Battle of the Bean-Counters

(Bloomberg Opinion) -- The Big Four accounting firms have long been criticized for the conflict of interest baked into their model of combining audit and consulting. A battle over who should be Deloitte LLP's next U.S. chief raises awkward questions about the governance of these partnerships too.

Deloitte's U.S. arm – the biggest part of the global firm – is making a mess of deciding who, if anyone, will replace Cathy Engelbert when her four-year term expires in May. At issue is whether she should get another go. Deloitte's board recently decided she shouldn't, prompting a backlash from the partnership, the Wall Street Journal reported last week. The row and the leak at the very start of the process are pretty unusual.

The CEO selection is meant to be transparent and democratic for the firm's thousands of partners. But the ruckus has drawn attention to the power that the 21-strong board has in taking decisions in private that limit the choices available to the wider partnership.

The process is meant to go like this: The U.S. board devises a long-list, and a sub-committee then canvasses opinion among the partners. Months of back-and-forth later, the partnership formally votes on a new leader. The snag is that the board determines that initial roster, and it's not clear how it forms its view.

Few CEOs actually serve a second term – although Mike Cook served three in the 1990s. Even so, it's not hard to see why some partners might be angry at being denied that option. Deloitte U.S. is performing well: revenue grew 8 percent in 2016 and 6 percent last year. Engelbert's success and apparent popularity can only help efforts to attract and retain talented women in senior roles.

There must be some disagreement between Engelbert and the board. It's tempting to assume this has something to do with the age-old clash between auditors and consultants. Engelbert used to run the audit practice. The board is chaired by a consulting partner, Mike Fucci, and happens to include Deloitte's global CEO Punit Renjen, another career consultant.

But not every argument in the Big Four can be viewed through this prism. It's not clear that the push-back from the partnership reflects an audit-consultancy turf war. The tangle may boil down to a simple power struggle or personality clash.

Constructive disagreements among directors are a good thing. A board where decisions are reached by group-think or “yes men” is useless. Deloitte's U.S. board should be able to live with internal challenge.

But a fundamental disagreement between board and partnership is another matter. The board's authority rests on the trust of the partners. If the backlash over Engelbert's non-candidacy reflects the view of the wider firm and the board ignores it, Deloitte U.S. will be a partnership in name only.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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