JOIN THE CIRCLE OF TRUST...OR WHATEVER....
The Morning Call hears a new Siren's call
In the great pantheon of boring-sounding jobs, “accountant” is always near the top. (No offense to any accountants out there. We don’t make the rules.) Yet accounting – at least as it’s practiced by the Big Four – is often one of the most exciting businesses around, presuming, of course, that you define exciting” as “cutthroat and corrupt.” Google “‘big four accounting firms’ scandals” and you get more than 32,000 results in .58 seconds. Because the Big Four are, historically, monsters.
PricewaterhouseCoopers, for example – PwC – is the second largest of the Big Four, and on its Wikipedia page the “controversies” section has 32 separate entries, 32 separate instances of corrupt or allegedly corrupt behavior, 32 massive, seven, eight, nine or even ten-figure scandals. PwC was AIG’s auditor, you may recall. And that’s just the tip of the ol’ iceberg. Consider, for example, the following, from POGO.org (the Project on Government Oversight):
After more than a dozen years auditing technology companies in Silicon Valley, Mauro Botta took an extraordinary step: He decided to become a whistleblower.
He drafted an account of what he had seen and experienced as a senior manager at PwC, the accounting firm also known as PricewaterhouseCoopers. Then, in November 2016, he submitted it confidentially to a federal regulator, the Securities and Exchange Commission (SEC).
Under penalty of perjury, Botta described example after example of sloppy if not misleading bookkeeping and weak internal controls at businesses in the Valley.
Botta told the SEC that, when it came to their accounting, companies he observed generally had a “low level of competence.” (He explained to the Project On Government Oversight that he was referring to small and mid-sized companies.)
But the prime focus of Botta’s whistleblower complaint wasn’t the tech companies. It was something deeper and more far-reaching: the culture of auditing at PwC.
Botta alleged that, to keep corporate managers happy and to avoid losing their business, PwC was pulling its punches—trying not to flag too many problems with companies’ internal controls.
He said he was concerned about “the risk of collusion between auditors and management in this valley . . . with management paying us the fees and auditors picking and choosing what to call an audit issue.”
PwC is corrupt, in short, and has been for a long, long time.
To be clear, this isn’t to say that everybody who works at PwC (or KPMG or Ernst & Young, etc.) is corrupt. They’re not. MOST are not. Heck, we worked for Prudential Securities and for Lehman Brothers. Believe us, we get it. We know that the overwhelming majority of people who work at massively corrupt companies are good people just trying to do their jobs. But leadership and culture make all the difference. And the leadership and culture at the Big Four are abysmal.
And on that note, we’ll share with you the following, from a June 16th Financial Times piece:
PwC’s $12bn, 100,000-person investment plan for the next five years, unveiled on Tuesday, is full of familiar talk of automation and Asian expansion, but at its core is the need to position its global network for the needs of clients struggling to keep pace with changing ESG expectations.
The new investment will pay for all of PwC’s people to be drilled in the rudiments of ESG, for a US push to find more jobs for racial and ethnic minorities, and for new “trust leadership institutes” in which PwC and its partners will teach executives about everything from ethics to empowering economic mobility.
“Our clients have two fundamental challenges and opportunities over the next 10 years, and those two challenges are what we call to trust and sustained outcomes,” Tim Ryan, PwC’s US chair explains.
Stripping away the jargon (and there is plenty of it in the announcement), what he means is that trust in business is fragile, companies are going to face tougher questions about everything from their data security to their tax bills, and clients want more help to avoid costly breaches of trust.
PwC’s US arm is so wedded to this theme that it is rebranding its audit and tax reporting units as “trust solutions”. Its own challenge over the next decade will be to avoid the kind of breaches that would make that sound like a hostage to fortune.
Then there’s this from the August 29th Financial Times:
[T]he Big Four accounting firms are jumping on a bandwagon that offers two tempting opportunities: an expansion of what companies must account for, and a chance to rebrand a scandal-plagued profession as experts on climate change, diversity, and winning consumers’ trust….
There will be increasing ability to cross-sell expertise such as adding climate-related criteria to the design of executive pay packages, a partner at another Big Four firm said. The number of global companies that include environmental or social metrics when deciding executive pay has already doubled since 2018, according to the latest annual report from ISS ESG.
The aim of PwC’s “New Equation”, which includes a rebranding based on “trust”, was to seize on an “inflection point” as companies consider how to explain their impact on society after the pandemic, said a person briefed on the plans.
Instead of simply “answering the question we are asked”, it wants to “frame” clients’ questions and enlist PwC teams with expertise relevant to other stakeholders such as employees, the person added. Consultants advising companies purchasing new technology, for example, could help to support workers who risk losing their jobs as a result, the person said.
To call this a load of bullsh*t would be an injustice to poor, innocent loads of bullsh*t everywhere. This…this is something else altogether, something far more cynical and ugly than a mere load of bullsh*t.
What does it all mean? Well, as best we can tell, two things:
First, it’s a scam – ESG, that is. It’s always been a scam, and it always will be a scam. The Big 4, bless their shrunken and grossly misshapen little hearts, are late to the scam. ISS (Institutional Shareholder Services) has been in the “Protection Racket” business for more than a decade, and it’s been making a killing. As I note in The Dictatorship of Woke Capital:
The conflict of interest for ISS is significant, lucrative, and damning. Traditional institutional research departments, usually run by large brokerage houses, provide research on companies to asset managers and others. They evaluate the company on a variety of measures and then recommend that their clients “buy,” “sell,” or “hold” these companies’ shares. When Thompson/ISS bought the SIRS in 2001, it made a new variety of institutional research available to a much larger audience—one that continues to grow. From that point on, ISS has had the ability to issue buy, sell, or hold recommendations to institutional investors based on the socially responsible nature of the businesses it evaluates. In and of itself, this would not be a significant issue, but as part of ISS’s broader business plan and political agenda, it has created an enormous problem—but one that is nevertheless lucrative for the company.
Today, ISS is the fourth largest third-party ESG ratings service provider in the world. That means it develops its own screens and measures; it sells those screens to institutional clients, helping them “discern” what is or is not proper behavior for a company and what is or is not a proper investment strategy for clients. Then it offers itself as a proxy advisor to those same clients, making recommendations on how to vote on shareholder proposals and performing the proxy votes on their behalf. In other words, ISS is shaping the perceptions of what investors’ interests should be and which companies they should invest in, before telling those same investors how to vote those interests. This is institutionalized, corporate “begging the question.” ISS is essentially fixing the game by creating shareholders who will, almost by definition, vote the way it wants them to on proposals ISS has decided matter. In this way, utilizing the successor operation to the SIRS, ISS can “create” the votes necessary to compel company management to comply with its wishes. This is coercive, conflicted, and most notably, intended to advance ISS’s interests rather than those of the investors.
But it gets worse.
ISS also has a division called ISS Corporate Solutions, which acts as a consultant to corporate clients on how to improve such things as governance, environmental record, pay disputes, etc. The proper term for this type of operation is “protection racket.” You buy our protection and we’ll make sure your windows don’t get broken. You buy our corporate solutions, and we’ll make sure that the asset managers we tell to buy your company are also aware that they should vote against any ESG proposals against your management. ISS has all bases and all aspects of the business covered.
This is precisely the part of the scam that the Big 4 want in on: “You have a lovely company here. It’d be a shame if something – like a bad ESG audit – were to happen to it. Maybe we can help?”
The second thing to note about these big, blatantly corrupt accounting plans is that no one is hiding anything about them. PwC is doing all of this right out in the open. And they’re doing so because they know they can.
It’s not that they think no one will notice or that one will care. It’s that they have taken the measure of the “ethical framework” that underpins ESG, sustainability investing, stakeholder capitalism, and all the other varieties of post-Enlightenment, post-Friedman capital market models and have found them hilariously wanting. They know that they can do whatever they want – whatever their intentions, whatever their history of corruption, whatever their…well…whatever – as long as they mouth the proper platitudes. “Yes, yes. We know that our audits have, historically, been a joke. And yes, yes. We know that mixing our accounting with consulting services is a big part of the reason that we repeatedly cut corners and break the law. And yes, yes. We know that what we’re promising clients going forward is giant load of bullsh*t. But wut about the poor widdle baby powar bears cooked awive in awctic heat? Wut about Yanomamos and their disappearing forests. Wut about Barack Obama’s 7000 square-foot, 30-acre, $12-million estate on Martha’s Vineyard that will be swept away by the rising seas? WON’T SOMEBODY, PLEASE! THINK OF THE CHILDREN! (And the Obamas.)”
It’s all so transparent and cynical and destructive and insulting and pathetic.
Which is why it’ll work, we suppose. That’s pretty much the description of most ESG success stories.
As we’re fond of noting in these pages, Bill Clinton once told Tom Brokaw that it didn’t matter how many barely-old-enough-to-drink interns he did not have sexual relations with, the real measure of a man’s moral worth is “who he fights for” and whose causes he supports.
The Big Four are late to this party too, but they’ll be damned if they don’t want to try it anyway: “We’re here to help you navigate these difficult times where your children may LITERALLY drown in their own bedrooms! That’s what accounting firms do. We care. Never mind those stacks of fresh, green bills in our back pockets. We care and stuff.”