deal to scuttle their sub-prime mortgage business collapse because their credit line expired. Others are also coming due and their credit situation is deteriorating. Remember, cash flow issues are a result, not a cause in and of itself, of other financial issues, primarily lack of confidence by the lenders in a company that keeps getting itself into trouble... PwC decided to get out early for a change. They resigned. How could that have been a "planned transition?". Was KPMG an "auditor in waiting?"

Letter appears to dismiss Block’s concerns about Breeden
Elbow jabbing is escalating in a contest between H&R Block Inc. and dissident shareholder Richard Breeden for three seats on Block’s board of directors.

An investment group led by Breeden, a former Securities and Exchange Commission chairman, released a letter late Thursday from U.S. Attorney Michael Garcia in New York. The letter appeared to dismiss Block’s concerns that Breeden’s election to the Kansas City firm’s board might compromise the ability of Block’s auditor, KMPG LLC, to independently evaluate the company’s finances for shareholders...

The Garcia letter, however, said that as a federal monitor, Breeden reports to the Justice Department, not to KPMG, and that, according to the agreement, he “shall not be treated for any purpose as an officer, agent or affiliate of KPMG.”

By the way, looks like Breeden has carved out a nice little niche, capitalizing on his SEC days, being an investigator and a monitor. And as we've seen with KPMG, he gets to stick around for a while, even after the formal issues are resolved. Later articles told me he'll be in KPMG through 2008. There's money in others' pain.

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7/26
Savvy management at H&R Block are trying to thwart Richard Breeden and his investor group from obtaining seats on their Board by playing the "independence" card. However, they miss the point of his role as a monitor for KPMG in relation to KPMG's deferred prosecution agreement with the SEC on the tax shelter situation. Breeden must be completely independent of KPMG to serve in the Monitor role. In other words, he is about as far away from being an employee of the firm as one of the DOJ guys that prosecuted them.

Nice try H&R Block. However, I would have to agree that it would make for a very uncomfortable situation for Mr. Breeden, especially if he was to serve on H&R Block's Audit Committee, which he may be qualified to do. If I were him, I would opt out of one or the other role. But if the case with KPMG is over, and they received their nolle presequi, then why is Breeden still there?

And it's kind of funny that a tax preparation company would hire as their auditor a firm that has been under a consent decree by the SEC and IRS for violations in their own tax practice...

H&R Block: Breeden's role at KPMG creates conflict

"H&R Block said Thursday that shareholder Richard Breeden's role as a monitor for KPMG LLP creates a conflict that could threaten the company's relationship with the auditor.

H&R Block said nominating Breeden or any of his associates would create "great expense and disruption" because it would force the tax preparer to hire a new independent auditor, according to a filing with the Securities and Exchange Commission.
"There is no conflict. He doesn't work for KPMG and is in no position to direct business toward them," said a source familiar with Breeden's thinking on the matter. Representatives for H&R Block weren't immediately available to comment.
Breeden, an SEC chairman from 1989 to 1993, has urged H&R Block shareholders to nominate himself and two other associates to the tax preparer's board. Through his Greenwich, Conn.-based hedge fund, Breeden beneficially owns 1.86% of H&R Block's shares.
In 2005, Breeden was asked to monitor KPMG after the accounting firm reached a $456 million settlement with the government over its role in devising questionable tax shelters. His role as monitor extends through September 2008.
Breeden's role as monitor would give him far greater influence over KPMG than any other employee, and would destroy KPMG's independence as an auditor if he or his associates were elected to H&R Block's board, H&R Block said, citing SEC rules for auditor independence.

"Among the relationships specifically addressed in the SEC's rules, a partner or professional employee of an audit firm cannot serve on the board of an audit client without destroying the audit firm's independence," H&R Block said in Thursday's SEC filing.

The company wants shareholders to vote to ratify KPMG as its auditor at its annual meeting on Sept. 6.

H&R Block said it acknowledges that KPMG's settlement with the government explains that Breeden isn't an officer, employee or agent of KPMG. However, the company said it believes that "independence turns upon the reality of a relationship rather than its characterization in an agreement, particularly one entered into before Mr. Breeden launched his investment funds or acquired any shares of H&R Block stock."

H&R Block said it has asked the Office of Chief Accountant of the SEC and the U.S. Attorney for the Southern District of New York to consider its concerns about Breeden's relationship with KPMG. H&R Block shares traded Thursday morning at $20.63, down more than 2%."

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Is Breeden Still A Believer?

In addition to Don Nicolaisen, Richard Breeden has been, in the past, an outspoken proponent of major reforms that would affect the accounting profession. (Interestingly, both spent time at Pricewaterhouse/Coopers and Lybrand. Maybe that time provided inspiration and motivation for making things how they should be instead of how they are.....) Some of his suggestions were incorporated into the Sarbanes-Oxley Act of 2002. Some were not.

Here, here Mr. Breeden. Your suggestions are worth repeating.

On February 12, 2002, six months before the passage of SOx and before Arthur Andersen disappeared, he testified before the Senate Banking, Housing and Urban Affairs Committee. This testimony was part of an Oversight Hearing on "Accounting and Investor Protection Issues Raised by Enron and Other Public Companies."

The Honorable Richard C. Breeden, as you may recall was the Chairman of the US Securities and Exchange Commission from 1989 to 1993.

His testimony, entitled, "Responding to Enron – Strengthening Accounting and Disclosure," was wide ranging and is worth a read in light of his recent activities. However, one particular section was of great interest to me.

Enhancing Performance and Accountability of Accounting Firms.

Require Audit Firms to have boards of directors with a majority of outside directors.

"Getting to the heart of these problems involves shifting the balance of priorities inside the auditing firms in the direction of greater concern for getting the numbers right, and for creating healthy governance structures that will open up the highly insular big firms.

One way of shifting internal dynamics in favor of the public trust would be to require that, as a condition of satisfying the "independence" requirements, an auditing firm for a public company must have a board of directors with full power to remove management, to determine compensation, and to set overall policy. At least a majority of the members of such a board should be from outside the firm. As with stock exchanges, there should be a minimum number of "non-industry" directors on each board representing the interests of shareholders and users of the markets. Officers of audit clients should not be eligible to sit on such boards.

For historic, licensing and other reasons, the Big Five operate as limited liability partnerships rather than as corporations. They are by far the largest private business organizations that do not have a real board of directors. Internal governance comes from various committees drawn from within the firm, whose members are elected or chosen by the partners or the CEO. They are generally subordinate to the CEO, not independent of him or her. While it is an axiom of good corporate governance to have a majority (and typically much more than a majority) of independent directors who can among other things hold the CEO accountable for performance of the firm, the large accounting firms may not have ANY independent directors to provide a wider public perspective or to have the power to remove the CEO.

A board composed of independent directors (with similar standards for independence as a corporate director is required to have) would go a long way to bringing a more balanced approach to how these firms manage conflicts between their legitimate profit interests and their public responsibilities. Ultimately the CEO of any Big Five firm should be subject to getting replaced if the board does not have confidence in the firm’s ability to deliver on its professionalism. There should be accountability for performance in audit quality, not just profit per partner, and that accountability at the top would be better exercised by a board of directors rather than the government. When Andersen was agonizing over its doubts regarding Enron’s potential accounting fraud in February of 2001, discussing the issues with a board including outside independent directors could certainly have given management a better perspective on the decision they had to make and its potential impact on investors, retirees, and others.

A good precedent for requiring the Big Five and other auditors of publicly traded firms to create boards of directors can be found in the operation of stock markets themselves. Though stock exchanges have generally been mutually-owned institutions with many similarities to partnerships, these organizations have a board of directors, with a 50/50 balance of inside and outside directors. Independent boards is one way we institutionalize a body within each Exchange that is directly concerned with carrying out the exchange’s responsibilities to the public."

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Big 4 and Mandatory Retirement

ABA To Firms: Retire Your Mandatory-Retirement Policies

"Should law firms have mandatory-retirement policies for their lawyers? The American Bar Association is saying no. Here’s the story from the National Law Journal’s Leigh Jones. According to a 2005 Altman Weil study, reports the NLJ, some 57 percent of law firms with more than 100 lawyers have them policies mandating that their lawyers step down upon reaching a certain age, typically between 65 and 75 years old. In a vote on Aug. 13 by the ABA’s House of Delegates at its annual meeting in San Francisco, the organization took the official position of urging law firms to rethink their policies."

In many of the largest audit firms, the mandatory retirement age is 60. If you don;t make partner by 50 or so, it's not worth it to you or the firm, given the amount of time for either to earn back their investment. Why so young? Because the recruiting model is still, "hire them right out of school and keep them for the duration or until they are no longer producing revenue," otherwise known as plain old fashioned feudalism?

Why no push for a change from the AICPA?

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