Hey Big 4! If I Were You, Here’s What I’d Do (Instead…)By Francine • Apr 8th, 2009 • Category: Audit Firm Management, Latest, Pure Content, Your Career
All of the Big 4 firms have had significant reductions in staff during the last 18 months, and especially the last 8-12 months. 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 PwC. Only KPMG and Deloitte have issued voluntary, anticipatory press releases for their “workforce resizing.” But not recently. PwC was forced to acknowledge some cuts last February due to reports here, but did so reluctantly and only after questioning by another publication. Their reductions have been mainly through attrition and forced ranking approaches that pushed employees to seek other opportunities involuntarily. These cuts have occurred in the US and outside the US.
One of the main suggestions I make to firm spokespersons and their recruiting professionals is about the handling of these terminations by HR/local partners. The numbers to cut may come down from on high, often decided on a nameless, faceless and arbitrary basis. However, execution, literally and figuratively, is all local. I’ve heard many reports and I’ve seen the personal and professional impact of botched paperwork, poorly handled meetings, and inconsistent treatment within offices and even within practices in a specific location. I’ve heard strong cases for discrimination complaints and have had former employees cry on the phone when describing their shame and embarrassment mixed with confusion and a sense of betrayal. If the firms could do one thing better, if they must continue, it would be to develop teams of highly trained, focused, dedicated professionals to handle these issues in each location so that consistency and adherence to appropriate policy, procedure and employee rights/employer responsibilities is ensured. The local partner who thinks they can talk their way through and make exceptions ends up promoting more bias, perceived favoritism, and unfair retribution and punishment and is, therefore, a dangerous weapon that must be stopped.
So what’s happening out there? How are the Big 4 cutting costs and eliminating payroll costs in order to “survive” ?
(This information is based on not only emails, calls, and personal interviews I’ve conducted, many of which are included in the blog posts linked to, but the thousands of comments provided by readers in particular on the posts here, here and here.)
- All of the firms have had reductions in force
- Implementation by some of short weeks with proportionate reductions in pay, although how realistic this is in actual practice remains to be seen.
- Implementation of mandatory paid holidays during non-busy season
- Offering sabbaticals to top performers
- Offering secondments to top performers, although this is just moving the checkers around the checkerboard, since
- a secondment is usually paid for by originating firm, and
- then there’s the problem of not enough work in the destination, and
- the commitment to reemploy after the time period that is now subject to quite a bit of uncertainty.
- Reducing Paid Time Off (PTO) carryover – Effectively reduces liability for vacation and other time off from a scheduling and a financial liability perspective. The financial aspect is especially significant due to the obligation to pay accrued paid time in the event of involuntary terminations.
- Application of “forced ranking” techniques to seemingly force otherwise or previously good or above average performers into lower performance categories. This approach is used to justify termination or an unexpected Performance Improvement Plan (PIP) process that is really just a self-fulfilling prophecy
- Denial of unemployment compensation based on the sudden or fabricated “performance problems.”
- Attempts at recouping signing, CPA, or other bonuses based on “performance-based” terminations versus business based reductions.
- Demotion and outright termination of partners who are effectively at-will employees via similar techniques as the staff terminations.
- Forcing equity partners, including those in protected categories, out via sudden poor performance ratings, loss of responsibility and corresponding compensation level reductions
- Terminating pre-MLOA (primarily pregnant women,) on MLOA, or MLOA immediately upon return to work under the guise of job elimination.
- Terminating visa holders, often with no notice, who then have very short times to find new sponsors or else return to their home country. Many of these employees were recruited from the university. Firms save costs of sponsorship and other legalization costs if employee had been kept on. In some cases, firms have denied these employees their rights under law, due to rushed terminations, stonewalling, or denial of required legal assistance.
- Reducing administrative staff by closing administrative and technology support centers in some cities.
And how are the firms reducing payroll and costs related to new recruits and employees under one year of tenure?
- Firms are terminating employees with less than one year of tenure, even though most of them came to the firm after serving an internships prior to graduation and are most often the top graduates of the top accounting programs in the world. These new hires are returning to campus to their alumni placement offices and asking for support as well as spreading the word to their friends still in school, thereby engendering quite a bit of fear and uncertainty amongst imminent hires.
- The firms are still recruiting on campus and, in some cases, paying bonuses for referrals for campus recruits. This is happening while they are terminating tenured employees, including those in protected age categories. Although the spigot on the university pipeline has finally been turned a half-turn during the last six months, the firms were very reluctant to do anything until their hand was forced.
- Firms are holding fewer interviews in campus for internships and full time or are holding interviews with no commitment to number of hires.
- Start dates for those already offered a job and accepted have been delayed, sometimes multiple times.
- Some firms have rescinded offers completely, leaving students with few options.
- Firms are frequently changing practice or location both before and after a letter of acceptance has been issued.
- Some firms are sending out offer letters with no salary, “pending changes in their compensation programs and evaluation of market conditions at the time of start date.”
- Changing salary after offer is extended and accepted.
Other techniques to reduce costs/increase profitability being employed
- Forcing professionals to eat hours or work even more than usual to make up for less staff and or reduced budget. This is happening without overtime and with less paid time off, comp time off and insecurity in taking earned time off.
- Overbilling or inaccurate, inflated billing, especially on fixed fee/monthly retainer engagements such as internal audit and tax compliance.
- Forcing managers and partners to do staff work, thereby losing more margin (because the client can’t be charged a higher rate of course for same work) and resulting in a loss of review/quality assurance layer and objective independent risk management.
Why they’re doing it
What are the business reasons the firms are feeling a reduction in profitability, a loss of business and a strong feeling that they need to take significant measures to reduce costs?
- Compression of number of clients both on audit and consulting /tax side due to number of bankruptcies, acquisitions, nationalizations and attendant pressure on fees in remaining clients related to subprime and financial “crisis.”
- Significant reduction of Sarbanes-Oxley revenue stream due to maturity of this initiative with regard to financial controls, in particular, and pressure from clients on fees for any current or future work both on the external audit and the consulting sides.
- Over-hiring or wrongly allocated staff during SOx era left some firms overstaffed in wrong practices, wrong locations, and not prepared for reallocation/reassignment.
- No comparable new “next big thing” in practice pipeline. IFRS, XBRL, not as big.
- Bankruptcy trustee and corporate investigation work is shorter term specialized work compared to audit, with key independence constraints in US and limited duration, except in rare instances, (Lehman for PwC in UK, for example.)
- Softening of all spending on technology and business process improvement consulting unless it has clear and compelling cost saving component and even then delayed starts, reduced scopes and pressure form clients on rates.
- Firms took longer than they should have to slow flow from university pipeline due to reluctance of firms to alienate universities and dependence on leverage (constant stream of lower cost/lower hassle resources from universities.)
- Firms did not see cost savings and efficiencies from offshoring that they’d hoped (Deloitte and PwC, in particular) just as their clients did not.
- Significant and increasing litigation settlement and ongoing securities and wage and hour litigation defense costs.
- Fear, anticipation of additional costs associated with wage and hour litigation.
- Significant increase in compliance costs, including technology, that has not resulted in efficiencies, as a result of scandals like KPMG tax shelter, independence violations, and increased PCAOB inspections.
It’s not easy to turn the massive Titanic-like ships of states that are the Big 4 firms away from the iceberg. It may be that they can use the excuse of the financial “crisis” to defend the actions they’ve taken to reduce costs and make, “…targeted and limited workforce reductions where appropriate.”
But the things they are doing to respond to what they see as a business downturn and a profitability squeeze are only tactics. They plug holes temporarily. They don’t renew, redirect, and retool the firms to respond to reality. It’s hard to fault them. They are constrained by a model and a mentality that quashes long- or even medium-term strategic thinking. Notice: I didn’t say anything about increased competition for the Big 4 firms. There is none, by design.
So I asked myself, “fm, what would you do if one of them asked you to step up and offer solutions?” After all, I’ve been accused by even my own readers of stirring up the masses to violence and rebellion, not to mention encouraging demands for overtime pay, unionization, and potentially the rejection of the default position that a Big 4 career is the only worthy one for a top graduate of a top accounting program.
If anyone asked me to help find a way to get through this period,
- Without reductions in force,
- Without betraying the trust of otherwise very loyal employees,
- Without losing the confidence of key clients,
- Without endangering quality and integrity in the work they’ve been enfranchised to do under the exclusive licensing of various federal governments and public/private bodies such as exchanges,
- Without risking new lawsuits for negligence and complicity on fraud and malfeasance, and
- Without completely abdicating responsibility to their true client – the shareholders and investors in the public companies they audit,
I would start at the top.
I have tried to stick to criticizing, and specifically criticizing by name, only the top leadership of the firms and those who are publicly named in litigation or regulatory enforcement actions. That approach is taken for two reasons. The first is that I do not have the resources or time to verify claims regarding anyone other than those who professional journalists already write about, who are in the public eye, who have held their actions open to public scrutiny. The second reason is that I have a great deal of respect for the average accounting/audit professional, at all levels, who knows their stuff and does their job in the best way under tough conditions.
The firms and the profession have an incredibly loyal membership. Even in the face of what I have called double dealing, incompetence, betrayal, and downright double-faced lies by the firms, the regulators and the universities, many still defend not only the firm leadership but the way of life which is a Big 4 job, in particular in audit. It borders in some cases on a kind of “Stockholm Syndrome” response.
I frequently ask others for an explanation for this behavior. That discussion delves into the realm psychology and, potentially, a quite biased and stereotypical portrayal of the kind of people who choose and succeed in this profession. Not the purpose of this post, but perhaps an indulgence for me at a later date.
If we focus on actions of the top management and the most strategic decisions of the Big 4 firms, I believe we’ll see some things that could be done differently and more effectively, if only the senior leadership were willing and able. In making the following suggestions, there are two assumptions to keep in mind:
- I’m not necessarily offering these suggestions for the next tier firms (GT, BDO and RSM.) Their size, model, and client base is so dramatically different from the Big 4 as to make the discussion of their strategy completely different. And I’m not sure these three are all long term players anyway, especially BDO. For that reason, I have most often not focused on them on the blog except when their issues spillover to the industry in general or to the Big 4 themselves.
- This blog has discussed the general lack of purpose, the worthlessness of the current audit opinion for public companies. Another completely different approach is needed, in my opinion, to protect shareholders and investors in public companies than the current product, especially when the shareholder/investor is the taxpayer as has occurred in the recent investments in AIG, Fannie Mae, Freddie Mac, Citigroup, GM, etc. But for the purpose of this discussion, we will assume the Big 4 need to keep doing what they’re doing, but more successfully, profitably, with their current staff rather than cutting their nose (their staff) to spite their face (maintain partner profits in the short term.) A bigger set of propositions includes government control of audits of companies taxpayers are significantly invested in, utilizing a Service Corp for Accountability and Transparency made up of the professionals the firms are irresponsibly shedding.
So, starting at the top, at a strategic level, I recommend significant changes in two main areas:
- Refocus on the true client – the shareholders and investors of the public firm, and
- Reform the business development process with an emphasis on meeting client needs, where they need it, how they need it, and with the kinds of resources required to do the work in a quality and risk-managed way.
Tomorrow I’ll post the details behind these two recommendations.