Agency Assurance - Universität St.Gallen

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Significantly higher stakes were accessible to executives in the incentive stock options,
exit payout guarantees, and other forms of compensation they were granted. Princeton
University economist Paul Krugman has noted that the compensation of the chief
executive officers (CEO’s) of publicly traded American corporations grew from an
average of 40 times the pay of the average worker’s compensation in the corporation
in 1970 to as much as 1000 times in 2000, just before the crisis erupted. Following the
crisis, Krugman stated that the situation has not improved, but that the pay gap has
actually widened. 13
Over this same time period, especially through the 1990’s, investment bankers were
earning fees and advising on deals whose values were significantly over a full order of
magnitude greater than they had experienced just a short period before. Their mergers
and acquisitions (M&A) and strategy consulting clearly dominated their quasiregulatory
role as financial analysts advising the public on the state of the corporations
they were following. The brokerage side of the investment banking business was
persistently under competitive pressure especially due to competition in trading fees
from discount brokers operating by telephone and the internet. The mammoth size of
mergers and acquisition deals and initial public offering placements generated huge
fees, customarily based on a percentage of the deal, for the investment bankers
advising or underwriting the deals. In the period 1970-1980, for example, the volume
of M&A deals in the US averaged $22.8 billion per year and 1.3% of US gross
domestic product (GDP). By the period 1993-1999, the yearly average volume had
grown to $647.1 billion and 8.4% of GDP. M&A activity outside of the US evidenced
a similarly dramatic pattern. 14
The largest audit firms found that they, too, could earn far greater fees per hour
consulting on creative and proprietary internal reporting and planning systems rather
than on legally required audit services or on their voluntary participation in the
advancement of public accounting and auditing standards. The entire accounting
profession suffers under an audit fee commoditization crisis that is in great part selfmade.
Rather than promoting the internal advisory value of the audit in today’s
complex economy, public accountants choose to differentiate audit hours from
consulting hours, as well as the hourly fees associated with these two activities.
13 Krugman (2003).
14 Weston, et al. (2001), pp. 195-197.