Editor’s Note: Francine McKenna is the founder and Managing Editor of Re: The Auditors. She has more than 20 years experience in leadership positions in the Big 4 and in the professional services and consulting industry both in the U.S. and abroad. She has covered the Big 4 at Re: The Auditors for the past three years and has become a leading voice on the current state of the profession and the industry in the blogosphere. She has been quoted in several publications including the the Wall St. Journal, the Financial Times, and the Chicago Tribune. You can follow her on Twitter @retheauditors.
Call me incredulous, but the Big 4’s public relations professionals may be on to something. Set the bar low, tell us what the Big 4 can’t do, won’t do, want to make you believe they have no responsibility to do, and maybe everyone will leave them alone. Then they can go back to making money the old fashioned way – via a government-sanctioned oligopoly.
It’s a trend that started with the “We were duped” defense, used most recently by PwC in its initial reaction to the Satyam scandal. PwC then piled on to the pity party when, in a rambling, incoherent interview with an Indian journalist a couple of weeks ago, Global Chairman Dennis Nally stated,
Read the rest, after the jump
“Many times there is an expectation from the investor community that the auditor is in fact fully responsible for the detection of fraud. Now that is not our job, today.”
Gee, Dennis…Have your guys ever heard of SAS 99?
SAS no. 99 reminds auditors they need to overcome some natural tendencies–such as overreliance on client representations–and biases and approach the audit with a skeptical attitude and questioning mind. Also essential: The auditor must set aside past relationships and not assume that all clients are honest.
Similarly, the soon-to-be retired CEO of Deloitte Bill Parrett told a reporter at the Globe and Mail last April,
…there are limits to what an auditor can detect – and those limits often fall far short of what investors expect from the process. “We’ve always had this expectation gap between what the auditor really can do and what the investing public wants the auditor to do, or wants the audit to represent
And the reporter lapped it up with no critique.
Deloitte is defending itself against several lawsuits, including their own version of the global network challenge related to the Parmalat fraud, as well as experiencing declining revenues and loss of clients for the first time in several years. Just last week, United Airlines dumped Deloitte as the auditor for E&Y. Of the Big 4, Deloitte lost the most business from the “crisis.” Several of their audit clients and consulting clients failed or were acquired. They got screwed both ways.
Deloitte has terminated thousands during the last eighteen months, including firing or demoting partners. I’ve gotten thousands of comments criticizing their miserable handling of staffing issues.
The lawsuits and the scandals keep on coming. Just when PwC thinks they’ve got a handle on Satyam, the Huron debacle hits.
How you gonna ’splain that, Lucy?
The most disingenuous, double-talking part of the Globe and Mail interview is when Parrett said, “I don’t think there was an economic windfall for the firms…On balance, I wish we could all have forgotten about the last five years because it’s been negative for everybody.”
Really? Record revenues and record partner payouts since 2002 as a result of Sarbanes-Oxley have been a negative?
Well…Fasten your seat belts Big 4. There’s a bumpy ride in store for you in the next five years. If you last that long.
Francine, are you really an auditor? Seriously, have you read SAS 99? Auditors don’t need to be fully responsible for detecting fraud. They need to consider the possibility of fraud.
Do you know how expensive audits would be if auditors never failed? If the auditor had to detect every material fraud at every audit client, the audit bill would make investor’s eyes bulge. There would be no incentive for companies ever to go public. Established public companies would try to go private.
Your lack of knowledge of how capital markets work is shocking. It’s an almost juvenile understanding.
Auditors provide reasonable assurance, not absolute assurance.
However, there is definitely a gap in what the public perceives as the auditors’ job versus the service the auditors actually provide.
@1 Guest
Yes, I’ve read SAS 99 and, yes, I realize external auditors are not responsible for “fully” detecting fraud. But the abdication of responsibility for detecting any fraud, a little fraud, a big fraud once and a while, should be embarrassing. The Indian journalist asked Nally, “But it must make the auditor uncomfortable to express an unqualified confidence in a financial statement of a company and see that company’s promoter confess within months to an accounting jugglery… ” Nally was insulted. That’s the problem. To avoid litigation they’re refusing to acknowledge any responsibility at all and act all smug and pissed when you call them on it.
As far as my “juvenile” understanding of how capital markets work, well, I will take that criticism with a grain of salt. My credentials are public. Yours are not. Less companies going public, such as Huron, might be a better thing.
“To avoid litigation they’re refusing to acknowledge any responsibility at all and act all smug and pissed when you call them on it.”
Are they supposed to admit full fault and be bankrupted by the plaintiff’s bar? That would be just dumb. The dumbest. You need a better argument than that Francine. I know you can craft one.
The ultimate solution is to send the fraudsters to Federal-Pound-Me-In-The-Ass prison, not Club Fed.
See if any of those slimeballs want to take that chance if they are going to be someone’s bitch.
I watched Prison Break; I know how things work there.
@Peter Frampton
Yeah, those PW auditors in India are getting a taste of close confinement.
@guest 4
Don’t obfuscate in public statements and with the media. Stand up like a man and fight the issue in court. If they had a few wins and precedent in their pocket, instead of settling like scared ninnies every time, maybe the big bad old plaintiff’s bar would leave them alone. In the meantime, plaintiff’s are going to keep bringing the suits because it’s so easy to spot the double talk. Even the judges are getting sick of letting them off the hook. Better do it quick. Stoneridge loophole be closed soon.
“…a bill introduced by Senator Arlen Specter from Pennsylvania that, if passed, would reverse a disastrous series of Supreme Court decisions that prevented many victims of fraud from filing lawsuits against third-party participants. The concept of Senator Specter’s legislation is straight-forward: help someone steal money and you are also held accountable.”http://www.zamansky.com/blog/2009/08/a-“game-changer”-for-investors-in-washington.html
hahaha oh franny fran fran, your are in for an amazing asspounding on this site
you know its bad when people insult you on this jv site without any references to DB
this is gonna be great…who’s got the popcorn?
FM:
The bill was merely introduced…that doesn’t mean squat. It may not even get out of committee.
Just like you thought Banco Espirito was the end for BDO yet BDO Int’l was not pierced or so the jury didn’t see it that way yet you thought it was open and shut. Oh how the law is grand, eh Francine. Stop betting everything is a sure thing and that all these things are self-fulfilling prophecies for you…it is not healthy ya know.
FM:
Why would the Big 4 take these matters through trial? They have good lawyers who advise that settlement is the wiser and probably cheaper course. Cost/Benefit Analysis. This is not Vegas and craps table where a firm will risk the livelihood of 30K+ people’s jobs on litigation.
With the settlements the Big 4 pay it is not as if they get off “scot free” high costs are still incurred and it shapes risk management but I know you’ll keep yelling about it until you are blue in the face and that is not for nothing as it provides healthy debate and skepticism that is needed. Don’t want to discourage you.
Let’s see what these guys said and let’s see if it’s true or not.
“Many times there is an expectation from the investor community that the auditor is in fact fully responsible for the detection of fraud. Now that is not our job, today.”
True, that statement is entirely true. But FM is criticizing them for saying something that is true. How is SAS 99 relevant when SAS 99 doesn’t say the auditor is fully responsible for detecting fraud? FM, your logic is off the f’ing charts.
“…there are limits to what an auditor can detect – and those limits often fall far short of what investors expect from the process. “We’ve always had this expectation gap between what the auditor really can do and what the investing public wants the auditor to do, or wants the audit to represent”
Again, the statement is true. What the average investor thinks and what an auditor does are two different things. The average investor doesn’t read the audit opinion. It’s “reasonable assurance” not “absolute assurance”. However, whenever there is an audit failure, the audit firm gets sued, every damn time. It doesn’t matter if the auditors were acting prudently or not, they get sued.
FM, I bet an accounting student knows more about accounting than you. I don’t need to flash any credentials, even though I have a bunch.
-Guest 1
OK…so namecalling and credential questioning aside…I think there are elements of things that probably need to be explored. Being an auditor at heart, I have to say that the overall posting struck a negative chord with me..even if I can understand some of the frustration that is being vetted. True, there is a disconnect between stakeholder expectations and the overall mission of the external auditing community. This is an education issue. And True, an auditors attestation requirement is for reasonable assurance rather than absolute assurance. One would like to think that large material fraud would be exposed through the top-down risk based financial audit process…and even I would like to believe that this would be the case…but this runs contrary to the very tenets of fraud…that is is by its very nature usually hidden proactively by the perpetrator.
So much of the quality and depth of an audit is attributable to the audit team and partners overseeing the audit. And each team/partner has its own set of influences, risk tolerances, paradymes, etc that will inherently conflict with those of any given individual or organization reviewing such work.
To blame entire organizations for the oversight of several, who, arguably, may very well have been acting with professional skeptism in the execution of their duties, seems judgmental.
Perhaps both parties of this post (commenters and writers) needs to hedge their bets a little to account for the unknown specifics of each accounting case referenced. There is so much I could say on this topic…but I think I’ll leave it at that. Contentious but interesting opinions..all the way around.
Robert
AccountingNation.com
“Well…Fasten your seat belts Big 4. There’s a bumpy ride in store for you in the next five years. If you last that long”
you have got to be fucking kidding me.
Guest, why do you have to respond with that kind of attitude? It doesn’t make your arguments stronger; rather the opposite.