The subtle art of negotiation (1 of 2)

Recently I caught up with an old university friend of mine who is now a senior partner at one of the big 4 accounting firms working in the areas of mergers & acquisitions. We had a great catch up over coffee & raisin toast. To protect the innocent lets call my friend Brad as in Brad Pitt. I’m sure he’d like that!

Brad made mention of very useful tactic when it came to working with large clients. Big accounting firms tend to have multiple relationships with their corporate clients with certain partners wanting to protect their “turf” and not wanting other partners to get in on the act. Its sad to say but unfortunately its true.

However, my mate Brad has come up a clever & innovative approach. He seeks out the other partners working within a particular organisation and helps them win more business with the client in their respective areas. By so doing he builds the relationships he has with other partners in the firm and fosters the reputation of being a team player. All good stuff! However, the real genius in Brad’s approach is the subtle creation of a wonderful device that is critical in any negotiation with existing clients or when chasing new business.

What is this so-called “wonderful device”?  Tune into the next post to find out.

Keep well,

James

Try not to be an ASS!

Over the course of the last year I have I have met with and interviewed dozens of CFOs. Although they come from different backgrounds and work with organisations in a variety of industries it is quite amazing to note the common threads they have in their thinking of working with external accounting firms. One such thread is the importance of understanding the client’s business and not assuming anything.

Here is a quote from Ashley Selwood, CFO, Australian Rugby Union.

… I find at times that external accountants already have some preconceived ideas about what the solution is before they spend the time to actually get to know our business.  We’re a sport and nine out of ten people who walk in the door are either followers of Rugby or at the very least know a bit about Rugby.  When you’re dealing with sport there’s a lot more heart than head involved and sometimes people will walk in the door as a consultant or an accountant and the first thing they’ll do is spend an hour telling you what’s wrong with the Wallabies! Once you get through that, they always seem to have quite fixed ideas of what the solutions are without actually spending the time to get to know our business. In my view this is a fundamental mistake. It not only applies to accountants but all other external professional consultants irrespective of their discipline.

Ashley goes on further to cite some interesting examples of how  accountants have come into the business and not really taken the time and effort to invest in really understanding their business. Too often accountants assume too much without first asking their client questions. As my dad used to say to me when I was growing up (and still does) when you ASSUME you make an ASS of U and ME!

The morale of this post – don’t be an ASS!  (or a donkey for the non-Americans out there).

All my best

James E

It has finally arrived!

Well its only taken 8 months of hard work – phone calls, emails, meetings, more meetings, drafting, editing, redrafting, even more meetings and most of all praying –  yet in spite of all that effort the book “What do Accounting Clients Really Want?” has finally arrived!

We had a lunch to celebrate the book during the week kindly hosted by one my clients, PwC. The majority of the Sydney-based interviewees for the book were in attendance along with senior representatives from the publisher Thomson Reuters and selected special partners from PwC.

One of the CFOs who attended, Kate Malov of CargoWise, sent me an email the day after the lunch with some great encouragement. Here it is (used with Kate’s permission of course)

Hi James,

Just wanted to say thank you very much for the fantastic lunch yesterday and the book as well! It looks great and is a must read for everyone in the professional services industry in my opinion. Our <CFOs> life would be so much better if they all followed the principles in the book. And this especially applies to the younger generation of auditors and accountants. As was pointed out yesterday, partners often have a gut feel for a lot of these things through their years of experience, whereas the younger auditors/accountants are usually the ones guilty of not following these principles – don’t listen, etc. So they should be making this book a mandatory reading in their grad programs.

Kind Regards,

Kate Malov
CFO, CargoWise

Now it that remains is for me and Thomson Reuters to get the word out!

Thanks for reading

All my best,

James

 

Auditing the auditors (2 of 2)

Following on from the last post, here is another extract from the Radio National Background Briefing segment. It makes for great reading!

Former accountant and auditor who writes the accountancy watchdog column at Forbes Magazine, Francine McKenna.

Francine McKenna: The four largest firms-Deloitte, PwC (PricewaterhouseCoopers), Ernst & Young, and KPMG-they probably earn more than 100, 120 billion dollars worldwide. It’s a very large industry, just those four firms. And they employ worldwide hundreds of thousands of people.

Those numbers are made up of lots and lots of individual firms at the country level. So you have very large countries like Australia, like the United States, like the UK, like Germany, Japan, China, et cetera, where the firms may be very, very large and employ a lot of people and the revenues are very large, too. And it all gets added up together. However, each firm in a country is a private partnership, it’s a separate legal entity, it operates independently, and the firms, country-by-country, operate together under a brand name, like PricewaterhouseCoopers or like Deloitte and KPMG.

Stan Correy: Francine McKenna is making an important legal point about the big four audit firms. While, for example, KPMG China or Australia may have the same brand name, they’re separate entities. So if there are problems in KPMG China, that doesn’t mean KPMG Australia is to blame. And, as Francine McKenna explains, the ‘Big Four’ are past masters at avoiding blame.

Francine McKenna: We often say you can bring the auditors to court, but you rarely bring them to justice. First of all, they don’t go to jail because to go to jail they would have to be proved part of a fraud, complicit, then you would have to have the smoking gun, which doesn’t happen because the auditors don’t tell on each other-there’s sort of like the mafia, there’s this omerta-they never, never, never tell on each other.

Stan Correy: Nevertheless, with all this apparent incompetence, hiding behind complexity, and being too close to the people they’re supposed to be independently auditing, when are the audit firms liable? Francine McKenna says it’s tricky.

Francine McKenna: The other thing is that, you know, hardly anybody goes to jail. We have this, you know, ongoing debate now about how nobody is going to jail over the financial crisis and the auditors are at the bottom of the list in terms of people that anyone thinks deserve to go to jail about anything.

Stan Correy: Most big auditors have insurance against making mistakes and their good brand name is important to them, so they get the big clients. So they hate bad publicity and have a lot of defences ready. All this is being played out in a high profile case in Australia.

Journalist [archival]: Local stocks have tumbled three and a half per cent to a three month closing low, after retail property trust Centro announced it’s struggling to refinance $1.3 billion in debt…

Stan Correy: In late 2007, the shares of shopping centre owner Centro Properties Group collapsed after the company admitted it released misleading accounts to the market. The corporate legal drama involving Centro Properties Group then began, as investors who lost money wanted revenge. The drama involves management, directors, and auditors.

So, who was to blame for allowing the misleading accounts to be released? Well, two years ago, ASIC, the Australian securities regulator, brought proceedings against the directors on the board of Centro Properties Group and two managers, claiming they had breached their duties and had misled investors. In late June this year, ASIC had one of its rare legal victories.

ABC Newsreader [archival]: The federal court today raised the bar of responsibility for company directors. The court has ruled that directors of the giant property group Centro breached their duties by not picking up billions of dollars in errors in the accounts. In 2007, the directors approved the accounts, which showed the company had no short-term debt, understating the situation by about $3 billion.

Greg Medcraft [archival]: It’s a landmark decision in Australian corporate governance. I think it does send a very clear message to boardrooms across the country about corporate accountability.

Stan Correy: Greg Medcraft, the chairman of ASIC.

Justice Middleton rejected the directors’ argument that they relied on the expertise of outside auditors who had approved the accounts. But the Centro saga doesn’t end with the ASIC case. The directors of Centro are in turn suing the auditors, PricewaterhouseCoopers, and so are the people who lost their money in the Centro crash. There are two class actions against Centro and PricewaterhouseCoopers by investors-one by law firm Slater & Gordon, the other by Maurice Blackburn.

From Maurice Blackburn, senior associate, Martin Hyde.

Martin Hyde: Centro has brought cross-claims against its auditors. Centro said that if shareholders have lost money as a result of what went on it was partly or completely the fault of the auditors, PricewaterhouseCoopers. And so Centro and PricewaterhouseCoopers will fight it out and have to prove up the elements of their cross-claims at the hearing next March in the same way that we will have to prove up the elements of our case.

Stan Correy: It’s important to repeat what Martin Hyde just said. There are Centro investors suing Centro Properties and its auditors, PricewaterhouseCoopers. Centro Properties also has a claim against PricewaterhouseCoopers, its former auditor. And PricewaterhouseCoopers, in a cross-claim, is saying that the individual directors of Centro Properties and Centro executives misled the auditors. It’ll be QCs at ten paces for months.

Last June, Justice Middleton found that the Centro directors had failed in their duties when they approved the faulty 2007 accounts. The penalties will be handed down soon. ASIC wants the full punishment: fines and banned from holding office as directors. But Justice Middleton, while finding the directors ultimately guilty, wasn’t kind about the auditors either. He said there was evidence that the auditors didn’t understand the new accounting standards and that they didn’t inform the audit committee of a more than $1 billion error in the accounts.

Justice Middleton’s decision, according to Martin Hyde, reinforces the investors’ case against the auditors.

Martin Hyde: In one sense we still have to prove our case, and that hasn’t changed, but there are some aspects of the decision that may be helpful to us, and also if the judge goes on to make declarations about what happened, they are also potentially useful.

Stan Correy: So could you just give a summary of what your class action case is?

Martin Hyde: The Maurice Blackburn class action involves a range of investors, from the biggest institutions in the country right down to mum and dad shareholders, who lost money in Centro during the course of 2007. And we allege that the company and also the auditors engaged in misleading and deceptive conduct and also breached corporations law, and as a result our clients lost money.

Stan Correy: Martin Hyde from Maurice Blackburn.

The Centro case was widely reported in the international media, and at Forbes Magazine, Francine McKenna wrote a story on the judgement for her column.

Francine McKenna: I think it’s a very interesting decision; one, because the judge took such a very adamant position with regard to the directors’ responsibility and the clear direction that they could not abdicate responsibility to a third party advisor like an auditor. And that is the ready excuse that many executives and directors here in the United States use; in fact, our own US Attorney in Manhattan, I quoted him from an article, saying that we have a difficult time here prosecuting fraud cases, because executives say the auditor said it was OK, and the auditors say, ‘Our client gave us false documents,’ and so who am I to believe?

Stan Correy: In the recent ASIC case, the judge found that the directors couldn’t just delegate financial decision-making to the auditors. But PricewaterhouseCoopers, according to Francine McKenna, still has some explaining to do about their role.

Francine McKenna: And I think it’s going to be interesting to see what happens if PwC can also find a way to explain the fact that they didn’t stand up and do their job, I think, to communicate this information to the board of directors and not to let internal executives sort of paper over it and perhaps obfuscate the information from the directors themselves.

It’s a very interesting case both from the director and auditor perspective.

See you next post for something entirely different!

Keep well,

James E

Auditing the auditors (1 of 2)

The other day I was listening to a podcast of the ABC Radio National show Background Briefing. The segment was titled Auditing the auditors. It was simply fascinating. Here is a transcript of the opening section. The ABC reporter’s name is Stan Correy.

Stan Correy: As the financial world tumbles all around us yet again, let’s pause to find out where the buck stops. Sure, the banks and big financial institutions played pass the parcel with other people’s money, but who was meant to stop their music? Is the answer the auditors, the people who sign off on the books and say they’re OK?

Remember ten years ago? Then it was Enron.

Congresswoman Stephanie Tubbs Jones [archival]: The reason we are here is because you audited Enron Corporation and the representations you made were not in fact a true financial picture of the corporation, such that a lot of people lost money and we’re in a public hearing trying to decide whether the auditing principles that have governed our nation for the past few years, are truly in the best interest of the public. Is that a fair statement, Sir?

Stan Correy: The ‘sir’ being questioned in congress then was the CEO of auditing firm Arthur Andersen, Joseph Beradino.

Joseph Beradino [archival]: And I’m here to give you some thoughts on how we might go forward with a much better…

Congresswoman Stephanie Tubbs Jones [archival]: Well then, why don’t you give me some thoughts? How is it that the public could see what was wrong with Enron based on your auditing practice?

Joseph Beradino [archival]: I don’t know how to answer that question.

[Excerpt from song: ‘Don’t Worry, buy Enron’]

Stan Correy: Arthur Andersen collapsed in a heap and no longer exists. Enron was thought to be a wakeup call to the world’s auditors. But just six years later, in 2007, the global financial crisis swamped the world. At the heart of the storm, dodgy accounts, signed off as OK by auditors from the big four audit firms.

Journalist [archival]: At more than 4 billion, the loss recorded by the Royal Bank of Scotland today is the biggest in British corporate history.

Commentator [archival]: Well, colossally big numbers we’re talking about for what used to be a global colossus. As you say, 4 billion of losses, 25 billion insured by the government, and if that goes sour that’s coming back to us, the British public.

Stan Correy: Auditors of the Royal Bank of Scotland were Deloitte Touche Tohmatsu. And then, across the Irish Sea there was the Anglo-Irish Bank.

Journalist [archival]: The soundtrack may have been upbeat on this video presentation to Anglo-Irish Bank staff, but the message it contained was anything but: one of the biggest losses ever for an Irish company and a colossal 4 billion government bailout.

Anglo Irish Chairman[archival]: From these figures it is clear that we made mistakes in some of the lending decisions taken in recent years, particularly in relation to property development here in Ireland.

Stan Correy: The auditors for Anglo-Irish Bank were Ernst & Young.

In Iceland, three of the biggest banks collapsed after Iceland was found to be in debt for $120 billion, ten times the entire economy. Auditors KPMG and PricewaterhouseCoopers were subsequently investigated over their role in the bank’s activities.

The giant American insurance company AIG was spectacularly bailed out by the United States government. AIG’s auditors: PricewaterhouseCoopers.

But strangely, it seems nothing much changed. In fact, it’s all really bad again. And if you thought there were problems in Europe and America, just wait till you hear about China. There-and it affects America and Australia, too-the auditors have for years been missing the fact that companies they were auditing had no business at all. They were empty shells doing nothing, listed on overseas exchanges but mere figments. No one home, but the auditors still signed off on them for years.

Tune into the next post for some highlights.

Keep well,

James E

How do clients want to pay their accountants?

The honest answer to the above question is … it depends. Clients differ on the method of payment. Here is what just none CFO of a $200m revenue privately-owned company thinks …

I think it’s a horses for courses situation. An audit engagement is normally done as a fixed fee so you know what you’re dealing with. The accounting firms tend to do the same thing year in and year out, so they should be able to quote a fixed cost without too much trouble. Clearly, if they come up with any unusual circumstances or anything out of the norm, you expect that will be an add-on to the base fee that you pay them. I don’t have any issues with that.

However, for other services, I would normally expect to pay on a time basis. It’s usually very difficult up-front to understand how much time and effort is going to be required in the assignment and to put a fixed amount on it. Often any figure is incorrect and either underestimates or overestimates the work that’s required. I’d just as soon rather they came in, did what was required, and billed me for it as long as they were efficient in the way that they went about it.

In regards to a retainer, I’ve never been in a position where I’ve actually engaged an accounting fi rm on that basis; I just don’t see the value in it. I can’t think of any circumstances where a retainer would be warranted.

See you next post,

James E

 

Accounting in the cloud?

You would have noticed, in particular in the area of software, the rise and rise of “open-source”. From word processing to databases to design to spreadsheets to books, there is little in the way of applications that can’t be used as open-source.

Put simply, open-source refers to the use of software and/or information without charge, given certain conditions. Often the software is given freely and the provider makes their money from the provision of value-added services and technical support. A great example of how money can be made from giving something away is the antivirus company McAfee Associates. Back in the early 1990s, McAfee gave away its software to millions of users around the world for nothing. They made money from providing upgrades and support to the user base, and charging a modest fee.

You would be thinking to yourself, no accounting fi rm on earth has
millions of clients so that business model couldn’t work. You’re right.
However, is there anything stopping you providing your clients with
tools and methodologies to help them with their compliance needs
and your firm providing value-added services and technical support?

Keep well and see you next post,

James E

 

Life is like a card game …

A friend and past client of mine is Mark O’Hare – a shrewd and highly skilled business adviser based in Brisbane, Australia with Grant Thornton. This is Mark’s response to the question:

What has been the most unusual client experience you have ever had and what did you do about it?

My view of life is that it is like a card game: many hands are dealt to you, over an extended period (my career being 30 years to date) and a few of those hands are bound to be special.

The most special hand I have received was in the form of a casual referral of a business, owned by a husband and wife team, by a regional banker. At first I did not recognise this event as the dealing of an exceptional hand: they had outgrown their existing provider and all I had to do was make the call to tee up a meeting. I promptly made the call, had the meeting and – in less than one hour – had formed the bond that would be the foundation of an extraordinary relationship. The meeting was with the wife in the partnership, who I was advised was a very tough operator, so it was crucial that I impress her. I am fortunate to have been reared by a mother who is of a similar nature, so we hit it off from the first minute. The engagement of both my division’s services, and those of three other divisions of the firm, was sealed on a handshake – a firm one, I might add!

The remarkable success that followed over the next 12 months could not have been anticipated nor planned. During that time, we rendered fees of around $1 million. These fees were all paid within seven days of being issued, sometimes sooner.

The client’s business, it should be mentioned, had commenced some 10 years earlier with a modest turnover ($3 million) and had grown to its current turnover of $200 million per annum and $50 million in net assets. This growth was all under the stewardship of a husband and wife team, residing in a remote area, with no formal business qualifi cations. To achieve this, there was determination and integrity in spades!

The best part of this story is the fact that the net cost to the client for our services over this fi rst year was nil. This was due to our successful submission to the ATO to have $600K of interest on overdue tax waived and $400K of GST repaid, on the basis that it was never properly claimed by their former provider.

As a result of this event, I have learned not to be quick to judge circumstances on face value and to build all relationships on both deep commitment and trust. Then, sometimes, magic happens!

Nice on Mark  🙂

Until next time,

James E

The importance of listening

They say that a picture is worth a thousand words. So here we go.

Julian Treasure (what a fantastic surname! ) is the chair of the Sound Agency, a firm that advises worldwide businesses — offices, retailers, hotels — on how to use sound. He asks us to pay attention to the sounds that surround us. How do they make us feel: productive, stressed, energized, acquisitive?

Click on this link to watch the video. 5 ways to listen better

Any professional adviser, including accountants, can always learn to become a better listener. Did you hear that? 🙂

See you next post.

All my best,

James E

A little bit of humility …

Cliches, as I’m sure I’ve written before, are cliches because they are often true.  The old saying that a little bit of humility goes a long way is one such example.

Be it accounting or any of the other professions clients want, no let me correct that, they need their advisers to have a little humility and not be full of their own self importance. Now that might sound a bit harsh, but do you really think clients want to work with, or take advice from people, who show little respect for them?

The other day I was surfing the web and came across an expanded definition of humility on a site called “Two Paths” (http://www.twopaths.com/humility.htm). I think it is worth reading … so here it is.

Humility or humbleness is a quality of being courteously respectful of others. It is the opposite of aggressiveness, arrogance, boastfulness, and vanity. Rather than, “Me first,” humility allows us to say, “No, you first” Humility is the quality that lets us go more than halfway to meet the needs and demands of others.

Friendships and marriages are dissolved over angry words. Resentments divide families and co-workers. Prejudice separates race from race and religion from religion. Reputations are destroyed by malicious gossip. Greed puts enmity between rich and poor. Wars are fought over arrogant assertions.

Where do you rate on the humility scale? I dare say the majority of “trusted business advisors” would rate high on such a scale.

Until next time,

James E

PS: I try to include an image in each post that graphically reinforces the main point of the piece. I think the above image doesn’t quite do that. Apple pie … humble pie? Sorry … way too long a bow! 🙂