Industry Trends

Auditors Aren’t Supposed to Root for Clients

Caleb Newquist Editor-at-Large, Gusto 

December 2, 2022

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Auditors

Accounting firms that provide audit services must be “independent” of the client paying them for those audit services. So right away, you see the problem. 

But if you don’t, think of it this way: Imagine the umpires of a baseball game were paid by the home team. Even if these umpires were the finest stewards of baseball’s rules and of the utmost integrity, a reasonable person—who doesn’t even have to be the visiting team or their fans—would immediately have reason to doubt the umpires’ impartiality. 

For auditors, it’s the same thing. Auditors get paid by their clients, but they’re also supposed to be independent of those clients. You wouldn’t blame someone for thinking that, that doesn’t seem quite right. And for what it’s worth, many people already don’t think it is quite right.

Nevertheless. According to the PCAOB, “independent” means: “intellectually honest” and “free from any obligation to or interest in the client, its management, or its owners.” The AICPA says, “Accountants in public practice should be independent in fact and appearance when providing auditing and other attestation services.” Firms that can credibly demonstrate independence can audit a business.

But auditing is a business, too. A service business, no less. The clients need an audit and are willing to pay for it. An audit firm performs this service and—rightly or wrongly—wants the client to be pleased with the result. A person could argue that the need for independence should render a client’s happiness irrelevant. But audit firms are staffed with humans, and many humans want to be liked, so many times there’s a desire to connect with the client as opposed to keeping it transactional. It’s that connection where audit firms occasionally get into trouble.

We’ve talked about this before. Auditors should not be friends with their clients. It’s too fraught with pitfalls, and well-intentioned people have gotten snagged by these rules plenty of times. To be fair, there have been plenty of auditors who have flaunted the independence rules too. So if you’re erring on the side of caution—and auditors should be—you should not be friends with clients.

Anyway, wouldn’t you know it, among the many, many bizarre things that have emerged from the FTX saga, we have a little auditor-client weirdness:

When FTX faced a liquidity crunch, the auditor of its U.S. unit seized the moment to promote its services for other crypto companies that were under the spotlight.

It is a “great time to remember” Armanino LLP’s specialized crypto assurance, the firm tweeted last week, referring to a product that verifies customer assets held by crypto firms. 

Okay, so the world’s third largest crypto exchange—whose U.S. entity you provided assurance services to—is going down for the dirt nap, and you take it as an opportunity to plug your crypto assurance services? I mean, a) Okay, but also b) NOT NOW. The house is on fire, guys. Maybe you could tell us about a home security system another time?   

Also:

When FTX’s former chief executive, Sam Bankman-Fried, gave evidence to a congressional committee in December, the firm, which is in the Top 20 firm by revenue, cheered him on. “Let’s go buddy!” the firm tweeted.

I doubt that an audit firm tweeting “Let’s go buddy!” in support of the then-CEO of a client’s parent company somehow violated auditor independence rules, but it sure looks strange. If your firm needs to be “independent in fact and appearance,” tweeting “Let’s go buddy” does not appear independent. At all! Quite the opposite, actually! Let’s try a little harder, people.

Elsewhere: What Investors and Accountants Missed in FTX’s Audits

Accountants vs. Robots

A common fear that some people have of technology is that it will get so good that it will eliminate human jobs. In the most extreme versions of this fear, technology gets so advanced that human jobs are entirely eliminated, and the robots take over and wind up running everything. 

On a more practical level, though, the jobs that are really at risk involve things that computers are good at—like crunching numbers, for example, or making telephone solicitations and not caring when someone hangs up on them. When it comes to crunching numbers, computers rarely make mistakes, and since they don’t have feelings, they are indifferent to an angry person on the other end of the line. 

Accounting is one of those things that technology is getting good at, but not so good that humans should be worried. At least not yet. But even when humans aren’t needed to do the accounting, it’s not like the robots will be taking your seat at meetings or eating the last donut. Human accountants will still have to run the accounting firm and organize social events that people will enjoy. The stuff that robots can’t do. 

Still, the pace at which technology is developing makes many people uncomfortable. And so it makes sense for a company to introduce robots in a way that won’t freak people out. Because aside from actually building it, human comfort—and safety!—is probably the main barrier to technology really unleashing its potential, whatever that potential is. There are whole organizations dedicated to studying whether technology will become too dangerous as it gets smarter. Might be cold comfort. Dunno.

So, in an effort to move forward without causing a panic, one South Korean company has been introducing robots that are a little less threatening:

Naver — a soup-to-nuts internet conglomerate in South Korea — has been experimenting with integrating robots into office life for several months. Inside a futuristic, starkly industrial, 36-story high-rise on the outskirts of Seoul, a fleet of about 100 robots cruise around on their own, moving from floor to floor on robot-only elevators and sometimes next to humans, rolling through security gates and entering meeting rooms.

[…]

Naver said one distinctive feature of its robots was that they are intentionally “brainless,” meaning they are not rolling computers that process information inside the machine.

“Our effort now is to minimize the discomfort they cause to humans,” a Naver executive told the New York Times. Part of that includes making sure the robots don’t look like people. That really freaks people out. And it also means having the robots focus on the non-threatening-to-human tasks such as fetching coffee, delivering packages, and the like. 

You know, the stuff some people do before they end up running the whole company.

Fresh from Gusto (and friends)

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Caleb Newquist
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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