It’s time once again to look back at the year just past in the hope that, perhaps, this will illuminate what we can expect of the future. As we did for the stories we published in the fourth quarter of 2009, we at CFO Innovation looked at which articles and white papers found particular resonance with you, our 19,000 or so readers, in the course of 2010.
Ernst & Young Gets Sued and Other Hot Stories
Why? As we wrote last January: “It is useful . . . to be aware of what your peers as a group are thinking about and where they are focusing their energies. If everyone is focusing on risk management, say, and you are not, you may be putting your company at a competitive disadvantage. And you may find yourself being left behind as your peers acquire new insights and knowledge.”
It is not surprising that among the most well read articles are those dealing with potential seismic changes involving the accounting profession. The single most read article posed the question: Will Ernst & Young Survive the Lehman Scandal? Published in March, the story delved into Ernst & Young’s role in the fall of Lehman Brothers, which caused the global financial system to seize up in 2008, and whether it could mean the decimation of the Big Four into the Big Three.
We analysed the 2,200-page report released on March 11 by Anton R. Valukas, the U.S. examiner tasked by the Bankruptcy Court of the Southern District of New York to investigate Lehman’s bankruptcy. He found ‘colorable claims’ against Lehman’s CEO, three CFOs and Ernst & Young, Lehman’s external auditor.
“Ernst & Young took no steps to question or challenge the non-disclosure by Lehman of its use of $50 billion of temporary, off-balance sheet transactions [to allegedly manipulate the balance sheet],” he wrote. “Colorable claims exist that Ernst & Young did not meet professional standards, both in investigating [allegations by a Lehman executive about the supposed manipulation] and in connection with its audit and review of Lehman’s financial statements.”
The legal term ‘colorable claim’ means that the examiner “has found that there is sufficient credible evidence to support a finding by a trier of fact,” Valukas explained. “Whether claims are in fact valid will be for the triers of fact to whom claims are presented.”
Those triers of facts are now considering Valukas’s findings. Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York is hearing a class-action suit by Lehman shareholders that was amended to include Ernst & Young as defendant in May. The same judge is also presiding over a suit brought by the state of New Jersey and the U.S. Department of Treasury against the actors that Valukas said had colourable claims against them.
In the UK, the Accountancy and Actuarial Discipline Board launched a probe in October of Ernst & Young’s conduct in relation to the preparation of a report to the Financial Services Authority “in respect of Lehman Brothers International (Europe)’s compliance with the FSA’s Client Asset Rules for the year ended 30th November 2007.”
On December 21, Andrew Cuomo, in his last act as New York State Attorney General before assuming the office of New York Governor, sued Ernst & Young for alleged accounting fraud. For more than seven years, Cuomo charged, Lehman had conducted what it terms ‘Repo 105’ transactions designed to temporarily park fixed-income securities with European banks in order to reduce the amount of leverage on Lehman’s books.
“This practice was a house-of-cards business model designed to hide billions in liabilities in the years before Lehman collapsed,” the attorney general alleged. “Just as troubling, a global accounting firm, tasked with auditing Lehman’s financial statements, helped hide this crucial information from the investing public. Our lawsuit seeks to recover the fees collected by Ernst & Young while it was supposed to be using accountable, honest measures to protect the public.”
Will these various triers of fact ring the death knell for Ernst & Young? We doubt it, but perhaps the answer to the popular CFO Innovation February article, Metrics: Who’s the Biggest Accounting Firm?, will be different in 2011. Ernst & Young, which had billings of US$23 billion in 2009 to become the world’s third biggest accounting firm, may see revenues trimmed because of its various legal and regulatory problems.
Integration vs. Independence
As Ernst & Young stumbled, another accounting firm made a big move in Asia. Also very well read is Why Grant Thornton Jumped Ship in Hong Kong, which was published in November. In that interview, Albert Au, chairman and CEO of BDO Hong Kong, told CFO Innovation about the switching over to BDO of some 500 Grant Thornton partners and other finance professionals in Hong Kong. “A firm of that size, with a track record of more than 50 years – the firm originated originally in 1949 – it’s a very rare opportunity,” he said. “It is a rare opportunity for us to take up the talents from that firm en masse.”
The interview elicited a sharp reaction from Grant Thornton International. “It is disingenuous, or possibly wishful thinking, on the part of BDO to suggest that Grant Thornton is pulling out of Hong Kong,” said Hilary East, Head of International Communications at Grant Thornton International. “Many partners and staff from the former Hong Kong firm have already contacted the new Grant Thornton firm and clients will, of course, decide for themselves whether to move to BDO, or remain with the integrated, ‘one firm’ approach of Grant Thornton.”
The widely followed saga should find closure in 2011. Reached by CFO Innovation in Brazil, Alex MacBeath, the member of Grant Thornton International’s global leadership board with responsibility for strategy in Asia Pacific, stressed that Grant Thornton will remain a major player in China and Hong Kong. A new Grant Thornton member, Grant Thornton Jingdu Tianhua. has been formed by five partners of the former Grant Thornton Hong Kong (which MacBeath said has been asked to leave the Grant Thornton because of differences in strategy over closer integration with Grant Thornton China).
“We expect to have about 150 people by spring of next year  and grow from there,” he said in an exclusive interview. The new entity will be more strongly integrated with the China member firm in a way that the former Hong Kong firm was apparently not willing to do.
“Our clients are increasingly regarding China as a single market and they are driving us, and I think will drive other firms, to an integrated approach to the China market,” MacBeath explained. “It’s not about one firm controlling another firm. It’s really about firms working together closely, being strategically aligned and serving the client seamlessly across the market.”
The fireworks between two accounting firms are inherently interesting, but we feel that readers are also paying attention because of Grant Thornton International and BDO’s divergent visions on the way forward. BDO appears happy to continue the old model of autonomous member firms that cooperate with other member firms to the extent and depth that they are comfortable with. In Asia, Grant Thornton is bent on closer integration, to the point where important Greater China decisions are jointly made by the China and Hong Kong firms.
It’s a debate about the future of accounting firm models that we at CFO Innovation will follow, report and analyse in 2011 and beyond.
Fraud and Scandal
As in the fourth quarter of 2009, we also find great interest among CFOs in what we think of as there-but-for-the-grace-of-God stories. When the Accountant Disappears was among the best read articles last year. It was again a popular read in 2010 as the BDO-Grant Thornton food fight proceeded – the accountant in question, Gabriel Azedo, was the former managing partner of the Grant Thornton member firm that has now left the network. (Both Grant Thornton International and BDO say Azedo’s disappearance has nothing to do with the transfer of former Grant Thornton Hong Kong employees to BDO.)
Almost on cue in November, Azedo was found in Spain; our report on this development was one of the most well-read news items of the year.
As we wrote last year, we don’t believe this obsession with fraud and scandal necessarily means that finance professionals take personal enjoyment from the missteps and misfortunes of their peers. We like to think that it has to do more with sympathy with the travails of others in circumstances that readers know they can easily find themselves in. We think our readers are also interested to discover exactly what happened to draw lessons that may help them avert similar situations.
The other popular articles in this vein include The Hontex Scandal: Now, It's KPMG’s Turn, and A Thief in the Financial Controller’s Office.
Asia’s financial executives were as interested in day-to-day financial management as they were in the high-profile Ernst & Young-type cases. Among the most well-read articles are those on talent management, including How to Find and Keep the Best CFO, After Cost Cutting: How to Attract and Retain Talent, and How to Keep Your Finance Staff.
This is consistent with the findings of the quarterly CFO Innovation Asia Business Outlook Survey, which is now on its fifth iteration. In the survey looking forward to the final quarter of 2010, the CFOs, financial controllers, treasurers and other finance executives surveyed said their top concern continues to be attracting and retaining qualified employees. In the first survey for the fourth quarter of 2009, the top internal focus was cutting costs, which has now fallen to second place as a prime concern.
“The number of executives that regard the ability to cut costs and reduce supplier spend has [decreased] to 35% from 40% previously,” the fourth quarter 2010 report noted. “In contrast, more respondents are focusing on working capital management – 31% versus 23% in the previous survey. It seems that Asia’s companies are making the transition from straightforward cost-cutting to the more nuanced task of managing working capital.”
This trend appears to be reflected in the best-practice articles that our readers are most interested in, which include Cash Management in the Post-Crisis Era. That said, other operational aspects of financial management garnered keen interest as well, among them Business Performance: Dashboards on the Go, Finance-Function Cost: The 0.6% Solution, The Art of Cutting Travel Expenses and How IFRS Is Changing the M&A Game.
Other white papers were also widely read: HKFRS Technical Bulletin: HKFRS for Private Entities and CFO Innovation Insight Survey: Asia and Enterprise Performance Management - The CFO's View.
If you have missed any of the articles that have found special resonance with your peers, we urge you to read (or re-read them). You may just find something useful for your business and your own professional development.
About the Author
Cesar Bacani is senior consulting editor at CFO Innovation.