I am wise enough to know what I know and what I do not know. As a risk mitigation and due diligence expert, I understand risk, due diligence, mergers, and acquisitions, what makes a business successful, and how fraud and money laundering occur.
And while I have familiarity with law, regulations, human resources, building and reading financial statements, and marketing, I am not an expert in these areas. When the subject matter arises, I refer the situation to an expert. I believe it a core principle of authenticity to avoid providing advice in areas outside of our expertise.
Unfortunately, many do not share my values and perspective and, yet again, over the last several weeks I have been presented with accounting firms in embarrassing examples of credential overreach.
Many of these firms were performing AML (anti-money laundering) audits. Most do not have a clue of the various forms/factors under which money laundering occurs. This dearth of experience may also explain why their clients were fined.
I am also looking at a compliance manual authored by one of the big three accounting firms for a bank that is absolutely atrocious. The $125,000 compliance manual is a “cut and paste job” from the internet! I kid you not. I get plagiarism is how many people get our first compliance manual’s copy from which we begin revising. It’s a faulty method, but I understand why. However, auditor editors should at least get the laws with which one should comply with the right nation. The client was in Rwanda/Africa, yet the clauses referred to Wyoming/USA. Mistakes like this are not new. However, the rate at which the accounting firms are straying far from their core of competency is alarming and is resulting in more and more mistakes that could have been avoided.
Starting in the 1950s, the SEC raised concerns about the rise of non-audit services
In the 1970s Congress looked into the issues, and while it seriously considered limiting the non-audit services that independent public accountants could provide, no action was taken.
The Congressional investigation continued in the 1980s, with the Chairman of the House Commerce Committee, John Dingell, conducting numerous oversight hearings directed principally to audit quality and independence.
In the late 1990s, in response to an increasingly complex web of business and financial relationships between auditors and their audit clients and the dramatic increase in the revenues from non-audit services to clients, the SEC took action by imposing certain requirements for auditor independence.
The link between the rise of non-audit services in the 1980s and 1990s to the financial reporting crises preceding the adoption of the Sarbanes-Oxley Act in 2002 is somewhat unclear. But, the rise of advisory services is considered to have fundamentally changed the culture and tone at the top at the firms and had their leaders focusing more on offering broader services to audit clients.
(From PCAOB Web site)
Many of the large accounting firms now provide services well outside their expertise including enterprise strategy, marketing and sales, corporate finance, mergers and acquisitions, government consulting, legal services, immigration. And they do not stop there; they also offer a wide variety of risk management services, including financial, insurance, IT risk management, cybersecurity, human resources transformations, etc. In fact, a Big Four announced its ambitions to become a global top-20 legal services player within the next five years.
Let’s take a step back and ask with all the catastrophic failures, do we even trust those big accounting firms? Personally, I do not trust the accounting firms one iota in any of those areas. Why? The accounting firms are having a serious problem with just providing a competent level of their core services. So without sufficient quality or skill sets in place, how in the world can they off all these other unrelated disciplines?
The bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp., sued PwC for $5.5 billion in damages in 2012 after the bank went bankrupt in August 2009. Federal regulators, not the bank’s auditor, Deloitte, uncovered a $3 billion fraud involving fake mortgage assets. (Bloomberg)
Colonial Bank, a Montgomery, Ala., institution with $25 billion in assets, also filed for bankruptcy in 2009. The Colonial Bank bankruptcy trustee and the Federal Deposit Insurance Corp. brought a lawsuit in 2012 against PwC for negligence as the auditor of Colonial Bank, claiming $1 billion in damages. (Bloomberg)
Another large case names PwC’s Brazil member firm for its allegedly negligent audits and failure to detect a multibillion-dollar bribery and corruption fraud at the state-sponsored oil company Petrobras. (Bloomberg)
The auditor BDO’s operations in the Cayman Islands, Trinidad & Tobago and the United States are being sued for $280 million in damages by the liquidators of Cayman-domiciled Argyle Funds, which collapsed due to alleged fraud. (Offshore Alert)
There is a serious issue in the quality of these accounting firms’ core competencies – accounting and auditing. We get why. Its because on average 80% of the accounting billing hours are from juniors – newly minted earnest professionals with the university degrees and CPA or Chartered Accounting credentials. Please understand these are not bad or somehow defective professionals. These newly minted eager professionals merely lack experience.
I do see a day in the near future when a large judgment will be rendered against one of the big 3, 4, 7 accounting firms. When not if, this happens the major firms will atomize in months. The top tier professionals will split off from the big poly-professional firms forming their own firms. The remainders of the large firms will enter a death spiral – spewing out clients and juniors as they all depart looking for simple authentic competency.
What does this mean for the small and family businesses looking for advice? It means one should look for professionals within firms that possess the essential core of competencies. When you need a report on say, branding, the big firms send the juniors off to the business library, and you’ll get a report that looks great but is not composed by those with genuine experience. These are expensive textbook exercises – term papers. You do not need “term-paper” advice in our dynamic business environments. You need an expert that can not only research, but also process and apply insight to solve your problem the first time.
When you are looking for an expert in risk and due diligence, choose a firm where risk mitigation and due diligence is their core of competency and ensure they have the experience to handle your situational needs. Looking for branding and marketing, again, look for experts. When looking for an expert on AML, find someone who knows what money laundering looks like. Looking for legal advice? Choose a law firm. As much as these shortcuts and online solutions are gaining momentum, they do not bring the necessary expertise to see beyond your symptoms to the cause, and you will often end up paying the price, exponentially in the future.
If you need help, or are unsure of what kind of expertise you need, contact us today and we will help bring clarity to the complexity.