The Sunday New York Times Business Day section regularly features, “Corner Office,” a column by deputy national editor Adam Bryant, author of the book, “The Corner Office: Indispensable and Unexpected Lessons from CEOs on How to Lead and Succeed.” Bryant’s book has seventy interviews with “top executives on leading and managing.”
This past week, Bryant talked with Barry Salzberg, current chief executive of Deloitte LLP who will be promoted to global chief executive of Deloitte Touche Tohmatsu on June 1. Salzberg talks about hiring the right people in his interview, “The Right Job? It’s Like The Right Spouse”:
Q. How do you hire?
A. The one thing that’s most important to me when I interview is to be sure there is a very good marriage. This isn’t about Deloitte just believing that the person we are interviewing is perfect for some role. It’s also that person believing that Deloitte is perfect for the environment that they want to be in. And throughout my interviews with people, I’m searching to determine whether that marriage is there. It shouldn’t be one-sided, because if it is, it’s not going to be a successful marriage. So I’m looking for values. I’m looking for priorities. I’m looking for personality. I’m looking for fit.
You’d never know from reading this puff piece that his firm, Deloitte, was a bigger loser during the crisis than even Lehman Brothers’ auditor, Ernst & Young. At least E&Y only has a single, massive financial-crisis failure on its watch.
Among Deloitte’s crisis-era-audit-client-failures, for instance, was none other than Bear Stearns, whose investors sued Deloitte, claiming its audit was so deficient it had effectively performed “no audit at all.” Merrill Lynch and Washington Mutual, were also Deloitte audit clients, and were duly taken over by Bank of America and JPMorgan Chase, respectively, when everyone finally acknowledged they were insolvent. Current Deloitte client Fannie Mae is now run by a conservator, and the U.K. government was forced to nationalize another client, the Royal Bank of Scotland.
Heckuva job, Deloitte.
None of the major financial services institutions that failed or were bailed out, forcibly acquired, or effectively nationalized received so much as a “going concern” warning, except Bear Stearns—and that one was issued retroactively after the deal with JPMorgan Chase was already done.
Thanks for nothing.
Hey, NYT: that’s a lot of bodies in that “Corner Office.” How about a little context?
To take another example, Deloitte played an important role in another story in the Times on Sunday. An excerpt from a new book by Gretchen Morgenson and Joshua Rosner describes how the S.E.C ignored a short seller’s repeated red flags and warnings about Novastar, a mortgage originator that crashed and burned in late 2007.
Morgenson and Rosner’s piece doesn’t mention (as a Floyd Norris column did at the time) that Deloitte in September 2007 actually withdrew its 2006 audit opinion for Novastar, a drastic step taken after the crash, obviously too late (I wrote about Novastar, too). Losing Deloitte’s certification was the catalyst for Novastar’s delisting. Deloitte remains the company’s auditor. It’s now listed on the pink sheets.
In addition, Deloitte audited mortgage originators American Home and Beazer. The auditor was sued for negligence by American Home and Beazer shareholders. They settled American Home for $4.75 million and Beazer for $1 million.
With watchdogs like that…well, why have them? Please, oh Salzberg, tell us your philosophy of hiring again.
The audit industry continues to have a “good crisis” because auditors are generally overlooked by the media. Unless someone files a new lawsuit or one is settled they’re invariably left out of the story. Lucky them. By contrast, however, there’s been plenty of coverage of the industry’s failures in the U.K.,thanks in larger part to more active regulators, including a recent statement by the Office of Fair Trade (OFT) that the market for audit services is “distorted and restricted.” But we’ve seen no equivalent clamor by regulators, legislators, or the press in the U.S. for auditor accountability. Too bad.
Great post.
If this whole mess weren't Fannie Mae, Freddie Mac and Barney Frank's fault(TM) it might get some traction.
#1 Posted by edward ericson jr., CJR on Wed 25 May 2011 at 10:17 AM
Thanks, e.e. jr.
Barney Frank was less than frank when I asked him, before final passage of what became Dodd-Frank, about auditor reform. There was minimal mention of the audit firms, unlike the ratings agencies who have the same model and conflicts, in the final bill.
Francine
#2 Posted by Francine McKenna, CJR on Wed 25 May 2011 at 08:17 PM
Francine,
I am a Big 4 Manager, and could not help but notice that you really do not understand the role of an auditor, so let me fill you in. An auditor's responsibility for public companies is to express an opinion on the reasonable presentation of the financial statements and the "Design and Implementation" of internal controls (not their operating effectiveness). It is NOT an auditor's job to detect fraud, search for fraud, or search for intentional misrepresentations by the client, as this is beyond the scope of the audit (and this position is supported by the SEC). In NO way is it an auditor's fault when a company experiences hardship due to these factors. Nearly all of the baseless lawsuits filed by struggling companies such as Bear Stearns is their weak attempt to grasp at straws and spread the blame to cover up their mistakes before they completely go under. Understand what the hell you are trying to "express to the public" before you start vomiting from the mouth as you did in this article. You should be embarrassed by your lack of knowledge on something you put your name on.
#3 Posted by Rajav, CJR on Wed 1 Jun 2011 at 10:08 AM
Rajav - Francine has broached two important issues here. One concerning the editorial policy of the NY Times and the other concerning the value of the audit. As an investor, I have come to the conclusion that the purpose of the audit is as a 'loss leader' in the accounting firms' efforts to secure multi-million dollar contracts for IT and tax consulting. In that regard, I would like to see the audit requirement disappear. Removal of this regulatory tax would add billions to companies' bottom lines. Regarding the editorial policy of NY Times INC., Francine has pointed out their all too deft editing in squeezing these two ostensibly conflicting book promotions into the same issue. CJR ought to look into an award for that.
P.S. Rajav - If your description of what an auditor is/does were included on proxy statements, I guarantee your industry would get some long overdue attention.
#4 Posted by David Fialkowski, CJR on Mon 13 Jun 2011 at 02:34 PM
Rajav,
The tragedy is what you don't know because your professors were too cowed by Big 4 recruiters to make sure you did, and because the partners you work for are too focused on money to coach and mentor you to the right path.
I've written on SAS 99 many times. So has PCAOB Chairman Jim Doty. Be careful out there. The expectations of investors - and regulators - are much higher than what your current leaders have led you to believe.
#5 Posted by Francine McKenna, CJR on Sun 19 Jun 2011 at 11:50 AM
David,
Thank you for your comment. It's on the money and much appreciated.
#6 Posted by Francine McKenna, CJR on Sun 19 Jun 2011 at 11:52 AM
Rajav,
PCAOB AS5 requires the examination of the design AND operating effectiveness of internal control regarding financial reporting in the audits of public companies. All the companies Francine mentioned are issuers. You should be embarrassed by your abject ignorance.
#7 Posted by Mike, CJR on Sun 21 Aug 2011 at 09:19 PM