The Connected Accountant

Audit firms left unprotected against claims of negligence

So says the Times of London.  In the article, Alex Spence details that, under pressure from the SEC, the UK government has declined to limit the exposure of auditors to damages.

Apparently, the SEC fears a 'you scratch my back' situation, where auditors issue a less than stringent report in return for an agreed restriction on auditor liability.  A version of this already exists in the UK under the 2006 Companies Act, where auditor liability can be limited if shareholders approve. To date, no major UK companies have taken advantage of this provision.  No doubt investors would experience a certain 'chilling effect' upon disclosure of such a deal.

Spence goes on to list the current firm-killing litigation against the Final 4:

KPMG A defendant in a class-action lawsuit in the Southern District of New York against Tremont, a Bernard Madoff feeder fund

Ernst & Young Sued by investors in a Luxembourg court with UBS for oversight of a European Madoff feeder fund

PwC Included in several lawsuits in Canada claiming damages of up to $2 billion against Fairfield Sentry, a big Madoff feeder fund

KPMG Sued in the US for at least $1 billion by creditors of New Century Financial, a failed sub-prime mortgage lender, which claimed that KPMG’s auditing was “recklessly and grossly negligent”

Deloitte Sued by the liquidators of two Bear Stearns-related hedge funds that collapsed at the start of the credit crunch

No doubt the Final 4 will be ready with their 'too big to fail' arguments should any of these appear to be headed to a finding against the firms.

A career for life....or just a job?

A recent survey at an audit careers website (A UK-based website) indicated that just 28% of those responding were looking for a career in public practice - less than 1/2 of those looking to be in the private sector.

Having said that, 46% of responses indicated that 'accounting is a job for life.'

Perhaps most telling for associations was the fact that 70% were open to working overseas - those associations that offer or encourage inter-firm transfers or experience are in a good position to support the desires of the new auditor.

Additionally, pending visa arrangements, this could be a way around skills shortages!

Red Flags or Red Herring for Accounting Firms?

Barely registering a blip on the radar are imminent identity theft rules that MAY affect accountants and firms.

The Red Flag Rules, coming into effect in less than a month, establish rules designed to aid in the fight against identity theft.  For accountants, this matters if they extend credit to clients.  The act of extending credit makes an entity a 'creditor' under the regulation.  The issue then becomes whether the firm has any 'covered accounts.' These are accounts for which "for which there is a foreseeable risk of identity theft", the FTC helpfully includes small business and sole proprietorship owned accounts in this category.  As that represents a lot of the clients of accounting firms, you may well have an exposure here.

And so, if you have those accounts, you need a program designed to:

1. Identify relevant red flags;
2. Detect red flags;
3. Prevent and mitigate identity theft; and
4. Be updated periodically.

The guidelines for establishing a program are available from the FTC here.

The good news is that there are no criminal penalties for non-compliance - there are possible civil penalties.  Not to mention the PR headache if a client's identity is 'hacked' through your firm.

New Ethics Rules

With the ink barely dry on the last iteration, here come IFAC with some revised independence guidelines - effective 1/1/11.

The full rules are a bit of a grind at 132 pages, but there are some interesting highlights:

The revised codeextends the independence requirements for audits of listed entities to all "public-interest entities."  You will hit page 126 before the definition of a "public interest entity" becomes clear.  In addition to the obvious - quoted companies, the standard will also apply to any entity required to have a similar audit. So, private companies, government departments, charities, etc. might all now be covered by this extension.

The revised code also now precludes audit partners from being evaluated on (or compensated for) selling non-assurance services to their audit clients.

The material that addresses the definition of a network and a network firm for independence purposes appears untouched at this stage.

National institutes (AICPA, CICA, et al) will now have to go through their own consultation and notification process in order to get these revised rules adopted.

Not rocket science, but....

The Proactive Accountant Blog (a part of the UK's Accounting Web) has details on the four steps to take to help clients through a recession.  The genesis for this was a survey that said that 17% of business owners do not expect their business to survive the current downturn. 

So the steps, and, like I said, this is not rocket science, are:

ONE - Proactively start a dialogue with clients about the recession and how to beat it

TWO - Proactively help them to understand the facts about the recession and the facts about what it means for their businesses and their families

THREE - Proactively help them to create action plans for dealing with the implications of these facts for them and their family

FOUR - Proactively help them to implement those plans – and update them in the light of what happens

To which I would add:

FIVE - Provide a flow of benchmarking information on the economy and their industry to allow them to see their progress

SIX - Gently remind them of the progress they have made with your help.  How they have survived and are positioned to thrive

"Accountants Drag Their Feet When It Comes To CRM"

Or so says the UK website Accountingweb.co.uk.

While the information may appear to be UK-specific, it does have some interesting findings/suggestions:

• Accountants want a way to manage cross-sell/up-sell e-mail campaigns - and not much else.

• Accountants are reluctant to adapt generic CRM to their practices.  Niche providers such as Sage or CCH are having better luck by integrating CRM into their other software offerings.

• Thereare more options for CRM - at a  variety of price-points - than ever before. 

It is clear that the usage of CRM is growing within accounting firms, although there appear to be few ardent champions of its use at the moment.  This seems to be the opposite from the legal community, where its adoption has been deeper and stronger.

The Law Firm Meltdown - Are Accountants Next?

O.K., first the caveats and disclaimers:

I know that law firms are not accounting firms and that law firms are even more transaction driven than accounting firms. No transactions = no work.  Secondly, a lot of the 'sky is falling' stuff comes from the UK, home of one of the deeper recessions currently underway.  Thirdly, and a combination of the two above, a lot of the firms in trouble are related to The City, London's financial sector hub.

Having said that, the news in the Daily Mail was chilling. A Top 200 law firm preparing to 'go into administration.' (A sort of Chapter 11 filing.) With typical British stiff upper lip, a partner is quoted as saying 'the firm is having some difficulties.'

The rot goes deeper too. Clifford Chance, a firm with offices in New York and D.C. has laid off partners and is reviewing all 30 of its global offices for viability.  These are big guys - In New York they boast of being able to house 500 lawyers in their 14 floors of midtown real estate. Allen & Overy, another Top 5 London firm, has frozen rates and cut support staff by 10%. 

Of course, this might all create work for the insolverncy practices of accounting firms! 

Accountants have no sense of humor?

Apparently, it's true.

The best April Fools joke that was (attempted to be) perpetrated on or by accountants in the media realm appears to have been in Accountancy Age from the UK.  Among the obvious clues that this was bogus was the line:

‘There is a really challenging scene where one auditor sharpens a pencil for almost eight minutes. It’s electric. Almost as good as Omar Sharif’s entry on a camel in Lawrence of Arabia.'

The premise is that Jason Statham (Transporter, Italian Job) plays an audit partner in a drug and drink fueled romp through the high stress world of attestation.

Nobody enjoys good satire more than me - but this was useless.  If this is the best that accountants can do at mocking themsleves then it is a doomed profession!

I hope that somebody out there has better examples.

Apres le deluge? (After the flood)?

According to George Bernard Shaw, if all the economists in the world were laid end to end, they would still not reach a conclusion.

Having said that, there is a fairly strong consensus that this downturn/recession/economic crisis will be:

1.       Deeper

2.       Steeper

3.       Last longer

4.       Have a shallower recovery

than most of the similar situations that the global economy has faced since the end of World War II.

With just over a month to go in the US ‘busy season’, there is a growing sense that April 16^th will bring a stark reality for accounting firms.  Effectively, April 16^th represents a cliff, and nobody knows how long the drop will be.  Based on what I have heard around member firms of IGAF Worldwide and the industry in general, here are some key points:

A.      Staffing:  Employment is a lagging indicator in an economy. Entities shed jobs too slowly for the situation that they see, and then staff up too slowly for the recovery.  A focus on the jobs numbers reported is a poor indicator of where we are going (but a great indicator of where we have been!).  Employment in accounting firms will be down, but firms will try and determine ‘where is bottom’ before they make draconian cuts.

B.       Partner Compensation: This might be the year where partner income takes a bit of a beating in order to position the firm for growth in recovery.  In other words, staff will be retained at a lower utilization so that they are available for assignment when work picks up. This will drive down leverage, and the fallout will be in partner income.

C.      Fraud & Risk: Clients that played it ‘a little loose’ in the good times will have even greater temptation now.  Risk assessment and fraud awareness will need to be pumped up in order to protect the firm.

D.      The Hunt for Cash: Long term business development will be replaced, at least partly, by a search for quick projects that dump cash into the firm.

E.       Firm Management: WIP and A/R management, perhaps even extending to a more formal retainer and progress billing system, will be to the fore

So what do your employees REALLY think about your company?

Or, for that matter, what do they think about you.  You could hang out at the water cooler to try and find out, but there are also some other tools out there that might help you peek behind the curtain.

One of the best that I have seen is www.glassdoor.com.  Just enter your company's name (or the name of a client company) and see what the anonymous employees (or ex-employees) are saying about you.

A few gems:

Reznick Group: (an IGAF Worldwide member) “A fast growing, young firm, that is a great place to start and could be a good place to stay.”  Reznick scored a 3.7 average

Crowe Horwath: (not an IGAF Worldwide member) “A descent (sic) place to work.”  Crowe Horwath scored a 3.4 average. 

(One could perhaps suggest that elementary grammar and spelling lessons might be in order at some firms!)

KPMG: (a member of the 'Final 4') "A great company, but beware of the internal politics and backstabbing." KPMG scored a 3.6 average.

All of which is to say that your employees MAY tell you what they think of working for you - but they will DEFINITELY tell their peers, and these days that is not confined to the water cooler!