Elsewhere in bad consulting
Here is an SEC enforcement action against Aon Investments USA Inc. that has the quality of a nightmare. Aon acts as an adviser and consultant to the Pennsylvania Public Employees’ Retirement System (PSERS), a public pension fund, and calculates the fund’s investment returns. PSERS asked Aon to do a calculation for it, based on PSERS’s historical returns. The details are not that important, but if the calculation produced a number of 6.36% or higher, that was good. If it produced a number lower than 6.36%, that was bad, and “public school employees would be required to contribute more to the retirement fund going forward.”
In 2020, Aon did the calculation and got 6.38%: close to the line, but fine. But some PSERS employees noticed that “some of the quarterly returns in the spreadsheet provided by Aon did not match the historical quarterly returns previously reported by Aon for those periods.” That is a terrible thing to notice. If your client notices that some of the historical quarterly returns in your spreadsheet do not match the historical quarterly returns in their spreadsheet — or, worse, in your own previous spreadsheets — then the best approach is probably to delete all the spreadsheets, delete Excel, take a baseball bat to your computer, change your name, grow a beard, and set sail for a deserted island. This is not legal or investing or consulting advice but, honestly, what are the chances that you will efficiently identify and fix the source of the discrepancy? Better to start over on an island, far from any spreadsheets. Just read this passage and imagine being Aon Employee A:
On June 17, 2020, PSERS staff asked Aon Employee A to verify the quarterly return rates provided on the spreadsheet for fiscal years 2014-2017 “since some of those are significantly different from what we have on record.” About an hour later, Aon Employee A responded that they “just double checked and the quarterly returns I sent [on June 12] do match what we have in our system.”
On June 19, 2020, PSERS staff asked Aon Employee A whether the discrepancies in return rates that had been identified were due to subsequent adjustments to the return rates that were reported in prior quarterly reports. On the following day, Aon Employee A responded, “I assume so, yes but I don’t know what historical numbers you’re referencing.”
Just the worst possible emails to get. “I assume so, yes but I don’t know what historical numbers you’re referencing” is, in this context, a pretty good answer (not legal advice, and apparently the SEC disliked it), but it would be even better to disclaim even more knowledge. “I’m sorry, I don’t know what historical numbers you’re referencing, or who you are, or what a number is, or how to use email, please never contact me again.” It’s not going to get better. The rest of the SEC order gets worse:
- Aon tries to figure out why its numbers are slightly off.
- It thinks of promising ideas — maybe one private equity fund in the portfolio retroactively adjusted its performance reporting? — and looks into them and finds out that they don’t explain the discrepancy.
- It throws out those ideas to PSERS anyway to, like, suggest that it is on top of the problem? For lack of better ideas? Gotta say something.
- PSERS sends around increasingly agitated letters saying things like “I have been unable to locate past documentation provided to the Board that would explain these reporting differences. Perhaps something has been missed, but ….”
- Universal despair.
The SEC’s press release says that the Aon partner involved “misrepresented to PSERS that the discrepancy was not due to errors when, in fact, she did not know the reason for the discrepancy,” and that “ultimately, the discrepancy turned out to be due to errors in the underlying data.” But the actual order just sort of trails off. As far as I can tell, nobody ever figured out what happened:
On April 16, 2021, Aon sent an update letter to PSERS’s CIO. Although the Aon Partner had given PSERS the impression that Aon had identified and determined the exact cause of the error, the update letter referred to Aon’s “continued review” and indicated that “Aon fully understands that its responsibility to report to PSERS is ongoing and will supplement the information related here when and to the extent appropriate and, of course, as may be responsive to any questions PSERS may have.” The letter further explained that “all indications are that the issues here reflect inadvertent clerical mistakes at a data-entry level.” The letter concluded that “Aon is determined to ascertain all pertinent details surrounding the issues here and will provide it as our comprehensive review continues.”
Someone just put the wrong numbers in the spreadsheet, somehow, at some point, probably. Nothing to be done about it. Anyway the corrected calculation produced 6.34%, which is bad.
