re: The Auditors » Your Career

Madoff, MLK, Buddha And Elusive Nature of Self-Interest

Francine — Mon, 16 Jan 2012 08:37:00 +0000

A repost of one of my favorite – and one of my most read – posts in honor of Martin Luther King Day. It was originally published December 24, 2008.

Back home after dropping off my friend at the airport. As those of you who have been following me on Twitter know, I’ve spent the last few days visiting with an old friend from my JP Morgan Latin America days. Kenny recently came out of almost five years of semi-reclusive Buddhist retreat. We hadn’t seen each other during that time, but had been in touch each time he was home in Brooklyn for the holidays or between sessions at the retreat in Northern California.

We worked together in Latin America, primarily Brazil, during the Year 2000 project period. I was JPM’s PMO Director for the project in Latin America. He was implementing a new order entry and trade management/compliance system for their equity options and derivatives business. As calm and serene as he has learned to be when faced with crowds, traffic, schedule changes and chatty friends like me, he is also still human. And he is still my old friend with enormous knowledge of how and why controls and regulations are intended to safeguard investors in financial services industry.

It didn’t take much to get him to talk about the Madoff scandal, the financial crisis, the Big 4 firms, the SEC, and the major players on Wall Street. As much as things should have changed in the seven years since he was actively working in the industry, unfortunately according to him, most things have not. He was up to speed, even more than me in some areas, since he has been catching up the last few weeks by subjecting himself to a heavy daily dose of MSNBC, CNBC and BloombergTV.

I sought his advice on some topics and ideas for posts, but he continuously pulled me back to the human element, the psychology of the issues we discussed.

Why would Madoff do it?

How did he get away with it?

Why do regulators not regulate?

Could the auditors have caught it?

What is the nature of evil and its manifestations such as greed, hubris, unbridled self-interest, lying and cheating even those in your own community, denial of responsibility, unjust blame, and refusal to take action in the face of illegal or immoral acts?

Heady stuff. Fortunately he has not given up drinking or laughing so the heaviness was lightened with caipiroskas, pinot noir, Negra Modelos, and cuba libres.

One of the topics we kept coming back to is the responsibility of “professionals,” those who are licensed and mandated by their states to uphold a code of ethics and professional responsibility that demands action beyond that which does or doesn’t profit one personally. Your first obligation as a professional is to your client, not your firm, your partners, or even your family. If your client is doing something illegal then it is to law enforcement. That may seem harsh, but it’s the code that’s supposed to insure that lawyers and accountants, for example don’t cut corners out of their own self-interest and to the detriment of their client’s interests.

From the AICPA’s Section 50 – Principles of Professional Conduct:

“By accepting membership, a certified public accountant assumes an obligation of self-discipline above and beyond the requirements of laws and regulations.

The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.

A distinguishing mark of a profession is acceptance of its responsibility to the public. The accounting profession’s public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility on certified public accountants…In return for the faith that the public reposes in them, members should seek continually to demonstrate their dedication to professional excellence.

Due care requires a member to discharge professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of a member’s ability with concern for the best interest of those for whom the services are performed and consistent with the profession’s responsibility to the public.”

Too much regulation? Too little regulation? The problem is enforcement? Inadequate budgets? Lazy Boards of Directors? Overzealous plaintiff’s bar? Conflicts of interest? Bush? Democrats in US Congress? Greed? Satan?

Martin Luther King Jr.: “Morality cannot be legislated, but behavior can be regulated. Judicial decrees may not change the heart, but they can restrain the heartless.”

Regulate the immoral. Restrain the heartless.

It’s hard for an external auditor to step up and do the right thing. As I have written in so many other places in this blog, the model of providing this critical public service meant to protect shareholders (the purpose of the audit report) via a profit making private partnership often encourages “behavior that must be regulated” (as the PCAOB was charged to do after Sarbanes-Oxley.)

Many, even the young professionals writing me in earnest for advice, have either never learned or have suppressed the nature of the true auditor-client relationship. The client for audited financial statements is the shareholder, not the company management. The Audit Committee of the Board of Directors, who hires and is supposed to manage the external auditor, represents that shareholder client. Other beneficiaries include bondholders, lenders, employees, vendors/customers who depend on the continued viability of the company, and regulators (whose role is to protect investors and overall capitalist system.)

When they forget or suppress acknowledgement of the true client, an auditor loses the ability to properly structure decisions with moral and ethical implications, let alone those with serious legal and regulatory ones. In the face of potential legal implications of a decision, they seek advice from their own counsel in order to avoid liability. In the face of a moral or ethical dilemma, they look at costs/benefits of looking out for the shareholder versus looking out for their own financial self-interest, at an individual and at a firm level.

Adam Smith Philosopher, 1723-1790:

Man naturally desires, not only to be loved, but to be lovely; or to be that thing which is the natural and proper object of love. He naturally dreads, not only to be hated, but to be hateful; or to be that thing which is the natural and proper object of hatred. He desires, not only praise, but praiseworthiness; or to be that thing which, though it should be praised by nobody, is, however, the natural and proper object of praise. He dreads, not only blame, but blame-worthiness; or to be that thing which, though it should be blamed by nobody, is, however, the natural and proper object of blame.

Human beings, however noble, virtuous and full of integrity in words often fall short in action. We only have to look at the cases of whistleblowers I’ve written about and a new one, Gary Aguirre of the SEC, to see how hard it is to step up. Whistleblowers and those that push unpopular ideas or try to report on wrongdoing often lose their jobs, are vilified by the former employers and sometimes their former colleagues, are often disbelieved and laughed at, attributed with bad attributes and intentions such as revenge, anger, payback, whining, mercenary goals, bitterness, spite, Don Quixote-like tilting at windmills, unreasonable idealism, and impractical expectations.

They are often very right, but often end up being right all alone.

How many times has an external or internal auditor been told when raising concerns or questions about lack of segregation of duties, improper expense reports, lack of proper authorizations for stock options or shady compensation decisions:

“He’s a man of integrity. He lives this company. He is a pillar of the community. He donates to charity. He is an elder statesman of the industry. He has unquestionable, unassailable ethics and cares about this company.”

And maybe they are also told, “How dare you suggest that he would ever do anything to harm his employees, shareholders, business partners…”

Faced with the challenge of questioning someone who everyone else thinks is an icon and may not be, most people back down, question themselves, wonder if they’ve read, seen, or heard what they thought they had. Pressured by the cost of moving forward with potentially imperfect evidence, or with an accusation that shakes the foundations of belief and trust, most “professionals” trust their boss, the lawyers, the advisors, and drop it. Add more pressure over accusations that potentially threaten a lucrative business relationship, a big deal, or an important hire, speaking up is often a career limiting move, threatening your own livelihood.

But auditors, who are inevitably almost always CPAs also, have a higher responsibility. Making the type two error of being right in your suspicions of illegal activity and potentially enormous harm or loss and not acting on them is completely unacceptable. US Attorney Patrick Fitzgerald explained his decision to bring corruption charges against Illinois Governor Blagojevich before all “the t’s were crossed and i’s were dotted” this way:

“…But I was not going to wait until March or April or May to get it all nice and tidy and then bring charges and then say, “By the way, all this bad stuff happened because no one was aware of it back in December.” I think that would be irresponsible. (Cross talk.)

So sometimes, when there’s ongoing criminal conduct — and this is a very different case than what we often see — we will expose the criminal conduct and bring charges to let people know we’re on to it, and to hopefully — to put a stop to it…“

Don’t let anyone ever tell you again, after Madoff and the rest of the cases of hubris we have seen during this ignominious year, that any man or woman is above suspicion. When you’re told, “He’s an icon,” as an auditor you should look even harder, be professionally skeptical, trust your own instincts and judgment as long as they have been educated and are competent and objective. Push hard for truth and justice.

As the guardians, the watchers, those entrusted by the investors with seeing and speaking up when they can not do so themselves, if you don’t do so then history is bound to continue repeating itself.

From The Guardian:

“So how did these exceptionally smart people forget their habits of due diligence? One answer lies in the curious respect Americans have for their leaders, which is something rarely appreciated in Europe. Anyone who reaches the top of the pile in the United States, whether in the law, broadcasting, investment management, business, the church or sport is given unwavering respect.

Their employees and supporters faithfully cluster round and offer up what seems to the European eye to be blind fealty. Pastor or president, you become the Man, at which point followers begin to suspend all judgment. Madoff was the Man and potential clients had to be damn well connected for him even to consider trousering the $1m minimum investment.

This tradition may have something to do with the small groups of pioneers that struck out West and relied on their leaders for their survival, but I prefer HL Mencken’s insight that while Americans see themselves as rugged individualists, they are rather conformist, as well as respectful. “There are no institutions in America, only fashions,” he once wrote.

It is true that Americans are often furiously trying to join something, enroll others or keep them out. The more exclusive a country club, society or nightclub the more desperate they are to gain entry…”

Or avoid being kicked out.

Will More Women Mean Better Audit Firms?

Francine — Sat, 26 Nov 2011 15:51:23 +0000

This column originally appeared in Going Concern on June 16, 2010.

From the Chicagoland Chamber of Commerce website:

Deb [DeHaas] is the vice chairman and Central region managing partner for Deloitte LLP, which includes 23 offices across 12 states. With 9,000 professionals, Deloitte is the largest Big Four organization in the region. In this role, Deb leads the quality, client satisfaction, growth, marketplace, and human resource initiatives in the Central region.

Deloitte recently gained notoriety as the first Big Four firm to have the private portion of their PCAOB inspection reports made public as a result of significant audit quality deficiencies that had been first cited in 2006.

******************************************************************************

Do sheer numbers mean women will now gain equality or even the upper hand in the workforce? Will this influence permeate all areas of professional life or only the ones that men allow?

Hanna Rosin was a guest last night on The Colbert Report. She’s a Contributing Editor for The Atlantic and the author of an article entitled, “The End of Men”.

Earlier this year, women became the majority of the workforce for the first time in U.S. history. Most managers are now women too. And for every two men who get a college degree this year, three women will do the same. For years, women’s progress has been cast as a struggle for equality. But what if equality isn’t the end point? What if modern, postindustrial society is simply better suited to women?

I think it’s a fallacy to believe having a majority leads to having power and influence. Does either gender have a lock on being compassionate, emotionally intelligent, fair and just? Or do those in power inevitably become corrupt and self-serving regardless of sex, race, ethnic background, or sexual orientation? Does diversity or the interest and aptitude to be a ethical, workaholic brainiac matter more when choosing audit partners?

Professor Bob Jensen noted today, “Nearly 20 years ago, Deloitte embarked on a “Women’s Initiative” to help female employees break the glass ceiling…”

The occasion was an article in AccountingWeb from June 2, “Number of Female Accountants Increasing.”

Women now make up more than 60 percent of all accountants and auditors in the United States, according to the Clarion-Ledger. That is an estimated 843,000 women in the accounting and auditing work force.

He cited evidence of Deloitte’s efforts from SmartPros on December 26, 2006.

For the tenth consecutive year, Deloitte tops the Big Four accounting firms in percentage of women partners, principals and directors…Deloitte’s percentage is currently 19.3 percent, surpassing that of KPMG (16.8 percent), PricewaterhouseCoopers (15.8 percent) and Ernst & Young (13.5 percent).

Professor Jensen is a legend in our time, a tireless supporter yet honest critic of the accounting profession and a treasure trove of information about all things accounting and auditing, especially for those who teach it. But as is my precocious habit, I disagree with him once and a while anyway – respectfully but often strenuously – especially about Deloitte.

Hi Francine,

Both you and I only presented anecdotal evidence that never satisfies academics beyond giving them ideas for research. Anecdotal evidence is easily cherry picked, and you and I have simply cherry picked different cherry trees. Having one rotten cherry (named Flanagan) on the tree does not make the entire tree rotten. Also concluding that Deloitte’s $1 million PCAOB fine “has had a huge impact on that firm” contradicts your assertion that the Big Four only gives “lip service” to PCAOB inspection outcomes.

Hi Bob,

You are completely misrepresenting my comments.

I am not cherry picking. I have been writing about the firms – Deloitte makes many, many appearances – for almost four years…the PCAOB and 404 have had a huge impact on the firms in terms of the infrastructure they have had to build to feign compliance. But it is my opinion that they are only feigning compliance and it is based on my reading – and writing – of the results.

In Deloitte’s case alone there were recently 475 reasons for believing they have much more work to do on internal compliance…The sad thing is I could make the same case for any of the four largest firms at any point in time. Try me. I’d be glad to go one-on-one with any of the retired partners on a panel. Most do not know the half of what their firms face, faced, have swept under the rug or dodged in the courts.

Deloitte employs a very prominent woman in a leadership role in Chicago.

Deloitte LLP executive Deborah DeHaas sees it this way: To ensure a growing and diverse economy, Chicago’s business community needs to retain its college graduates, expand work force training in technology, health care and other growing industries and support the city’s vital small and entrepreneurial companies.

On Tuesday, DeHaas, 50, will embrace that vision when she becomes the first woman to lead the 106-year-old Chicagoland Chamber of Commerce.

Deloitte is the same firm that’s made the deepest, and most brutal cuts in their workforce during the last three years of all the Big 4. They were the first to admit, on re: The Auditors, that thousands of cuts were made to respond to the economic crisis. A woman who believes in cutting her way to partner profitability will lead Chicago’s Chamber in embracing the “cut to grow” philosophy of business.

Has anything really gotten better at Deloitte with Deb DeHaas in charge?

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In Memoriam – Roberta Gilna Merkel

Francine — Sun, 16 Oct 2011 21:07:54 +0000

Executive search is a lot like the real estate business. Headhunters, with very few exceptions, like realtors, are getting paid by the seller or the company that is selling the job that you, as a candidate, are buying. The best ones manage this ethical dilemma well, especially when the compensation package, like the purchase price of the house, enters into the negotiations.

You can make money on transactions, but you can’t make a living over time without repeat business and referrals. You don’t get either repeat business or referrals by screwing people.

Roberta Gilna, a friend of mine for more than twenty years, died after a short illness on September 11, 2011. She was one of the best ones.

Roberta was a candidate’s advocate. She was always straight with you, told you where you stood in the competition, and tried to give you as much information as possible when it came to making decisions about salary and benefits.

I worked with Roberta on both sides of the executive search transaction. She was the one who got me the job at Jefferson Wells as Regional Vice President of the Midwest Region. The job did not yet exist when she pitched the idea to the CEO to split the country into three instead of two and give me the middle.

I had been working in Latin America for BearingPoint the successor firm of KPMG Consulting. I came home to visit that Labor Day weekend and got stuck, unable to fly back to South America, when the planes hit the World Trade Center on September 11, 2001.

I sat and watched the buildings burn. I contemplated the impact on everyone in the days and weeks afterward, and I wondered how I would ever be able to continue to do what I had been doing. I was gone 100% of the time, flying constantly between Chicago, Miami, Mexico City, Caracas, Bogota, Buenos Aires, and Sao Paulo leading the Industrial, Automotive, and Transportation Practice for BearingPoint in Latin America.

I could not get back to Brazil from Chicago and so I started to think about alternatives. I tried to negotiate a permanent move to Mexico. When that seemed to hit a brick wall – they wanted me to move to Detroit instead and take responsibility for developing business with some Tier 2 automotive suppliers – I called Roberta.

Within a few weeks I had an offer from Jefferson Wells. A good offer. I was responsible for ten offices in the Midwest and Canada, more than 500 people, and millions in revenue.

Roberta focused on internal audit, accounting, and finance. She knew the market. She’d been doing it for years. We first met in 1988 when I joined Newark Electronics, a division of Premier Industrial, now Premier Farnell. I was recruited from Continental Bank to take a job as the financial reporting manager. Eventually I was responsible for all of Newark’s general ledger staff and payroll.

When Roberta passed away on Sunday, September 11th, we had known each other, been friends, helped each other, worked together, ate and drank together, and listened to each others stories for twenty-three years. Roberta had many of those kinds of relationships. I saw some old friends from Newark at the funeral. One of them had been working with her on a client request when she got sick.

Roberta was sixty-two when she died. She worked her ass off the whole time I knew her. She’ll never collect a dime of Social Security. The search business, like the real estate business, is cyclical. But like the real estate bubble, there were periods when Roberta’s business was booming. The post- Sarbanes-Oxley period was especially busy.

Roberta taught me the terms “active” versus “passive” candidate. That’s recruiter-speak for unemployed versus employed candidates, although an employed person could be more active than passive if they were anxious to find a new job and putting feelers out. But employers, and therefore recruiters, prefer to work with employed versus unemployed candidates and passive versus active candidates. That’s just natural risk aversion and human nature.

During the Sarbanes-Oxley boom, all that pretty much went out the window. If you could walk and chew gum at the same time – and had any accounting or audit experience – you had no trouble entertaining competing offers at all times.

The last few years were tough for Roberta. Automation in the search business, company cutbacks in outside recruiting and paid search, and an almost total pull back on retained search versus contingency at all levels meant Roberta had to work very hard for any money she and her small dedicated team earned.

“Retained” search is when a company agrees to pay a contracted fee whether or not the firm finds any candidates. It’s a guarantee of sorts for the work that goes into sourcing candidates and managing the process for companies, some of whom can be a pain in the ass and take forever to make a decision.

“Contingency” search is agreeing to be paid a percentage of the starting salary and bonus guarantee of a candidate once hired. In some cases, a search firm does not have a contract with a company but sources candidates based on public information about hiring. They hope that if they present a viable candidate the company will honor the effort and pay up. Most companies nowadays discourage that and insist all vendors are approved and all amounts agreed to before any candidates are presented. That also prevents dealings with unscrupulous recruiters who try to take credit and claim payment for candidates who have been presented previously by someone else.

That avoids messy situations but does not leave much room for the small or one-person shop without corporate connections. It takes time and money to sell your firm and yourself before doing anything and then more time and money to source candidates and wait for a company to make a decision.

It’s also common in a recession or in companies that are going through financial stress to cancel a search in the middle or after candidates have been presented because of budget constraints or organizational changes. A contingency search firm loses money on that deal and loses credibility with candidates if not handled well.

Roberta dealt with these industry changes by branching out a bit into the software side of candidate search and by working, sometimes as a volunteer, with professionals who had been outplaced or layed off.

She was an executive search professional at heart and loved nothing more than finding friends better and better places to pursue their life’s work. Because of her efforts and loyalty, she was rewarded with placing many people more than once and with seeing careers progress over the years. I’m only one example of many that worked with her firm as both a candidate and a hiring manager .

I will miss her. I can still hear her voice on the other end of the phone, “Fraaaaaaaancine! What are you doing? I have a great opportunity for the right person. Do you have a minute? Maybe you know someone?”

She really did good phone.

Top Ten Reasons You Still Want To Work For The Auditors

Francine — Thu, 29 Sep 2011 13:42:10 +0000

College students are being wined, dined, and picked over by the large firms. The recruiting season is in full bloom. One of the most frequent searches leading to my blog is some variation on what to wear to the post-interview fancy restaurant dinner.

As you go through the experience, remember: They’ve already established what you are. The firms are now just trying to figure out what your final price is.

This post was originally published at Going Concern.com on August 19, 2009.

The Top Ten Reasons You Still Want To Work for the Big Audit Firms:

10. “A career in Tax at KPMG is dynamic and intellectually demanding. Could you take the pace?” Perhaps… Unfortunately, the pace has slowed considerably for everyone cut yesterday.

9. “[At Deloitte] audit isn’t what it used to be. Our clients expect more of us. And our risk-based approach, experienced professionals, comprehensive methodologies and technical resources deliver.” Yes, at least 50 billable hours a week, meaning you’re on the clock at least 80, managing the risk of falling asleep, your face landing in leftover stuffed pizza scattered all over the conference table.

8. “PricewaterhouseCoopers is all about you. Your personal and professional development, your achievement, your life long learning, your individuality and your choices. “ Actually, PwC is all about PwC.

7. “I’m going to Disney World!” I think we’ve seen the last of first year training blowouts at Disney World. Prepare yourself for Houston in August.

6. “[At EY] your base salary compensates you for the value you bring to the firm and for meeting our everyday high expectations. Our goal is to make base pay externally competitive, internally equitable and related to performance.” If only you knew what your salary was going to be. Job offers made with no start dates, no salary info. Previous salary commitments retroactively “adjusted for market conditions.” Or is it the inevitable overtime pay requirements? Sign up, forsake all others. Don’t call us, we’ll call you with the details.

5. “At PricewaterhouseCoopers, we are committed to ensuring women have the opportunity to build a rewarding career. Not just because it’s the right thing to do, but because it’s a business issue that affects our bottom line.” Yes, ladies, you are a business issue. You can make us money or cost us money. Especially when you’re a whore.

4. “BDO Seidman offers a distinctly different option for talented professionals as they evolve their careers.” Unless or until they shrink enough to cry “too poor to pay” the pending $571 million judgment.

There are some Tax positions open, however.

But don’t expect to make partner soon in the UK.

3. PwC is blogging! Yea! They embrace social media! Well…Yes… If you’re interested in the “Gender Agenda.” Because gender issues are a business issue. Just don’t try to make it a real conversation or you’ll get banned.

2. Deloitte Wants You! “For U.S. junior military officers transitioning to the business world, Deloitte offers an unparalleled opportunity to create a challenging and rewarding career.”

Unfortunately, the BearingPoint professionals just acquired may not have as easy of a time fitting in. Some of them actually started at KPMG!

1. You want to work with the best. “The people of KPMG are committed to corporate citizenship; they want to lead change and be involved in dynamic solutions that improve the societies in which they live and work,” says Tim Flynn, Chairman, KPMG. Yes, at clients such as Citigroup, New Century, Countrywide, Fortis, Fannie Mae, Rentokil, HSBC…

Looking For Talent? Steal From Your Competitors

Francine — Mon, 05 Sep 2011 11:30:00 +0000

This was originally posted September 6, 2007. Not much has changed since then. Not much varies for the Big Four member firms all over the world. Regulators, please note: This is the level of responsibility- the level of expectations – for non-management staff.

Quite significant.

I ran across this recruiting ad for PwC Belgium while looking for something else. (Updated on September 5, 2011 with current recruiting video.) It’s an ad for experienced hires with only 2-5 years of experience.

Watch the video. Notice the ubiquitous hotelling. Nice cars, nice suits, nice offices, but sheer monotone boredom just doesn’t look very good on video.

(Notice how the cute dark haired girl is always shown behind the straitlaced Senior Manager.)

*The job of your life

In this position, you will be the ambassadors of the PricewaterhouseCoopers brand and be best placed to identify our clients’ needs. You will have a key management role on audit assignments where you will utilise and further develop your knowledge and skills.

You will:
* Have direct contact with clients and work in their offices (Better to save on office space at PwC and office space hotelling is so tedious…)
* Work closely together with experienced engagement teams (Yeah right…)
* Execute and complete a variety of engagements (More likely stuck on the same client all year or more.)
* Work independently (Yeah, no Managers or Partners ever show up.)
* Continue technical development through report writing, management presentation and other client deliverables (What do the Partners do?)
* Develop and maintain ongoing work relationships with clients’ middle and senior management (I’m sure they really love talking about Fin 46 with a 25 year old…)

* Continually look for opportunities to help clients to solve their complex business problems in an ever-changing environment (For sure!)
* Utilise the PricewaterhouseCoopers methodology (What a prize!)
* Develop listening and questioning techniques (Listen more, question less)
* Organize and collaborate in the planning of projects (Is there more?)
* Coach teams of auditors: distribute their work according to experience and expertise, train them and follow up performance (I’m 25, I’m new to the firm, I’m not even a CA yet and I am coaching others?)
* Lead our teams in the performance of audits at a wide range of our multinational and major clients (Many are called, few are chosen.)
* Contribute to the development and the on-the-job training of our professional staff. (Isn’t there anyone who works here besides me? When do I get to go home? What time is lunch?)

*Your profile (The only people who fit this profile are others who have already had two years of training at another Big 4 firm!)
- You have 2 to 5 years of experience in external audit .
- Demonstrated strong analytical skills and organisational abilities with a proactive approach to solving problems and delivering client solutions,
- A proven track record of establishing and maintaining strong relationships,
- Action-oriented self-starter, able to work autonomously,
- Experienced in supervising and developing junior staff,
- Ability to communicate clearly with colleagues and clients at all levels,
- Basic knowledge of IFRS and US GAAP would be an advantage,
- Flexible and adaptable to new situations

Say Anything: The Big Four Defense Of Overtime Exemptions

Francine — Tue, 21 Jun 2011 04:38:20 +0000

Although the state and federal wage and hour laws governing eligibility for overtime pay are complicated, the public policy issues they present for audit firms are not.

The largest public accounting firms want entry-level accounting graduates to feel like professionals, by virtue of their university degree, the potential to take the Certified Public Accounting (CPA) exam, and their eligibility to be licensed eventually. But when it comes to eligibility for overtime – or rather exemption from overtime – it’s not who you think you are or where you came from but what you actually do that matters most.

The education of accounting majors consists, in the worst case scenario, of being “taught the exam” and, in the best case, of four to five years of head-down, hard-core study and rote memorization of facts with rarely any time for other outside reading, enrichment, travel, or world view development. If all goes well, the student gets the highest grades – the Big 4 limit interviews to only tippy-top students – and has a choice of internships and then full-time positions.

The firms take that raw material and, via constant on-the-job training, turn it into a finished product that can hopefully perform some portion of an audit of a public company after five or six years. The roles and responsibilities – and time served – at each level within the firm are rigidly defined. At each step along the way, there is another young professional with only a year of experience more who is assigning tasks and reviewing your work, until you’re promoted to manager.

At the manager level, most firms require you to be licensed - even though the only one who can take ultimate responsibility for an audit and sign the opinion is a qualified partner – and the assignments are more focused on the industry or technical aptitude you may have demonstrated along the way. Until then, most firms still treat individuals as fungible, pooled resources, assigned to teams or tasks by a central scheduler based on availability, location, and personal qualities. Dynamics between team members and between team members and client contacts become more important success factors over time.

This is how Deloitte describes the day-to-day:

Whether you work in Audit Services or Enterprise Risk Services, you can expect to devote a significant amount of time at the client site with your team. You might spend part of your day talking to clients at various levels (from the accounts payable clerk to the CFO). You may examine documents, cancelled checks, and general ledgers, documenting your observations for your clients and team members.

Your team’s structure may vary. For a large engagement, there may be as many as 20-25 people on a team. You may work on multiple client accounts simultaneously. Engagements can be regionally, nationally, or globally focused, and usually involve close interaction with the client’s senior management.

During the first three to four years, most of the professionals are still unlicensed although some may have, by now, passed the CPA exam. All the states have some kind of experience requirement before licensing depending on how many university credit hours are required to take the exam and/or obtain a license.

Because they are unlicensed, these employees do not meet the easiest test for exemption – being licensed or certified. In California, the professions covered by this straightforward exemption are listed and include accounting.

However, the Ninth Circuit Court of Appeals disagreed with the District Court that the “professional exemption” is completely unavailable to unlicensed accountants. They recently reversed an earlier decision that precluded, as a matter of law, the use of the “professional exemption” for unlicensed accountants:

We reject Plaintiffs’ argument that exclusivity between the second and third categories implies exclusivity between the first category and the latter two. We see nothing in the text or structure indicating that enumerated professions (subsection (a)) cannot in some instances also be either learned or artistic professions (subsection (b))…

[S]ubsection (a) is much easier for an employer to prove. Subsection (a) precludes the factual disputes for which subsection (b) is a veritable hotbed—even in this case—about the employee’s actual job duties and whether those duties meet the requirements of a “learned” or “artistic” profession.

In the Campbell v. PwC case, PwC will have an opportunity to prove, if they choose to go that route, that duties performed by the entry level employees in their audit practice meet the requirements of a “learned” profession.

(i) Work requiring knowledge of an advanced type in a field or science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual, or physical processes, or work that is an essential part of or necessarily incident to any of the above work; or

(ii) Work that is original and creative…and

(iii) Whose work is predominantly intellectual and varied in character (as opposed to routine mental, manual, mechanical, or physical work)

I can’t imagine the lawyers will go so far as to claim that accounting is an “art” and auditors are “artists”. That would certainly test the limits of good public policy.

The audit firms can also testify that the unlicensed employees are not eligible for overtime because they meet an “administrative” exemption. This exemption, in California for example, is defined as:

Administrative Exemption. A person employed in an administrative capacity means any employee:

(a) Whose duties and responsibilities involve either:

(i) The performance of office or non-manual work directly related to management policies or general business operations of his/her employer or his/her employer’s customers; or

(ii) The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and

(b) Who customarily and regularly exercises discretion and independent judgment; and

(c) Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity (as such terms are defined for purposes of this section); or

(d) Who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge; or

(e) Who executes under only general supervision special assignments and tasks; and

(f) Who is primarily engaged in duties that meet the test of the exemption.

The Code of Federal Regulations explains an important component of the administrative exemption – the exercise of discretion and independent judgment – more fully:

§ 541.202 Discretion and independent judgment

To qualify for the administrative exemption, an employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. The term ‘‘matters of significance’’ refers to the level of importance or consequence of the work performed.

There are two reasons that arguing the administrative exemption for audit associates is contrary to public policy.

The first is that more than one judge has already told the audit firms that expecting audit associates to perform, “office or non-manual work directly related to management policies or general business operations of…his/her employer’s customers, “ is contrary to auditor independence rules.

In the overtime case against KPMG in Washington State court, Litchfield v. KPMG, the judge concluded the following:

“The independence rules of the accounting profession as a matter of law preclude accountants performing work on audit engagements from qualifying for the administrative exemption.”

The judge determined that KPMG cannot invoke the administrative exemption in the overtime case without compromising the SEC-required obligations for auditor independence. Nevertheless, KPMG (and the other Big Four firms) have continued to defend against the imposition of overtime pay by claiming unlicensed audit staff perform administrative work for their audit clients.

Just this past April, KPMG again asserted the administrative exemption as a defense to the overtime case filed against them in the federal district court in New York, Pippins v. KPMG. Note also that the firm defending KPMG in the Litchfield case, Orrick, Herrington & Sutcliffe, is the same firm that defended PwC at the district court stage in the Campbell v. PricewaterhouseCoopers case.

I suppose it’s not surprising KPMG might think they can get away with this open flaunting of the independence rules. After all, they are performing administrative tax work – work that should be done by the client’s staff – for century-old audit client GE.

The firms have created a Hobson’s choice for the entry-level auditor. Their immediate superiors may ask them to do robotic, routine, data entry into pre-programmed audit software, scan hundreds of documents, or to ask questions of a senior client employee while using discretion and judgment in deciding if they’ve heard true and complete information.

Either way, their choice is only to do what they’re told. During busy season they have been known to follow orders for 60-80 hours per week.

But when audit firms expect entry-level professionals to, “exercise discretion and independent judgment with respect to matters of significance,” they are perpetuating performance requirements that contradict PCAOB Auditing Standards in service to avoiding overtime pay.

More likely, the firms’ first objective is to perpetuate artificial status and value in the eyes of both college graduates and audit clients so the firms can continue to attract bright-eyed graduates and justify higher than necessary fees for work that is performed by the least experienced, but least costly, resources under general, or less than general, supervision by partners.

The PCAOB’s Auditing Standards say that as the risk of material misstatement increases, the supervision of engagement team members by partners should increase. When “matters” become “material” the entry-level audit associates are not supposed to be going it alone.

Auditing Standard No. 10 Supervision of the Audit Engagement

Effective Date: For audits of fiscal years beginning on or after Dec. 15, 2010

6.To determine the extent of supervision necessary for engagement team members to perform their work as directed and form appropriate conclusions, the engagement partner and other engagement team members performing supervisory activities should take into account:

§       The nature of the company, including its size and complexity;

§       The nature of the assigned work for each engagement team member, including:

(1) The procedures to be performed, and

(2) The controls or accounts and disclosures to be tested;

§       The risks of material misstatement; and

The knowledge, skill, and ability of each engagement team member.

Note: In accordance with the requirements of paragraph 5 of Auditing Standard No. 13, The Auditor’s Responses to the Risks of Material Misstatement, the extent of supervision of engagement team members should be commensurate with the risks of material misstatement.

Compare what the PCAOB said in a recent disciplinary order with what PwC is claiming in the California overtime litigation. (Unlike what the Big Four say in open court, such as the quotes below from PwC, the Big Four have designated nearly all of the evidence in these cases as confidential and/or documents have been filed in court under seal. These transcripts, here and here, therefore provide rare insight into PwC’s claims about their unlicensed audit assistants that would not otherwise be public.)

I’m calling on the PCAOB, and the SEC, to investigate the use of these specious arguments that are contrary to public policy, contrary to the regulatory goals of both agencies, and violate the Sarbanes-Oxley Act of 2002 amongst other laws and professional standards. How can the regulators also condone the AICPA and state CPA societies who prepare amici briefs in support of these contra-public policy arguments? How can they not condemn groups like the US Chamber of Commerce for also supporting performance expectations for entry-level professionals that dilute and diminish the value received by Fortune 500 companies during their audit?

What’s even more strange is the SEC and PCAOB allow a double legal compliance standard amongst the registered public accounting firms. Most small, medium, and regional public accounting firms are forced to operate on a different business model because they do pay their unlicensed professionals overtime in compliance with state laws that are clear to them.

The audit firms should no longer be allowed to perpetuate the myth in the judiciary – via settlements, seals, and gag orders – that it’s acceptable that so much is being done in service to the capital markets by employees at the very bottom of the hierarchy.

Boombox Serenade

Say Anything…

— MOVIECLIPS.com

Just A Cog In The Big 4 Machine

Francine — Mon, 20 Jun 2011 11:03:22 +0000

This column was originally published at Going Concern.com on June 9, 2010.

Attrition levels in the Big 4 are at historic lows. People are staying, if they can, because of generally weak prospects outside. Unfortunately, the Big 4 and next tier are still cutting, as evidenced by news on this site and consistent reports on re: The Auditors.

The pace in the external job market for former Big 4 audit and tax professionals is picking up slightly. There are jobs in industry, but it’s best to scout those carefully and make sure you’re “the one” before planning your good-bye party. The CFOs seem to be unable to make up their minds about hiring.

In the latest survey, nine percent of CFOs said they anticipate staff reductions. This is up from eight percent in the prior quarterly survey.

Add it up, and CFOs are more pessimistic now than they were three months ago. Not a recipe for bringing down the nation’s stubbornly high unemployment rate.

This is particularly dreary because the source of this survey, Robert Half, has a vested interest in saying everything is going to be fine. Robert Half is a publicly traded staffing company focusing on accounting and finance temporary placement. Their clients (and their recruits) are accounting and finance professionals. If they admit the market for accounting professionals is in the toilet, they admit their own business outlook is dismal.

In the meantime, the Big 4 are still reeling them in like large mouth bass via the new hire and intern programs.

So let’s get this straight…

The firms are pushing out “experienced” hires via layoffs, poor raises and bonuses, fewer partner promotions and longer hours but continue to make room for lower-cost, new hires from the universities. Unfortunately, “experienced” is not what it used to be.

The industry accounting hire model is based on receiving fully trained Big 4 “experienced ” professionals who leave the firms of their own accord after 4-8 years. They typically already have their CPA, have been through several busy seasons and have led audits. But they may not yet be managers and, therefore, not exorbitantly expensive.

Staff with less than 1 year of experience have been cut as well as terminations made at the pre-partner level. There are reports that firms have asked staff with less than three years of experience to repay CPA signing bonuses and CPA review course subsidies. These young professionals probably don’t have their CPA and they do not have enough experience to be considered “experienced” in the typical way industry had been accustomed.

Industry and government are not prepared to take over where the large public accounting firms have left off and train new graduates. Where are the jobs for someone with only 1-2 years experience in the public accounting? They can’t go to another Big 4 firm since those firms are hiring less and then only new grads or specific expertise at higher levels.

Any ideas? I get lots of mail and blog comments with that question. Do any of the optimistic professors – taking money from the Big 4 for research, endowed chairs, and new curriculum pushes such as for IFRS – want to answer my mailbag once a week?

That would be a great blog feature – Ask a Professor: What Do I Do Now?

The universities continue to allow the large audit firms to come to campus and promote job opportunities, stability, and great working environments. And the magazines still print that accounting firms are best places to work or start your career. The schools still pride themselves on excellent placement statistics. Have the universities reopened placement centers to accounting graduates who’ve been cut with less than three years experience?

During the Sarbanes-Oxley boom, universities responded to the firms need for more and more graduates by bringing in tons of international students. The firms hardly ever sponsor visas anymore. Instead they’re building centers in India and on the African continent to employ them at home. For much, much less. There are active, strong, mandated initiatives at Deloitte and PwC, for example, to use a fixed percentage of offshore staff on every audit.

Don’t be fooled by seemingly stronger hiring and recruiting trends for new graduates and interns. The Big 4 may restart the assembly line before the economy fully recovers because it takes two to three years to polish the part, from an offer of an internship to finished cog ready for full-time work. The firms would rather pull cheaper staff resources in at the new graduate level and work leaner than have an over abundance of expensive experienced staff unassigned and eating into partner payouts.

PricewaterhouseCoopers Headed For A Trial In California Overtime Case

Francine — Fri, 17 Jun 2011 14:10:42 +0000

I wrote yesterday in Forbes on the decision by the Ninth Circuit Court of Appeals in California regarding the PricewaterhouseCoopers Attest (Audit) Associates overtime case.

It’s a complicated case and it’s not over yet.

It’s also another case, like Satyam, that I’ve followed for a while – almost as long as I’ve been writing this blog.

Here’s an excerpt from the first article I wrote about it in October of 2007. The case started in 2006.

With echoes of pending actions against E&Y and KPMG in Canada, PwC has now been served in the first Big 4 suit to make it to the class certification stage, according to the firm representing the plaintiffs, Kershaw, Cutter & Ratinoff…According to CFO.com, “…under California law, only certified public accountants can properly be classified as exempt from receiving overtime.”

“For years, the Big 4 accounting firms have ignored Federal and State laws mandating the payment of overtime to unlicensed accountants,” said Bill Kershaw, the KCR attorney representing the plaintiffs. “This is in stark contrast to smaller accounting firms, many of whom comply with California’s overtime law and pay overtime to their unlicensed associates as non-exempt employees.”

In June of 2008, I wrote about it again:

Take a look at this response to one of the most important points of fact in the complaint and tell me what you think is wrong with this picture..

“Answering paragraph 4 of the Complaint, PwC admits Plaintiffs are individuals and residents of the State of California. PwC further admits that Plaintiffs were employed by PwC as “associates”in PwC’s Assurance Line of Service. PwC is without knowledge or information sufficient to form a belief as to the truth of the allegations concerning Plaintiffs credentials or degrees, licensing status by a state or federal agency, test status or “Certified Public Accountant” or “CPA” designation from the State of California, and on that basis denies such allegations. PwC admits Plaintiffs bring this action as a proposed class action on behalf of themselves and certain current and former California employees of PwC. Except as so admitted, PwC denies each and every allegation ofthis paragraph in the complaint. “

Hey Jude Curtis, PwC Chief Ethics, Risk and Compliance Officer: Shouldn’t you guys know who is licensed in each state, each and every state where your professionals work and travel, and whether a particular person has proper credentials and degrees to be an auditor?

Lawsuits are tedious. They take forever. Judges often reverse each other. It’s almost never over when you think because there’s almost always an opportunity for an appeal. Those who think an injustice has been done often only give up when they run out of money or die.

The latest twist in this case was a reversal by the Ninth Circuit Court of Appeals of a lower court decision that handed a partial summary judgement to the plaintiffs – more than 2000 PwC attest associates in California who claim they are owed overtime under California law.

Yesterday, the Ninth Circuit Court of Appeals decided that the lower court had erred in granting partial summary judgment because it misconstrued the statute. The lower court erred by finding that all of the enumerated professions, including accountants, were precluded as a matter of law from presenting evidence that their employees could meet the professional and administrative exemption requirements.

From yesterday’s decision:

PwC has viable defenses under the professional exemption and the administrative exemption. Neither exemption is categorically inapplicable to unlicensed accountants as a matter of law, and PwC has established material fact questions on whether Plaintiffs fall under either exemption. The exemption defenses must be resolved at trial.

The case is now headed to trial unless something happens before that. There’s one thing about litigation that everyone agrees on. Anything can, and sometimes does, happen.

Read the rest in Forbes.

Embracing Change – Day by Day

Francine — Thu, 31 Mar 2011 10:57:00 +0000

I’m putting together a presentation for the AAA Public Interest Conference tomorrow about the future of the accounting profession and remembered this post. If you want to know what a varied career – and rich life – I’ve had, then this is the one.

It was originally published July 28, 2008.
I often think of my career as having had at least four parts, so far:

1. The first nine years I was, first, an internal auditor and financial analyst in a bank and then a financial accounting executive in two different B2B industrial distribution companies. (Many of my best “what not to do” stories are from those years and it was during this period that I passed the CPA exam.)

2. The next eight years I spent with KPMG Consulting, JP Morgan, and then returned to BearingPoint as a consultant, the last half of which was spent in Latin America 100%. (It was during this time I became a consultant in mind and body, met many wonderful people who are still my friends, perfected my Spanish, and changed my life irreversibly.)

3. The post 2001 years, until recently, were spent at two firms, Jefferson Wells, part of Manpower, as a Regional VP for the Midwest including Toronto, and at PwC. I was on my own for two years in between, but I allowed two men, a PwC partner who had been the #2 Auditor at CINB, my first employer, and the National Partner in Charge of Internal Audit at PwC, to entice me back to working for PwC.

(It didn’t take much, only a large salary that helped me out of the financial challenges I had created for myself in being on my own for two years and the flattering comments of the National IA Partner:

“You are a renaissance woman. We need you to inject consulting experience and a global view into our flat, insular, internal audit culture.” I’m a sucker for an Italian man who looks up to me.)

4. I’ve been on my own now again since October 2006, writing the blog and doing client work that infuses that writing, while staying close to only whom and what I want to spend time with. I call it professional convergence.

Some people I know now only know me as a writer and blogger. Many people who know me now didn’t know me as a married person. (I haven’t been for ten years.) They only know me as a Jefferson Wells executive or PwC employee and don’t know I speak Spanish and didn’t know me when I was in Latin America or when I was a Controller, General Ledger Manager and Internal Auditor.

Some people only know me from my Latin America days and will forever see me as Francisca the “gitana”, living a life filled with travel, tequila, and task-oriented, technology focused, cross-border project management.

So when I show up at the ISACA Leadership Conference in Toronto, as the Vice President of the Chicago Chapter, people are surprised to find I am not really an IT auditor or security professional. I write a blog about the Big 4. I consult on strategy, sales and marketing, operations and Web 2.0 issues for professional services firms in the internal audit, corporate governance and compliance space.

I was never one to load myself down with a lot of designations and certifications. I passed the CPA exam, but I have never been licensed or practiced public accounting. I have been in the public accounting firms but in technology consulting and internal audit practices and most famously, thanks to my PwC colleagues, auditing the strategy, operations, compliance and governance of that firm.

I am not an internal auditor, nor am I a super-technical technology consultant. I do consider myself a writer now. I use that term often when introducing myself. And I do have my own firm, however small and beautiful I keep it for now.

I thought of all these things when I sat and talked for hours with Krupo and Neil last Thursday and since. They are both 26 1/2 or so, at the beginning of their lives, and yet they feel so much older in their actions and insights. Is that good or bad?

Well it’s better than being flaky, and it made it so much easier for an old lady like me to talk with them. But I worry that they won’t be able to keep up the pace for as long as I have. It takes a lot of energy and pure resilience to do what we are all doing now for another twenty years, at least in my case, and another forty in theirs.

I hope they have it in them.

The Perils Of Pre-Inspection File Polishing

Francine — Mon, 06 Dec 2010 17:50:56 +0000

This column was originally published at Going Concern.com on July 28, 2010. Given the latest disciplinary actions reported over there at that fine blog regarding a young lady at Ernst & Young and her apple polishing – I mean file polishing – I thought I would reprint it.

Ever wondered what it would be like to see your name in print? Most auditors do not aspire to seeing their name in the papers. It’s a career-limiting move to be cited in a bankruptcy examiner’s report or a disciplinary order issued by the PCAOB. But that’s just what might happen if you follow your partner’s orders blindly and roll over. Be very wary if asked to participate in a pre-inspection file review and you’re asked to add evidence of reviews and signoffs, insert documents after the fact, change conclusions or recreate analyses.

Last week Going Concern reported the latest findings of the UK version of the PCAOB, the Audit Inspection Unit. There were two troubling findings that you may have dismissed as uniquely British – faking facts in support of weak assertions and “premature” discharge of the audit report before true completion. Going Concern quoted Accountancy Age and FT Alphaville:

“Auditors have also been accused of altering documents before handing them to regulators and putting cost savings ahead of quality {and} some cases where partners signed audit reports before the audit was complete.”

Have you ever been involved in “cleaning up” a file in preparation for an internal risk and quality review or a PCAOB inspection? Do you know when to say “when”?

Recent cases may provide some guidance. In the New Century Financial case, junior auditors and professional practice specialists saw their names in the bankruptcy examiner’s report because they raised issues and were ignored or overruled by engagement and professional practice partners. In one instance, issuance of the 2005 audit report was delayed until the last minute because of concerns expressed by a KPMG hedge accounting specialist.

He was overruled.

“The issue, however, had not yet been resolved to Klinge’s (KPMG Partner Financial Risk Management/Financial Derivatives Resource Group) satisfaction and it was still holding up KPMG’s audit opinion…In an e-mail exchange in the late evening of March 15, 2006, Kim (KPMG Senior Manager) learned that Klinge was not prepared to sign off on the FRM/FDR review…Donavan (KPMG Engagement partner) stated : “I am very disappointed we are stil discussing this. As far as I am concerned, we are done. The client thinks we are done. All we are going to do is piss everybody off.”

Ultimately…a high ranking member of the KPMG Department of Professional Practice, Terri Iannaconi authorized Donovan to issue KPMG’s audit report…also instructed Klinge to prepare and forward a sign off memorandum and instructed Kim to prepare a “disagreement memorandum” to document the dispute.”

Sources tell me they’ve been asked by audit teams, long after report issuance, to provide “backdated” reports and documents that were needed to “complete” the file. Auditing Standard 3 covers the requirements for audit documentation and lays out, in vague terms, the basic requirements for crossing t’s and dotting i’s. But it’s your firm’s internal quality procedures that should mirror AS3 and provide sufficient and clear detail on exactly what is and isn’t allowed when it comes to “cleaning up the file.”

There’s a less well-known PCAOB disciplinary case that refers to changing documents after the fact.

(Mr. Nardi has since been reinstated by the PCAOB to practice.)

Ex-BDO Seidman Auditors Disciplined by PCAOB

The Public Company Accounting Oversight Board has disciplined two former auditors at BDO Seidman for failing to review the audit work of a junior member of the firm and then trying to cover up by backdating documents…The subordinate noted the absence of initials and signatures indicating that a detailed review had been performed.

(fm Note: There was probably time billed to the client for the partner and manager review but an absence of any time charged in the firm’s internal time reporting system. Regulators: you should be looking for this common discrepancy.) .

When Fitzpatrick returned from vacation the following week, Nardi directed her to initial and sign the workpapers and backdate them to dates preceding the issuance of the March audit report, even though she had not done a detailed review…”

Rule of thumb for junior auditors: If a partner uses the word “backdate” it’s pretty certain he or she wants you to do something you may be famous for later – and not in the good way. If you hear the word “backdate”, run as fast as you can in the other direction to your firm’s Ethics Hotline.

If you get no satisfaction there, try the PCAOB tip line or, maybe, the SEC’s new whistleblower tip line. If your client is a SEC registrant, there may be big bucks for you that will compensate for the fact you will almost surely lose your job, be blackballed from working for any other PCAOB registered firm and never hear from any of your former colleagues ever again.

Small price to pay for being on the side of right…