Outsource internal audit for greater objectivity

That’s the recommendation from the Institute of Chartered Accountants of India (ICAI), as reported by The India Express:

“In the high-powered committee report on Satyam scam, we have proposed that internal audit should be outsourced and not be in house so that there is more independence. If the auditor is from the organisation, it is as good as being an employee of the organisation and the chances of remaining unbiased decline. Market regulator Sebi through clause 49 and the corporate affairs ministry through the Companies Law should make it mandatory that the internal auditor should be from outside the organisation,” ICAI president Amarjit Chopra told The Indian Express.

I can’t really argue with the logic, but the feasibility of the idea is fair game. The logistics of putting this into place is giving me a headache, and it does seem like an overreaction to a single instance of fraud.

The voice of reason comes from the director of KPMG in India:

“More important [than outsourcing] is the communication between head the of internal audit and CEO or chairman of audit committee. The success depends more on how freely and directly the internal auditor can discuss the shortcomings in a firm with the CEO of audit committee.”

Boards should be ensuring that the lines of communication between the Chief Audit Executive and the Audit Committee are direct and communications frequent and frank. That applies even if IA is outsourced as well.

I blogged a while ago about the Satyam scandal.

IIA: Keep internal and external audit separate

AccountancyAge is reporting that the UK and Ireland IIA’s chief executive Ian Peters recently made a statement on the contentious issue of having external auditors provide internal audit services:

Internal auditors answer to management and the non-executive directors… external audit reports to shareholders. Merging these two important functions has the potential to cause serious conflicts of interest and reduce the effectiveness of internal controls and the management of risk.

The statement was made in relation to the KPMG-Rentokil deal.

I think if the two parties gave us more details about the work performed around independence it was assuage many of the fears stakeholders are having.

KPMG has said they believe the provision of both functions “is perfectly feasible to do in the spirit and letter of the law.” If that’s so, how long before more of these arrangements are made by KPMG or other firms?

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.)

Big 6 accounting firms call for changes

The Big Four audit firms – Deloitte, Ernst & Young, PricewaterhouseCoopers, and KPMG – along with the number five and six firms – BDO and Grant Thornton – have joined forces to call for significant changes to the way public companies report their results.

They propose businesses report realtime financial data via the Internet, rather than quarterlies. It’s obvious that this would provide more timely information for investors, and that’s a good thing. It also seems like this could at least take advantage of the costly effects of Sarbox, that of thoroughly documenting controls – because the controls would be even more critical if information is constantly updated and available.

Either way it’s nice to know the guys at the top are still thinking about ways to improve the industry. Taking advantage of technology, especially the web-based variety, will continue to grow in importance not just for auditors and accountants, but in every aspect of business. Some accountant bloggers have been quite hysterical about the lack of focus on our part on technology.

Now if I can slide off on a tangent, I’d like to draw your attention to the headline (from the link above): “Accounting firms want company accounts revamp, paper says.” First of all, is this even a sentence? Is revamp a noun now? I had to read that thing several times over to really get what they were trying to say.