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<meta xmlns="http://www.w3.org/1999/xhtml" name="robots" content="noindex" /><title>Re:Balance -- Jim Peterson</title>
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    <id>tag:typepad.com,2003:weblog-1430627</id>
    <updated>2025-09-11T12:36:54-05:00</updated>
    <subtitle>Financial Statements, Auditor Value, and the Critical Condition of the Large Accounting Firms </subtitle>
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        <title>Should Technology Shut Down My Blog? At Least It Triggers a Re-Think</title>
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        <published>2025-09-11T12:36:54-05:00</published>
        <updated>2025-09-11T12:36:54-05:00</updated>
        <summary type="html"><![CDATA[“So long, it’s been good to know yuh … And I’ve got to be driftin’ along.” --Woody Guthrie, 1935 For reasons beyond my control, this will be my last post on this platform. I’ve just received a surprise notice that...<div style="clear:both;padding-top:0.2em;"><a title="Like on Facebook" href="https://feeds.feedblitz.com/_/28/924686159/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/fblike20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Pin it!" href="https://feeds.feedblitz.com/_/29/924686159/jamesrpeterson,"><img height="20" src="https://assets.feedblitz.com/i/pinterest20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Post to X.com" href="https://feeds.feedblitz.com/_/24/924686159/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/x.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Subscribe by email" href="https://feeds.feedblitz.com/_/19/924686159/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/email20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Subscribe by RSS" href="https://feeds.feedblitz.com/_/20/924686159/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/rss20.png" style="border:0;margin:0;padding:0;"></a>&nbsp;<h3 style="clear:left;padding-top:10px">Related Stories</h3><ul><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2024/11/refuge-from-the-storm-seeking-shelter-in-troubling-times-november-25-2024-but-we-must-cultivate-our-garden.html">Refuge from the Storm &#x2013; Seeking Shelter in Troubling Times</a></li><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2022/12/tipping-points-the-financial-fragility-of-the-big-four-part-two-none-of-us-has-a-clue-the-late-william-mcdono.html">Tipping Points: The Financial Fragility of the Big Four (Part Two)</a></li><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2022/03/the-accountants-toast-to-esg-with-loving-cup-or-poisoned-chalice.html">The Accountants Are Toasting ESG -- With Loving Cup or Poisoned Chalice?</a></li></ul>&#160;</div>]]>
</summary>
        <author>
            <name>Jim Peterson</name>
        </author>
        <category term="Accounting Firm Structures" />
        <category term="Auditor Liability" />
        <category term="Count Down" />
        <category term="Regulators&#39; Activities" />
        <category term="Sustainability" />
        
        <category term="Big Four" />
        <category term="Private equity" />
        <category term="Sustainability" />
        
<content  type="html" xml:lang="en-US" xml:base="https://www.jamesrpeterson.com/home/"><![CDATA[<div xmlns="http://www.w3.org/1999/xhtml"><p style="padding-left: 40px;"><em>“So long, it’s been good to know yuh …</em></p>
<p style="padding-left: 40px;"><em>And I’ve got to be driftin’ along.”</em></p>
<p style="padding-left: 80px;"><em>--Woody Guthrie, 1935 </em></p>
<p>For reasons beyond my control, this will be my last post on this platform. I’ve just received a surprise notice that after two decades of support, my hosting service is shutting down. My regrets and appreciation for the team at TypePad, and best wishes as they move on. &#0160;&#0160;</p>
<p>As for my plans? Do I make the effort to move – or take it as a valedictory signal? My writing schedule has been so reduced of late, from the long-running model of my bi-weekly newspaper column, that this need to consider re-locating inspires some introspection.</p>
<p>While the benefit of solo control has allowed my topics to range far and wide, my focus has followed the arc of my legal practice: the large accounting firms and their role, performance and issues in the eco-system of the world’s commercial society and capital markets.</p>
<p>The archive spans twenty-plus years - dozens of columns, several hundred posts and two books. I along with my audiences might reason that any views of value have been fully aired out, for better or worse.</p>
<p>That at least feels plausible in the current environment, because it’s a fallow period of relative calm. In short, for the moment there’s not much going on. History does teach, though, that ebullient markets are cyclical, accompanied as a trailing indicator in their eventual downward plunges by the outbreaks of non-zero instances of financial misbehavior; recall Warren Buffett, that “when the tide goes out you knows who’s been swimming naked.”</p>
<p>Things are sure to heat up. The vengeful howl of “where were the auditors?” will be heard again, soon enough, in the next period of serious investor distress. Until that inevitable return, we languish in the combination of historically low interest rates, record-setting market indices, investor pursuit of fantasy-based returns untethered from actual performance, and regulatory and law enforcement attitudes of indifference shading to active complicity in white-collar criminality.&#0160; &#0160;</p>
<p>We don’t know when, although we are already a half-decade into the trough of official impotence and disinterest that muted the loud blasts of outrage over the likes of Carillion, Patisserie Valerie, Wirecard and Evergrande and the non-listed if no less real predations of Elizabeth Holmes and Sam Bankman-Fried.</p>
<p>All this may counsel that it’s a time to lay back.</p>
<p>So too my relaxing view of the prospects for a litigation-driven collapse of the Big Four firms’ iron grip on the large-company audit franchise. Not that they are not exposed to the scale of catastrophe that Enron’s fall in 2001 inflicted on Arthur Andersen – as spelled out in detail in my book, <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://www.amazon.com/Count-Down-Present-Uncertain-Accounting/dp/1787147010/ref=sr_1_1?crid=1TN8KU3KS8A1Z&dib=eyJ2IjoiMSJ9.alCmyb8cfwpF0V0d6YqQ3g.dLzjBn7Q4WhBz6YZunqKg9JiSi5SqRlk7C3ctjw6sNI&dib_tag=se&keywords=count+down+jim+peterson&qid=1757531073&s=books&sprefix=count+down+jim+peterson%2Cstripbooks%2C326&sr=1-1">Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms</a> (Emerald Books, 2d ed 2017). They are still exposed under the limitations of their self-insurance and their organizational and capital structures. But as the largest firms’ annual global revenues approach or exceed $ 60 billion, their expanded resilience and the well-demonstrated lack of competence or appetite among the world’s judicial systems to impose a death-blow judgment makes the likelihood now look considerably diminished.</p>
<p>Still, for a risk manager unable to suppress the nagging question – “what else is lurking?” – there are at least two concerns that will in time move to the front burners.</p>
<p>The first is the increasing presence of third-party capital – most often, private equity investments - in the “mid-sized” accounting firms – those below the size of the dominant Big Four, who themselves have neither need nor appetite to share their profitability. Announcements come weekly from firms large enough to have audit practices serving the smaller listed companies and significant private enterprises.</p>
<p>The injection of private equity and other forms of profit extraction from the accounting firms in the middle bend of the size curve introduces appetites and aspirations that are doubtful of reconciliation with both the structure and the principles of the traditional partnership model.</p>
<p>That’s a subject for separate and further scrutiny another day. For now, a time of reckoning will come, because the target firms are large enough to suffer a financial debacle that would generate a “one-and-out” litigation blow. That will come when an eruption of client malfeasance blows up into a lawsuit claiming auditor failure, or client service suffers, or a deal founders under the dysfunction of leadership trying to serve non-aligned strategies and divergent interests. Then, instead of the anticipated pay-day of an IPO or other exit strategy, a PE investment will at best be trapped and captive, or worse, will go out the door as part of a lawsuit resolution.</p>
<p>The second concerns the rapidly-evolving area of Sustainability – the high-volume public cry for expanded reporting of corporate activities spanning a broad and vaguely-described spectrum running from greenhouse gas emissions and environmental protections to workplace safety and employee rights across whole supply chains. Advocates within and around the accounting profession are vigorous in pursuit of opportunities to extend their assurance opinions. Those are worthy aspirations, although concerns for risk and exposure are both fraught and under-appreciated, with standards that are neither matured nor converged, requirements for expertise across new fields remaining to be filled, and for want of “safe harbor” provisions or exposure protection from claims sure to arise at a deadly level.</p>
<p>With all this, where do I go from here? Your thoughts are invited and welcome – especially those of you who have been with me over much of this adventure, and whose reactions and feedback have been inspiring and sustaining.</p>
<p>I have appreciated your loyalty and your support. If I can cope with the technical challenge of a site relocation, I am inclined if not yet committed to carrying on. I take some inspiration from the image of the old fire house dog, rather greyed and scarred from the years of wear and tear, yet still roused to answer the call when the alarm bell rings. &#0160;&#0160;&#0160;&#0160;&#0160;&#0160;</p></div>
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</content></entry>
<entry>
<feedburner:origLink>https://www.jamesrpeterson.com/home/2025/05/lessons-from-the-classroom-how-trump-worked-his-advantages-which-we-allowed.html</feedburner:origLink>
        <title>Lessons from the Classroom: How Trump Worked His Advantages – Which We Allowed</title>
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        <id>tag:typepad.com,2003:post-6a00e54ef85fc4883402e86100da3d200d</id>
        <published>2025-05-12T10:12:45-05:00</published>
        <updated>2025-05-12T10:12:48-05:00</updated>
        <summary type="html"><![CDATA[When and how can the looting and pillaging inflicted by Trump’s malign version of government be arrested? It’s not only that the damage already done is incalculable, under a barrage of attacks so sweeping as to make clear that the...<div style="clear:both;padding-top:0.2em;"><a title="Like on Facebook" href="https://feeds.feedblitz.com/_/28/918155933/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/fblike20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Pin it!" href="https://feeds.feedblitz.com/_/29/918155933/jamesrpeterson,"><img height="20" src="https://assets.feedblitz.com/i/pinterest20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Post to X.com" href="https://feeds.feedblitz.com/_/24/918155933/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/x.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Subscribe by email" href="https://feeds.feedblitz.com/_/19/918155933/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/email20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Subscribe by RSS" href="https://feeds.feedblitz.com/_/20/918155933/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/rss20.png" style="border:0;margin:0;padding:0;"></a>&nbsp;<h3 style="clear:left;padding-top:10px">Related Stories</h3><ul><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2024/04/kristi-noem-shoots-her-dog-wounds-herself.html">Kristi Noem Shoots Her Dog, Wounds Herself</a></li><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2022/07/auditors-cheating-on-ethics-exams-whos-surprised-july-13-2022-the-past-is-never-dead-its-not-even-past.html">Auditors Cheating on Ethics Exams &#x2013; Who&#x2019;s Surprised?</a></li><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2021/12/brian-kelly-leaves-notre-dame-the-oxymoron-of-college-football-ethics.html">Brian Kelly Leaves Notre Dame: The Oxymoron of &#8220;College Football Ethics&#8221;</a></li></ul>&#160;</div>]]>
</summary>
        <author>
            <name>Jim Peterson</name>
        </author>
        <category term="Ethics and Leadership" />
        
        
<content  type="html" xml:lang="en-US" xml:base="https://www.jamesrpeterson.com/home/"><![CDATA[<div xmlns="http://www.w3.org/1999/xhtml"><p>When and how can the looting and pillaging inflicted by Trump’s malign version of government be arrested?</p>
<p>It’s not only that the damage already done is incalculable, under a barrage of attacks so sweeping as to make clear that the MAGA intent is that our national future will be more fearful, sick, poor, dirty and stupid.</p>
<p>Or that vital institutions are under relentless and escalating attacks - the agencies responsible for our health and welfare, scientific research, and global security and stability; the financial foundations of the world’s interdependent economies; and the core values of universities and law firms and museums and art centers.</p>
<p>It’s also that the quality and extent of engaged resistance has yet to provide either broad grounds for optimism or effective strategy and tactics.</p>
<p>I <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://www.jamesrpeterson.com/home/2024/11/refuge-from-the-storm-seeking-shelter-in-troubling-times-november-25-2024-but-we-must-cultivate-our-garden.html">posted</a> my anxiety and concern right after last November’s election. If anything, the impact of the last months leaves me feeling worse. Now more than then, it is tiresome and dispiriting that so much of the commentary is dominated by hindsight hand-wringing from those presuming to have substantive insight. (A saddening recent example was the May 1 <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://www.nytimes.com/2025/05/01/opinion/trump-100-days-opposition.html?searchResultPosition=181">Opinion</a> from the editorial board of the New York Times – a great mound of platitudes attempting without success to provide original thinking or actionable suggestions.)&#0160;</p>
<p>That outburst now aired, here is fair warning that this contribution to the dialog will invoke several layers of academic research.&#0160;&#0160;</p>
<p>I’ve just finished my law school teaching for the spring. This non-traditional course takes its theme and title from the pioneering 1974 article by Daniel Kahneman and Amos Tversky, <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://sites.socsci.uci.edu/~bskyrms/bio/readings/tversky_k_heuristics_biases.pdf">Judgment Under Uncertainty</a>. The goal is to unpack the sources of bias, influence and misdirection that inhibit optimal decision-making, at all levels including personal and societal. Bright and curious young students explore the ways by which they can acquire and develop the skills and tools to provide advice and counsel to their clients, firms and companies.</p>
<p>The syllabus has a section relevant to the so-far bewildered public perplexity: “Why didn’t we know?” <em>and</em> “Why wasn’t he stopped?” <em>and</em> “What can we do now?”</p>
<p>Punch line first, with explanation to follow - the academic literature offers a lesson in two parts:</p>
<ul>
<li>That the dangerous behavior of a malign personality will often start at a modest level which – unless stopped early – may be successively leveraged upwards.</li>
<li>That society’s in-built sources of bias mean that early chances to intervene or interrupt can be missed or ignored, under a failure to recognize the potential gravity of the threat.</li>
</ul>
<p>Start with the early signals and predictive signs of opportunities for high-level <em>positive</em> achievement – an important context given the basic bias in the American psyche in favor of optimism and success.</p>
<p>There we see the importance of “early incremental advantage”- what may be detected as a slight early-stage competitive edge, subtle perhaps and difficult to discern, possibly random in its presence, which over time can build and escalate to become highly consequential.</p>
<p>Landmark research in Toronto forty years ago solved the question why the team rosters in professional Canadian hockey were dominated by players with birthdays in the first quarter of the calendar year.<a href="#_ftn1" name="_ftnref1">[1]</a> The light-bulb flash revealed the phenomenon not to be based on astrological influences or peculiar seasonal timing of infant conception in the prairie provinces. Rather, boys first introduced to organized hockey were assigned to teams at age six. Thereafter they were evaluated and promoted such that high performers graduated to premier or all-star levels, while average players were grouped together, and de-motivated lower performers gave up the sport altogether.</p>
<p>At each level, upper-tier players received the benefit of preferred rink times, superior equipment, more extensive and focused coaching, and extended playing time at a higher competitive level. A self-reinforcing cycle favored their further promotion to successively more elite levels, while opening up a gap with the average players whose “catch-up” prospects became increasingly difficult and unlikely.</p>
<p>All this, to emphasize, was based on the randomly distributed physiological reality that a boy with a birthday in the first quarter of his sixth year is that much bigger, faster, stronger, and more visible than his teammates younger by six to nine months or more.</p>
<p>Decades on from this Canadian scholarship, the principle has been extensively fleshed out and can feel familiar. High school students assigned to “advanced” or “AP” classes enjoy extra attention, favorable evaluations, and reinforced expectations by which their superiority comes to be assumed – ultimately with consequential impacts as they compete for university admissions.</p>
<p>Likewise, a new employee’s distinctive performance on an early assignment sets a pattern: “Jones did a great job on that project - let’s give her another and expect the same” – from which will flow recognition, promotions and increase in stature. Children raised with the advantages of high-performing parents will have both access and reinforcement to support their skill and interest. (Spanning broad sectors, <em>see</em> as examples the sons of Tiger Woods and LeBron James and the senior Bill Gates, and the daughters of Bernard Arnault, Michael Redgrave and Blythe Danner.)</p>
<p>Those not so fortunate are competing in a world where the metrics can be brutally and publicly obvious, measured by a stop watch or a stock price or a ballot box. Only a tiny fraction of early competitors reach the pinnacle of success – a national team or an Olympic gold medal, a firm’s partnership or an Academy award - while the vast population even of those equally well qualified are relegated to the sidelines of the unsuccessful and the vast and invisible pool of those failing to be in the competition at all.</p>
<p>Without that advantage, what ways has an aspiring competitor to “level the field?”</p>
<p>In the law firm where I spent my early years, the leadership applied a recognizable if unfair bias - young lawyers who were <em>tall </em>received better assignments and higher levels of recognition. Those so favored by random genetic chance needed no more than to enjoy the benefit. To solve his well-recognized disadvantage, a perceptive young colleague who stood not more than 5’6” searched the partner list. There he identified the firm’s <em>shortest</em> partner, with whom he could look eye-to-eye as he offered his services – a tactic that was foundational for his extended and successful career.</p>
<p>Moving to the current context, a trajectory of socially harmful behavior can also be built on the exploitation of an early advantage.</p>
<p>That is, a violently rogue policeman or an abusive priest whose early violations are tolerated and unchecked will be reinforced to continue. Schemers from Charles Ponzi to Crazy Eddie to Bernie Madoff may have started small, but they were reinforced and allowed to flourish, financed by their early results and fueled by the unrelieved credulity of their later victims.&#0160;</p>
<p>Here a reminder, that for the most part, those so favored with early and consequential advantages did not ask for them or in any moral sense “earn” or “deserve” them. Nor would they be expected to renounce or forswear the opportunities so presented. Quite the contrary.</p>
<p>Their principal challenge in achieving their ambitions, instead, is to make choices and pursue strategies that preserve their footholds on the upward ladder. That challenge is risky and not easy to maintain, it being a basic if under-appreciated principle in career development that a necessary aspect of maintaining momentum is to <em>avoid</em> the events that lead to failure.&#0160;</p>
<p>To stay on the upward path, in other words, requires avoiding the conduct or the impacts that would be disruptive. For an aspiring young athlete it could be a season-ending injury, or a family relocation away from a league schedule, or a career-destroying personal choice resulting in a failed drug test or an arrest for abuse.</p>
<p>Observing that early incremental advantage is built into our social systems by way of incentives and rewards on the positive side, a look at those falling off the upward graph toward elite status reveals a lesson in symmetry for addressing the problems of <em>bad actors</em> as well.</p>
<p>That is, the best time to stop a schoolyard bully is with an early punch in the nose. The metaphorical equivalent for an extortionist or a fraudster, or a malign narcissist bound on a path of social wreckage, would have been at the earliest evidence of his destructive intentions. In Trump’s case, that would have been as he first emerged from Queens as a bigoted real estate developer, with a bankroll and a business ethos underwritten by his father and schooled by the notorious Roy Cohn in the legal tactics and ethics of delay, deflection and denial.</p>
<p>Enablers of early-stage non-compliance will only encourage further and expanded bad behavior. As reflected in the stunning rate of recidivism among those charged with repeat incidents of white-collar criminality, the well-intentioned if ineffectual recitals that “He deserves a second chance” and “He’s learned his lesson” serve to foster rather than deter or prevent the predations of a budding young criminal.</p>
<p>To do no more than to re-assign an abusive priest or to slap the wrist of a violent police officer is to encourage and invite further and expanded levels of harmful behavior. Yet there is a through-line in our culture that not only tolerates but perversely elevates and admires the conman – from P.T. Barnum to Elmer Gantry and the Wizard of Oz and the Music Man, to Ken Lay and Jeffrey Skilling and Sam Bankman-Fried.</p>
<p>To be effectively deterred, just as with expulsion from a police force or de-frocking an abusive clergy, a novice in white-collar criminality can be knocked off a felonious pathway at an early stage – <em>e.g</em>., conditioning a reduced prison sentence on a permanent prohibition from access to investor funds or a corporate treasury. The would-be criminal whose potential never ripens is the flip side of a young skater’s failure at age eight to make the all-star team.</p>
<p>It cannot be claimed that “nobody knew.” Instead, and fully consistent with the American character that can perversely find something like bemused admiration for the rascality of a conman, Trump was treated early on with a patronizing mixture of disdain and derision, instead of being shunned and shut down for his disregard, disrespect and abuse of the rules and guardrails of well-ordered society.</p>
<p>Even in an era when the prevailing evaluation of client acceptance and retention was “Will Work for Food,” my old firm only purged Trump as a client - for his pattern of unreliable disclosures and his disdain for the niceties and obligations of fee payments - <em>after</em> the bankruptcies of his New Jersey casinos.</p>
<p>Instead, maxims in our cultural vocabulary demonstrate how late-arriving is the reluctant American readiness to grasp the scope of abusive or fraudulent conduct. Only when the damage has been inflicted is heard, “fool me twice, shame on me” or “once burned, twice shy” or “too good to be true” or “never play cards with a man called Doc.”&#0160; &#0160;&#0160;</p>
<p>Recognizing even so belatedly the understandable if unfortunate biases that inhibited any effective intervention to thwart Trump’s ability to leverage and expand the toxicity of his early advantages, then, the lesson for the present moment is that the next best time to act is right now. &#0160;&#0160;&#0160;&#0160;&#0160;</p>
<p>&#0160;</p>
<p><a href="#_ftnref1" name="_ftn1">[1]</a> <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://www.researchgate.net/profile/Roger-Barnsley/publication/284328248_Hockey_success_and_birthdate_The_relative_age_effect/links/5a67d202a6fdcce9c106eca1/Hockey-success-and-birthdate-The-relative-age-effect.pdf"><span style="text-decoration: underline;">“Hockey success and birthdate: The relative age effect”</span>, </a>Canadian Association for Health, Physical Education, and Recreation Vol. 51(1985) Barnsley, Roger; Thompson, Angus; Barnsley, P.E. – picked up and popularized by Malcolm Gladwell in <u>Outliers</u> (Little, Brown and Company, 2008), and subject to <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://www.frontiersin.org/journals/sports-and-active-living/articles/10.3389/fspor.2024.1516173/full">much discussion, research and commentary</a>.</p>
<p>&#0160;</p>
<p><em>Thanks for joining this dialog. Please share with friends and colleagues. Comments are invited and welcome, and subscription sign-up is easy and free - both at the <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~www.jamesrpeterson.com">Main</a> page.</em></p></div>
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<entry>
<feedburner:origLink>https://www.jamesrpeterson.com/home/2025/03/kpmgs-family-planning-good-luck-jim-peterson-march-11-2025-on-march-10-2025-stephen-foley-reported-in-the-fin.html</feedburner:origLink>
        <title>KPMG’s Family Planning – Good Luck!</title>
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        <id>tag:typepad.com,2003:post-6a00e54ef85fc4883402e860e4e9b5200b</id>
        <published>2025-03-17T13:04:48-05:00</published>
        <updated>2025-03-17T13:04:51-05:00</updated>
        <summary type="html"><![CDATA[Last week I was pleased to guest-post on The Dig, Francine McKenna&#39;s Substack. For those who missed it there: On March 10, 2025, Stephen Foley reported in the Financial Times that “KPMG is aiming to slash the number of ‘economic...<div style="clear:both;padding-top:0.2em;"><a title="Like on Facebook" href="https://feeds.feedblitz.com/_/28/914966780/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/fblike20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Pin it!" href="https://feeds.feedblitz.com/_/29/914966780/jamesrpeterson,"><img height="20" src="https://assets.feedblitz.com/i/pinterest20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Post to X.com" href="https://feeds.feedblitz.com/_/24/914966780/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/x.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Subscribe by email" href="https://feeds.feedblitz.com/_/19/914966780/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/email20.png" style="border:0;margin:0;padding:0;"></a>&#160;<a title="Subscribe by RSS" href="https://feeds.feedblitz.com/_/20/914966780/jamesrpeterson"><img height="20" src="https://assets.feedblitz.com/i/rss20.png" style="border:0;margin:0;padding:0;"></a>&nbsp;<h3 style="clear:left;padding-top:10px">Related Stories</h3><ul><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2025/09/should-technology-shut-down-my-blog-at-least-it-triggers-a-re-think.html">Should Technology Shut Down My Blog? At Least It Triggers a Re-Think</a></li><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2025/01/the-cpa-pipeline-how-it-looks-from-here-january-18-2025-a-drunk-scrabbling-on-his-knees-under-a-street-light-tells-t.html">The CPA Pipeline &#x2013; How It Looks From Here</a></li><li><a rel="NOFOLLOW" href="https://www.jamesrpeterson.com/home/2024/12/auditor-performance-metrics-the-pcaob-offers-such-a-deal.html">Auditor Performance Metrics: The Deal Offered by the PCAOB</a></li></ul>&#160;</div>]]>
</summary>
        <author>
            <name>Jim Peterson</name>
        </author>
        <category term="Accounting Firm Structures" />
        <category term="Arthur Andersen" />
        <category term="KPMG" />
        
        <category term="Arthur Andersen" />
        <category term="Big Four accounting firms" />
        <category term="KPMG" />
        
<content  type="html" xml:lang="en-US" xml:base="https://www.jamesrpeterson.com/home/"><![CDATA[<div xmlns="http://www.w3.org/1999/xhtml"><p style="padding-left: 40px;"><em>Last week I was pleased to guest-post on <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://thedig.substack.com/p/kpmgs-family-planning-needs-more"><span style="text-decoration: underline;">The Dig</span></a>, Francine McKenna's Substack. For those who missed it there:</em></p>
<p>On March 10, 2025, Stephen Foley reported in the <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://www.ft.com/content/b8acd7f5-eb69-4bfc-9d03-8c0ed19e0b14">Financial Times</a> that “KPMG is aiming to slash the number of ‘economic units’ that make up the international network to as few as 32 by next year, from more than 100 two years ago…”</p>
<p>A reader’s comment quickly followed:</p>
<p style="padding-left: 40px;"><em>“Consolidating audit entities across jurisdictions? That worked brilliantly for Arthur Andersen – right up until it didn’t.”</em></p>
<p>Because little enough is known, much less understood, about the organizational genius that made Andersen the profitability leader and structural envy of the profession for the last quarter of the 20<sup>th</sup> century, the reader’s intent was presumably sarcastic.</p>
<p>And wrong. From one who was there – if intended as snark, the comment is unironically correct. Each of its two parts requires scrutiny in assessing what KPMG is up to.</p>
<p>If Andersen could not survive Enron, despite being the most cohesive and profitable of the large firms, what are the prospects for KPMG’s aspirations?</p>
<p>Some background will help.</p>
<p>In the early 1980s I moved from private law practice to join the Andersen organization, in its newly formed in-house counsel group. It was my privilege to be a partner in the Andersen Worldwide Organization until my retirement in 2001 – fortuitously enough, just months before the pervasive misfeasance at Enron triggered Andersen’s rapid disintegration.</p>
<p>As Andersen was collapsing, a fellow member of Big Audit’s in-house legal fraternity gave a more nuanced version of the FT reader’s comment, in a combination of jealousy and <em>schadenfreude: </em></p>
<p style="padding-left: 40px;"><em>“The Andersen global structure was brilliantly designed for success; unfortunately it was also ill-suited to manage failure.”</em></p>
<p>In the mid-1970s, as it was extending its global footprint, Andersen with the assistance of a Washington-based international lawyer (RIP 2024), had adopted its unique global structure. At its core was an obscure form of legal entity peculiar to Swiss law - a Swiss “Société Cooperative” or S.C. for short - which provided that while country-level firms retained their separate legal forms and identities to comply with local laws and regulations, they <em>along with</em> individual country personnel – both accountants as well as consultants and others like myself – joined and made up its partnership. &#0160;&#0160;</p>
<p>The ownership flexibility of an entity that was not an accounting firm, supported by internal accounting and book-keeping of eye-watering complexity, made it possible to capture costs at the global level for aggregation and re-allocation, so as effectively to enable true profit sharing among the worldwide partners.</p>
<p>Put more simply – unlike the approaches of the other firms, then and since – the financial fortunes of <em>every entity</em> in the Andersen organization had a direct impact on my compensation, for better or worse. It was to my benefit as a worldwide partner, housed in the headquarters function and with a world-wide remit, if the French practice had a boom year; if Italy or Mexico slumped, I felt it; if Brazil required global support through a rough patch, it came out of my pocket.&#0160;&#0160;</p>
<p>It can be inferred from the FT’s reporting that at least for the moment, KPMG has a lower level of ambitions:</p>
<p style="padding-left: 40px;"><em>“KPMG is also insisting that, in any mergers, the profit pools for partners be at least partially shared across the countries involved, with the aim of moving to full profit-sharing over time…”</em></p>
<p>Or not. Let it be clear – without common commitments of financial skin in the game, it’s at best only a “merger” for optics and a level of administration. Andersen not only required world-class treasury and information management, across countries with dramatically different economic business models and costs of living and working. It was required to solve the logistics and the politics of multi-national engagement referral and performance, while achieving broad and acknowledged fairness in partner compensation, employee salaries, practice opportunities and career development.</p>
<p>With the incentive to cooperation created by common financial interests, referred work was not begrudged, but was recognized for the common good; training and quality initiatives were for shared purposes; personnel secondments strengthened both sides of a transfer. Democratizing and leveling followed from shared information – locally maintained fiefdoms and cookie jars were exposed, and closet doors were pried open to reveal long-concealed skeletons.&#0160;&#0160;</p>
<p>Andersen was in funds for investment, in part but not entirely with the stunning profitability of its consulting practice, which acted to blunt the edge of the other challenges. That is, by definition, half of Andersen’s practices would in any year have earnings below the global average – but with earnings booming along, time and mutual support would give room and resources to turn the fortunes of a country needing support.</p>
<p>And with complete information sharing about both the financial results of the country practices and the individual ownership units allocated to the partners under a plan disclosed to and voted for approval by all the global partners, potential squabbles were swept up in the celebration of shared success.&#0160;&#0160;&#0160; &#0160;&#0160;&#0160;&#0160;&#0160;&#0160;&#0160;&#0160;&#0160;&#0160;&#0160;</p>
<p>These were all achieved not only with the stunning quality of the people at the heart of its infra-structure, but because of shared commitments in the form of trust, transparency, patience, and a level of profitability that fueled an operation like no other.</p>
<p>“Until it didn’t.”</p>
<p>It was crucial at Andersen to centralize both the costs and the culture of practice quality, ethics and independence, and compliance including related insurance, litigation and law enforcement. The Andersen/Enron debacle provided the proof – when its leadership allowed a local office to sideline and evade centrally-provided expertise, the integrity of its once-robust and complex tapestry was revealed as frayed and tattered beyond repair.&#0160; &#0160;&#0160;</p>
<p>“Until it didn’t.” The FT comment is right – and rightly fingers the skunk at KPMG’s party. Which is, <em>even if achieved</em> with real profit sharing (as may be but is not disclosed), the KPMG “mergers” will have embedded at least two fatal flaws.</p>
<p>The first is the questionable extent to which firms with dominant profitability will sacrifice to sustain their brethren. The growth orientation in the years of Andersen’s expansion lasted only to the turn of the millennium, and the recent signals are to the contrary – the trust-busted Accenture divorce, the failure of EY’s Project Everest, and the arrival of third-party equity capital with the questionable alignment of its strategic objectives for the mid-tier firms.</p>
<p>The second is the unsolvable weakness that was fatal to Andersen - as emerged with the corrosive and ultimately fatal consequences to its accounting practice of the divorce with the practice that became Accenture – namely that there is nothing in the strongest contractual commitments or optimistic year-on-year results that will sustain a global network under the imposition by a legal system of a multi-billion dollar litigation or law enforcement impact.</p>
<p>Even though uniquely cohesive and the envy of its fellows, Andersen blew apart in weeks in the tempest of Enron, as its separate national practices disavowed their contractual obligations, voted their local interests, and left the US firm alone, isolated, and financially bereft.</p>
<p style="padding-left: 40px;"><em>Lest I be charged with misleading by incompleteness, brief mention here of what I hope is the diminishing myth that Andersen was killed by the Justice Department’s indictment over the destruction of documents in its Houston office. As laid out at pages 56-60 of my book, <u>Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms </u>(</em><a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~https://www.amazon.com/Count-Down-Present-Uncertain-Accounting/dp/1787147010/ref=sr_1_1?crid=3PDG9R8744BWR&dib=eyJ2IjoiMSJ9.sVk--Q1sMr4g9HBgwMFZ-SyoGTbPzPHJUQgQlSn0BL8-UYHaijSighBR_KRU1hXY.s4NvTa7dp5qUZOKXcoxjovwzQXhdaXoLzPA6076tQhA&dib_tag=se&keywords=jim+peterson+count+down&qid=1741713172&sprefix=jim+peterson+count+down%2Caps%2C131&sr=8-1"><em>Emerald Books</em></a><em> 2d ed. 2017), the large firms are not organized nor do they have the financial resources to withstand claims from misfeasance on the order of Enron’s $67 billion bankruptcy. Andersen was like a terminal patient on life support in an ICU. Its demise was inevitable – DOJ was just the nurse that pulled the plug. </em></p>
<p>This is neither a prediction nor a voice of doom. KPMG deserves credit and respect for its aspirations, and may indeed make it happen. Andersen’s run of success, after all, extended across a generation.</p>
<p>There is however a corollary to movie mogul Sam Goldwyn’s attributed view that an oral contract is not worth the paper it’s printed on.</p>
<p>Which is that under stress, neither are the written versions.&#0160;&#0160; &#0160;</p>
<p>&#0160;</p>
<p><em>Thanks for joining this dialog. Please share with friends and colleagues. Comments and feedback are invited and welcome, and subscription sign-up is easy and free - both on the <a href="https://feeds.feedblitz.com/~/t/0/0/jamesrpeterson/~www.jamesrpeterson.com">Main</a> page.&#0160;</em> &#0160;</p></div>
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