A Tale of Two Clients – And Lessons Lehman Learned Late or Not at All
by cactus
A Tale of Two Clients – And Lessons Lehman Learned Late or Not at All
My first “real” job (i.e., after grad school) was at what was then a Big 6 accounting firm (and is now a Big 4 accounting firm) doing “transfer pricing.” I wasn’t right for the job (or the environment), nor was the job (or the environment) right for me. But I did learn a lot about how the world works.
One of the big clients serviced by the transfer pricing group from the office I was working is a household name. Other than North Koreans and people with some form of mental impairment, I doubt there’s anyone anywhere in the world over age eight who would fail to recognize the company name or its logo. And to be honest, I’m not sure about the North Koreans. Another big client has a name that is only slightly less recognizable. I’ll call them Co. 1 and Co. 2.
Now, when I was there, Co. 1 was very aggressive on tax issues – which means it was willing to push the envelope and see how far it could push the IRS. The odd fine or two for going too far was just a cost of doing business, and it expected its highly priced Big 6 accounting firm to produce, ahem, tax plans that fit the bill. Essentially that meant coming with, ahem, tax plans that were cutting edge enough that the IRS hadn’t seen them yet but that on the face of it resembled something that had in the past gotten an official OK, either through a regulation or some court decision. That would be enough to get a law firm to write a letter saying it was their opinion this was OK, no matter how much what was being done might sound, to the uninitiated, to be questionable or even illegal. Incidentally – on the rare occasions when the firm came up with a scheme on its own, it was the job of its advisers (i.e., accounting firms and law firms) to get the client to make sure that whatever changes were necessary to keep things on the right side of the blurry line were made.
Co. 2 took more the pussycat approach with the IRS. They seemed to feel that if they didn’t push too hard, they’d avoid a lot of hassle from disputes with the IRS. They were, of course, right, and it cost the Big 6 accounting firm, but then the Big 6 accounting firm wasn’t exactly losing money on this client so it was happy to oblige.
In other words, accounting firms are like criminal attorneys – they represent the client and try to do what their client believes is in their best interest. They advise their client when they think their client has taken a suboptimal turn, but when the client wants to do X, if its not explicitly illegal, the firm finds a way to make it happen.
All of which is to say, if the allegations that came out last week about Lehman’s accounting schemes are true, and if as those stories indicate, Lehman was forced to find a non-American law firm to sign off on what they were doing, one of the following must be true:
a. Ernst & Young personnel working on the account had no idea what Lehman was doing.
b. E & Y personnel working on the account knew what Lehman was doing (perhaps having peddled the scheme to Lehman themselves) but had no idea it was an obvious no-no to the IRS.
Either way, it looks to a casual outsider like me that E & Y had a B-team made up of PONIs (partner of no importance) on the job, and that should have been obvious to Lehman. Now Lehman should have been a big enough client to warrant a few POGIs (partner of great importance). If Lehman did not seek out out or deliberately avoided the best possible representation, they were guaranteeing an eventual disaster. Deliberate ignorance or deliberate evasion (the allegations would imply one of these two to be true) of the law doesn’t go over well when the doo-doo hits the fan.
But it goes the other way too. E & Y’s POGIs should have realized that Lehman’s business model involved taking big risks. Why would they have assumed that Lehman was going to be satisfied with orthodox accounting practices? And as the old saying goes, you don’t send a boy to do a man’s job. The Anderson/Enron debacle is a clear demonstration that if some partners certify a client’s shenanigans, and those shenanigans come to light, the entire firm will take a hit. (And that, of course is the flip side of everyone benefits from the shenanigans as long as they haven’t been forced to a complete halt.)
So, what do you think about the situation?
Cactus
I’m surprised that their firm does tax anymore.
My previous employer was a large multi-regional firm, and even they had adopted an “alternative practice structure” where the tax business was owned by a totally separate entity. Their entire business tone was very different from the firm I worked at prior to that (an independently owned/operated office that is part of a national association of a very large international firm) which did full service public accounting.
I’m happy to be out of the business now, but I much preferred working at the firm prior to the multi-regional one. Lesson: Never take the money, there’s a reason they’re offering it to you.
Cactus,
Either way, it looks to a casual outsider like me that E & Y had a B-team made up of PONIs (partner of no importance) on the job, and that should have been obvious to Lehman.
Where did you come up with this one. It seems like a pretty specific allegation on your part and ought to be backed up with a specific reference. My common sense tells me that the big accounts that pay the most money go to the bigger (important) partners.
Also who is company 1 an company 2. If you don’t work at your previoius employer and it’s been several years I don’t see any point in hiding names.
***My common sense tells me that the big accounts that pay the most money go to the bigger (important) partners. ***
I think you are thinking in terms of Law firms which are actual one-for-all–all-for-one partnerships. My understanding is that law firms divide up the profits somewhat in accord with what partners bring in. So the big money goes with the big partners just as your common sense suggests.
Accountants apparently used to work that way, but about two decades ago they started getting sued for big money and sometimes losing. Since all partners in a real partnership are liable for partnership debts, accounting firms rather quickly switched to Limited Liability organizaitons — LLP/LLC. Apparently nowadays they operate much more like normal (if privately held) corporations. Some of them at least require partners to buy into the company then divvy up the spoils according to ownership share, not value of accounts served. That means little real incentive for the senior partners to work with the most valuble accounts.
The customers of course have a say, but I have to think that many of them might prefer the mid-level, partnership track guy who does a great presentation and seems to have the answer to any conceivable question at his fingertips to some doddering wreck who should have retired fifteen years ago.
Cantab,
Something I admit it took me a while to learn… the fact that I’m no longer with something (an employer, a relationship, whatnot) doesn’t mean it isn’t best to respect its wishes if that involves nothing more than not spilling its secrets. I imagine my current employer would prefer to know that its not necessary to hide things from me for fear that I’ll write a book about them in the future. And if for some reason my relationship with them were to come to an end, my guess is that future employers would appreciate knowing I wouldn’t screw them over either. So provided nothing illegal is being done, this is as far as I am going.
As to the specific allegation, as you put it… I did a quick google search and found this on zero hedge (http://www.zerohedge.com/article/deconstructingfuncting-ernst-young) My post was written before this appeared, though that post appeared before this one. Regardless, I didn’t see it when I wrote what I wrote.
Scroll to the bottom of the post for info on who the lead partner was. Now, nothing against stay at home moms (I personally think working from home is a good idea for almost any job, frankly), but when I worked at a Big 6 firm, being stay at home was prima facie a sign that you were not on the A Team. Just about everyone was at the office all the time (and I mean, all the time – the hours at a Big 6 firm resemble those at an investment bank).
Cactus,
I think the worst thing that Lehman was some transaction where they for a short period of time turned some assets into cash. It seems they were misleading investors by doing this.
Another issue in the recent report is for some hedge funds shorting Lehman. I think you can make a case against Lehman with their tricky accounting but there is no justification for banning short sales — because they were right.