Happy Monday! I’m here with some news to start your week, just like I do every Monday “morning” (this really gets published closer to noon).
ICYMI: the weekend discussion was about firms acting like assholes and making it that much more difficult to seduce the next generation of accountants to the profession. Shocking. The words “circling the drain” come to mind. Go weigh in if you like.
Jack Castonguay, who used to be a favorite follow of ours on Twitter before he dipped out from the platform in protest, has written about FTX for CoinDesk:
In situations like this, it’s always easy to play Monday morning quarterback and say this could have happened to any auditor and any client. But here, the failure was idiosyncratic. Prager Metis’ audit failed, and it failed because they didn’t mean the minimum standard for due professional care. And there were signs aplenty. FTX apparently kept its accounting record in Slack channels, personal messages, and QuickBooks. QuickBooks is a fine tool if you are a small business owner just starting out. It’s an unacceptable tool for a complex currency exchange worth billions and should have set off alarm bells for the auditor. Yet it didn’t. Maintaining records in Slack should have raised red flags. Yet it didn’t. The billions in cash transferred between FTX and Alameda should have raised red flags and led the auditor to investigate the relationship further. And yet it didn’t.
These aren’t complex misunderstandings in gray areas. They are clearly identifiable risks Prager Metis should have identified, responded to, and sought more evidence about to ensure the risk of a misstatement were lowered to a reasonable level. Prager Metis, as charged by the SEC, didn’t apply the appropriate level of skepticism to respond to the risks in large part because they seemed to lack the understanding or have the technical knowledge on crypto clients necessary to meet auditing standards.
The SEC’s actions should be warning signs to accounting firms regardless of their involvement in the cryptocurrency or blockchain industry.
Last week:
Kelly Phillips Erb explains in Forbes why private equity is so interested in accounting firms and what accounting firms are getting out of the deal. There’s a nice little chart of firms that have taken or are considering private equity investment:
Ah, I’d been wondering if CRI inked a deal yet. Guess not. Um, they missed BDO no?
Meanwhile, FT published this opinion piece:
Private equity roll-ups of accounting firms could run into trouble
Another worry, noted by regulators, is that private equity ownership could damage audit quality. Maria Nykyforovych, an assistant professor at George Mason University, says the short-term investment objectives of private equity investors could create damaging incentives. Even though regulators require audit businesses to be controlled by auditors, there might be scope for private equity investors to influence the audit practice through interlocked boards or management service fees.
There is also uncertainty over investors’ end game given the difficulties of initial public offerings and trade sales. Private equity, which mostly began investing in 2021, has barely tested the exit routes. Ownership could end up with pension funds, family offices or even return to the partners.
For now, the most likely outcome seems to be a sale to other private equity firms.
And here’s an editorial from Chicago Tribune with no author credited. They inexplicably used a picture of an ERC call center for the article image. There’s really nothing new here, down to the several paragraphs dedicated to talking about Arthur Andersen.
Editorial: Not every finance major can be an investment banker. We need more accountants.
America’s most famously boring profession is in trouble, and that’s bad news for Chicago.
The city is a hotbed of professional services, including lawyers, consultants and the now-endangered species of certified public accountants. CPAs are essential for financial reporting, advanced tax preparation and other dull-but-important tasks that keep the economy going.
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Yet another challenge is that these days one of the big trends in the accounting world is the interest of private equity firms in grabbing a piece of the business. For generations, accounting firms mainly have been partnerships, governed in ways similar to law firms and other partner-dominated fields. Private equity is becoming a primary means for retiring senior partners to cash out their stakes. How the influx of these outside owners changes the profession remains to be seen. But CPAs will need to push back against any reputation-damaging schemes from their new overseers to boost revenues, a la Andersen.
Consulting, investment banking and other high-paying finance and tech jobs are still competing for the same up-and-coming number crunchers who used to pursue accountancy. Many of these math-savvy young adults see no reason to invest so much time and money into becoming a CPA.
PwC is abandoning a $140 million project to build a brainwashing compound in China because of all that Evergrande stuff.
The ambitious project, located at Haitang Bay in the southern island province of Hainan, was intended to be a training facility for “building trust in leadership,” but recent regulatory action has forced the firm to suspend work on the site.
Designed by the architectural firm Gensler, the Reimagine Park campus spanned 16 acres and was set to be a zero-carbon facility comprising nine buildings connected by autonomous electric shuttles. The facility was planned to host the firm’s Trust Leadership Institute in Asia Pacific and aimed to be a symbol of sustainable and innovative leadership in the region.
The project, part-financed by the local municipality, began construction last year and was expected to be completed towards the end of this year.
The government of India is investigating the sudden death of an overworked young woman working for EY:
Minister of State for Labour Shobha Karandlaje has now announced that the government will be investigating the case, stating that justice must be served and employee safety guaranteed. This move follows widespread criticism, with social media igniting discussions about the “toxic work culture” prevalent in large firms like EY, which is one of the four largest and reputable accounting and consulting firms in the world.
Earlier:
We have a couple updates to the above story I’ll get published ASAP.
Meanwhile, across the pond…EY partner pay is going to be disappointing again this year. Smithers, fetch the violins!
Partner pay at EY is set to fall for the second year in a row while senior staff will forgo a pay rise, in a sign that professional services firms are still battling a downturn.
Benoit Laclau, the firm’s managing partner who runs the consulting division for UK and Ireland, told senior managers and directors on a call last week that average partner pay would be down this year, according to EY sources.
The Big Four giant, which provides auditing, consulting, tax and other professional services, also told staff across several of its divisions last week that they would not be receiving a salary increase, which many have come to expect in recent years. Among the staff told that they would not be getting a pay increase were several senior managers and directors, who are below EY’s hallowed partner ranks, in the company’s consulting division.
Have they paid off that $500 million Project Everest hole yet?
According to a recent KPMG report, a majority of CEOs think hybrid work will be dead within the next three years. It was fun while it lasted I guess.
A majority (83%) of CEOs surveyed globally predict that companies will shift to require a “full” return of employees to in-office work in the next three years, an increase from 64% the prior year, KPMG said, reporting on the findings of a survey of 1,300 chief executives conducted in July and August.
The report also revealed a generational divide in the executives’ sentiment on the back-to-the-office matter: 87% of CEOs aged 60-69 predicted a full return to office, 83% of those aged 50-59 expect the shift back to the office to happen while only 75% of chief executives aged 40-49 did so, according to the report. Meanwhile more male CEOs (84%) bet on the full return to office scenario compared to 78% of top female executives.
“This year’s findings reveal that CEOs are hardening their stance on returning to pre-pandemic ways of working,” KPMG said.
In other KPMG news, firearm manufacturer Smith & Wesson has a new auditor:
Smith & Wesson Brands, Inc. (NASDAQ:SWBI), a leader in firearm manufacturing, has announced the appointment of KPMG LLP as its new independent registered public accounting firm, effective September 17, 2024. This change comes as part of a competitive auditor selection process conducted by the company’s Audit Committee, which involved several notable accounting firms.
The decision to engage KPMG was based on a comprehensive evaluation of each firm’s capabilities, responsiveness, and fee structures. Notably, this change does not reflect any dissatisfaction with services provided by the previous auditor, Deloitte & Touche LLP, which had served Smith & Wesson since 2014.
Surely that’s plenty of news for the first Monday of fall?
Please let me know if you spot something interesting, have a tip, or watched a good TikTok cat video (my job gets boring) via email, text, or on Twitter. Text is best, my inbox is cursed with hundreds of emails about the top ten cities in which to eat hot dogs and other such public relations trash.
Have a good week, you.