I did some homework today on KPMG

Ever since I received that phone call from KPMG, I have been curious about a few things. The first is how they even found this blog! Let's face it, the traffic isn't huge. I'm on track right now to get around 5700 page views per month - I installed a counter recently. These are not big numbers. So, how did KPMG find me?

Well, I saw the domains that refer traffic to my blog, and it appears that somebody recently came to this blog from the MSN search window, using the criteria: KPMG and regulatory problems. This blog comes up on the seventh page of search results. But, it could have been the person who used Google to search for: "big four" accounting firms prosecution litigation 2005. That put the blog as the tenth option out of 515.

Thanks to everybody who is checking this out from as far as India, by the way. I appreciate your interest.

Assuming that somebody from KPMG found my blog, they still had to get my home phone number. Since I work from home (one of the perks of being a freelance writer), one can call me at home using my "work" number. Well, I recently published a few articles in the Sarbanes-Oxley Compliance Journal (http://www.s-ox.com), and I listed my cell as my business number. This is usually more prudent, because I do a lot of my writing from a local cigar shop.

But, they called my home number. This means that they probably did a Google search on "tom johansmeyer, assumed I am not the guy who writes for an adult-oriented publication, and sifted through the many white papers I have written for Imceda and Quest Software. On the Imceda white papers, I list my home number as the business line.

Clearly, these folks did their homework.

I know that this doesn't provide much insight into the Big Four, but I did want to provide some context on the recent phone call from KPMG - as well as their reaction to my 9/30 story.

Tom Johansmeyer

You won't believe the phone call I received

I received an interesting phone call yesterday.

Over the past few weeks, I have learned to accept the fact that this blog has a small but growing readership. Let's face it - the information here is targeted at a relatively small population. Further, it's pretty clear that I am not one of the "celebrity" bloggers that gets featured in Time.

I learned yesterday that interest in my modest blog is much deeper than I realized. I received a call from KPMG.

I'm just surprised they found this blog! Seriously. If you do a Google search on KPMG, the Big Four Alumni Blog isn't exactly at the top of the results list. Somebody clearly keeps track of what is written about the firm.

Clearly.

I can't remember the gentleman's name. He told me, but I have to admit that I was not paying as much attention as I should have. He agreed to send his contact information, so I should "remember" his name soon. This gentleman was extremely professional, and of course polite. (Note: I still have not received his contact information.)

But, why the call?

KPMG, it seems, objects to my coverage of their recent challenges. Specifically, the gentleman on the phone referenced my post from September 30th (below). Overlooking my praise of the firm's talented practitioners, he zeroed in on my thoughts on the recent PCAOB examination in which a handful of KPMG's public company audits were questioned.

The PCAOB examination certainly is public knowledge. I read about it first in the Financial Times, simiply because that is the newspaper I read every morning. I also encountered this story in a number of other places. Of course, this is not what upset the gentlman at KPMG.

He was a bit concerned about my discussion of the "Big Three" - a possible outcome of KPMG's continued legal problems. Readers of BigFour.com know that I have been pondering this theme since the middle of the summer - even before we launched this blog. I wrote about it in a few newsletter articles. In fact, these articles were picked up by a number of web publications around the world.

I pondered whether this latest KPMG problem renews concerns about audit industry concentration. On its own, the thought would never have occurred to me. PwC was examined as well, adn they received criticism from the PCAOB.

So, why am I picking on KPMG?

It's really quite simple. With KPMG, there's a bit more going on. PwC, Deloitte, and E&Y did not write a half billion dollar check to the US government to avoid prosecution (as settlement). PwC, Deloitte, and E&Y are not subject to indepednent oversight as the result of a recent deal with the feds. KPMG, well, you know the story.

Let me make one thing perfectly clear. I like KPMG. It's a great firm, as I wrote in my "objectinoable" article on 9/30. They do great work, and I think the majority of partners and practitioners at KPMG are getting a raw deal. The many are punished for the sins fo a few. It's truly a shame.

I stand by my story - as I stand by every story, blog post, and everything else I have written. KPMG is in an unenviable position; I can't do anything about that. But, I will continue to cover and analyze stories pertaining to the Big Four - including KPMG - as I see fit.

To any Big Four marketing or PR professionals out there, please feel free to contact me if you would like to be offered the chance to comment for my blog. You have the option to comment or not, but ultimately the decision to publish is mine alone.

Please share your thoughts on this matter.

Tom Johansmeyer

I Told You It Wasn't Over

KPMG’s settlement with the US government over its abusive tax shelters may indicate some degree of finality for the firm (in regards to the case itself), but the story is far from over. The US government made no secret about the fact that it plans to pursue certain individuals criminally.

The roster just grew by ten, bringing the total to nineteen. Charges range from conspiracy to defraud the IRS to tax evasion. Yes, we’re in felony territory. Sixteen of the individuals charged, according to a recent report in Financial Times, are former KPMG partners (10/18/2005).

One thing seems to be certain: somebody is going to jail.

This brings up an interesting question. Is it really more appropriate to pursue individuals? A conflict seems to have emerged. The purpose of the partnership is, as an independent entity, to shield the members from liability.

If a crime occurred – let’s let the jury decide whether one has nor not – shouldn’t KPMG be on trial? After all, KPMG committed the acts that are alleged to be criminal. Sure, the actual decisions were made by members of the firm. No business entity “acts” independent of its employees. But, the partners acted through the firm.

As we all know, though, going after the firm is dangerous. We can’t afford to lose another accounting firm. Going down to a “Big Three” would certainly have a negative effect on the accounting industry.

So, we’re avoiding the firm and going after the partners. In compromising the integrity of the LLP structure, we are preserving the actual KPMG partnership. It does seem contradictory.

IN the criminal prosecution of former KPMG partners, a profound problem has arisen. We have to choose between two of the most important challenges facing the Big Four: the integrity of the LLP structure and prevention of the collapse of another major accounting firm.

What happens to KPMG over the next year will undoubtedly shape the industry for the next decade.

By Tom Johansmeyer

Auditors Are Hot!

The sexiness of this profession just won't quit! Accounting, once avoided as "boring" and mere "bean-counting", is suddenly desirable. It's interesting. It is easy to credit the demand created by SOX as the driver behind this trend. This much is obvious.

What's going on?

After the collapse of Enron, we saw just how important accountants are – especially independent auditors. Auditors became the guardians of shareholder value.

So, a number of forces have converged to make accounting sexy. Of course, the demand in the market that resulted from SOX is one prominent factor. Another is the prestige that has emerged around the accounting profession. After Enron, the business community – and individual investors – knows how important auditors are. Among the most substantial drivers, though, seem to be salary.

Salary?

Once upon a time, brand new audit associates didn’t make squat. When my wife and I were at Deloitte, I was a first year consultant, and she was a first year tax associate. My salary was twice hers. So, the notion that the profession’s salary is attracting people is mind-blowing.

Among the ten factors used to rank why recent graduates were attracted to different companies, salaries ranked sixth – much higher than I expected. (This was covered in a Financial Times article on 10/12/2005.)

Clearly, this trend has a Big Four angle. According to the FT article mentioned above, three of the Big Four are among recent grads’ top ten ideal employers. PwC turned in the best Big Four performance at #2, with E&Y at #3 and Deloitte at #6. Given their recent image problems, KPMG is not among the top ten – though I think this will change in future years.

By Tom Johansmeyer

This is making me extremely nervous

When I saw KPMG's name spread across the business pages regarding recent audit work, I was disappointed but not surprised. Let's face it - the firm has fallen on hard times. That they would be targeted by the PCAOB did not surprise me, though. Bad things happen. When I took a look at the news this morning, I was shocked to see that Deloitte is now sharing these PCAOB headlines.

These news stories are disturbing. Some-number-of-name-withheld-clients have restated earnings after federal regulators identified material problems in the audits conducted. What scares me is the fact that the names of the audit "victims" are not disclosed. We have no idea what the problems are. This news is not news at all. It merely announces undisclosed government findings. It appears to be bad press for the sake of bad press.

Like KPMG, Deloitte disagreed with many of the board's assessments. While this may be standard practice as a way to assert innocence in the court of public opinion, I think that KPMG and Deloitte may have a point. The PCAOB has become notorious for ineffective practices, vague guidance, and really having no connection to reality. The "perpetrators" appear more credible.

Reports for PwC and E&Y are on the horizon; it should be interesting to see what the PCAOB does. KPMG got nailed on 19 of 76 audits investigated (not a spectacular result), while D&T got hit for eight out of 125. No details were released.

How does this inspire confidence in public companies?

By Tom Johansmeyer

The Threat of Big Four Consolidation

Concerns around the long-term prospects of KPMG to get out of the government’s sights have renewed the discussion of auditor concentration in the accounting industry. The collapse of Andersen did not result in the promotion of Grant Thornton to the Big Five. Instead, the activities of Andersen’s former clients and employees demonstrated that there would only be a Big Four.

Is that enough?

The marketplace, of course, has cast its vote. The collapse of Andersen did not result in a flight to smaller firms, and it is likely that the loss of one of the remaining Big Four would have a similar result. This trend toward concentration merely has accelerated a trend that began as consolidation – featuring such monstrous mergers as Pricewaterhouse with Coopers Lybrand and Deloitte Haskins and Sells with Touche Ross.

What’s next?

Certainly, the rapid growth of smaller audit firms is unlikely. While public companies lament the lack of options, they are really unanimous in voicing the insufficiency of smaller audit firms to meet their complex needs. Joining the chorus is the investment banking community, which has an overwhelming bias toward the services of the Big Four.

The only alternative to audit firm concentration appears to be a forced break-up of the Big Four. Would we see the return of such forgotten partners as Haskins, Marwick, and Lybrand? Could Fidelity wind up selecting Touche Sells as its auditor?

The possibilities are endless, while the plausibility is not.

The problem of how to decompose the Big Four firms would represent the preliminary problem. Regional divisions would make little sense given the broad domestic and global reaches of even smaller public companies. Could you put Deloitte on the East Coast and Touche on the West Coast? Give Coopers the Midwest, Price the Deep South, and Waterhouse Texas and Oklahoma?

The easier option would be to divide the Big Four firms along business lines. This would entail different firms for tax, audit, and consulting services. Maybe Deloitte could resurrect Braxton after all!

The problem with dividing the Big Four along business lines is that it would do nothing to reduce audit concentration. There would be four big audit firms, four big tax firms, and four more big consulting firms.

Did PwC’s sale of its consulting practice to IBM do anything to audit services? KPMG’s spinoff and eventual IPO of BearingPoint? Of course not.

The government cannot do anything to unwind an industry consolidation that has evolved over two decades. The cure would be far worse than the disease. Instead of worrying about audit concentration, the PCAOB and SEC should focus on effective, clear auditing standards to ensure effective, thorough, consistent audits – instead of trying to shape market forces.

By Tom Johansmeyer

Keep from Getting Lost in the Shuffle

When you're on a big project team, it's pretty easy to be overlooked. Generally, these large projects (those with more than 30ish people) represent spectacular opportunities. You'll meet people from all over the company, especially those who may not work in your practice or serivce line. You'll run into a plethora of senior managers and partners who can keep you in mind for future projects. And let's face it, big projects mean you'll be billable for a long time. No need to hunt for projects every few months - huge projects take care of that for you.

The problem with these substantial opportunities is that it's easy to get lost in the crowd. You can wind up doin ga spectacular job, and your performance review for the project may not reflect the work you actually did. You could have an amazing idea in the middle of a project - executed beautifully. Four months later, when the project is coming to a close, it's forgotten. So, your performance review could wind up overlooking many of your important contributions.

There is an even worse scenario. During the project, you could be forgotten completely. This has happened to me twice. I remember staring at the four walls of a hotel room in Kalamazoo (not kidding) that we used as a satellite office for the project. What a waste . . . I also spent the better part of a month outside in the smoking area when I worked on a project here in Manhattan. In both cases, the efforts were so large that the leadership forgot they had me around. This can be disastrous for you. At the end of the project, whether or not it was your fault you were overlooked, somebody has to review your performance. If they have nothing to say, that's exactly what your review will reflect.

How can you avoid these problems? Actually, it's easier than you think. First, always keep a project journal. Every day (if you have lots of time on your hands) or more realistically every week, keep track of what you accomplished. Good meetings with clients, ideas you contributed, and tasks you completed are the most effective entries into your journal. Don't sink a lot of time into this. Twelve months from now, the four or five lines you wrote about what you did this week might be helpful.

To keep from being forgotten - which can and does happen - you need to remain prominent; you have to stay in the game somehow. The easiest way to do this is to review every project deliverable that gets circulated through your workstream and have something constructive to say. This shows that you are staying in touch with the work that is being done. Another idea is to volunteer for a role that coordinates acrivities between members or work streams - such as version control or document management.

If you stay in the middle of the action, your career and morale will benefit significantly.

Tom Johansmeyer

Sarbanes-Oxley not as Good as It Seems

Ostensibly, Sarbanes-Oxley looks like a great opportunity for the Big Four. The cost of compliance is extremely high, with an average price tag of $4.36 million for publicly traded companies in the US. Of course, most of those fees go to the Big Four. What's not to love?

Plenty.

Despite the increase in fees - both through rate increases and larger audit engagements - Sarbanes-Oxley has made the audit business riskier. The risk from litigation exposure is clear, but there is a subtler, more dangerous angle. Clients are becoming less tolerant of complex audit and weary of the excessive fees for which they are responsible.

The fact that auditors are afraid of government prosecution (a legitimate fear as we have seen from KPMG recently) and client litigation (take a look at Equitable's recent suit against E&Y - recently dismissed) has driven them to set the audit bar high. Weaknesses in internal controls that may not be material are often characterized as such. Auditors want to be careful, so they err on the side of control.

The impact has been profound. Many publicly traded companies are now shopping for more "reasonable" auditors than those they have engaged at present. Auditors thus are squeezed by competing pressures. On one side, they are driven to conduct brutal audits that protect them from even the hint of negligence. On the other hand, overzealous audit standards can cause clients to seek counsel elsewhere.

The only market force that balance the Big Four community is the lack of alternatives. The Big Four have equally, though not collectively, driven fees upward along with audit standards and zero tolerance audit policies.

Tom Johansmeyer

Changes at the NYSE?

I hope everybody at least has kept an eye on this. Over the summer, the New York Stock Exchange (NYSE) announced a mind-blowing two-part plan: (1) acquire the automated Archipelago Exchange and (2) ditch its non-profit status and go public. The elder statesman of the stock exchange industry's plan is radical, despite the fact that the NYSE is a bit late to the party.

The NYSE has long labored under the "specialist" model, which relies on a human intermediary for all stock transactions on the Exchange floor. The result is suboptimal trade execution, a reliance on a restricted trading day (9:30 AM to 4:00 PM), and a higher cost of trade execution that ripples through the brokerage industry.

Most observers took the Arca merger as a sign that things were about to change at the NYSE. The acquisition of a prominent automated exchange could only mean that the NYSE was considering a move from the dated specialist trading model.

It would be about time. Seriously.

The NYSE's primary competition, NASDAQ, operates exclusively in an automated fashion, and most of the regional exchanges (Phily being the most recent) have headed in this direction as well.

The NYSE's notion of going public is also not unusual, as the CBOE is in the process of doing so. A public offering and abandonment of non-profit status also would alleviate many of the NYSE's recent problems around executive compensation.

Of course, revolutionary changes breed discontent. The NY Post reported last week that a NYSE member lawsuit against the exchange continues to recruit participants from among the membership. The old guard, it seems, is comfortable with the status quo.

The absurdity of this position cannot be overstated.

The relevance of the NYSE will recede if changes do not occur soon. As automated trading platforms gain momentum, the only advantage the NYSE has in retracting listing companies is prestige. Prestige, though, does not compare to more advantageous trade execution and more reasonable bid/ask spreads.

The iconoclasts will have their day! The NYSE must adapt or fade into irrelevance (i.e. become a closer cousin to the American Stock Exchange).

Tom Johansmeyer

Strategies for Finding the Right Project

Everyone in the Big Four knows there is a lot you can do to manage your fate. You don't have to sit and wait for somebody to find you. In fact, you'll be a lot happier if you seek out the projects you and and position yourself to get on board. You'll build relationships, work on projects that interest you, and generally be seen as a "go getter." It's easy to be perceived as ambitious when it gets you what you want!

The importance of networking cannot be understated. This is the best way to build your visibility, and a properly managed network can put you in the enviable position of having multiple projects from which to choose. You can expand your network simply by talking to people. When you go to practice or firm-wide events, don't spend all your time talking to the people you know. You'll talk to them soon anyway. Introduce yourself to people you don't know. Find out what they do. These are acquaintances that definitely will remember you when they need you.

Keep track of people. It's easy. On most projects, especially big projects, you'll meet a number of new people. After the project ends, shoot them an e-mail every now and then. On many projects, especially during the proposal or ramp-up stages, my project managers would ask existing teammembers if they knew of any talent for project team positoins that hadn't been filled yet. Keeping in touch with former teammates can definitely help you. Yours will be the name that comes to mind when their project managers ask.

Work on proposals - as many as you can. Yes, proposal work is frustrating, tiresome,a nd of course not billable. But, it positions you at the front of the line when your firm wins the work and the project team needs to be assembled. Also, working on proposals expands your network.

When you wait for a project to find you, you're stuck with whatever finds you first. By finding projects on your own, you stay ahead of the game, and you'l be more likely to find interesting, satisfying opportunities. You'll notice the difference during your appraisal process at the end of the year.

Looking for an Accounting Gig?

There has been no better time to become an accountant than the present. Seriously. This once boring profession has become almost sexy in today's business and regulatory environment.

Hey, I'm as blown away as you are.

Among the major reasons for the sudden accounting boom is the Sarbanes-Oxley Act of 2002. SOX, as it is called, has resulted in stricter requirements for public companies around internal controls, such as the reduction of fraud. The average public company pays more than $4 million to comply with SOX, and the vast majority of these fees wind up in the Big Four's coffers.

To earn these fees, of course, the Big Four need to be able to staff their projects. Demand for CPAs and CPAs-to-be is through the roof, and it doesn't look like the demand will subside anytime soon. The Big Four can't fill their open positions fast enough, making it harder and harder to staff projects.

If you ever wanted to work in the Big Four, now's the time to do it!

It's still not easy to break into this prestigious subset of the accounting market. It helps to have gone through a solid business program and have had a more than respectable GPA. The good news, though, is that your chances are better than ever of breaking through.