The developing issues in India have been covered by Going Concern on a fairly regular basis, so I suppose I should take a crack at the subject as well.
It can be very easy scroll past the articles on India, but I advise you not to; after all, as one of the BRIC countries (do your homework), there is an absolute necessity for the Big 4 to position their resources here. And no, I’m not referring to outsourcing.
Based on February research, the Gold Men are bold to state the following:
While it’s clear that BRICs nations tightened their financial conditions when the financial crisis hit at the end of 2008, they rapidly eased back afterwards. Chinese and Indian financial conditions have eased substantially post-crisis, they’re now looser than pre-crisis even. Brazilian conditions also remain very stimulative compared to its past decade. Only Russia looks tight and unstimulative historically.
Sounds like a cash cow, doesn’t it? The BRIC development has long been looked at as the next fat cow for accounting firms to feed off of; closing the gap between the SOX hey days and the
inevitable eventual IFRS transition. A fundamental issue is how the firms chase after business in these emerging markets. Push too hard and get burned. Tip toe through the daises and be passed by your three bullish cousins. Either way, on the table at all times is the branding image of each firm.
No one wants a Satyam situation on their hands, because even though no one knows what Satyam actually does, PwC’s global image is at stake because of this situation. Think about ripple effects. The potential client that is ignorant of the situation and whose thought process is “I think PwC is in some kind of trouble in India” is a more volatile problem than a client that, you know, reads the paper every day. Protecting the welfare of client relationships, but seeds and established, is absolute priority in situations like this.
With the exception of those few public sponsorships, the Big 4 don’t spend much time in the presses. And you know what? The big wigs like it that way. After all, we’re all accountants, forced to work in broom closets and wet basements for long hours and GREAT financial gain.
So the quieter the better, because we all know how it turned out for the last one to steal the spotlight.
There’s a bit of a tiff going on over at my former place of employment as a result of the cover story in the latest issue of CFO Magazine on the recent fall in auditor’s fees.
Some critics seem to fear that the phenomenon will be encouraged by a new benchmarking tool the website unveiled on April 1.
For a fee of $1,200, the tool allows companies to compare the fees that their peers pay for auditors. The process should be both quicker and more comprehensive than the requests for proposals now put out by many companies trying to figure out what they should be paying.
Accounting mavens David Albrecht and Lynn Turner, however, seem to worry that such an exercise will lead to the further commoditization of audits, and so to lower quality financial reporting, even though there’s no evidence the increased fees we saw in the wake of the Sarbanes Oxley Act did anything to improve its quality. Lehman Brothers, anyone?
Yet after the article appeared, Turner sent around comments on his list serve saying it contained several “factual inaccuracies” and that “a firm cannot do the same amount of work with these lower fees without seeing a huge reduction in profits.”
One problem here, it seems to me, is that we’re talking about an oligopoly, which invariably skews the normal effects of supply and demand. Albrecht concedes that the industry is an oligopoly but doesn’t make a cogent point about the significance of that. And he misses the other complication, which is that SarBox not only required auditors to review a company’s internal financial controls as well as its financial results, but also prevented auditors from offering audits as loss leaders for their more profitable consulting services. Now auditors can’t offer both services to the same clients. So audits have to stand on their own two feet.
Turner gets this point, though he confuses the chronology of the regulatory events involved. And he seems to suggest the article is flawed in the conclusion it draws about it, without saying how.
Here’s the point. If, in fact, the extra work SarBox required inflated auditors’ profits, why shouldn’t CFOs be able to make sure they’re getting what they pay for?
And the apparent assumption that benchmarking will inevitably lead companies to push for lower fees seems a bit shaky to me. As CFO.com’s editorial director Tim Reason points out, the process may instead merely keep auditors on their toes. Are Albrecht and Turner arguing that opacity is necessary for the public good, so auditors can pad their fees with impunity? Sorry, but that just doesn’t compute.
In an email to me this morning, Tim wrote: “We think finance executives and audit committees will benefit from having an independent, trusted editorial source provide them with a quick way to benchmark their fees-and make sure they are neither too high nor too low.”
Too low? Sure. You get what you pay for.
Tim also points out that there are no advertisers or sponsors for the tool. “It is a pure editorial offering being made directly to our readers, giving them information they’ve been asking us for years.”
Now there’s a radical idea.
• ‘Big four audit firms bending laws in India’ [Times of India]
A committee of the Institute of Chartered Accountants in India that is investigating the Satyam fraud is claiming that the Big 4 is “circumventing laws while providing auditing services in the country.” According to the Times of India, the committee has claimed that the firms have been granted permission to provide consulting services but not “taxation services, auditing, accounting and book keeping services and legal services.” The firms are able to provide these services through affiliate firms like Price Waterhouse Bangalore vis-à-vis Lovelock & Lewes who were responsible for the Satyam audit.
The committee states that “Indian firms and [multi-national accounting firms] are defacto the same entities providing the assurance, management and related services and as such their operations are designed to circumvent the provisions of the Chartered Accountants Act, 1949,” and that information sought from some local firms has not been provided to determine if they have partnered with the Big 4.
• Debunking the FIN 48 Conspiracy Theory [CFO Blog]
When the IRS proposed its latest rule for disclosing uncertain tax provisions it debunked a theory concocted by some that the FASB was in cahoots with the Service to provide treasure maps for companies that take aggressive tax positions. It was thought that when the FASB was developing FIN 48 (aka Topic 740) in 2006 that they were siding with the IRS in requesting companies to report specific information about those positions.
Not the most interesting conspiracy theory we’ve ever heard but a conspiracy theory nonetheless. Anyhoo, FIN 48 requires less detail about the uncertain positions than the new IRS proposal, thus, debunking the conspiracy, at least in former FASB member Edward Trott, “I think FIN 48 accomplished exactly what was intended…The IRS’s proposed rule makes it clear that [FASB] was able to provide information to investors without providing a gold mine of information to the IRS.” You can go back to your illuminati theories now.
• More Americans Give Up Citizenship As IRS Gets Aggressive Overseas [Dow Jones via TaxProf Blog]
Just over 500 people renounced their citizenship or permanent status in the fourth quarter of 2009. The report, citing public records, states the figure is more than all of 2007 and double of 2008. Mostly people are creeped out by future tax increases and more regulation, including the requirements to report details of foreign bank accounts.
While that does drive some people out of the US of A, the IRS claims that there has been a push to get some out who have already surrendered their passports, “The IRS says some of the swelling of numbers of expatriations towards the end of 2009 occurred because the agency made a push to notify people that had already surrendered their passport, but had not completed the process by submitting the IRS form. Until that form is received by the IRS, these people are still subject to U.S. tax.” Or in other words, “GTFO and stay out.”
• The healthcare party is over – now comes the (accounting) hangover [FT Alphaville]
Now that healthcare reform is behind us, the matter of sorting out the impact on corporations now falls to the accounting professionals in those companies as the first quarter winds down this week.
FT Alphaville notes that AT&T, for one, has already filed an 8-K that states that it will “take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change.” The change that the company is referring to is the “Medicare Part D subsidy” which, under the new law, is no longer eligible for a write-off against a company’s taxes. The subsidy is given to companies to help to pay prescription drug benefits to its employees.
FTA cites a report by Credit Suisse that shows many companies’ (including Goodyear Tire, International Paper and The New York Times) first quarter earnings will be impacted significantly by new healthcare legislation. And it also appears that it will cause companies to take a second look at the benefits they currently provide to employees, as Ma Bell stated in its filing that it “will be evaluating prospective changes to the active and retiree health care benefits offered by the company,” as a result of the legislation.
• Why solos and small firms shouldn’t “partner” with larger CPA firms on projects [Fraud Files Blog]
Tracy Coenen recently had a large firm approach her to see if she’d be interested in helping them out with some “Fraud Risk Assessment services.”
The larger firm asked her if she would be interested in “a partner/subconsultant” arrangement. Tracy explains why this isn’t a good situation for solo practitioners like herself, “[T]he consulting firm doesn’t have the know-how necessary to provide their client with the services they need. But they’re not about to let something silly like competence stand in the way of collecting fees! They will find a way to do it.”
Tracy says that the larger firm will ask you to discount your billing rate, train their staff, and ultimately, give them the secrets to your practice, “Don’t lose money by discounting rates, training someone else’s staff for those discounted rates, and creating a competitor for yourself who uses your proprietary methodology.”
• U.K. Accounting Suits Reached 5-Year High Last Year, Study Says [Bloomberg BusinessWeek]
The number of lawsuits filed in the UK against accounting firms in the past year is greater than the last five years combined according to Bloomberg. The thirteen suits filed in 2009 is more triple than the four suits filed in the previous five years. Although the number of suits is considerably smaller than the 61 suits filed after the collapse of Enron, et al. in the 2002-2003 time period, Jane Howard, a partner at Reynolds Porter Chamberlain LLP, is quoted that it’s not clear whether things are just getting started, “What is still hard to tell is whether this sudden rise in claims will subside quickly or whether accountants will face a higher number of claims over the coming years.”
Plenty of lessons came out of the financial crisis. For some it was that Big 4 auditors are irrelevant. For others it was that we need one set of high quality accounting standards ASAP. Aaaannnd for others, it was that the SEC needs to get better at pretty much everything.
For CFOs, it appears that at least some of them learned that miserable employees are a drag. Robert Half Management Resources surveyed 1,400 CFOs and 27% of them said “they learned to place greater focus on maintaining employee morale.”
It’s likely that this isn’t a lesson learned by just CFOs. Plenty of CPA firms have probably realized that a bunch of morose auditors and tax pros hanging around doesn’t make for a happy shop and are looking to improve their cheerleading skills going forward. KPMG has already brought back the Standing O, PwC, Ernst & Young, and Grant Thornton have all guaranteed merit increases for this year so there are signs that your happiness is no longer an afterthought.
CFOs Advise Keeping Employees Happy [Web CPA]
For some time now, Caleb has been touching on the upcoming/ongoing/always-occurring exodus from Big 4 into the private sector. The obvious reasons for the change from public to private are obvious, but here’s a few for kicks:
• Bigger pay day (and potential growth)
• CPA requirements completed
• Actual work/life balance