June 2, 2022

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Auditing

We discussed auditing a while back and whether accounting firms should do it. The upside to auditing is that many businesses need it for one reason or another, and only independent CPA firms can do it. The downside to auditing is that it can create conflicts of interest due to independence rules. Here’s a simplified scenario:

  1. Firm A audits Client Z. 
  2. Client Z wants some fancy consulting services, but Firm A can’t perform those consulting services due to independence rules. 
  3. Client Z still needs the work to be done, so they have Firm B, who doesn’t have any conflicts of interest, do the job. 
  4. Firm B will charge a lot for those consulting services. 
  5. Firm A will continue auditing Client Z, but thanks to auditing, it lost out on the consulting money. 

So, again, should accounting firms provide auditing services? “Yes,” says one group because it is the bedrock of the profession, giving firms the reputation as objective, sober professionals that can be trusted to call things—those things being financial statements—as they see them. Whether or not there’s another group explicitly saying, “No,” isn’t clear; still, at least one notable firm appears to be talking with their feet:

Big Four accounting firm Ernst & Young is moving to spin off its audit business in a global corporate move which follows a string of scandals and audit failures and has radical implications for the world’s most powerful financial firms.   

The deal has a long way to go, but should it close, this is just a bit of accounting history repeating itself. And while EY’s rivals currently have no interest in doing this for themselves, I’m sympathetic to the arguments for splitting up the firm mostly because who needs the HASSLE? Auditing is a valuable service on its own; consulting is a valuable service on its own. You conceivably have two valuable businesses that can exist just fine independently. Having both under one roof creates endless conflicts and complications that mainly just get firms into trouble. You know, HASSLE.

You don’t have to be EY to appreciate simplifying your business, though. Firms of all sizes could have fewer clients and serve fewer industries; in general, doing less in order to focus on being experts at a small number of specific things. There are plenty of businesses out there that would like this from their accountant, and are even willing to pay more for it.   

This could include auditing! An accounting firm that dedicates itself to auditing and brands itself as such could convince businesses that need audits that they should go with the audit-only firm because this is all they do. And because this is all they do, they can credibly (and smugly) claim the high ground as auditing experts that won’t have any conflicts of interest. Some people argue that an audit-only firm would still need non-audit experts in tax, valuations, and other specialties. This is true, and the audit-only firm could contract those experts to only work on those specialized areas for their audits. If there’s a lot of work to go around, maybe they can hire those experts full-time.

I think the main point here is that auditing, for a long time now, has been a hassle. It’s a hassle for firms, it’s a hassle for clients, it’s a hassle for regulators (if applicable). And in general, maybe auditing can’t be completely hassle-free. But it certainly could be less of a hassle, and the easy way to do that might be for audit-only firms to be the ones doing the auditing. Plus, the firms that do it right—auditing purists—can lay claim to all that vaunted credibility with a straight face.

RTO: A Cartoonish Mega Billionaire has thoughts

Well, this is one approach:

“Everyone at Tesla is required to spend a minimum of 40 hours in the office per week,” [Elon] Musk wrote in a message addressed to employees at the electric-car maker. That “must be where your actual colleagues are located, not some remote pseudo office. If you don’t show up, we will assume you have resigned. The more senior you are, the more visible must be your presence.” 

Honestly, I don’t know what else one would expect a Cartoonish Mega Billionaire to say about remote work. Perhaps that it’s not “real” work? I mean, he said that, too, so it’s all pretty on brand. But that doesn’t even get into the toxic overwork: 

In his return-to-office memo, Musk said Tesla would have “long ago gone bankrupt” if he hadn’t “lived in the factory so much — so that those on the line could see me working alongside them.”

And, ok, maybe. But they also might’ve thought, “That guy sure is on Twitter a lot.”

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Caleb Newquist Caleb is Editor-at-Large at Gusto. In 2009, he became the founding editor of Going Concern, the one-of-a-kind voice on the accounting profession, serving in the role for 9 years. Prior to Going Concern, Caleb worked as a CPA for nearly 6 years in New York and Denver. He lives in Denver with his wife, two daughters, and two cats.

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