Good article. But, to avoid any type of extrapolation of it toward GIFS or the building of FUD (dear, uncertainty, doubt), this article needs some perspective regarding the accounting profession and related matters.
1. The article is focused on auditing. Auditing is and has been a low profit, high risk operation for a lot of CPA firms (big to small) for 20+ years. If CPA firm is involved and ANYTHING is slightly out of kilter (real or perceived) to a bank, investor, stockholder-chasing lawyer, etc., the CPA firm is sued. Sometimes, the CPA firm is sued and the COMPANY isn't. It is not uncommon for a CPA firm to be sued for a perceived or real problem for which the firm had no knowledge or responsibility (e.g. new acquisition, sue to the CPA firm who did the audit last year; technology breakdown, sue the CPA firm who did the audit). And this is not limited to big firms. Little 1 and 2-man operations doing monthly write-up (which is far from an audit; just compilation of client accounting records) gets sued regularly (e.g. one CA CPA with 30 years experiences gets hit with 5-7 lawsuits per month from write-up and tax services; one client sued for $25,000 when he didn't get the tax refund he wanted) when a client's business does worse than the CLIENT thinks or tells others it will.
Bottom Line: Lawyers and plaintiffs go after the people with the most $$$ to pay. CPAs are perceived to have deep pockets because of professional liability insurance. The liability insurance problem has become so huge that less than (estimate) 25% of CPA firms in the US continue to do audits. (haven't seen the latest survey for 1996.) They can't afford to pay insurance rates equal to or greater than doctors. While the 15% quoted in the article sounds acceptable, keep in mind what other insurance costs as part of a ticket price, fee, sales price, etc. Also, a growing number of firms are self-insuring, or worse, carry no liability insurance. They structure their firms so a judgement against them simply leads to bankruptcy and restarting their practice over.
2. The Big 6 (which used to be the Big 8 and some believe will be the Big 4 in a few years) have been LOSING clients at a similar rate for over 20 years due to mergers, acquisitions, LBOs, bankruptcies, etc. That's one reason why there are fewer Big X firms. And why some believe there will be even fewer. Auditing used to be the big $$. Now, consulting services in some Big 6 generate more than auditing.
3. Fortune 500 companies are usually safe. However, this purging of clients because of risk is not new. Partners of accounting firms go through cycles of risk acceptance and risk avoidance. From the 1970s (following the Penn Central Railroad bankruptcy) through the present, big firms have gone through 3 or 4 cycles of acceptance and avoidance. It's a ying/yang thing for the firm partners: they want the big bucks, the ego boost, the high flying benefits that come with risk acceptance (sort of sounds like GIFS investors, huh?), then when they get nervous, see a trend of lawsuits, or get a little paranoid, they pull pack from "risky" clients. In this ongoing swing of the pendulum, big firms have now entered a period of risk avoidance (or at least, the perception of it, possibly as a CYA activity in case of lawsuits).
Bottom Line: Big 6 firms (or any larger accounting firm) know they have to seek out clients beyond the Fortune 500, 1000 or 5000 to maintain their stature, payouts, benefits, wives, husbands, lifestyle, etc. (If you think a partner does not make decisions based on what personally goes into his or her pocket, then you do not understand the fundamentals of the group.) They are in business. They want the $$. The pendulul swings: sometimes firms are willing to "sell the Big 6 seal" (not meant in a derogatory way) and other times they aren't. Also, keep in mind that auditing, consulting and other services are not limited to the Big 6. This term strictly relates to the revenue levels of the firms, and I know far too much about the real "quality" of some offices to go too far here. (Like everything, it comes in a wide range, from very low to outstanding, as the firm chases after elusive revenue.)
Also, keep in mind that the profit margin on some smaller companies is lower given the fee versus extra time needed to do quality work. A first year audit is rarely profitable, or as profitable as long-time audit clients. Also, I hear of too many instances of corners being cut by large firms to beef up the profit margin, because it's not a "name company" and other motivations. When you've had to referee partners in a room arguing like 4-year olds over $$, looking only at a bunch of numbers, you see the "profession" in a different light. Quality service is balanced against personal and firm profit in professional decisionmaking, except in the rarest of CYA situation. (Then you exit as quickly as possible.)
4. Talked to my accountant, a former Big 6 partner (auditing) with ongoing contacts in four Big 6 firms. I gave him the run down on GIFS, told him about Mohammed traveling with $10K cash, gold coins, traveler's checks, etc. in his briefcase, etc, and faxed him the latest SEC doc. I shared press releases about CRIC and other GIFS activities.
His take: An aggressive company pushing to build a big company. Probably driven by a core vision among a small group of people. The carrying of large amounts of 'currency' initially was a red flag until I added it was international travel to S.A., to which I got "Oh, that's different." My accountant indicated it is easier to get things done, to gain special services, to gain credibility and acceptance with "hard currency" than with legal papers. "It's not the US. Not the same culture." My accountant had a lot of questions, most of which I could not answer as a shareholder, but on the surface, he saw no reason for high risk to be associated with GIFS.
5. Internal controls are an issue, and as a former auditor, I too have walked away from situations waving a red flag. As a consultant working with small and medium-size businesses, I've been appauled to see the lack of internal controls. They are so fundamental. If designed right, internal controls are not burdensome. Too often, they are overly bureaucratic, making managers more inclined to bypass them to get things done. Of course, other managers are just lazy or too ego-driven to follow any rules, however important.
I've seen nothing (even trying to read between the lines) to indicate serious internal controls problems at GIFS. I hope I haven't missed anything, but then again, that's why I'm waiting on the auditor's report (believe it is due a 4-6 weeks after CRIC closes). If there's a "material" shortcoming, the auditor MUST report it whether management likes it or not.
Hope this helps to put the article into perspective.
And the adventure continues... |
