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Letters to the Editor The Andersen divorce jolted the accounting community and professionals throughout the country are reacting with a wide range of opinions, ideas, and observations. The upset began Monday when Colombian arbitrator Guillermo Gamba issued a 129-page decision, splitting up the two entities. The decision forces Andersen Consulting to abandon the Andersen name and pay about $1 billion to the partners at Arthur Andersen. The arbitrator also ruled that Andersen Consulting must relinquish any technology jointly held by the firms, but Andersen Consulting dodged a $14 billion payment that could have been awarded under the contract between the two firms. A second shock came when, hours after the arbitrator's ruling was announced, Jim Wadia, worldwide managing partner for Arthur Andersen, announced that he is resigning from his position and has chosen to take early retirement from the firm. Louis P. Salvatore, chairman of the Arthur Andersen Oversight Committee of the Andersen Worldwide Board of Partners, has been named interim worldwide managing partner and will serve in that capacity until a new managing partner is appointed. To add your voice to the discussion write to information@smartpros.com. A Marriage Made In Hell From Dan Sautner Editor's Note: Dan Sautner is the chairman of Athens, Ga.-based Padgett Business Services, a 300-unit chain of accounting offices. My ultimate opinion is that the split up was rooted in the cultures of consulting and audit. Historically these groups do not work well together. When the dollars come into such wide differences they had no basis (or desire) to solve the problem. 1) What does it say about how partnerships can become dysfunctional? Essentially all partnerships are dysfunctional. If the marriage divorce rate is 50 percent, the partnership divorce rate must be 95 percent. I can think of very few partnerships of any kind that last ten years. In the world of the big firms, the term partnership is used, but hardly represents the actually mechanics of the relationship. There are partners and there are partners. The executive committees tend to be the driving decision makers, with the other partners merely rubber-stamping the result. Partnerships work when all parties are doing work important to them AND they are financially successful. This has to be an equal experience. When there is any perceived inequity things tend to fall apart. 2) What does it say about how consultants and auditors can or cannot work together? You have a basic problem within the two professions. Auditors work towards the long-term relationship with the client. Client fees are seen as annuities to be cultivated and expanded on over the long run. Consultants are transaction-based, performing the work of the project, completing and moving on. While consultants want a happy client, they do not have the luxury of making up a shortfall on the next year’s billings. This attitude and relationship with the client creates immediate conflict. The auditor wants a satisfied client for the long term (annuity) the consultant wants a completed, profitable project (transaction). The above creates problems for the relationship in that auditors are afraid to expose their clients to the consultants. They cannot risk their annuity to short term profits. A client may leave a consulting firm and the hurt is short term. That same client also leaving the audit firm and serious damage is done. This damage affects the firm, but also the long term prospects of the partner in charge. The next issue lies within the consulting itself. The audit side is forced to live with the results of the project long after its completion. A classic example is a computer system installed by the consulting group. The following year, during the audit, this system will be reviewed for internal controls, and if shortfalls are found, how does the client react? Naturally, during the consulting assignment, auditors are called in, but this is seen as an expensive overhead threatening the profitability of the assignment. Consultants will not remain partners long with unprofitable projects. Finally, the rules for becoming a partner in both firms were very different and trying to impose a common culture was very difficult. In audit it was time and service. In consulting it was billings. In both it was new business generated. On the consulting side a consultant could be in a very hot area and generate huge fees quickly. This could never happen on the audit side, where time had to pass. This led to frustration for both sides. 3) What lessons does it hold for CPA firms? I doubt that there are any lessons here for other CPA firms. In the case of Andersen the issues are magnified due to the size of the dollars. They are the same in all firms. When the gap widens to the point where one party will be better off without the other they will split. It will not be as dramatic as Andersen, but the result will be the same. In the smallest of firms, auditors who are able to do some consulting maintain the balance. As soon as a person goes full time and is more successful, there will be discord. Once a partner has spent a few years in consulting they have little to no desire to return to audit. In many cases they are unable to absorb the ongoing change. 4) What lessons might it hold for clients? Clients are probably better served by using an audit firm to do audits only. I would want our auditors to be examining the results of consulting work without the obligation to protect their own consulting wing. 5) What should Arthur Andersen do next? Partnerships are only one form of business association. The split is final, now the parties have to learn to act like civilized people again. My advice would be to get over it as quickly as possible and look at other forms of business association. Since the leadership of both companies are now gone, the new leaders should be able to look to the future. They do have common interests and common markets; in the name of good business they should try to work towards some form of alliance that while benefiting both does not impinge on either. Conclusion -- Consulting and auditing, marriage made in hell. -- Aug. 10, 2000 A Doomed Relationship From the Beginning Re: Andersen Divorce Rocks Profession From Allan Boress Editor's note: Allan Boress is a sales and marketing consultant to CPA firms. Having consulted to over 500 CPA firms, I have always maintained that the reason for Arthur Andersen’s tremendous success (never having merged or acquired as their competitors have in order to grow) was that AA simply had more entrepreneurial people in positions of leadership on a per capita basis than their competitors. Twenty-five years ago, the other firms laughed when AA created a consulting function. In the meantime, AA and later AC created the most successful consulting firm of its kind - and a major cash cow. However, this was a doomed relationship from the beginning as the accountant/auditor mentality is the exact opposite of the intellect needed to build and create a consulting juggernaut. CPAs and consultants CANNOT co-exist UNLESS the consultants run the firm and the accountants are kept under control. The technical mind looks at the bottom line today and doesn't understand marketing, selling, aggressiveness, or capturing market share. Although much more entrepreneurial than the average CPA, AA’s partners were still less aggressive than AC’s. Today, AA, however, is still highly entrepreneurial. You watch - this will be a major motivator to grow their firm and will wind up being a benefit to both AA and AC. Only in my opinion, it is quite likely AA will merge (read "buy") one of the other Big Five firms, although I would recommend they not do that as it would infect their carefully created culture with people who are not of the same mind. In the end AA will grow and succeed and likely be number one again because they are Arthur Andersen. -- Aug. 9, 2000 From August Aquila Editor's note: August Aquila is vice president of American Express Tax & Business Services and a noted speaker and author on marketing. The breakup of Arthur Andersen and Andersen Consulting, albeit on a much larger scale, is not uncommon in the accounting profession. There are several examples of smaller firms that open a branch office and after a few years the two offices separate. It appears that when things are going well, one office feels that it is giving the other everything (e.g., Arthur Andersen getting Andersen Consulting off the ground). When the branch office does well, it feels that it is sending all the profits to the home office. A corporate structure would surely solve this problem. At the core of the matter is the basic difference between the accounting profession and the consulting profession. Accountants have clients, if not for life, for a long time (6-10 years). The accounting partner does not want to jeopardize this relationship. The consulting partner has a more transactional relationship with his/her client. As accountants move into consulting there will be these conflicts. It's unfortunate that Arthur Andersen felt it had to compete with itself. There are obviously a lot of facts that we as outsiders do not know. For the small- to medium-size CPA firm, this event should (1) Show them that whatever agreements they have with their consulting arm, they need to be clear as to who can do what for the client. (2) Make sure you don't set up a separate company to do the consulting unless you have a clear cut idea on how you will dissolve it. (3) Don't compete with yourself, there are enough competitors out there already. -- Aug. 8, 2000 Small Firms Watch Out From Conrad Giedt Editor's note: Conrad Giedt is a CPA at Los Angeles-based C.D. Geidt & Co. There has and always will be conflict between auditor and consultant. Small firms watch out. Many small firms have always had trouble with the consultant business because at small firms there was never enough money and profit to justify the consultants. This of course is changing. But small firms watch out, bet we see some new regulations and laws on combining the consultant practice and audit and tax practice. All CPAs need to separate consultancy and the audit and tax practice at least into separate business units. -- Aug. 7, 2000 A Welcomed Ruling From Jim Hudspeth, CPA In my opinion this is a welcome ruling. Years ago, when incidental consulting really was incidental, auditors could provide consulting services without impairing their independence. Such is no longer the case. Consulting as it presently exists is not incidental, therefore auditors cannot do it without impairment of independence. -- Aug. 7, 2000
Dispute Is Reflection of the Past From Mark Zivin Editor's note: Mark Zivin is a CPA at Business Productivity Systems, the technology consulting unit of Chicago-based Morrison & Morrison. My general feeling is that to some extent this is a unique situation, the seeds of which were well sown back in the mid '80s. It was at that time that the rift between Andersen Consulting (AC) and Arthur Andersen (AA) began. So, what we are seeing now really reflects more on that time than current times. At that time, it seems that the accountants were not willing to negotiate a "fair" deal with the consultants -- fair being defined as relative to both the then current billings and growth potential. On the other hand, at that time, it would probably have been a lot more difficult for AC to grow as quickly with the Fortune 500 without the cachet of the Andersen name. As for what happened in the intervening ten years, it seems that AA took a calculated risk in moving into the consulting arena. They basically had far more to lose by NOT expanding their consulting practice and sticking to the letter of the agreement, versus trying to expand into "non-competitive" consulting markets -- perhaps a gray area. I say perhaps because the arbitrator obviously felt that the areas were much more black and white that AA had obviously overstepped its bounds. Obviously, similar issues could arise in the other Big Four as well as smaller accounting firms that remain in the tech arena. It could also potentially affect the new "one-stop shopping" firms that offer other value-add services, where the fruits of labor are not relatively equitably divided. (Maybe AA needed some good cost accountants to properly allocate the revenues and expenses?) In the larger picture, I believe that the economic lessons of consultancy versus auditing/tax are somewhat self-evident. The growth in consulting has been nothing short of spectacular and appears to be likely to continue so. Auditing and tax have been relatively stagnant during this period -- both being compliance oriented services. I think that auditors in particular need to reevaluate themselves and their practices ASAP. It seems clear to me that in a world running on Internet time, audited financial statements issued three plus months after year-end add little value. The AICPA, the Big Five and the SEC should be brainstorming new watchdog services that will run on a much closer to real-time basis. -- Aug. 7, 2000
Clearly Consultants and Auditors Cannot Get Along Editor's note: Gordon Gilchrist is a London, England-based consultant to professional service firms in the U.S., the U.K. and South Africa. The inevitable has now happened, the only shocker is that AC has to find a new name and that the money is very small indeed. Clearly consultants and auditors cannot get along - they never have and never will and that has extended across all of the top five firms and before that to the top eight. Even the second division firms who tried to get their consultancy arms going failed primarily because the audit partners failed to refer their clients to the consultants. Typically, the lack of referrals was due to the fact that the consultants did not win the confidence nor friendship of the partners around the country. In the smaller firms we have success stories especially with IT consultancy and financial services and we have been able to advise clients from the outset that the structure of these types of "add on" services must be outside the domain of the existing auditing and accounting practice. Otherwise, we see the accountants and consultants "clashing" and ultimately failing. I think AA should "sell" their good name (AC) as a brand/franchise to their internal consultants and build up another great consultancy - this time knowing that they will not get along and therefore creating a structure that allows for both businesses to grow. -- Aug. 8, 2000 From Joel Sinkin Editor's note: Joel Sinkin is an executive at Global Force International, a New York-based mergers and acquisitions advisor to CPA firms. The message I get from all of this continues the emphasis on firms going away from the day-to-day traditional functions of accounting and more and more to consulting. Clearly Arthur Andersen recognized their revenues from traditional services were and most likely would continue to decline. The mistakes were not finding ways of cooperating and instead creating unhealthy competition between their own entities. The lesson for everyone is that when creating partnerships, regardless of the scale, one must thoroughly: Arthur Andersen's strategy should probably be to tell their clients that the firm is doing all their accounting work, knows and understands the day-to-day operation, and needs better than special project people; and the whole conflict occurred because they wanted the people best suited and with the greatest understanding of their business to head all consulting work and the other division did not want them involved. And that now Arthur Andersen has developed the experts, either internally or through a type of subcontractor network to get the job done. The mergers I have seen collapse are typically because of partners with goals that are different and have changed. -- Aug. 7, 2000
From Ron Baker Editors Note: Ron Baker is a CPA in Corte Madera, Calif. and a consultant to CPAs. I have always thought the battle between AA and AC was the war of the bean counters vs. the butterflies. One issue is that AC isn't as tied to the "billable hour" as is AA, and they're more profitable from a resources input criteria, and carry less risk from the work they do (one bad audit and the whole firm topples). Significant marketing differences arise because of all that. But I think the cultural aspects are more important, as CPAs and consultants are just different animals. The former report on history, the latter help make it. One is an "expert," the other a facilitator. -- Aug. 7, 2000
From Alan Weiner Editor's note: Alan Weiner is a partner at Holtz Rubenstein & Co. in the New York City area and a former president of the New York state CPA society. It's interesting, but the AA dispute and resolution is mega-business and affects only the largest of accounting firms and other similar businesses. It's true that if I looked deeply enough and subtracted a few billion dollars, I could probably find something in the dispute and decision that affects smaller firms but I don't think that the AA split up is anything more than a matter of interest because it concerns an accounting firm with a fine reputation. -- Aug. 7, 2000
Interesting But Not Surprising From Carlton Collins Editor's note: Carlton Collins is a leading consultant to local CPA firms. Collins, based in Norcross, Ga., is a member of the K2 Enterprises consortium of consultants. This is an interesting topic - but not surprising. Andersen Consulting split off from Arthur Andersen because the consulting side was making so much more money per partner, there was dissention in the ranks. The official word for the split referred more to "conflicts of interest" - but money was the underlying reason for the split in the first place. Based on the law suit, it appears that Arthur Andersen partners are still bitter about the money being made by their consulting counterparts. Every partnership I've ever done work for has eventually gone dysfunctional. People always argue over money and workload. "I'm doing most of the work", "You're not pulling your weight", "I'm bringing in more revenue than you!", "I'm the one with all the talent and good ideas." The problem is that once these ideas begin to dominate the thoughts of the Partners, future decisions tend to be based more on what will balance out these inequities rather than what's good for the partnership as a whole. Once this happens - your have instant dysfunction. I've seen it - even lived it. As employees, consultants and auditors can work together fine - it actually works very well because of the good blend of knowledge between the two parties. However once you throw two Partners together, the above issues emerge. The consultants find that the consulting is usually far more profitable. The auditors resent this and they might also view the consulting work as exposing them to too much liability. Further, the art of consulting relies mainly on opinion whereas auditing relies mainly on facts and evidence - and therefore the auditors often find fault with the consultant's advice - after all you know what they say about opinions. Arthur Andersen may be served well to establish a new consulting organization and compete head-to-head with Andersen Consulting - after all that's where the bigger money is and better opportunities for growth. I wonder if previous agreements prohibit AA from taking this step? -- Aug. 7, 2000
Segregation Is Key From Bert Doerhoff Editor's note: Bert Doerhoff is a CPA at a local firm in Jefferson City, Mo. It reaffirms that firms who want to continue the audit function will The consolidators have had to address this very issue. However, the non attest functions need to be in one business advisory consulting firm with all parts communicating with one another. As the ruling states, the consulting business is the most profitable and what clients are willing to pay for. The audit function is nothing more than a compliance function which is a necessary evil and therefore will always be subject to bidding and price negotiation. Tax, planning, consulting, and the other business services are designed to help businesses be more profitable and the success of the engagement determines price and future growth of the firm. I see the AICPA having even smaller control over these small attest firms as the truly profitable part of the business gets segregated into a business advisory firm where separate dues are not owed to the AICPA for each specialty, but rather that firms will have members from various professional segments. To truly help firms the AICPA will need to forget about segregation and truly become a resource center where I can go online and find the question to any small business need. The small firm of the future will act as a general contractor with strategic alliances and a very effective database to locate experts and statistics in all areas. The client is always willing to pay the general contractor who can pull it all together. The subcontractor will always only be allowed to charge for the service he or she is asked, rather than having the trusted relationship of the general. The future is not in doing it all but in helping clients get it all done and knowing they have one place they can turn to for answers. Firms that spend all their time developing a market niche sometimes loose sight of the fact that our clients still need broad-based business advisors. |
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