Your Auditor Is Not Your Friend

The way that high-level professional services — investment banking, law, consulting, etc. — work is that a professional firm provides services to a client company, and the company pays the firm, but particular people at the firm pitch and work with particular people at the company, and the people at the company want to work with people they like and trust. And so the business of a senior investment banker consists largely of winning the trust and friendship of executives at companies in her coverage industry. Sure sometimes she will pitch a company she barely knows on a particular deal and win the business (or not) based on the quality of ideas in her pitch; other times a company will want to do a deal, will ask banks for fee proposals, and will choose her if she proposes the lowest fee. But in the course of a career these things tend to be less important than the day-to-day building of reputation and relationships. Mostly companies will hire her because their executives have worked with her before and like and trust her.

There are obvious, mostly low-grade conflicts of interest here. Probably some banking business can be done well enough by anyone, some other bank would do it cheap, and the company overpays for it because the chief financial officer wants to work with a particular banker whom he likes and trusts. Or the chief executive officer hires a banker who tells her what she wants to hear (“do a big merger”) rather than what is actually in the best interests of her company; the shareholders end up worse off because the CEO picks advisers based on personal preference. Or of course professional service providers tend to buy a lot of dinners and sports tickets for client executives, and while the clients probably mostly don’t hire firms based on that sort of everyday bribery, it’s a thing you could worry about.