Archives for 2018

Consulting Now ‘Cash Cow’ for Big 4, Raising Conflict Questions

In the last five years, the Big 4 have come to rely on revenues generated from advisory services, but offering consulting and auditing services within the same firm is raising an old debate about conflict of interest.

As a group, the Big 4 accounting firms saw 42% of their global fiscal 2017 revenue come from consulting and advisory work. From 2012 to 2017, audit revenue grew by only 3%. Consulting and other advisory services grew by 44%, or from $39 billion to $56 billion, according to the Wall Street Journal.

“While consulting can be lucrative – it tends to be more customized, creative and driven by corporate clients than auditing is – the presence of the business at audit firms has been a concern for years,” writes reporter Michael Rapoport in the April 7 edition. “Investors fear it could cause the firms to take their eyes off the ball when it comes to their core auditing responsibilities and that it would be harder for an audit firm to be impartial if it is also reaping large consulting fees from the same client.”

The fears, raised during the early 2000s amid the demise of Enron and Arthur Andersen, are being revived in the U.K. Following Enron and other U.S. corporate accounting scandals, the Sarbanes-Oxley reform legislation prevented firms from providing many kinds of consulting services to audit clients. However, firms can still do both for clients outside the U.S., as well as provide consulting to any companies they don’t audit.

Now, following accounting scandals in the U.K., Stephen Haddrill, chief executive of the Financial Reporting Council, told the Financial Times that authorities should consider breaking up the Big 4, which audit nearly all the largest U.K. companies, so that corporate auditing is separated from consulting. That way, separate firms would only perform audits.

Deloitte and EY have voiced opposition. For example, Mark Weinberger, EY’s global chairman, says that having auditing and consulting together gives auditors easier access to technology and expertise about their clients’ businesses, the Journal reported. It “provides the structure, breadth and depth of technical skills and industry expertise necessary to deliver high-quality audits.” KPMG didn’t comment, but PwC’s U.K. firm said it was “open to ideas.”

While some industry observers think the move could improve audits while sparking competition, there’s been no push in the U.S. – at least lately – for audit-only firms, the Journal reports. The change would be complicated, as regulations differ from country to country. Also, Big 4 member firms in each country are legally separated from others in the same network.

Mellott & Mellott Co-founder Passes Away

Donald Mellott Sr.

Donald Mellott Sr.

Donald Mellott Sr., co-founder of Mellott & Mellott of Cincinnati, passed away on April 10 at the age of 83.

Mellott founded his firm with his father, Leo, more than 60 years ago. Mellott managed the firm until 1998 and retired in 2013.

Cendrowski Corporate Advisors Adds Veteran Accounting Expert in Chicago

Randy Wilson

Randy Wilson

Bloomfield Hills, Mich.-based Cendrowski Corporate Advisors has added Randy Wilson to its Chicago office.

Wilson brings more than two decades of experience in internal corporate and government investigations, fraud analyses, embezzlement detection and prevention, risk management analysis, and forensic accounting investigations. Wilson will work across CCA’s accounting and financial services, litigation support, risk services and compliance consulting practice groups to provide targeted investigations and advise clients on how to effectively assess and design internal control programs, implement best practices, and monitor the progress of internal compliance programs.

Previously, Wilson directed the Chicago fraud and forensic practice as a principal at Plante Moran, with prior experience at PwC and Deloitte, where he specialized in business recovery services and investigations.

ConvergenceCoaching Launches 2018 Anytime, Anywhere Work Survey

ConvergenceCoaching, a leadership and management consulting firm that works exclusively with CPA firms, launched the 2018 ConvergenceCoaching Anytime, Anywhere Work survey (ATAWW). In its fourth edition, the ATAWW survey examines the adoption of flexible work practices in CPA firms across the country.

“Flexible work programs are super strategic for CPA firms,” says Renee Moelders, consultant at ConvergenceCoaching. “Today’s talent is demanding flexibility around when and where their work gets done, and our Anytime, Anywhere Work survey helps firm leaders understand what’s happening in the marketplace so they can keep progressing their own flex practices and stay competitive. Clients also demand more flexibility from their CPA firms, so it’s crucial that firms are able to deliver exceptional service from anywhere, at virtually any time.”

Participation in the ATAWW survey allows firm leaders to benchmark their current program offering against other CPA firms around the country. Results of the survey are shared with participating firms, along with best practices and strategies to drive successful adoption of flexible work policies.

Click here for more information.

Deloitte Hosts National Audit Innovation Campus Challenge

New York-based Deloitte (FY16 net revenue of $17.5 billion) and the Deloitte Foundation hosted the 2018 National Audit Innovation Campus Challenge (AICC) at Deloitte University, awarding students of the University of Arizona first place for its idea to develop and use a proprietary artificial intelligence application to conduct audits of corporate sustainability reports.

Guided by faculty advisors and Deloitte subject matter leaders, students were challenged to find new ways to bring audit and assurance services to the marketplace using technology. Student teams from 52 colleges and universities participated in the event, with 12 teams advancing to the final round.

“The nature of many professions is rapidly shifting. Technology, innovation and process improvement continues to disrupt and redefine the way an audit is conducted at an unprecedented rate,” says Erin Shannon, managing director, change management.

“It’s our people, however, that are our most valuable resource and it is critically important that the next-generation of talent possess proficiency with emerging technologies and data analytics, as well as help bring new innovative solutions to stakeholders,” says Shannon. “This competition provides opportunities for students to apply their knowledge and creativity to real challenges facing today’s auditors and this year’s winners showed innovative thinking.”

The University of Arizona team’s winning submission focused on a recommendation to enter the market of auditing corporate sustainability reports in anticipation of potential regulatory guidance in the coming years. The submission cited Deloitte’s position to conduct a sustainability audit and introduced an artificial intelligence tool, “Deloitte Danni,” that could help auditors measure an array of environmental metrics and compare those readings to sustainability guidance.

“The Deloitte Foundation’s approach to helping prepare students for careers is twofold,” says Erin Scanlon, audit and assurance partner and Deloitte Foundation board member. “In addition to initiatives like the ground-breaking AICC that engage students, longstanding programs such as the Trueblood seminars provide educators with insights and rich case examples they can bring to the classroom to help develop students’ technical, research and critical thinking skills, and help better prepare the next generation of leaders.”

Hope is Not a Strategy – Particularly When It Comes to Growing

By Dom Esposito

Dom Esposito

Dom Esposito

There are several things that we find to be particularly curious about small and mid-sized CPA firms?

We are curious about:

  • Why so few firms share with staff (or, at a minimum, potential partner candidates), who see how hard partners work (i.e. “the pain”), the average, mean and high / low range of partner compensation (i.e. “the gain”).
  • Why very few firms share with the staff what it takes to become a non-equity partner and eventually an equity partner.
  • Why scarcely few firms make the necessary investment to develop the next generation of partners.

When it comes to the silence small and mid-sized CPA firms have around partners compensation, it appears that the firms believe that, if they share this information, the staff, in turn, will negotiate for more money for themselves. We guess that is human nature but, in our view, it is not sufficient enough reason to closely guard against compensation disclosure and to keep staff in the dark. Personally, we like staff who want to earn more money. As we see it, the more money they earn, the more they produce and that production results in more profits for the partners. Further, we believe that CPA firm partner compensation, while not comparative to the huge amounts earned in the tech or investment banking industries, is not anything to sneeze at or be embarrassed about. Partners earn handsome sums of money and live very comfortable lives with their families. They should be very proud of it as they work hard enough for it. We have found that disclosing partner compensation statistics to staff is a great carrot for those who aspire to be future partners.

While firms have recognized long ago that marketing, selling and identifying new clients are important activities to sustain growth and therefore spend lots of time and money in these areas, we find that many firms do not make similar investments in attracting and retaining talent – particularly when it comes to “growing” new partners.

In our opinion, it is very healthy for firms to develop a roadmap as to what it takes to get promoted to non-equity partner and then from non-equity partner to equity partner. We also believe that firms will reap considerable benefits if they developed a partner candidate development academy.

Presented below are examples of what is being provided in these areas by some very successful firms.

Not many staff want to become partners at small and mid-sized CPA firms. It is their perception that work and life are not balanced to their liking. Having said that, usually there are a good number of staff at small and mid-sized CPA firms who do, in fact, have an interest in becoming partners. But, again, large numbers of firms are not very helpful in “educating” staff as to what it takes to get the promotion.

On the other hand, there are successful firms who do provide a promotion roadmap for staff. In it they clearly indicate that the path to move to non-equity partner typically is considered after functioning two, perhaps, three years as a senior manager, principal or director. It is made very clear that the key question addressed when a firm is considering a professional for promotion to non-equity partner is: Does the non-equity partner candidate contribute to perpetuating and growing the business of the firm, maintaining and enhancing technical excellence and driving client and staff retention?

In addition to this key question, other criteria and guidelines, all designed to determine if the candidate has demonstrated a track record of performance, used in determining if someone qualifies for promotion to non-equity partner include detailed questions regarding:

  • Client Relationships and Client Service Excellence
  • Technical Capabilities and Distinctions
  • Personal Attributes
  • Staff Development
  • Business Development (a combination of new business and cross selling)
  • Office Leadership / Firm Management
  • Communications
  • Administrative Responsibilities

When it comes time to consider someone for promotion to equity partner, the more successful firms make it clear that they have financial and economic guidelines (including firm per partner standards for revenue, profits and billable hours) that recognize that practices generate different results and, therefore, depending on the candidate’s area of expertise, might require different standards. As a result, firms customize financial guidelines for a candidate’s applicable role and what the candidate needs to do to meet them.

The promotion roadmap also indicates that moving from non-equity partner to equity partner is a consideration after functioning two, perhaps, three years as a non-equity partner. The key question that is addressed when a firm is considering a professional for promotion to equity partner is, has the equity partner candidate significantly contributed to perpetuating and growing the firm’s business, maintaining and enhancing technical excellence, and driving client and staff retention? Further, has this contribution been demonstrated by a track record of steady and increasingly improved performance in the eight areas referred to above?

Finally, to develop the next generation of partners, we encourage firms to launch a partner candidate development academy. It provides an opportunity for partner candidates and senior management to get to know each other better and creates glue for the organization. Perhaps most important, it provides tools to the partner candidates that enable them to maximize their strengths and minimize their weaknesses.

ALM Intelligence Identifies Best Strategic Risk Consultants

The consulting division of ALM Intelligence released its 2018 ratings of strategic risk consulting providers. Five firms were identified as leaders in the consulting industry: Crowe Horwath, Deloitte, KPMG, McKinsey & Company and PwC.

“The challenge in risk management is not a lack of information, but instead getting the right data, and employing analytics capabilities and presenting it in a manner that draws out meaning from that data,” says Naima Hoque Essing, senior research analyst at ALM Intelligence. “Leading consultants use the process of aggregating risk data to improve, streamline and automate risk reporting by eliminating duplication, introducing the best technology and analytical solutions while embedding a standard taxonomy.”

ALM’s Vanguard research series assesses firms in terms of their relative ability to create impact for their clients. In addition to its overall rating assessments of consulting providers’ depth and breadth of capabilities and best-in-class provider designations, this series includes detailed capability evaluations for each covered provider as well as a qualitative analysis of their consulting organization, approach and service delivery model.

Big Four Cautiously Offering ICO Services

The Big Four firms are beginning to offer services related to initial coin offerings, or ICOs, which have become a concern for regulators around the globe, Bloomberg reports.

An ICO is a funding mechanism in which a company creates a new digital currency and sells it to the public. The SEC recently stopped an ICO, calling it fraudulent, and China and South Korea have banned them altogether.

Big Four firms are moving forward cautiously. “What we’ve been doing is advising some investors and some clients on what to do with an ICO – whether they should do one, whether they shouldn’t,” says Eric Piscini, blockchain leader for the financial services group at Deloitte Consulting. “Our stance is very – I don’t want to say risk averse, but it’s very wait-and-see for now on ICOs, because the regulatory environment is changing really fast.”

Playkey, a cloud-gaming startup, sough Deloitte’s help before holding an ICO last year. The firm spent about six months offering legal advice before Playkey’s ICO, which raised $10.5 million in December, Bloomberg reported.

At PwC, ICO work has been mainly limited to clients in Asia and Europe. KPMG started taking on ICO clients mid-2017, and EY is getting daily inquiries for ICO consulting.

“We are selectively working around the firm to help companies do ICOs, both domestically and internationally,” says Jeffrey Grabow, the U.S. venture capital lead at EY. In each offering, the firm is clearly communicating the various risks, he said. “We’ve been watching it evolve over time and are constantly figuring out what role we can and should play.”

Blockchain Offers Solutions in the Global Coffee Market

One Seattle startup, Onda Origins, is using blockchain technology to track their coffee from bean to cup, according to GeekWire.

Onda uses blockchain, which acts as a distributed ledger, to create transparency for customers, who can see exactly where their coffee comes from, and for growers to get maximum revenue out of every bean they produce.

“We can revenue share back to those growers and reward them a second time for the environmental or social good they’re bringing to the world,” says Paul Tupper, co-founder of Onda Origins. “Consumers are driven by that, and we can make a system that reflects the values people think they’re buying into. A backbone of experiential marketing makes it feel true and traceability proves that it is true.”

Onda had to find creative ways to make sure their first growers got paid, and that became more challenging as it looked to expand to larger growers and different locations. Using blockchain makes it easier to work across borders and languages barriers.

“As we expanded our offerings into cooperative models or small holders in locales where we didn’t have linguistic capacity, we could never guarantee that the actual trail was leading back to the producer,” says Scott Tupper, Onda co-founder. “That led to a couple disappointing situations where we didn’t know how to reconnect with the growers. Blockchain offers an ability, through auditing chain of custody on a ledger, to make sure that we are following product all the way through and that we will always have access to the growers.”

“Sustainability stories from origin, whether that’s environmentally sustainability or community sustainability, were being leveraged for really high price points on the consuming end but that price wasn’t shared back to the grower, even though they are bringing value,” says Paul Tupper.

Starbucks is also exploring the option of using blockchain technology for a similar bean to cup pilot program. They will launch the program with select coffee farmers in Costa Rica, Colombia and Rwanda. This will allow growers to log and share real-time information along the journey of coffee beans to develop and demonstrate over the next two years how data platforms can give coffee farmers even more financial independence and confidence.

“Many years ago, our controls and transactions were all done by paper, and today we are even talking about blockchain technology,” says Ronald Peters, executive director of the Costa Rican Coffee Institute. “This shows us that, more than being at the front of every technological advancement, having the information and being flexible and adaptable are important.”

“The promise of connecting coffee farmers to coffee drinkers is an extraordinary leap in transparency and accountability, and it speaks volumes about Starbucks commitment to creating a product that is good for people and for the planet,” says M. Sanjayan, CEO of Conservation International.

Prager Metis CPAs Admits Zarkowski as PIC

Joseph Zarkowski

Joseph Zarkowski

New York-based Prager Metis CPAs (FY16 net revenue of $60.8 million) admitted Joseph Zarkowski as the PIC of the advisory group and public company audit practice. He will be based out of the Basking Ridge, N.J., office.

“Bringing Joe on board is essential for our plans to expand our resources and further strengthen our reputation and expertise as the “go-to” expert in both advisory and public company audit services,” says Glenn Friedman, co-MP. “With his extensive background he is a perfect choice for us to lead the two critical areas.”

Zarkowski is responsible for developing, managing and delivering the advisory group’s service lines that include system and organizational control attestations, out-sourced internal audits, internal control risk assessments, integrity monitoring, custody surprise examinations, technology audits, regulatory and compliance reviews, and specialized attestation engagements.