14 Chapters
Medium 9781523098033

7 Porn Star The culture of the Big Four

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

The day-to-day correspondence of the Medici Bank reveals men concerned with external matters such as the alum mines, the wool and silk markets and the creditworthiness of monarchs. But they were also concerned with internal matters. Were the bank’s systems strong enough to detect fraud and prevent financial disaster? Who was ready for a pay rise and a promotion? Were the young men graduating from the abacus schools up to Medici standards?

Angelo Tani, Rinieri da Ricasoli and Cosimo de Medici all understood ‘leverage’, which in partnerships means growing the business by hiring junior staff to complement and extend the capacity and capability of partners. The Medici Bank was one of the first large partnerships to grapple with the underlying equation of leverage: the incontrovertible calculus that profit per partner is equivalent to margin times hourly rate times utilisation (the extent to which staff are busy) times the number of staff per partner. Bringing on more staff was one of the few ways in which the bank could pursue higher profits.

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11 Get Ready to Dance Conflicting interests in Big Four taxation services

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

Secrecy underpinned the Medici Bank’s success, especially in its ecclesiastical dealings. Through patronage and opportunism, most senior churchmen accumulated savings and investments, such as grand estates within and beyond Italy’s borders. Cardinal Hermann Dwerg, a friend of Pope Martin V, lived in ‘a spirit of evangelical poverty’ – while simultaneously holding 4000 florins, at a time when, according to author and banker Chris Skinner, ‘thirty-five florins would have paid a year’s rent on a small townhouse’. With each change of pope, the clerics faced the danger that their investments would be arbitrarily taxed or even confiscated by a new and unsympathetic man. The solution was a system of secret accounts, held by the Medici and accessible wherever the papal court resided. Cardinal Dwerg kept his 4000 florins in a Medici deposit account. In the twentieth century, secrecy was equally important to the success of the major accounting firms.

For the most part, Big Four taxation services originated in the Edwardian era, when income tax became more complex and burdensome, and advice on tax compliance – and tax minimisation – became indispensable. The simple days of the Domesday Book were long gone.

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13 Disrupted The obsolescence of Big Four technology

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

Since the reopening of China’s economy, the country’s government agencies and state-owned enterprises have gobbled up patents and other intellectual property in areas as diverse as microwave ovens, rare earth elements, telecommunications and solar power. The fields of accounting and auditing, too, were identified as potential areas of focus for the gathering of IP. According to Paul Gillis, Chinese officials initially saw joint ventures with the Big Four as a means of transferring technologies from the firms to China. That was the plan until the officials spent some time with the foreign firms and came to a surprising realisation: public accountancy depended on very few proprietary technologies, and most were available over the counter. The core innovations upon which accountancy depended had long been available in the public domain; there was very little technology for the Big Four to transfer.

This is not to say that accounting and audit are technology-free, or that there is no innovation taking place. In fact, accountancy today is a hotspot of innovation, and the impact on the Big Four of that innovation is profound. And complex – the industrial landscape of accounting is rapidly changing in multiple ways.

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12 One Four Ten The Big Four in China

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

In China, the Big Four have attained a dominant position in the accounting services market. Each of the firms is generating billions in revenue there. In a sign of just how much the world has changed, some of China’s largest state-owned enterprises have become Big Four clients. This surprising victory, though, is likely to be short-lived. At every step of their China foray, the firms have faced opposition from powerful forces. That opposition has now reached a crescendo. And it has reached the courts.

Disputes about something as seemingly incidental as audit working papers have become the centre of a transnational legal and regulatory battleground. In Shanghai, Deloitte recently found itself in a wicked dilemma. Deloitte had been the auditor of Longtop Financial Technologies. Longtop, a Chinese financial software company, had failed after accounting fraud was revealed. Longtop’s chairman admitted to Deloitte that ‘fake cash recorded on the books’ was the result of ‘fake revenue in the past’, a reminder that the strictures of double-entry accounting extend even to fraud. The American SEC demanded that Deloitte hand over working papers related to the audit. But Deloitte argued that handing over the papers would place it and its personnel at ‘substantial risk of prosecution’ under Chinese law. Facing enforcement action from the SEC, Deloitte worked frantically to resolve the dispute.

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9 Unqualified Auditing as the foundation of the Big Four brands

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

All the Big Four provide audit and advisory services, and in all the firms there are significant differences across these two service lines with respect to: staff qualifications and experience, job sizes, charge rates, delivery timelines and contract types. Compared to advisory, auditing is a higher-cost, lower-margin business with different economics and a different culture. Audit and advisory practices occupy separate divisions within the Big Four firms, and are often physically separate too. A Big Four advisor can go a long time without even seeing a Big Four auditor, and vice versa. When young staff speak of Big Four work as ‘indentured labour’, they are more than likely speaking of audit work. The daily routine of a junior auditor is dull and repetitive – so much so that the Big Four seldom highlight audit in their corporate communications and marketing to graduates. Inside the firms, auditing is deprecated and its practitioners have low status. Most graduates view a stint in auditing as a stepping-stone towards something else. Anything else.

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