Ever since my days as a staff auditor at Arthur Andersen, I’ve wondered what it costs to become a partner at a large firm. It’s obviously not something that is widely discussed with staff, so the youngsters all remain clueless.
But Francine McKenna of re: The Auditors has finally answered my question. She points to a report by the Center for Audit Quality. The report says that the average capital contribution per partner is $418,365, which is no small sum for an individual to pay.
The big downside is that it’s easy to lose all that money if the firm is sued or otherwise collapses. Think about all those partners who lost their contribution when Arthur Andersen folded. That had to be painful. And you can bet that when they wanted to move to another big firm after the collapse of AA, they had to pony up again. (I wonder if the firms offered any special deals for them?)
The report also points out that this capital contribution to a big firm doesn’t generally appreciate like other investments will. Francine disagrees, saying that the rate of interest paid on the funds on deposit are higher than market rates, so there is some value there.
Francine offers some insight to this issue as a former director at PricewaterhouseCoopers… She says that when partner-level people came to the firm late in life (age 50 or over) they did not generally get offered partnership because it made no economic sense. Most partners finance this buy-in with a bank loan, and with PwC’s mandatory retirement age of 60, there simply wasn’t enough time to pay off the loan. And with ten years or less to work, they wouldn’t earn enough money there to make it worthwhile.
There’s a bit of irony to all this. Francine writes:
Poor, poor auditors. They’re really suffering.
High risks.
Big financial commitments.
Not getting paid as much as their law firm “equals.”
Don’t most consumers think of auditors as smart people who do well with financial matters? That’s not necessarily the case if they’re creating these types of scenarios for themselves, is it?
I’m sure the issue has been raised more than once that audit firms should consider changing the way partnership buy-ins work and are valued. But really, there’s no incentive for partners who’ve already made the financial commitment to agree to the change. Why should they make it easier for those coming after them to become partners? If all the older partners had to do it this way, they probably think that the younger up-and-coming partners should too.
Yet it’s this kind of thinking that will make the mega-auditing firms extinct. There are so many partners who live in a world far removed from reality… a world in which “this is how we did it 20 years ago…”
Refusing to change to meet the new demands of our economy and workforce will put them out of business. Mark my words. And mid-sized firms aren’t necessarily doing much better on this issue. This isn’t based on scientific evidence, mind you. Just on what I’ve seen while practicing accounting.
The world is evolving but auditors have big incentives keep doing business the way they’ve always done it. After all, there are billions of dollars in fees for non-value-added services to consider. (Yes, I’m saying that audits don’t add value. *gasp*)
Aren’t the firms/partners well insured for something like that? And don’t you think both the firms and the gov’t learned a lesson from AA? I thought the biggest problem with AA/Enron was how so many people from AA started working for Enron – moves that are almost impossible now because of SOX (and, really, what helped to ruin AA’s reputation). Plus, I’m no expert when it comes to this, but I’m willing to bet special capital buy ins at the other firms were arranged for former AA partners because of all the new business they were bringing in with their old clients. Wouldn’t you think?
Ryan – Insurance has limits and doesn’t pay for everything. For one, insurance policies generally don’t cover criminal acts… and fraud is a crime. No, too many AA people didn’t start working for Enron. That had little or nothing to do with it. And the new firms couldn’t really make “deals” for the new partners because it would be unfair to the partners who paid the full fare to become partner. Regardless of the business brought along, there are still some basic parameters that they need to remember to keep it fair for everyone. Thanks for your questions!
The cost is nothing to the partners as the big four have agreements with the banks, the capital contributions are basically loans agreed with the firms bank, but in the name of the partner. In the big four the capital contribution is a non-issue as its just a matter of signing a piece of paper, no money goes in or out of your account.
I joined PwC as a director, with explicit expectations that I’d have a leadership role building a new consulting practice. Along with that, I was told I could make a run at partner if my sales numbers were good. Even when the leadership role and the new practice never materialized, I had great numbers and terrific reviews.
After over a year of solid performance and high praise, I found out only by chance that the partnership isn’t an option for me because of my age. Of course this came as a shock. When I asked about my only other option for advancement, the Managing Director role, a partner told me it has similar revenue targets as the partnership but with greater risks. Add to this the MD’s lack of authority and the general perception that MD’s are either old or incapable, and the position seems like a barely adequate consolation prize.
Sadly, apart from a direct admission to partnership, there’s no really compelling reason for anyone over forty-five to join the big 4. The benefits are certainly good, but if you’re joining as a director, the pay will probably seem average or a bit low. Most importantly for those with families, the long hours and hard work is a road to nowhere.
This partnership arrangement seems uniquely suited to the traditional audit/tax environment (circa 1900, when people died at 60), where growth is limited by a finite number of clients and it’s imperative to create advancement opportunities for younger partners. However, it seems out of touch in broader consulting and professional services industries, where market potential is only limited by the value of services offered.