The Big Blue Blues (Part One)

In my last installment to this blog series on Development Contractors, I wrote about what I believe is Abt Associates’ unique signature. I argued that Abt’s unique signature is the best collection of social science/policy minds that the private sector has ever assembled under a single roof.

In that last entry I also pointed out that both Abt and Chemonics have done outstanding jobs putting women into key leadership roles, and wrote that I thought both firms’ strong performance must be linked in some way to the fact that having women in key leadership roles has made each company smarter. I may have gotten a little carried away in that last post on the topic of women in leadership and my feelings about it. If so it’s probably because I had just watched my wife give birth to our son in less than three hours of drug free labor ... my awe and admiration of everything women can do has never been higher. (Mom and baby are both doing great!)

In my last entry I also pointed out that both Chemonics and Abt have employee-owned corporate models (i.e. ESOP), and I argued that I thought the ESOP model was also a key enabler of the strong performance that both firms have demonstrated in their contracting business with USAID over the last several years.

I did not spend much time in that last post elaborating on the ownership argument because I thought the discussion needed some more context, particularly before delving into my experience with AECOM International Development (AECOM) which is #8 on The USAID 50.  The reason is that unlike Chemonics and Abt which are private, employee-owned companies, AECOM is a publicly listed corporation which is traded on the New York Stock Exchange under the symbol ACM and regulated by the Securities and Exchange Commission (SEC).

I actually have a lot of experience managing USAID contracts from inside a publicly traded company which makes me one of very few folks in this industry that truly understand the unique challenges that can be involved. I thought it might be helpful for me to share a bit of my own experience on the subject before moving on to the discussion of AECOM. To get there we need to take a step back … a little history lesson.

Don't worry, it’s funny - I promise!

There must be a few folks out there that still remember what was going on with the management consulting industry in the late '90s and early '00s. For those that don’t, there was a lot of discussion taking place back then among regulators (especially the SEC) around “The Big Five” (now known as “The Big Four") audit firms regarding the issue of independence.

Here’s what the SEC was concerned about. 

Over the 1980s and '90s, the Big Five audit firms had been building up business consulting practices to complement their traditional audit services. On the surface it all made a lot of sense for both the auditors and their clients. Think about it. Let’s say the auditors find some kind of weakness in a company’s management systems or its business controls. In the old days the auditors would just log it into the work papers, discuss it with management, and maybe reference it as a finding in their opinion on the financial statements. Well, putting a consulting practice alongside the audit practice changed this dynamic for the audit firms; it enabled the audit firms to start helping their clients solve a lot more of the problems that came up over the course of an audit, rather than just writing about the problems in work papers and opinions.

As a management consultant working for Price Waterhouse back then, I got several opportunities to see how it worked firsthand.  I was based in the firm's DC office and therefore spent most of my time metroing back and forth between various Federal Agencies in the District and NoVA doing risk management and pricing analytics for different government credit enhancement programs. Occasionally, however, I’d get asked to go out and spend a week in places like Greensboro, NC; Columbia, SC; or Minneapolis, MN to help a PW audit team there resolve issues that had come up while going over credit accounts at banks and private finance companies that were audited by PW. Those were always fun jobs for me. For one, the per diems were higher and as someone fresh out of grad school it was pretty cool when you could order a steak for dinner and stay within limit! They were also great opportunities to experience first hand the differences between business practices in the public and private sectors.

The little advisory jobs that I was occassionally doing to help the audit side of the business isn’t what registered with the SEC, what the SEC was concerned about was the growing number of massive, multi-million dollar business transformation and systems implementation jobs that the Big 5 firms had started doing for their audit clients. The SEC recognized that consulting services were becoming more lucrative and potentially more financially important than traditional audit services to the Big 5. The SEC was afraid of the possibility that a Big 5 audit opinion might get compromised by the promise of a massive systems deal, or some other kind of deal that was lucrative enough to compel the auditors to "look the other way” when there were problems with the financial statements.  As a result, the SEC started taking steps to try and protect the veracity of audit opinions by pushing for more and more demonstrable evidence of independence between the audit and consulting sides of each Big 5 firms' business.

Now by that time our firm had already become PriceWaterhouseCoopers, or PwC, after our merger with Coopers and Lybrand in July 1998. Not sure if anyone out there remembers the goofy slogan that came along with that merger. It went something like this “Now The Biggest Name in Professional Services IS the Biggest Name in Professional Services.” I actually heard that some PR firm made a million dollars coming up with that slogan. I’m still not sure if it’s true, but I know I never liked the slogan.  

Here’s what I do know is true. The whole implementation of the SEC’s drive for independence between consulting and auditing was a huge pain in the a$%! The rules came fast, they were non-negotiable, and they made absolutely no sense (at least at the time). The firm actually lost some really good people (including from our little USAID practice inside the firm), because some folks just could't comply with all the SEC's ridiculous new independence rules.

I remember one of the silliest cases because it hit real close to home. As I recall, one of the guys on our team was married to a woman who worked for one of PwC's audit clients. Her 401K plan required her to hold some portion of her company's stock. However, the new SEC rules for us were that every employee of the firm had to be financially independent from every company that the firm audited, and independence included assets of the employees and their spouses. So, despite the fact that this guy had no connection at all to any of the firm’s auditors or the audits that the firm was performing, the decision came down that he had three choices: (1) His wife had to give up her 401K, (2) He had to get divorced, or (3) He had to resign from the firm. 

We lost that guy to the dark side … I think that was like early 2001.

Of course there is a silver lining to every story. I actually got a lucky break from the whole thing. I was becoming an aficionado of golf equipment at the time and decided in late 2000 to buy some stock in Callaway Golf (ELY). Well, you can probably imagine that I was not too happy when I found out that I had to sell my shares in ELY as a result of these new SEC independence rules that came into play. I didn’t even know that PwC was Callaway's auditor, let alone have any inside information about the audit! It turned out that being forced to liquidate at that time was a blessing in disguise. I’d bought the stock a year earlier for around 15 bucks a share and when I had to sell it the price was close to 20. And I think that's as high as it ever got. These days - almost 15 years later - it’s still trading somewhere down around 7. 

I would have gladly traded the $500 bucks I made on ELY to keep everyone on our team together. And of course the real silliness about all those SEC independence rules is that they ultimately failed to prevent what the SEC was really worried about. The whole issue finally blew up in late 2001. It was probably inevitable.

In October 2001 Enron Corporation - one of Wall Street’s darlings - reported a quarterly loss for the first time in over 4 years. A month later the company announced that it would be restating its earnings for each of the previous four years. That would have the effect of reducing the company’s net earnings by nearly $600 million. Later that month the ratings agencies downgraded Enron's bonds to junk status. Enron filed for bankruptcy in early December. The collapse triggered a massive rethink of corporate governance practices in the United States and ultimately led to the passage of the Sarbanes Oxley Act in 2002.

So what’s the relevance?

Well, as most people probably know Enron’s auditor, Arthur Andersen, admitted to making some key mistakes in its audits of Enron. Those mistakes ultimately fostered Enron's collapse. Arthur Anderson also collapsed as a result of its role in the fiasco, turning the Big 5 into what we know today as the Big 4. In the aftermath it became clear that Arthur Andersen’s extensive consulting work for Enron is ultimately what caused its judgment to be compromised on key aspects of its audit work. In fact, the records now show that Enron paid Anderson nearly $52 million in 2000, and $27 million of that was for consulting services. It turned out to be exactly what the SEC had feared about the Big 5 firms all along.

For those of us that were part of PwC consulting, 2002 was a very turbulent year. After the Enron meltdown and then Anderson's collapse the writing was clearly on the wall ... PwC's consulting business was up for sale. As I recall, the other Big 5 firms had already taken big steps by that time to deal with the inevitable need to separate. Most of Anderson’s consultants managed to escape the firm’s meltdown because Anderson consulting had already renamed itself “Accenture” before the Anderson brand became toxic. KPMG spun its consulting business off under the name “Bearing Point.” Deloitte and Touche had already created a separate company called "Deloitte Consulting” and Ernst & Young had already sold off its consulting business to the French IT company "Cap Gemini.”  

The only ones left were us … the consulting side of PwC. And the whole Enron & Anderson fiasco made the need to do a transaction much more urgent. Unfortunately, the urgency also drove down the value of the business. There are rumors out there that HP was actually very close to acquiring PwC's consulting business for around $18 Billion in mid 2001 but they walked away from the deal when the markets started reacting to all the Enron noise. 

For a very brief moment in time it looked like PwC was going to be spun off through an IPO under the new name “Monday.” Anyone remember that? We all suspected that it was a hasty decision when the announcement came out. We actually got emails to a link announcing the new company and branding philosophy. If I remember correctly that link was something like www.wearemonday.com. Our suspicions that it was a hasty decision were confirmed when it became clear that the firm forgot to register the corresponding UK domain www.wearemonday.co.uk.  And, as hundreds of thousands of people would find out over the following week, not only had that UK domain already been snapped up by some enterprising comedians, but there was already a website up on the domain with an animated film of two donkeys having sex while laughing out loud about a goofy new company called Monday.

Embarrasing start. But it didn’t matter because before they could find a way to get the animated donkey sex film off the new firm's UK web domain, news had already broken that there was a new buyer for PwC’s consulting business. All of us were about to find out what life was like inside a large, publicly traded company ... and we would all soon discover the unique challenges that created for contracting with USAID.

I actually found out about it through a phone call I received early one morning from my client at the USAID Mission in Bosnia. He wanted to know if the news meant that everyone on my team would be getting a brand new computer. When I told him that I had no idea what news he was talking about (not having seen the news yet) here’s what he said. 

“Congratulations are in order Drew. You guys are getting bought up by IBM!" 

- DS

Next Up … The Big Blue Blues (Part Two)