December 30, 2022

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Programming note

On the Margins is going on a short break to start the new year. Look for the next edition on January 27. In the meantime, if you like this newsletter, share it with a friend or colleague. They can sign up here. And if you desperately need some last-minute CPE, listen to Oh My Fraud on the Earmark app. I promise no more shameless, self-serving plugs for the rest of the year. 

And now the newsletter.

Risky clients

Generally, how an accounting firm assesses the riskiness of a prospect/client for assurance services goes something like this: the business approaches a firm and says, “Hey, we need an audit of our financial statements. Can you do that for us?” The accounting firm says, “Sure,” but offers the requisite caveats that it has to vet the prospect and its business before accepting the job. Now, there are rare occasions when something comes up during the vetting process that will cause a firm to ultimately say, “Nah, not for us.” The prospect might be disappointed, but if they’re lucky, the firm might be able to refer them to someone more willing or qualified.

If the firm accepts the job, then a risk assessment is performed during the planning stage of the audit to get a better handle on some of the specific risks. This is where things like risky accounting areas and fraud are discussed. Standard stuff. Similar to the vetting process, on rare occasions, something might come up during the planning of the audit that causes the firm to say, “Sorry, on second thought, we have to withdraw from this job because [reason].” This is more awkward, and the client will be pissed, but it is better for it to happen early on, as opposed to the whole thing going sideways later when the audit blows up and everyone looks really, really bad. 

That’s by no means everything that happens, but the point is firms have processes and methods in place to identify risky clients and how to handle these types of situations, and when, if necessary, it’s time to walk away.

Anyway, here:

Armanino is ending its crypto audit practice and dropping clients, two sources familiar with the matter say.

The unit may be folding under pressure from Armanino’s non-crypto clients, concerned that reputational risk to the firm will throw their audits into question, according to a source with knowledge of the firm’s crypto offerings. Last month, Armanino was named in a class-action lawsuit for failing to catch irregularities at FTX.US after performing the exchange’s audit last year.

And:

Cryptocurrency-trading giant Binance said the accounting firm it used to verify its reserves has paused all work for crypto clients, hampering efforts to reassure customers that their money is safe.

[…]

Mazars, a midsize accounting firm […] on Friday withdrew from its website a report on reserves at Binance and other cryptocurrency-trading companies. The report for Binance, which wasn’t an audit, was published last week.

A spokesman for the accounting firm said it had made the move “due to concerns regarding the way these reports are understood by the public.”

Here’s the thing. Whether these firms will admit it or not, there was always some reputational risk for firms who were auditing crypto companies. It’s a nascent industry that often operates outside the boundaries in many ways and has attracted plenty of bad actors who have engaged in some spectacular frauds. It is also true that crypto has attracted a lot of money from wealthy investors, and there was a big opportunity for firms to provide accounting, auditing, and tax services to these companies who sorely needed it. As far as I can tell, though, most firms looked at everything going on in crypto—a risk assessment, you might call it—and said, “Nah, not for us.” 

In the case of Armanino and Mazars, they decided a while ago that serving crypto companies was for them. Fully aware, I have to imagine, of the risks involved, but also very aware of the remunerative potential. Fast forward to 2022 and FTX’s collapse, and this caused them to rethink things. And it appears what they’ve concluded about crypto is, “Nah, not for us.”  

Which is fine! Things have gotten messy the past few months. But you can’t help but wonder whether a risk assessment should’ve picked up on the potential for messiness a while ago. Like, plenty of credible people have long held that most of crypto is just a bunch of Ponzi schemes, a house of cards, whatever. Even if that’s a reductive argument, wouldn’t a portion of an audit firm’s vetting of a potential client include, “There have been a fair number of frauds in crypto. Do we know for certain that this one isn’t a fraud?” And during the planning of the audit, should someone also ask, “Hey, lots of smart people think crypto is just a house of cards. Even if we think they’re wrong, maybe we should just double-check that this one isn’t a house of cards?”

We just talked about how crypto businesses need accountants and auditors now more than ever. But unfortunately for the crypto world, two firms willing to help crypto businesses are no longer helping any crypto businesses.  

So who steps in next? Yeesh, I don’t know. You have to believe many firms were thinking they could serve crypto businesses. But now they’ve watched everything go down, done some additional risk assessment, and probably decided, “Nah, not for us.”

People are worried about accountants

One thing we’ve talked quite a bit about in 2022 is how many people are worried that there aren’t enough accountants. What’s interesting is that people worried about it in 2021, too. And wouldn’t you know it, people were worried about it for 2020 before 2020 really gave us all something to worry about. Suffice it to say people will be worried about it in 2023. 

We’ve covered the reasons for this ad nauseum. Too much work for too little money, better career options in finance or technology. The 150-hour rule discourages too many people from sitting for the CPA. Et al. The pandemic arguably gave the profession an opportunity to reinvent itself, particularly by giving its people more flexibility than ever. Unfortunately, many firms have or will squander it, returning to the status quo of busy seasons, long hours, and burnout. 

Anyway, here’s another entry from where-have-all-the-accountants-gone journal that won’t make anyone feel better:

Jordan Pixley put his attention to detail and love of numbers into his Clemson University accounting classes. But in internships, he felt bogged down by the repetitive tasks of accounting—such as balancing cash sheets—and the work proved less interesting than the college class he enjoyed most—data analysis.

The 22-year-old accounting major attended a KPMG LLP recruiting event in Orlando, Fla., but ultimately chose not to apply. He graduated last week without a job lined up and is exploring opportunities with the U.S. military. Accounting’s grueling hours—70- and 80-hour weeks are common at the biggest public firms before tax and audit deadlines—were part of the turnoff, he said. 

“I was a little scared of it, not going to lie,” Mr. Pixley said. “I don’t know if I want to do all that.”

Scared of 70- and 80-hour weeks, so exploring options in the US military. Take note, accounting firms.

I’ve noticed a couple of ways people tend to think about this predicament:

  1. This is a problem to be fixed: Accounting has to do things radically different to excite and attract new people to the profession. What does this involve? For starters, revamping the business model, including getting rid of the billable hour, and maybe ditching the firm hierarchy. Also, getting rid of the 150-hour rule, paying people more money, offering them more interesting work, giving them viable long-term career options, reducing the seasonal work, and building better work environments. In short: it involves a lot of changes.
  2. This is an opportunity to double down: Fewer people working in accounting will mean that the services become more valuable, and professionals who commit to it will reap big rewards. These rewards will attract the best and brightest, weeding out those who want an easier path. Accounting has always required hard work, long hours, and commitment. It isn’t for everyone, and that’s the point. The main difference I’ve seen in this argument is that the profession has to return to a public service mindset and have a clear message of why that should be the focus going forward. This will also attract the most noble-minded accounting recruits, so not only will these magnanimous professionals return the profession to its fabled glory, they will get fabulously wealthy in the process.

The problem with #1 is that those changes will take time and won’t alleviate the immediate need for accountants. Regardless, there aren’t enough students coming out of universities to fill the gap. Plus, I can’t imagine that the AICPA will back off the 150-hour rule for prospective CPAs. They spent years getting all states to buy in; they’re not going to reverse course now.

The problem with #2 is, well, almost everything. I suppose it’s true that a decrease in the supply of accountants will make the remaining more in demand and, therefore, more valuable. But no amount of money in the world will make up for the physical impossibility of the remaining people doing all the work. Never mind the high likelihood of those very well-compensated people being absolutely miserable. 

I am sympathetic to the idea that accountants, specifically CPAs, should return to a public service focus. There are plenty of people who become lawyers to focus on public or community-oriented work. There’s no reason that a segment of accountants couldn’t do the same thing. It gets incredibly complicated, however, when you start talking about auditing and the client-pay model, which is another entirely different intractable problem. (We’ve also talked about this a lot, for what it’s worth.) It’s hard to fathom the accounting profession returning to its ideals and showering these idealists with riches. 

Fundamentally, that may be the question that needs answering: can a public mindset and lucrative career co-exist in accounting? I don’t know. That’s a topic for next year.

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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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