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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Books: The Big Six

Comments (6)

I read less this week than I read last week (mostly because it was a busy week) but I still managed to get through five books.  Looking back on the week, four of them were business books, which is unusual for me – I think I was stalling reading the last Dennis Lehane book for as long as I could (it’s up next.)

The best book of the week – by far – was The Big Six.  I’m generally grumpy (that’s a nice euphemism) with the accounting industry these days, especially the Big Four.  The combination of the accounting scandals of 2001 – 2003, which led to extensive new government regulations such as SOX, had the unintended consequence of making the Big Four more arrogant, lazy, ineffective, and non-responsive to entrepreneurial companies.  In the late 1990’s, these firms would do practically anything to get audit work with early stage companies, promising that they would “grow with them.”  Today, not only do they have no interest in working with young companies (“we don’t have enough time – we are too busy working with our large public company clients, helping them deal with SOX and other regulations”), they behave incredibly inappropriately with regard to any sort of client transition activity (I have a long list of stories here – ranging from requests for $185,000 to transfer work papers to a new auditor (a 10 hour process) to cover “cumulative discounts over the past four years” to holding up merger accounting for a public company for 12 months “because we don’t have time”, resulting in the public company having no way to get the SEC to approach an S-3 registration statement.)  I could rant for a while about this – I suppose that should be the topic for another blog post (or seven).

The Big Six – subtitled The Selling Out of America’s Top Accounting Firms – was written in in 1991 by Mark Stevens and is a brilliant description of the Big Eight landscape at that time, the people (and personalities) that led these firms, the scandals that rocked them, and the market pressure that generated the first wave of accounting firm consolidation that resulting in The Big Six.  Included is a short narrative of each firm, which provided context for their history and culture that I had never read before.  In addition, the book has several stories of major accounting scandles in the late 1980’s, including the fraud of ZZZZ Best (and how they hoodwinked Ernst & Whinney – mostly displaying the incredible incompetence of the people involved at Ernst & Whinney) and the S&L crisis – most notably the story of the demise of the Beverly Hills Savings & Loan and the revolving door of audit firms involved in this.   

This book made me more – rather than less – grumpy (see euphemism above).  Fifteen years later, I think things are much worse.  The accounting industry had a major breakdown – again – in the beginning of this century with the apex possibly being the complete demise of Arthur Anderson during the Enron scandal, the one firm in the Big Eight that went out of business rather than merging with someone else.  Ironically, all of this simply resulted in extensive government regulation, which made the audit firms who participated in the debacle in the first place more powerful.  While some unintended consequences are at work here, it’s doesn’t take much of a cynical mind to question the validity of the entire system.

You’ll hear more about the other four books in my next post.

  • ispivey

    Brad, what’s preventing a marketplace solution? My guess would be that accounting firms’ clients pay for a reputation (for the benefit of investors & creditors) more than for the actual service they receive, in the vein of “no one ever got fired for buying IBM”. And since creditors and institutional investors are such arch-conservatives, I imagine they won’t stand for anything other than the Big Four’s seal of approval. But reputations have been built before — is it that inconceivable that a new firm focused on providing responsive service to smaller clients could succeed?

  • http://www.feld.com Brad Feld

    There are many local / smaller firms that do excellent work (in many cases much better than the big four). We’ve shifted the majority of our business to them for startups / young companies. However, there’s still a reputational effect going on here – if you are going public, you “want” a big four. It’s a frustrating dynamic that no longer seems to be linked to quality.

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