The Hindu Business Line : Padded secrets spilling off big bean-counters

TEXARKANA city, Arkansas, in the US, has the following statistics: Total population 26,448; male 12,673; and female 13,775. There is not much business news to show on the city's Web site, and so it borrows `Washington' stories to slap on its pages. Yet, about a week ago, dateline Texarkana reports in the international media spoke about an unexploded bombshell lying in the accounting yard: A lawsuit filed about two years ago and pending in an Arkansas state circuit court accuses three of the Big Four - PricewaterhouseCoopers, KPMG, and Ernst & Young — of routinely overstating travel-related expenses when they billed thousands of clients over almost a decade since 1991.

The modus operandi was this: The accounting firms would bill their clients for the full amount of travel expenses (including airfare, hotel charges and car-rentals). However, the firms benefited from airline, car-rental, lodging and other companies in the form of rebates and volume discounts that soared to even 40 per cent.

This was pocketed by the accounting firms. Such a practice is strictly not illegal, as long as it is disclosed to the clients. Problem begins when the enrichment is secret.

The plaintiff is Warmack-Muskogee Limited Partnership, a shopping-mall operator, and among the accusations against the Big Three firms is that they colluded with one another to secure favourable deals with various travel vendors.

Shockingly, the suit also alleges that the firms operated under "an agreement not to disclose the existence of the rebates to clients or credit clients fully for the rebates". If the suit snowballed into a class action, there would be irrecoverable damage for the profession, it is feared.

It is no secret that service-providers (and that would include lawyers and doctors too, apart from accountants and consultants) look at reimbursable out-of-pocket expenses as a source to count on.

Thus, bills for travel and stay, conveyance and food, would end up in surplus, if one were to put reimbursement on one side, and actual expense on the other.

In a market when auditing supplies only the bread and not butter or jam, and audit fee cannot shoot through the roof, the accountant eyes the reimbursable cost as profit-centres, as much as salaried employees view many a reimbursement as an allowance by a different name. During most negotiations that auditors and clients have about `fee revision', an alternative route that is often agreed upon is that of considering an expense-head with an inbuilt elasticity and paddability, and the sole aim is the putting of some extra money in the pockets of the auditors. Where it pinches is when the client is unaware of how much is the padding.

According to one estimate, the lawsuit has cost PricewaterhouseCoopers dearly "to gather and analyse information pertaining to the suit". An affidavit filed by PwC computes the expense on this account as $10 million plus for about 1,25,000 hours of partners and staff at the firm's billing rates. KPMG has projected its "discovery expenses" at $26 million.

That could only be tip of the iceberg.

hindubusinessline@hotmail.com

Article E-Mail :: Comment :: Syndication

Stories in this Section
Will the real Indian investor stand up?

Power claims

A special cocoon called SPC

Debunking the staid look

Padded secrets spilling off big bean-counters

International terrorrism — The Saudi-Pakistani nexus

Where competition ends and collective conscience begins

Agri worries

IMF-Bank meet