Kula Consulting Blog

Last week’s posting ended with this question: “What does a poorly run financial institution have to do to get a qualified opinion from its auditors?”  Evidently I’m not the only person asking this question.A small army of lawyers is asking or planning to ask Big 4 bigwigs the same question - in court.  In fact there is speculation (see: http://www.accountingweb.com/cgi-bin/item.cgi?id=106124) that the Big 4 may not survive massive lawsuits that are either pending or will soon be filed concerning the collapse of many of our financial giants.

According to the U.S. Treasury’s Advisory Committee of the Auditing Profession, the Big 4, between them, have 27 outstanding litigation proceedings with damage exposure above $1 billion. Seven of these lawsuits exceed $10 billion!

These figures were compiled prior to September’s meltdown of our financial system. Think about this:  E&Y audited Lehman Brothers; PWC audited AIG AND Northern Rock. KPMG audited Fannie Mae. Lawsuits anyone?

Back in the dark ages when I was a Big 8 auditor, my firm, Ernst & Ernst (AC and DC), stressed the position of trust and independence we held in the financial community.  I know I took my audit responsibilities quite seriously, and always felt that we represented the shareholders of the companies we audited, not the management team.

It was our firm’s duty to let the board know about control weaknesses, inefficient operations and areas that could be improved. We presented “Management Letters” to the board, as well as providing an opinion on the financials.

When I was an internal audit director for a publicly traded firm, I believed I still worked for the shareholders and not the CFO.  My boss felt otherwise, so that job didn’t work out very well!  Of course he was known at the time as “Chef J___,” and I should have known better.  That company was later snapped up at a bargain price (sorry shareholders) because of how it was “managed,” but none of the executive team suffered because of their behavior. The external audit was a joke.

Evidently many of the Big 4 have been performing “joke” audits on Wall Street. We will find out if the same holds true for Main Street soon enough.  I’m predicting a boom time from litigation-support accounting services for the next 10 years.  I have no prediction regarding the viability of the Big 4 or the for profit business of auditing public companies.

I promise to not publish on Kula’s website any further rants about the non-performance of the Big 4 during the past nine years. I promise to only publish career-related articles from now on!  But, here’s some career advice for those planning to become Big 4 partners:  Don’t take on any liability. Ask to be promoted to Principal and receive substantial big cash bonuses. Becoming a partner is just too risky.