% fortune -ae paul murphy

Fatal Attractions: technology, judgement, and the big four

Ever since Arthur Andersen's destruction in the aftermath of the Enron debacle, people have been wondering when the remaining big four accounting firms will become the big two or three, and why.

Since 1980 six of the then top ten firms worldwide have disappeared - four of them through mergers, one (Laventhol & Horwath) through suicide by partner, and one (Andersen) mainly because its own people paniced under attack by the media and an over zealous prosecutor. Thus, if you assume that past trends will continue over the next few years you'd expect to see two of the current big four merge and another leave the stage in some form of scandal or collapse.

It is possible, however, to look at their use of technology and predict, on that basis, the collapse of all four within a few years of each other - and ultimately therefore the emergence of a whole new breed of international audit firms as the second and third rank firms step up to meet exploding market demand.

Notice please that all of this is highly speculative - I think there's an issue, but I do not have the data to know how serious an issue it is, nor how dramatic its consequences are likely to be.

The reason for the concern is that all of these firms use the same technologies in the same ways and for the same reasons - meaning that if something goes wrong for one, it goes wrong for all of them, and at roughly the same time.

All of these firms have strongly pyramidal management structures with large numbers of highly educated but immature and unpracticed juniors hiring into an up or out environment at the bottom of the earnings and control pyramid each year. In all four firms these juniors do almost all of the detail work within strongly defined practice standards largely enforced by laptop applications stepping their users through legally defensible processes to arrive at legally defensible conclusions.

In effect the technology is used to substitute firm wide standards of practice for individual judgement and decision making - thereby reducing the firm's exposure to lawsuits while simualtaneously allowing the firm to reduce costs by using less experienced people for more of the work. This sounds like a good thing for the firms, but there's an unhappy side effect: every time these firms find ways to use technology to supplement the audit junior's own judgement and expertise, they also reduce the educational value of time spent on the job by that junior.

In effect, therefore, this use of technology transforms what should be an apprenticeship period aimed at produced an experienced accounting professional into a training period producing a technician.

The catch is that the top of the pyramid needs accounting professionals; not technicians, and the up or out nature of life at the bottom of the pyramid combines with the job changes to permit only one route up: through sales. As a result the current generation of junior partners and candidates, the senior managers who survived starting as juniors in the nineties, have more experience selling than they do as business advisors and analysts.

Since the firms affected aren't growing the professional leaders needed to replace retirees from the top, they're facing two choices: promote people who are good at sales, or bring in senior partners by acquiring small firms.

In a revenue driven environment only the truly visionary will make the right choices more often than the wrong ones - and the promotion criteria currently in force winnow down the number of visionaries remaining in the firms. As a result their technology deployment choices have left them in danger of becoming hollow men - emptied of exactly the characteristics investors around the world depend on them for: the independence, integrity, and business judgement of experienced accounting professionals.

Paul Murphy wrote and published The Unix Guide to Defenestration. Murphy is a 25-year veteran of the I.T. consulting industry, specializing in Unix and Unix-related management issues.