Professional Services Monitor: Today

The UK edition of the Financial Times is reporting that PricewaterhouseCoopers’ Japanese Affiliate firm, Misuzu, will be shutdown.

PwC, the world’s biggest accounting firm, is to shut Japanese affiliate because of its involvement in the Nikko Cordial broking scandal, leaving it with a smaller presence than rivals in the world’s second largest economy.

Misuzu, one of Japan’s big four accounting firms, said yesterday it would wind down its operations because of possible penalties stemming from its work for Nikko Cordial, which faces delisting by the Tokyo Stock Exchange because of accounting fraud.

Misuzu was formerly known as ChuoAoyama and was penalized in 2006 with a two-month suspension in connection with another scandal at Kanebo. In July 2006, PwC opened a new Japanese firm, PwC Aarata, to give its ChuoAoyama clients a new firm. Today’s announcement does not affect PwC Aarata.

Some major PwC clients, such as Sony Corp. and Millea Holdings, have changed from Misuzu/ChuoAoyama to PwC Aarata. However, the Financial Times article reports that only 70 of the estimated 750 Misuzu clients have switched to Aarata.

Yesterday, KPMG made the front page of the Wall Street Journal.  And the story was positive.  At least, the story showed the positive steps KPMG took to handle a very negative situation.
"Narrow Escape: How a Chastened KPMG Got By Tax-Shelter Crisis" tells how the firm and its then-new chairman Tim Flynn got the firm through the crisis to reach an agreement with the government, avoiding criminal indictment of the firm.

Timothy Flynn, a top executive at KPMG LLP, was driving to a nephew’s graduation in May 2005 when he got a phone call from the chairman: The firm faced imminent criminal indictment over tax shelters it used to sell.

Then a different sort of shock. One week later, the chairman, Eugene O’Kelly, learned he had a brain tumor that left him just months to live. Mr. Flynn, a down-to-earth accountant who once led KPMG’s human-resources department, was suddenly thrust into its top job, where he faced an urgent task: to somehow persuade the government not to indict. He knew that criminal charges against the firm would probably kill it, as they did Arthur Andersen after the Enron scandal.

Clearly, KPMG’s problems here are not yet over. However, the article shows that both sides—the government and KPMG—learned a lesson from Andersen. Regulators, prosecutors and lawmakers now seem all-too-aware that losing another large, international audit firm would be disastrous for US and global capital markets. More interesting, however, is what the Big Four seemed to have learned from the tortuous, public death of one of their peers.

As the Enron frenzy grew in late 2001, Andersen largely let other dictate the story. Whatever Andersen knew about the seriousness of the matter internally, it publicly sat back. By the time Andersen tried to exercise some control of the story in the media, it was too late. Despite “public” being literally the professional middle name of CPAs, facing public attention and managing public relations has not been a strong competency of the profession. Thus, we bore witness to a case study in failure of crisis PR.

In a crisis situation, often the worst course of action is inaction. Tim Flynn acted. As the WSJ puts it, “Mr. Flynn took a gamble.” Until June 2005, KPMG had denied anything criminal in its “tax advice,” according to the WSJ. With a criminal indictment eminent, Flynn met with the Justice Department and admitted wrongdoing. “Two months later, the government gave KPMG a deferred-prosecution deal, holding off indicting if KPMG paid a $456 million penalty and met other conditions.”

This crisis for KPMG had many actors and constituents, with the Justice Department being only one. Flynn’s decision to admit that the tax advice was actually tax shelter was not universally supported within the firm. He had to assure the firm’s partners that the decision was in the best interest of the firm. According to the article, Flynn personally contacted hundreds of partners individually and then held a special meeting off partners, accepting hard questions and giving candid answers.

To retain clients, Flynn and KPMG partner Sven Holmes, a former federal judge, visited more than 100 audit clients, again taking tough questions but giving strong answers.

Mr. Flynn met with [General Electric] directors. According to a person who attended, his message amounted to: “There’s some stuff here, it’s really ugly, it happened, and here’s what we’re going to try to do with this situation.”
GE stuck with KPMG. A spokesman for GE says it is “pleased that KPMG and its leadership have aggressively addressed the compliance issues raised in the government’s tax case.”

Finally, KPMG dealt with the media and the public. Soon after meeting with the Justice Department, KPMG issued a statement in which the firm took full responsibility for “unlawful conduct by former KPMG partners.”

The article is well-written illustration of 360-degree leadership. Flynn took action, in very difficult circumstances, and followed through.