Anon #5, suppose I’m an audit committee chair, and here’s my question – why the heck am I paying a B4 millions of dollars in fees for audit services which provide not so much as an attempt to uncover issues like those at Huron? Yes, I understand that few smoking guns are uncovered directly by auditors, and we love to talk about how a fraudster who really wants to put one over on the auditors can do so. But the point I’m making, and that I interpret from many of FM’s posts, is that we don’t see even the professional skepticism or basic fraud brainstorming put into practice. The basic questions that should be asked, and the red flags that should wave in front of us, go unnoticed.

If you come back and say we still cannot detect any of these fraudulent activites, my response is that we shouldn’t propose fees to audit committees that imply we’re capable of doing so. (Of course, we also give going concernes to companies like GM three years too late, but I digress.)

Conspiracy theories, while interesting and fun to read about, are very rarely true. Occam’s razor, the simplest explanation is most often true.

Thanks for the thoughtful reply (when are you not thoughtful?). But I wasn’t really thinking about a private partnership. We know that’s not the way to go if the number of partners exceeds, say, 5.

I’m not an expert in corporate structure but I would have thought two or three times before going public with this business. Maybe the VCs gave them no choice, I don’t know. We do know (because we follow your Twitter feed) that the original partners gave away a huge amount of their equity to the VCs, likely so as to generate sufficient working capital to get the business going. The VCs were almost certainly in the driver’s seat when it came to deciding whether or not to go public.

– Tenacious T.

re: The question of why go public…

Unfortunately, many companies, and rather small ones at that, go public for only one reason – to raise money to pay off investors or legacy owners who want an exit strategy. I once took a look at the Crain’s Chicago Business List of Top Public Companies in the Chicago area. There are, of course, the big names like Boeing, Sara Lee, Kraft, Motorola, and CNA. But there are a bucketload of companies with revenues under $250 million. That’s just nuts. And they are the ones who complain about compliance costs and have yet to be put under requirements of Sarbanes-Oxley. Yet they are taking public investor money and acting like big muckety-mucks as “public” company CEOs and CFOs. Ridiculous. It’s an ego and greed trip that serves no one but a handful of insiders and the folks who make the deals happen. Most are not really ready for the big time and are wasting everyone’s time and money playing the game for ego’s sake.

That being said, if they issue public debt or have a big line of credit from a bank, they need a good audit.. But that can be bought.

Should Huron have gone public? Well, as a private professional services firm, partnership or not, they may have had capital restrictions and, of course, the inability to easily shift wealth to only a few unless they restricted the true equity partner ranks to only a few. Those poor former AA partners who are now wondering what they did to deserve this calamity twice should have maybe thought twice about equity in any form… But as you said and as we have seen with the audit firms, they should have known that a private partnership also can pretty well hide their dirty laundry from the public if needed.
Francine

It may be too soon to float the “f” word on this one.

Near as I can figure, ater reading the WSJ article on this, was that earn-out payments associated with acquisitions were partially redisitributed to non-owners. The non-owners who received the redistributions were employees of Huron, who had come on board with the acquired entities. WSJ characterizes the redistributions as being completely legal and not “kick-backs” in any sense of the term. I assume this is so because nobody in a position to determine the value of the earn-out payments received any part of the redistribution. It may be possible that Huron senior management was unaware of these redistributions. The article posits that the transactions were misrecorded and should have been recorded as “noncash operating expenses”. Not sure how they were recorded or even if they were recorded at all, since the CAO, CFO and CEO may have been unaware of them.

I’m not here to defend Huron, just to try to keep this FUBAR into perspective. Just because the infamous name of Andersen is being bandied about is no reason to convict anybody before the facts are outed.

Finally, let me offer this question. Why was this firm ever taken public? (Yes, I know, to pay off the VCs. But that’s not my real question.) How much would the costs of SOX compliance take away from the bottom line, wheras if Huron was a private business compliance costs would have been minimal. Certainly, the impact of this fiasco on the Huron brand would have been dramatically less, had the firm been private instead of publicy traded. Other companies have done the cost/benefit analysis and stayed private or have even gone from public to private (example: ARAMARK). Being public would seem to carry with it costs that would outweigh the benefits, at least in this outsider’s view of Huron.

– Tenacious T.

For the accountants and auditors who wonder why it costs you a bundle for professional liability coverage…now you know.