I don’t think I assumed anything that Wyman didn’t explicitly write. Wyman defined risk and I went with it. He didn’t discuss the trade-off between fees and risk — which, by the way, was definitely what kept Andersen at Enron, year after year, even though it knew Enron was pushing the GAAP envelope. They bet the firm for $100 million a year in Enron fees.

I agree with your point that the smaller clients were dropped from the portfolio(s) because the fees didn’t justify the risks, in the minds of the partnership’s lawyers. We could probably write a book on all the risk mitigation missteps the firms take these days, from rubber stamped “risk reviews” (that nobody reads until after the client goes south when the search for the guilty parties is in full swing) to a relentless focus on reducing small risks to zero exposure while ignoring the huge “elephant-in-the-room” risks such as partner and staff qualifications (or lack thereof) for particular industries, clients and/or engagements.

With respect to your other points, I think if you go back and re-read Wyman’s post, you’ll see I was responding to his thoughts. For instance, I did not suggest–indeed, I refuted–the idea that the large multi-nationals would “jump ship” to a mid-tier firm. No offense to the mid-tiers, of course.

Have a great weekend!

– Tenacious T.

I think you made a bit of a leap by assuming that “higher risk” meant “bigger, multimational” companies. “Risk” at a public accounting firm considers both risk of misstatement, and fees. The level of risk a firm might accept for a $15 million client might not be accepted for a $500K client. I think some of what happened is that the Big 4 looked at their $500K clients and said, “we’re not being paid enough to take on this risk, so we’ll pull back on those jobs and focus on the $15M clients”. So the other Big 4 and 2nd-tier firms picked up the smaller jobs that were dropped.

And of course, sometimes the $15M client is dropped, and those (at least to my knowledge, anecdotally) have mostly just been swapped among the Big 4. I don’t know of many huge multi-nationals jumping ship to BDO or GT.

I’m not stalking you, I swear. But I can’t let your comment go unchallenged. (And I note that I’m not making any new points here; Fran has posted on this before.)

You state that SOX forced “the major accounting firms to look at their clients in terms of business risk” and, based on the risk that a particular client might “turn them into the next Andersen”, to drop the riskier clients from their portfolio. Those high-risk clients were picked-up by some of the mid-tier firms.

Are you suggesting that the mid-tier firms are better positioned to manage the risks of those “independence and poor control environment” clients? No offense to any mid-tier or smaller firms, but what makes you think they will do any better job of mitigating those risks than a Big 4 firm would have? Haven’t we already seen some of the same audit quality issues/failures at the mid-tiers? And what’s worse, those mid-tiers don’t have the same financial or personnel resources to weather the storm as would one of the Big 4 (again, no offense meant).

So what I’m saying is if any firm was too risky for, say, Deloitte, what makes you think that a BDO Seidman or Grant Thornton would or could handle that risk?

Competition may be a good thing and it may be true that any Big 4 firm who does a poor job may lose the account to one of the mid-tier firms, but isn’t it also true that some companies, because of their sheer size and global dispersion, cannot be audited by any firm other than a Big 4 firm? You wouldn’t expect a local, regional firm to be auditing a multi-national corporation, would you? If that’s the true situation, then just how much force does the threat of competition have on the “audit integrity and quality”? I would argue, “not very much.”

From my experience, auditors get changed because of (a) price, (b) chemistry between the audit partner and somebody with influence at the company, and (c) disagreement on accounting treatment. (Those were ranked in descending order from most to least common, by the way.) I have yet to see audit integrity and quality play a signficant role in the choice of auditor. But maybe that’s just me?

Best,

– Tenacious T.