Who Says Accountants Can't Jump?

It's late in the fourth quarter at Madison Square Garden, and tension is running high in the skybox owned by KPMG Peat Marwick. Sipping drinks and sitting on the edges of their seats, the executives are hoping the New York Knicks can hang on to a slim lead over the Chicago Bulls. On the big television screen, they watch as Knick center Patrick Ewing thunders toward the hoop for a monstrous slam dunk. It's not until the high-fives are over that they realize something in the box is amiss: Their boss, Jon C. Madonna, has disappeared.

Cut to courtside. That's where you'll find Madonna during a close game. No offense to his colleagues, but Peat Marwick's 49-year-old chief executive feels cooped up in the rafters. "Jon can't stand the box," says his wife, Lynn. "We always wind up on the floor." An incorrigible sports fan, Madonna likes to be where the action is.

It's no surprise, then, that Jon Madonna has placed himself right in the middle of the turmoil swirling around the once staid accounting profession. He's become an outspoken critic of a profession that has watched U.S. business from its own kind of skybox for years. During the go-go '80s, the Big Six CPA firms expanded headlong amid unprecedented business activity. But lately, they've been battered by a shrinking client base and lawsuits over allegedly improper audits. Long accustomed to steady audit and consulting fees from publicly traded companies, they've been exposed as fat and undisciplined. And Madonna, unlike many of his peers, is perfectly willing to say so. "The old ball game is over," he says. "Everybody ought to be taking a fresh look at how they operate."

The Big Six have some big troubles. The savings-and-loan crisis and other business failures stemming from the deal decade have eroded their pristine reputations. They face a storm of lawsuits from shareholders charging that their audits failed to detect underlying problems at those companies. Last year alone, the Big Six paid more than $300 million in legal settlements, and 4,000 cases are still outstanding, representing $15 billion in potential damages. Worse, demand is drying up for the high-margin tax and consulting work that was a by-product of the mergers-and-acquisitions binge. And mergers themselves--not to mention bankruptcies--have culled the number of companies that need audits.

RAISING EYEBROWS. The result has been a slowdown in Big Six revenue growth to about 5% a year since 1990, vs. 12% annually during the 1980s. Add to that the legal settlements, and pressure has never been greater on the profession's earnings. Amid the chaos, Madonna is raising eyebrows with sobering straight talk about the profession's woes. From his splashy ties and Italian loafers to his hard-boiled approach to business, he's hardly a typical CPA. And as he shakes up Peat Marwick, he's giving the entire industry a jolt.

Other Big Six CEOs, from Arthur Andersen & Co.'s Lawrence Weinbach to Eugene Freedman at Coopers & Lybrand, have made changes in response to the profession's travails. But none has moved as quickly or as loudly as Madonna has since he took over in 1990, after running Peat Marwick's San Francisco office for four years. Consider how he has managed partner layoffs. Rivals have tended to trim their ranks in dribbles through attrition or partner buyouts. But just four months after taking over, Madonna lopped off 15% of Peat Marwick's partner roster, young and old alike. What's more, he publicized the cuts in a press release. "It was a pretty big shock to the system," Madonna says. "But it sent a strong message."

Madonna has also introduced the dreaded "or else" phrase into the firm's vocabulary: Auditors who had been generalists are being forced to develop expertise in certain fields--or else they may wind up out the door. Indeed, unlike Arthur Andersen, which spun off its consulting group, Madonna is integrating his professionals in industry-specific teams. The idea is to provide, say, banking clients with auditors, tax specialists, and business consultants who all have intimate knowledge of banking. Madonna hopes that will help avoid mistakes while drumming up more high-margin tax and consulting work. Another demand: Even the most senior partners must start bringing in more clients.

THE SHUFFLE. Meantime, Madonna has shaken up the power structure. Shortly after taking over, he forced into the field a layer of managers whose sole responsibility had been overseeing regional offices. He also demoted John Gannon, the former head of the firm's consulting practice, citing lax financial controls and weak profits. In his place, Madonna installed auditing head William Simon to tighten things up.

Not surprisingly, Madonna has his critics. Besides the normal griping about personnel cuts and changed duties, some partners are concerned that Madonna is too impetuous. In meetings, they say, he often lacks an agenda. And some wonder if he has the experience to make such quick decisions for a firm of 19,000 after only four years of running the San Francisco office. Gannon, they complain, was the third consulting chief in less than a year. That sort of draconian display has made professionals freeze up for fear of doing something wrong.

David Fowler, a retired managing partner, points out that Madonna can't make decisions unilaterally. The partnership's board has to approve all major moves. However, Fowler says, Madonna is a master at selling his position. When he proposed the 15% payroll cut, many on the board--including Fowler--insisted that it first be studied in detail. "Many of us felt that we needed more time. But his gut feeling was we needed to get on with business." In the end, Madonna convinced them that a "study-it-to-death" syndrome was part of their problem.

Others in the profession aren't so sure. Madonna's highly visible partner cuts, says one rival CEO, were "the profession's biggest public relations blunder in a long, long time. It's not like some assembly line. The partners are a direct line of communication to the clients."

Madonna's efforts, though, are beginning to show up on the bottom line. Before he took over, Peat Marwick limped through 18 months of flat profits, and last year's earnings were depressed by the cost of cutting partners. This year, though, profits per partner are expected to jump 12%, despite flat revenues of $1.8 billion. At $230,000 per partner, those projected earnings would move Peat Marwick ahead of Coopers & Lybrand as the fifth-most-profitable firm, says Jim Emerson, publisher of a trade publication, Professional Services Review. But Madonna still has a long way to go: Peat's profitability pales next to that of Arthur Andersen and Price Waterhouse, which lead the pack with earnings topping $300,000 per partner.

COACHSPEAK. Madonna insists that further improvement will come with time. He compares the Peat Marwick he inherited to a star-studded sports team lacking cohesion and direction. As a high school student in Modesto, Calif., he dreamed of coaching a pro football or basketball team. But since both of his parents were retailers--his mother owned a women's clothing store and his father Madonna's Liquors--he was steered to bookkeeping as a youngster.

The result is a CPA who, even in his most ardent discussions of accounting, invokes images more likely to be heard in a halftime pep talk. "Bill Walsh did not win because he drafted Joe Montana," he says. "And Pat Riley did not do a good job last year because he had Patrick Ewing. Those players helped, but the coach made the difference."

Madonna's first experience as a "coach" was a fluke. While attending the University of San Francisco, he was in the ROTC. And after graduating in 1965, he left for Vietnam to fulfill his obligation. "I was not a rah-rah military person," he says. He jumped at his first chance to avoid combat. Madonna was put in charge of running a major supply dump just outside Saigon. His job: hiring Vietnamese civilians to administer the supplies. Under Madonna, the supply-dump staff mushroomed from 200 to 5,000. Its growth and efficiency earned him the Army's bronze star.

Madonna joined what was then Peat, Marwick, Mitchell & Co. in 1968, becoming a partner in 1976. In 1986, a year after the firm merged with KMG Main Hurdman, he took over the San Francisco office, where Wells Fargo & Co. was his biggest client. Many of his ideas, such as forming industry-oriented client-service teams, were developed there.

As he moves forward, Madonna will need some more creative accounting. But he has already got Peat Marwick--and some in the industry--reconsidering their traditional approach. Says Arthur W. Bowman, editor of Bowman's Accounting Report: "Under Madonna, Marwick is operating more like a business and not some professional club." For the Big Six, it's about time.

MADONNA GETS TOUGH
      Since taking over in 1990, Peat Marwick's chief has:
      -- Cut 15% of the firm's partners
      -- Restructured firm into teams focusing on specific industries
      -- Replaced the head of consulting, citing lack of financial controls
      DATA: BW