Categories
Profession

BDO chooses blogging partner to head up international network

Jeremy Newman of BDO Stoy Hayward in the UK is a trailblazer as a managing partner who blogs regularly, primarily about the audit market in the UK. He’s recently won the job to be BDO International’s new CEO starting in October 2008.

Jeremy has been emphatic about getting the message out about audit choice and pushing BDO further into the market for large public company work.

A post he made about trusting people not to waste time on Facebook while at work, and being against the trend to ban it in workplaces, was quoted by yours truly in a post I made a short while ago that caused partners in my office sit up and take notice.

I wonder when others high up in accounting firms will join Jeremy and make blogging part of their regular routine. Communication skills are going to be key to his success in the new role, but judging by his blog, BDO will be in good hands.

Categories
Auditing

Grant Thornton insists client remove Chairman, is removed as auditor

Here’s an interesting story coming out of Dallas:

Embattled multi-level marketing firm Mannatech has fired its independent auditor, Grant Thornton, after the auditor gave the company an ultimatum: Remove Chairman and founder Sam Caster from the company or find yourself another auditor.

So they found themselves another auditor, BDO Seidman, and let Grant Thornton go. The strange thing is this part of their press release:

There were no disagreements between Mannatech and Grant Thornton on any accounting principles or practices, financial statement disclosure, or auditing scope or procedure.

It’s hard to imagine why GT would insist the company dump their Chairman, given the above quote. But it makes no mention of internal control or corporate governance at the company, which may have caused some concern:

Caster stepped down as CEO in August. His decision came a month after the Texas Attorney General filed a lawsuit charging Mannatech, Caster and other parties with illegally marketing and selling its dietary supplements as a way to cure and treat diseases, illnesses or serious conditions like cancer.

The company has made a concerted effort to fix the problems that led to the lawsuit, including updating their sales and marketing materials and guidance for employees. With adequate monitoring, solidifying procedures and policies and setting expectations should ensure Mannatech recovers in the future.

Categories
Business

Banning Facebook sends the wrong message

Facebook office signJeremy Newman, the Managing Director of BDO Stoy Hayward in the UK, provides real leadership and an inspiration across the pond to me and no doubt others who read about his management style and philosophy. He writes about workplaces banning Facebook, which is very popular right now here in Toronto among employers.

I am not sure how effective this will be at increasing staff productivity – which is presumably the intended effect. To be consistent I guess they also need to ban personal telephone calls and emails during office hours. Personally I prefer to trust people.

That’s a breath of fresh air coming from someone in his position. I would expect the employees of Stoy Hayward appreciate being treated like responsible adults. From the comments, by “russell”:

Rather than banning things companies should look to understand what makes it such a powerful medium and explore opportunities to engage with employees through such social networking sites.

He’s on the mark with the sentiment, which some businesses have already taken to heart. Especially in the profession, where potential employees are already users, keen on new technology, especially when it helps them meet people and build relationships, and looking for something to differentiate between what are essentially different flavours of vanilla.

Banning any site sends existing employees the wrong message, and failing to leverage the social network will hinder the growth of the firm when it comes to attracting the top young minds entering the profession.

Categories
Auditing

Sucks to be Seidman

By now, the verdict in the BDO Seidman lawsuit has been covered by all the major industry blogs. All the heavyweights have registered their opinions in this great swirling mass known as the blogosphere. The mainstream media has tossed it around this way and that. There is near unanimity amongst all commenters: Sucks to be them.

I don’t disagree completely. For failing to detect a fraud perpetrated at E.S. Bankest LLC, Seidman is on the hook for $170 million in actual damages and a whopping $351.7 million in punitive damages. The combined amount of $521.7 million is the value of accounts receivable E.S. Bankest fraudulently reported in their financial statements, which were audited by BDO.

Naturally a lot of speculation has focused on whether the firm will be able to survive, assuming their appeal doesn’t reduce the damages. Big Four Blog does the math:

The WSJ says, “Testimony and evidence presented showed that BDO had profit distributable to partners of more than $170 million for its 2006 fiscal year, which ends in June, and a net worth of about $40.5 million. […] Among 250 partners works out to about $700,000 payout per partner. The $521 million damage is equal to three years of current year earnings. […] Can BDO Seidman effectively handle such a large amount of payouts, without losing its current structure? This is serious money for a medium sized firm.

It’s serious money, period. Jack says:

Even for the Big Four, $522 million is a lot of scratch. Recall that the Department of Justice fined KPMG $450 million in its tax shelter travails. That caused outsiders to wonder if it would interfere with KPMG’s equilibrium. This is not the way BDO Seidman would like to join the big leagues.

Just how much scratch a half billion really is for either a Big Four firm or a mid-tier one is not crystal clear. Francine asks the question:

When will the SEC and PCAOB start encouraging all the firms to be more transparent about their ability to continue to weather all of these high payouts? It seems we only hear there’s a problem with covering the liability when the firm is about to go under.

E.S. Bankest was part-owned by the plaintiff in the lawsuit, Banco Espírito Santo (Get it? E.S.!), and Bankest Capital. BES relied on “faulty audits showing that Bankest Capital’s income had nearly tripled from 1995 to 1996” when deciding to start the venture!

The entity was involved in factoring, which is when a third party buys accounts receivable from companies at a discount (to improve cash flow for the original company), collects the receivables and keeps the profit. Needless to say, the accounts receivable assets of a factoring company should be a main focus of a properly conducted risk-based audit.

Another interesting bit is how quickly the jury decided the firm had been negligent. One hour. Gross negligence. The evidence must’ve been pretty convincing.

The best evidence of the existence and accuracy of receivables is the confirmation. This is where the auditor takes a sample of receivables outstanding at year end and sends a letter to the customer asking them if they agree with the amount owed. If they agree, it is confirmed. If they disagree, they typically provide what they believe the balance was, and the two must be reconciled.

The strength of the confirmation should be obvious. Evidence coming from a third party is stronger than other procedures performed on AR like vouching to invoices and shipping documents, which are client-prepared.

The problem is that most confirmations are not returned. In my experience, I’ve gotten as few as 6 of 20 back, although it really depends on the organization and industry. I’ve heard that some companies or the management have a policy of not returning confirmations. Either way, when confirmations are not returned, the auditor has to fall back on alternative procedures, which are less persuasive.

Another typical procedure is the analysis of the aging of receivables. The longer a receivable has been outstanding, the less likely it will be collected. An auditor will identify larger receivables that have been outstanding for longer than 60 or 90 days, and discuss the situation(s) with management to assess whether the receivables are collectible.

Details regarding the failed audits have been unsurprisingly scarce, but it’s a good bet that the two areas above played a significant part.

Categories
Profession

Big Four dominate professional services globally

The Managing Partners’ Forum was established in 1995 and is “dedicated to enhancing leadership and the status of the management team in professional firms worldwide.” They recently released the inaugural Global 500, a ranking of the top 500 professional services firms in the world by fee volume.

The Big Four are at the top of the list, with PricewaterhouseCoopers coming first, followed by Deloitte, Ernst & Young, and KPMG. Interestingly, Accenture, formerly Andersen Consulting, formerly a division of Arthur Andersen, formerly the auditor of Enron, formerly in existence, occupies the number five spot:

  1. PwC – $22.0B
  2. Deloitte – $20.0B
  3. Ernst & Young – $18.4B
  4. KPMG – $16.9B
  5. Accenture – $16.7B

I threw the numbers into Excel to do a little analysis. First, I wanted to see how they stacked up in terms of revenue per employee, since the report provided the number of employees. The third ranked firm in total revenue, Ernst & Young, is #1 when it comes to revenue per employee at approximately $161,000. The average of the Big Four is $154,000. The remainder of the four are in the same order as revenues, with PwC and Deloitte shuffling down to make way for E&Y:

  1. Ernst & Young – $161,000
  2. PwC – $154,000
  3. Deloitte – $151,000
  4. KPMG – $150,000

Beyond the Big Four, the next largest accounting firm is BDO at 22nd overall. Rounding out the top 10 accounting firms are Grant Thornton (35th), RSM (36th), Baker Tilly (46th), Horwath (48th) and Moores Rowland (50th). The average revenue per employee for those five firms is $114,230, which is significantly lower than BDO, in the middle of everyone, at $140,500.

The bottom of the Big Four in terms of total revenue is KPMG, but it is 332 per cent higher than BDO. There is about 10 per cent separating each of the Big Four, with PwC 10% larger than Deloitte, which is 9% larger than Ernst & Young, which is 9% larger than KPMG. BDO is about 40% larger than Grant Thornton and RSM. So the Big Four more spread out between each other than I’d originally thought, but is leagues above the rest of the pack which comes as no surprise at all.

It’s an interesting list, by an interesting ‘Forum’. Management in professional firms is a different beast altogether from management of more traditional “operations”. Experienced employees are an intangible asset of any type of business, but in professional services firms there are unique challenges which require special people skills. A good managing partner is so important to retaining strong team members and keeping them (us) satisfied.

(Via Accountancy Matters.)