• Is Deloitte The Perfect Firm?

    By • Aug 25th, 2008 • Category: Pure Content


    You’re reading that headline and, probably, scratching your head.

    Am I in a kind of meatball delirium, still intoxicated by the wonderful summer Chicago weekend spent strolling the festas and markets, eating, drinking, and listening to music?
    After all, I have written critical posts about Deloitte quite a few times.  One week, I had three in a row, here, here, and here.
    What gives?
    Well, email like the one in my earlier post today force me to reminisce about the good old days.  I  joined KPMG Consulting in the golden age of consulting for the Big 6.  In 1993, the firms were wild about the idea of building their consulting practices.  Andersen was ahead of this curve a little more than the others, but the rest were just starting to realize that they could compete with Booz Allen, Bain, and McKinsey in strategy. They could also build up huge systems integration practices to meet the needs of the switch to “client server” computing from mainframe and later to service the ERP boom.
    Those who were born in 1984, instead of college graduates in 1984 like me, please go here for a discussion of the commoditization of audit and the role of consulting for the firms from the early 90’s until 2002.  In 2002, Sarbanes-Oxley became law and all the remaining large firms, except Deloitte, sold off their consulting businesses to focus on audit and minimize the danger of independence violations.
    Given the desire of the Big 4 to again rebuild their consulting arms, I reexamined the case of Deloitte.  I have written before about the challenges that even Deloitte has in this environment.  As an audit firm, the constraints, regulations, and requirements of the new “outside” regulators, the PCAOB, have to take precedence.  Interestingly, even though Deloitte has a consulting arm and an audit arm, they are not the ones struggling to comply with the independence rules.  They have stayed out of trouble in that regard. That we know of…  It’s the others, who still don’t understand or care about independence, regardless of their past, that are still getting nailed for signing deals that compromise the objectivity and integrity of their audit opinions.
    And we’ll sit and watch the Big 4 stretch even further back into consulting and systems integration services?  Fortunately for the sake of shareholders, there’s not a chance the remaining Big 4 will ever get back any of the technology professionals they lost when they sold their consulting businesses.  Once burned…
    By looking at the current audit firms, remnants of the Big 4 behemoth firms of the 90’s, we can see the struggle the systems integrators and strategy firms are facing when trying to address the important issues of controls, GAAP accounting, IFRS, XBRL and accounting standards compliance with no audit practice.  It’s hard enough for the Big 4 to do that and they are in that business.
    Millions, perhaps billions, are spent worldwide on internal research, training, and tools and template development so that audits reflect the latest thinking and auditors know how to adapt to new requirements.  And they still miss the boat.
    We now have the specialist firms, focused only on advising on appropriate accounting treatment or risk management and controls without the burden of actually having to tie responsibility for their opinions to an audit report.  They invest time and money because they focus on these issues, but their resources pale in comparison to the Big 4 in terms of access, depth and breadth.  It takes a village, rather a whole global community, in reality, to keep up.  It’s one of the reasons I’ve said that the next tier don’t have a chance at catching up. Not enough critical mass to ever be good enough to audit the largest companies.
    So does that make a firm like Deloitte an ideal firm?  They have the combination of audit and technology/systems integration practices, they are global and big enough, they seem to have the balance to stay out of trouble and the savvy to court the right folks to keep the flow of business.
    Unfortunately, it seems they are as vulnerable to the audit-induced myopia, bad planning, and old fashioned approaches to a downturn as the rest of the Big 4.
    Once an audit firm, always and first an audit firm.
    I was doing a little research over the weekend, just the Saturday searches, on keywords that were bringing folks to this blog.  What I saw in the searches in just one day…
    deloitte is firing people auditors blog
    deloitte laid off
    deloitte lay off
    deloitte lay offs
    deloitte layoffs
    deloitte layoffs san francisco
    deloitte rif
    deloitte severance package
    deloitte starting salary low

    …confirmed what I heard last week…

    …and foretold what I would hear yesterday:
    From a reader:
    D&T is processing a downturn in audit personnel starting Monday.

    This downturn impacts all levels; nationwide maybe the number is about 800 people. The cut was made based on performance ratings, skill sets and ability to deploy.

    The reason of course is that the projected business does not support the existing headcount. In reality, we have been long on head count for a number of months, but had hoped that we could work out way out through revenue growth and expense reductions. All the low-hanging fruit was cut long-ago, and frankly there is no revenue growth for audit work. This will be a tough year.

    (fm note: I heard from another source last week that Deloitte audit is projected to have less than 2% growth this year.  So much for all the hoopla about record years and high payouts for partners based on last year.  That’s what you get when you have non-GAAP, partnership style accounting. )

    The people that are impacted will be notified over the next week, starting on Monday. I don’t have info on the various packages that will be offered, but in my experience the firm has been humane. Counseling and out-placement services will be offered.

    The real question of course is the partner headcount. This is the time of year that the newly promoted partners begin. I think we have about 70 new ones starting. Some partners retired at the end of the FY, which is May 31. In any event, I’m very sure that we have too many partners in the audit function, so the real fun has not yet begun. The last time there was a partner bloodbath was in 1990, right after the merger. If the revenue line does not grow, partners will be executed in due time.

    The rest of the firm (tax and consulting) seems to be very healthy. As you know, we have a single profit pool in the US, so if the audit practice continues to drag, the other groups will force the issue of audit partner terminations.

    I’ve heard the other Firms have similar issues. In the marketplace, we have seen desperation in terms of pricing for new work. I believe that PwC even offered to do an audit for free (they were the incumbent auditor). So right now, the market is very very Darwinian…


    It’s a very interesting development. Especially given another piece of internal documentation from a Deloitte professional outside the US that says that they expect savings in time and money from XBRL during the audit to be significant.
    Entitled: The Business Case for XBRL, this internal report estimates an 86% reduction in time for financial reports to be prepared for review by a partner under XBRL which leads to an overall reduction in engagement time of 54% per their calculations.
    That, to me, is really big.  All the while, the consulting side of the firms can earn revenue helping their non-audit clients convert to XBRL and IFRS and transition to IDEAS vs. Edgar for SEC filing.



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    12 Responses »

    1. What would it mean if Deloitte is merging their Audit and ERS group. This group is now known as AERS. All future recruiting will be for AERS, no more seperation. New hires will start doing 2 year rotations between what used to be risk consulting, and audit. Their fee structure is now the same and their is no more 6k differential in starting pay. Los Angeles just gave their intern group offers, ERS and Audit both recieved 50k.

      Why would they merge this group besides downturns in IA co-sourcing, AS-5, uncertainty in future Sox work needed by non accerlerated filers, etc.

      I am a fellow intern from another company wondering what this move might meen.

    2. Deloitte is hardly the perfect firm. Tax has started the “counseling out” process and more cuts will likely happen after 9/15 which is a big corporate tax filing deadline. There is a shortage of tax professionals in the market place. When the dust settles, the good ones will leave for better in house jobs, and Deloitte’s tax group will be much leaner. Watch for horror stories about partners managing project staffing to make “high performers” and “low performers” and the separation of the “low performers.” Discrimination law suits here we come …

    3. Just curious…where did you get that quote highlighted in blue (http://1.bp.blogspot.com/_AOMAlRNehzE/SLLclDlwWfI/AAAAAAAAA8c/w3AXoGdJUrU/s1600-h/Picture+5.png)? I think that’s a picture of me (and I’m a former DT’er) or my long lost twin! It’s really bizare!

    4. @anonymous The picture from Twitter is me. For sure. The comments come from a source I met with last week. If you’re my long lost twin, I’d like to know. Drop me an email at fmckenna@mckenapartners.com

    5. @anonymous The picture from Twitter is me. For sure. The comments come from a source I met with last week. If you’re my long lost twin, I’d like to know. Drop me an email at fmckenna@mckenapartners.com

    6. Deloitte is full of shit. They are racist company and where they say they pride themselves in diversity is a lie i have never heard more bull in my life. Experiencing first hand being told that i had to change my hair because i am not going to work for MTV. What gives people the right to talk like this and get away with it. Dont work there Run for the border if you can. Even people who speak several languages are tole they are in america now and should speak english. Diversity my ass it is all a front.

    7. @anonymous

      That was a useless post that isn’t relevant to this blog. Also, you may have more credibility if you would use punctuation.

    8. Meanwhile, the Treasury Department announced Tuesday that it had selected two major accounting firms to help manage the government's $700 billion rescue program for the financial system.

      The department selected Pricewaterhouse Coopers to be an auditor for the program that will purchase troubled assets from financial institutions while Ernst & Young was chose to provide general accounting support.

      THIS IS A SHAME AS THESE FIRMS GOT US IN THE MESS WITH FANNIE MAE AND FREDDIE MAC TO BEGIN WITH AND NOW ARE BEING REWARDED WITH HUGE CONTRACTS TO FIX THE MESS! THEY WILL CONTINUE TO FLY-IN NON-US CITIZENS TO DO THE WORK AT OUR EXPENSE AS NOTHING IN OUR ILL CONCEIVED GOV'T CONTRACTS PREVENTS THEM FROM DOING SO, WHILE OTHER AMERICANS ARE WORKING HARD AND BARELY MAKING ENDS MEET! I AM A FORMER PW AND EY ALUMNI AND THIS EVEN MAKES ME SICK TO SEE A CONTRACT AWARDED THIS UNFAIRLY!

    9. Hey Francine

      I am the guy who did the xbrl project that got the 86% reduction in processing time. Interesting to know that this came from the Australian Deloitte practice via our innovation program.

      If you want to see other cool stuff check out http://www.leadershipacademy.com.au

      Good news here (in Oz) is that we grew by 25% last year and will do double digits again, we are happy and engaged

      As for our commitment to diversity we had a Kenyan, a Vietnamese guy and an Aussie on the team so it seems to be working here.

      Anyway this is an international view from a Deloitte guy on the other side of the world, suffice to say Deloitte is a pretty broad church and at the end of the day I think we all strive to make the firm a great place to work but things are always going to get ugly if there is a financial meltdown

    10. […] Deloitte has had some success at staying out of trouble, other than the kind you can get into for project failure, while hanging on to a lucrative consulting practice that includes heavy systems implementation and integration services.  The other three firms later reexamined their precipitous decisions and PwC, in particular, began devising a strategy to get back in. Only one problem.  They had a five year non-compete with IBM that prohibited their involvement with anything anywhere near approaching systems integration work until the summer of 2007.   […]

    11. Interesting to see these posts. I am a big fan follower of you and like the different perspectives that you throw in….never thought journalism can be fun :) back to the point, I think I would do more research into these lay-offs. Do you know that Deloitte US now has a full fledged audit outsourcing location in Hyderabad – India where it employs more than 4000 employees to do audit,consulting,tax and SAP work ? They have annual targets to move work from US to India…60% of the Investment management audit is now done from India.

      The strategy is to increase the offshore hrs as the rate is only $27 per hr as compared to average $300 something in US. If you look at volume and sustainability, then you are looking at Seniors and Managers job that are at stake..

      have a good evening and love reading your posts

      rOHB

    12. […] They are also profit-making private partnerships, with the business purpose of creating wealth for their owners, the partners of the firms. How much longer can we tolerate this inherent conflict of interest, especially given the fact that it is serving no one well except the owners of the firms?  That is, as long as the firms don’t fail, like Arthur Andersen, where partner owners who had no real control over the destiny of their firm were wiped out. If another audit firm fails, and it will, the current firms’ partners, the majority of whom also have no real control over their investment in equity in the firms,  lose their equity.  In the meantime, given the desire of the firms to maintain high levels of profits for their partners, some of them may lose their jobs, along with their staff. […]

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