Round and Round She Goes… Where She Stops Nobody Knows

By • Jan 28th, 2009 • Category: Pure Content, The Case Against The Auditors

It wasn’t so long ago that, instead of predicting PwC’s imminent demise due to Satyam, Dennis Howlett was questioning Ernst & Young as a going concern:  

“Given all of the above, I can see lawyers going after EY globally. You participate in a single pool – that means everyone gets hammered when the lawsuits start flying. I hate to say it but when Francine predicted that one of the Big 4 might collapse it seemed plausible but deeply worrying. At the time, Francine and I discussed this issue in considerable depth, concluding that it would take a catastrophic event to bring another of the Big 4 down. In August, James Peterson declared in reference to the ostrich posturing among the Big 4 that:     

‘It will take courage beyond that shown so far, for a Big Four chief executive to inform his partners that their business model is broken, and requires replacement for the sake of future survival. If not, hindsight will charge the profession’s current leaders, whose state of public denial still avoids that difficult step, with a dereliction of their stewardship obligations to their younger generation. Because nobody else is going to rise to the occasion, the question is whether it matters enough today that they will.’ “

 

 

 

 


Well, since Dennis wrote this in September of last year, so much has happened and, then again, so little has changed. From one day to the next, I could be sounding a death knell for any of the Big 4 firms and easily any one in the next tier.  There’s that much going on that threatens their viability.
Just last Thursday, Ernst & Young had a triple whammy of events, and that’s only in the US. 
It demonstrates how preoccupied the firms and their lawyers have to be with everything but doing the audit work and doing it well. 


Last Thursday while I was in New York for a Huffington Post event at the 92nd Street Y, I heard reports that possibly sixty professionals, mostly at the staff and senior staff level, were cut from EY’s NYC Tax practice.  A combination of losing a big client to in sourcing (Viacom), the overall economic outlook, and the oh-so-typical challenges of having the right staff on the right projects at the right time in the right location, caused leadership to throw up their hands and reach for the easy button.  

What’s especially galling is that the professional I spoke to said he has recently participated in recruiting events for students joining full time in the fall and for summer interns. He thought the cuts were made strictly on the basis of utilization/chargeability. In fact, rumor was that one of the partners had tried to find work within the firm for the less utilized staff  by offering to sell them to the Transaction Advisory Services or the audit team for $120 per hour, a discount. It’s endearing to hear intelligent professionals refer to such a mucked-up way of managing a firm and allocating highly educated professionals as a good faith attempt to do right by them.

He had recently reviewed the lists and saw more than fifty people with lower chargeability than his and thought he was safe.  They can’t cut 50 people, can they?  Instead, there were professionals hoarding billable work to protect themselves, maintaining utilization over 100%, while others sat on the bench or were underutilized.    

I know what you’re going to say – the ones cut must not have been that good.  But how can someone who just joined the firm a year or two ago be “not that good”? How can there be such a wide range of skills and abilities in a group that were all recruited from the same schools, with the same high grades and well-rounded profile?  I don’t buy it.  I think that it’s another example of the clubby, cliquey, favorites-based way of managing where an inefficient process is driven by lower level staff and their personal preferences or partners and their biases.     

Sixty professionals in this location, in this practice, is estimated to be about 20% of the first three levels of staff in the practice. The irony is that instead of using the leverage model and cutting a few higher paid folks, they’re cutting all the workers, albeit highly educated workers, some with law degrees and Masters in Taxation. These are the staff that work 12 hour days,  seven days a week during busy season, with no overtime pay.  The work will be spread amongst more senior team members, at higher standard rates than they can probably charge the clients.  In turn, when these more senior professionals do the work, who will independently quality review the work and provide supervision?
In other news on Thursday, Ernst and Young was also watching, I’m sure, while one of the defendants in their very own tax shelter case plead guilty. Although the four former EY partners charged have not yet been tried, a guilty plea by a former investment advisor who helped market the tax shelters is certainly a damaging development.
And in a win of sorts for now for EY, their client Textron won a ruling that allows them to withhold their tax accrual workpapers from the IRS. The ruling is important because it speaks to the protection of attorney-client privilege when the work product in question has been shown to a company’s external auditors. From the blog, ataxingmatter, a short explanation of why the court’s decision was wrong:

“During an audit of the company covering its 1998-2001 tax years, the IRS requested Textron’s tax accrual workpapers, but the company refused to provide them, claiming that they are protected by various privileges, including the work-product privilege, even though they were at the least “dual purpose documents”. The First Circuit upheld the privilege, and even concluded that the company had not waived the protection by showing the internal workpapers to its outside auditor, Ernst & Young, calling the auditor-client relationship a “cooperative not adversarial relationship” that was unlikely to lead to litigation. 

Even so, the court acknowledged that E&Y’s own workpapers, which likely incorporate and even reveal Textron’s analyses, may be discoverable on remand, under the Arthur Young Supreme Court opinion. The court’s determination that the company’s internal tax accrual workpapers may not be summonsed is manifestly inconsistent with the court’s conclusion that the outside auditor’s workpapers incorporating the same analysis may be.”

Auditors, in the course of performing their audit, require free and open access to documents and to executives in order to do a complete, thorough, and professional job.  We have seen similar issues raised  when discussing changes and additional disclosures under FAS 5. Auditors understand the delicate balance and, although fully understanding of their responsibilities to push for full disclosure, are not willing to push when they believe more disclosure is contrary to their client’s (read corporate executives’) best interest even if additional disclosure may be in the best interest of investors and shareholders.  
So, a ruling here that allows attorney-client privilege for their clients while still allowing the auditors to have access to the information is good for the auditors.  Their clients can not use the excuse of losing this protection to keep important information from them.  
So, here’s the conundrum:
1) Audit workpapers are not protected.
2) Clients will remain skittish about sharing information with auditors that they want to remain protected under work-product doctrine or the broader attorney-client privilege.  
3)Auditors themselves are not comfortable with broader, more detailed legal contingency disclosures, for example, and have said so with regard to expanded disclosure under FAS 5.

Result: 
Auditors will see less and less of what is relevant to audit “in accordance with applicable auditing standards and supported by appropriate audit evidence.”
Outside of the US, EY has even more problems. The firm is facing intense scrutiny for its role in the failure and nationalization of Anglo Irish Bank in Ireland and they’re playing hide the banana at Dutch insurer Aegon where the CFO has been replaced by the chairman of the Dutch Belgian EY firm, their auditor.
And I don’t even have to tell you how hard they’re working to disassociate themselves from the Satyam scandal over in India.  Although early reports said that they had acted as Satyam’s internal auditor, we may never know for sure what contracts they had in the past.  One thing for sure, they are wrapped up in the scandal due to their role as auditor of the Raju sons’ Maytas companies. 
From India’s The Statesman:
“Auditing major Ernst & Young today said its valuation of controversial Maytas Properties was for a deal involving existing shareholders of the firm, but declined to comment on whether its report was misused by scam-tainted Satyam Computer.     

 

 

 

 

 

“We were not given to understand by any party, explicitly or implicitly, during the valuation exercise, about Satyam’s plans to acquire Maytas Properties,” an E&Y spokesperson said.
Asked if the valuation, which it said was done in an “unrelated context” was misused by Satyam, also founded by Raju, and if E&Y would take any action against the IT firm, the spokesperson said “no comments.”
It was this failed acquisition that forced the hand of Satyams CEO and prompted his “confession” of the scandal.
Over in Russia, EY has just dodged a bullet, similar to to the one PwC eventually dodged, in Moscow related to under reporting profit and underpaying taxes.  Someone, maybe that EU guy that bulldozed Sir David Tweedie of the IASB late last year, must have gotten to the Russians and reminded them that the Big 4 are “too few to fail.”
But for how much longer?




is
Email this author | All posts by

22 Responses »

  1. The partners have been preparing for months for the cuts. In preparation, they rank people from most to least valued. The most valued people are fed (and continually fed) work, while the least valued are left to fend for themselves. This explains why some are 100% plus utilized. So, when layoffs occur, the partners can point to utilization and claim (with a straight face) that it was based on performance. The other firms are probably getting ready for another round of layoffs too. At this rate, partners will probably be out of jobs themselves soon. We should all give thanks to Wall Street and the financial institutions that are now receiving federal funds for the lovely situation they left the rest of us in. Question — is trash worth saving, or should you simply burn it and get it over with?

  2. Hi FM,

    I was laid off out of a Big4 tax practice in a large city in December and am happily working in industry now.

    About the wide disparity in skills even in the 1-2 year range, I think it does exist and can be perceived if you are looking just at staff/senior level skills.

    The ability to learn quickly, attention to detail, work ethic, and time management all seem to present themselves rather rapidly and are fairly apparent if you want to “rank order” employees based on those skills. Of course that doesn’t tell you about that persons ultimate potential to sell and become a deep knowledgable technical resource, but at the staff and senior level those are the skills you live and die by.

    I took 20 days of PTO in 2008 for personal reasons and my hours were low at the mid year December point which was probably a significant factor in my release as well.

    Its just a bad time to have low chargeable hours.

    For now I’ll just have to live with it in a job doing the same work but getting paid more :) To all those staff and seniors who have been cut loose out there – keep looking and talk to everyone you know – something will turn up.

  3. Strange. Not a bleep from the EY’ers. Wonder what kind of nondisclosure provision they had to agreed to, in order to receive their severance packages. Deloitte should be so wise (or maybe they’ve gotten wiser) so as to stop the negative blogging.

    Thanks for the post, Francine. We can always count on you to keep us in the loop.

  4. To: Anonymous 1.27 11:05 pm

    You ask “Question–is trash worth saving, or should you simply burn it and get it over with?”

    It’s not clear if you are referring to human capital or firms/businesses as a whole.

    Either way, what about recycling – if the raw material could be used in some other (perhaps more productive) way?

  5. My experience at several of the Big 4 firms led me to question whether the “relative ranking” process resulted in the proper ranking of people based on (a) current and (b) future value to the firm.

    As has been noted above, the rankings tend to focus on utilization, sales, and other easily measured attributes, while subject matter expertise are not given much if any weight. Potential consquences of this situation with respect to quality are quite obvious and need not be belabored.

    But for those still in the Big 4 and looking for a survival strategy, let me offer this: The stronger your relationship(s) with a partner or partners, the better your chances for (a) work (utilization) and (b) participation in the sales process (receiving sales credit). Since those are the two most valued attributes, you can see that linking up with one or more partners and “aligning” with their needs/desires is the best survival strategy. Also: pick your partner(s) well — look for seniority, ties to other partners, and the right practice area. Your best bet for survival is high utilization, acknowledged sales credit in sales reports, and links to a large pipeline of future work. No guarantees, though!

    Conversely, such behaviours reinforce the “partner as lord and master of the universe” concept, which I abhor. Such arrogance is at least partly to blame for recent quality failures and poor management decisions.

    But if you’re looking to survive in your firm, that’s the strategy to pursue, as much as I hate to say it.

    – Tenacious T.

  6. Well said Tenacious T. You hit the nail squarely on the head.

  7. I have to also agree with Tenacious T.
    The partners have already determined who will remain and who will be let go. E&Y is not the only firm manipulating billable hours. Deloitte, PWC, and KPMG are all participating in this practice. These partners need to protect themselves and those they have already deemed safe from lay-offs. And lets not kid ourselves, only those who kiss up to the boss will be spared – regardless of performance, work ethic, dedication to the firm, or, clearly, utilization. Partners who condone this practice are not the leaders they think they are. A successful leader does not surround his/her self with only "Yes men" as they are now doing. How do these guys look at themselves in the mirror and think they are doing the right thing!?!

  8. Insecure people need to surround themselves with “yes men.” Whoever said that these partners are true leaders. They likely kissed a ton of asses to get where they are, rather than build their technical and other capabilities. So, they prefer “yes men” who don’t challenge them.

  9. Edith, recycling is definitely more PC. However, if there is a drop of arson (or some hazardous material) within, what would recyclying do?

    Hint, I am not talking about the financial services institutions, but the trash in the public accounting firms.

  10. I got canned from EY in december as “my position was being eliminated”. these orders came from the FSO in NY and were not even made at a sub area level. they received a fedex with a list of employees to can. I had just been promoted to senior in october and had just come off work as the coordinating senior on the federal tax side of a fortune 25 client. i improved our process considerably over the PY, reducing charged hours and thereby increasing the profit margin which must have certainly pleased the partner. this apparently was insufficient to warrant hanging on to me. I guess i shouldn’t have done such a good job. i was technically terminated on a wednesday but no one informed me until friday. in essence i was “milton-ed”, doing work but not really having a job. I found a job the next week with a regional firm with more pay, more pto, and less hours (last year was their busiest at 48/wk during busy season lol). I am glad I worked for EY but don’t miss it one bit. I do however feel sorry for those left behind. I was lucky in that I found a job quickly, I don’t think others will be as fortunate. word on the street is more cuts are coming in march, these will be AABS and whatever tax folks they can start cutting out before the season begins. i think the most frustrating part is knowing that all the big 4 are still actively recruiting on campuses nationwide, and to read on CNN that DT PWC and EY were as listed as “companies still hiring” in a recent article. it’s disgusting how they’re so willing to throw knowledge and experience down the drain in favor of a lower bill rate. it’s a temporary fix and oftentimes not a good one as the new person has no idea what they’re doing and there’s no one left to tell them. of course that’s not stopping them from continuing the cycle.

  11. The layoffs are definitely coming and I am a living proof of that statement

    I started working with EY a month ago and got fired last week because my performance wasn’t “good enough”

    Of course the fact that I was never given any training whatsoever(put to work from Day 1 with an absolutely farce colleague who was more than happy to stack me with work w/o telling me a word of what I was supposed to do)

    Had been given no warning whatsoever (told to come to a meeting for a performance review – next thing I know…I’m fired)

    Got terminated in less than a month (that’s surely a lot of time to assess somebody’s performance…yeah right – not to mention, I “always” completed my work before deadline – heck, we finished working on our last client in 3 days – with my work finished in 2 days…when the client was expected to take 6 days!)

    Then there’s the whole scenario of me being a F1/OPT student so shunning me was an easy decision for the firm – except that it’s left me with little to aim for now considering the current economy (of course that’s not something that the firm will be concerned about – after all I’m nothing more than trash for them)

    Needless to say I’m very bitter right now…because not only does this spoil my image for something that I didn’t even do (heck I didn’t even get a chance – let alone prove my worth)…but it also ensures that I’m left with little to no options in the near future considering the economic downfall

    So then am I pissed off? You bet I am…Can I do something about it? Yeah right

  12. Boy, I feel badly for some of the youg people getting terminated from E&Y.

    I worked for E&Y for 10 years, ending back in 199x. I loved it while I was there, except for the ever present fear of being fired and the working around the clock and the stupid dress code at the time

    I was lucky. I worked in a small office and was chargeable all the time and worked on the largest SEC clients in the area. That wasn’t becasue I sucked up either. Imagine that? I can’t believe, in hind sight, that it happened that I survived 10 years. But in the end, when I was ready for Partner, I didn’t have the big
    flash senior partners to support me.

    But folks, what goes around comes around. Now on the Corporate side, I meet with potential employers and they regularly complain about the Big 4 and PWC and E&Y in particular. I even had a company complain about their specific partner. Thing is, I know him and he got a Partner slot ahead of me and then I left. Funny, now E&Y and their clients would be better off with me – at least the client wouldn’t think I was an intellectual neophite.

    All the firms have issues. These are very big ships. And from what I have seen, and it’s a lot, most are poorly managed. Good people leave or get terminated all the time. So, who is left running the place? Someone previously hit on this issue. In my opinion this is an issue at the Big 4 and at many corporations as well. You can’t keep promoting the glad handers and let the smart people walk out the door and be around forever.

  13. I am struggling on how to answer the following interview question, since I was terminated due to my performance (worked for big4), please help me out.

    Why did you leave your last position?

  14. [...] The largest reductions seem to be at Deloitte and KPMG.  But significant cuts have occurred at EY and have been rumored  to have occurred, although couched in “performance only” language, at [...]

  15. EY Tax NY (and Boston and NJ) is laying off more people tomorrow. Unsure of the number. At least a couple dozen.

  16. Confirmed the number. At least 50 staff and seniors in the Northeast, from New York to Boston. Attorneys (JDs and JD/LLMs) hit very hard.

  17. 13. I would say that there was a sudden decline in the amount of available work due to the economic downturn, and that your former employer elected to reduce staff. I’m guessing that a lot of people’s “performance problems” were concocted in order to achieve this.

    BTW, it’s not big news because it only affects a few people, but PWC has just decided to dissolve its property tax practice. I think it was only active in a few offices, but it was fairly profitable and didn’t involve that many staff so I would think it would have been pretty low cost to maintain. One director and one manager in my office are going to be leaving in a couple of months.

  18. @13 — were you able to collect unemployment? Technically, if you are “fired” for cause you are not eligible for unemployment, yet if you are “laid off” you are eligible. In reality, the unemployment office almost always sides with the employee and pays — even if the employer says it was fired for cause. So — if you got or are getting unemployment benefits… then by the letter of the law, you were laid off and not fired for cause (i.e., not due to performance). You can hang your hat on that technicality and then use words like those @17 provided… that due to a decline in workload your position was eliminated.

  19. BTW, if you’re in CA you can collect unemployment even if fired for poor performance, as long as no gross misconduct was involved. I like to keep that fact out there, many aren’t aware of it. I think the only exception is if they can prove that you are deliberately underperforming, but they can only do that if you have a track record of high performance.

    You should always file in any case, for reasons stated in 18.

  20. @19 – I am in CA and my experience is that you have to show the unemployment office that it was a layoff not a firing. But their standard of proof is low and they tend to believe the employee regardless. I agree with you in that your description is what happens… I think the policy though is that you cannot collect if you were fired for cause. It is just that the burden of proof regarding cause is with the firm and the bar is raised very high on what they have to prove.

  21. They have some pretty detailed examples on the EDD website regarding this:
    http://www.edd.ca.gov/UIBDG/Misconduct_MC_5.htm#Refusal of Work Distinguished From Discharge

    Check out the section regarding “Inefficiency,” also the definition of “misconduct.” The employer’s contention that the firing was “for cause” is considered irrelevant by the EDD. Basically, unless you are meeting the EDD’s definition of misconduct, which involves deliberate acts, you will most likely be eligible for benefits if terminated. I

  22. [...] NY because sixty professionals had just been cut from their NYC tax practice. In fact, that was a very bad week for EY.  But, other than being sued for the failure of Lehman Brothers (the catalyst for the “financial [...]

Leave a Reply