PricewaterhouseCoopers recently announced a structural change in their organization structure, with network firms being organized into three major geographic “clusters” starting as early at October 1, 2008. PwC’s intent for this change is “to increase further its focus on emerging markets, which it believes will be the engine of much of its future growth - allowing greater flexibility and speed when making both investment and acquisition decisions.”
Starting from the West, the West Cluster includes USA, Canada, Mexico, South and Central America and the Caribbean; Central Cluster includes the UK, Western Europe, Central and Eastern Europe, the Middle East, India, Pakistan, Sri Lanka, Africa , the Channel Islands, Gibraltar, Iceland and Isle of Man; and East Cluster will include Hong Kong, China, Singapore, the South East Asia Peninsula, Australia, New Zealand, Japan, Korea, and the South Pacific countries.
If one were to trifurcate the planet by drawing four North to South imaginary lines, the first passing through New York, the second through London, the third through Sri Lanka, and the fourth through Los Angeles, one would generally land up at PwC’s clusters.
This is not far from other Big4 organizations which typically divide the world into manageable regions along continental lines. But in PwC’s case, the motive appears to be somewhat different in that large structural changes in the firm’s organizational structure is hinted at, but not completely explicated. Reorganization at Big Four firms, as every alum knows, is a constant process - groups are constantly shifted, renamed and realigned and new formations created almost annually.
PwC talks about a new Network Leadership Team of just a few senior partners – so we ask if this change is some reactive or proactive response to higher level power mongering? The “further growth on emerging markets” seems to be a tepid reason, there were little structural impediments in the past which prevented a focus on higher-growing emerging markets….consider the explosions in PwC BRIC firms.
We can only speculate why PwC would reorganize at this point in time, perhaps our readers have more insights they would like to share by adding their comments.
Wednesday, August 27, 2008
Wednesday, August 06, 2008
SEC Fines Ernst and Young $2.9 Million for Independence Violations
The SEC has sanctioned Ernst and Young $2.9 million for being “engaged in improper professional conduct” and in violation of several rules and acts, specifically the Exchange Act § 4C and Rule 102(e) of the Commission’s Rules of Practice. Rule 102(e) and Exchange Act Section 4C. E&Y shall pay the SEC $2.9 million, composed of disgorgement of $2.4 million and prejudgment interest of $0.5 million.
All this stems from a relationship between E&Y and Mark C. Thompson, during which Thompson was a Board of Directors member of three E&Y audit clients. The SEC did not name the three audit clients by name. E&Y and Thompson collaborated to create a series of audio CDs called The Ernst & Young Thought Leaders Series between October 2002 through early May 2004. Apparently, E&Y paid Thompson over the course of the relationship, $377,500, for co-producing seven completed CDs in five separate audiobooks, and unbeknownst to E&Y, this sum was approximately half of Thompson’s net income at the time.
As we see it, this was a business development effort by Ernst and Young to elevate itself as a thought leader and produce insightful material that would allow it to have “critical leadership issues” discussions with company CEOs which could lead to potential engagements to Ernst and Young. This is a reasonably common practice for professionals service firms to produce thought-provoking interviews or written pieces to establish themselves as thought leaders, with a view to influence key decision makers and gain strategic or tactical projects.
However, it appears that Ernst and Young did not adequately disclose this relationship to companies A, B and C. Moreover, a senior internal E&Y review concluded that this relationship would not impair its independence, and was a “ordinary course of business” matter. On the contrary, the SEC claims that E&Y was not truly independent when it issued its auditing opinion since it had this relationship with Thomson, who was on the Board of Directors of these three affected companies. Further, E&Y did not fully and adequately disclose this relationship to the companies.
By doing so, it violated its auditor independence, since as the rules explicated, “An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an audit client’s officers, directors, or substantial stockholders.”
This only highlights the fine line that public auditors have to walk when they engage in any sort of arrangement with any influential party who is connected with their audit clients. Did E&Y adequately address the risk and consequence of such relationships? Did they draw the right conclusion in that it was not an extraordinary relationship? Why should the SEC see it differently? How important is the definition of independence and necessity of disclosure? These are serious questions which perhaps should be considered at the outset, but perhaps never done, since it is not evident that seemingly innocuous events can lead to bad future consequences with regulatory authorities.
This also emphasizes the need for risk management at the highest levels of the Big Four firms of anything that lead to skirmishes with the authorities. The scrutiny of the SEC on the Big Four firms and the glare on auditor independence is just beginning to show in such cases, and likely to get more intense as the years pass. The firms have to quickly get to manage these risks in their course of business.
By piecing events together, the media gathered that Company A was Best Buy Company.
The SEC has a large amount of detail in its pronouncement of August 5, 2008 at http://www.sec.gov/litigation/admin/2008/34-58309.pdf
All this stems from a relationship between E&Y and Mark C. Thompson, during which Thompson was a Board of Directors member of three E&Y audit clients. The SEC did not name the three audit clients by name. E&Y and Thompson collaborated to create a series of audio CDs called The Ernst & Young Thought Leaders Series between October 2002 through early May 2004. Apparently, E&Y paid Thompson over the course of the relationship, $377,500, for co-producing seven completed CDs in five separate audiobooks, and unbeknownst to E&Y, this sum was approximately half of Thompson’s net income at the time.
As we see it, this was a business development effort by Ernst and Young to elevate itself as a thought leader and produce insightful material that would allow it to have “critical leadership issues” discussions with company CEOs which could lead to potential engagements to Ernst and Young. This is a reasonably common practice for professionals service firms to produce thought-provoking interviews or written pieces to establish themselves as thought leaders, with a view to influence key decision makers and gain strategic or tactical projects.
However, it appears that Ernst and Young did not adequately disclose this relationship to companies A, B and C. Moreover, a senior internal E&Y review concluded that this relationship would not impair its independence, and was a “ordinary course of business” matter. On the contrary, the SEC claims that E&Y was not truly independent when it issued its auditing opinion since it had this relationship with Thomson, who was on the Board of Directors of these three affected companies. Further, E&Y did not fully and adequately disclose this relationship to the companies.
By doing so, it violated its auditor independence, since as the rules explicated, “An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an audit client’s officers, directors, or substantial stockholders.”
This only highlights the fine line that public auditors have to walk when they engage in any sort of arrangement with any influential party who is connected with their audit clients. Did E&Y adequately address the risk and consequence of such relationships? Did they draw the right conclusion in that it was not an extraordinary relationship? Why should the SEC see it differently? How important is the definition of independence and necessity of disclosure? These are serious questions which perhaps should be considered at the outset, but perhaps never done, since it is not evident that seemingly innocuous events can lead to bad future consequences with regulatory authorities.
This also emphasizes the need for risk management at the highest levels of the Big Four firms of anything that lead to skirmishes with the authorities. The scrutiny of the SEC on the Big Four firms and the glare on auditor independence is just beginning to show in such cases, and likely to get more intense as the years pass. The firms have to quickly get to manage these risks in their course of business.
By piecing events together, the media gathered that Company A was Best Buy Company.
The SEC has a large amount of detail in its pronouncement of August 5, 2008 at http://www.sec.gov/litigation/admin/2008/34-58309.pdf
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