July 29, 2022
Want more On the Margins? Check out the archive.
Who gets to be an auditor?
Generally speaking, auditing involves a third party verifying some information that belongs to a person or organization. In the accounting world, the two main audits people think of are: 1) tax return audits performed by the Internal Revenue Service (IRS) and 2) financial statement audits performed by independent CPA firms. In both instances, auditors must be knowledgeable about the things they are auditing. IRS auditors have to know the tax code; financial statement auditors have to know accounting rules. This doesn’t really work in reverse, though. For example, it might be awkward for an IRS agent to audit a company’s financial statements. And I’m certain there isn’t a financial statement auditor on Earth who wants to audit tax returns.
One area of auditing that’s getting attention these days is the accounting for, and the attestation of, environmental, social, and governance (ESG) information. We’ve talked about this a bit, and the premise is pretty simple. Users of financial statements have been demanding more details around ESG, and the Securities and Exchange Commission (SEC) recently proposed that companies attest things like their greenhouse gas emissions and have those figures independently verified. You know, audited. The SEC has said that this audit can be performed by an audit firm but also “other service providers, such as an engineering, consulting or [a] certification firm.”
Strikes me as pretty reasonable, but guess who has a problem with that?
The Big Four accounting firms—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—are pushing for narrower criteria on who can perform this duty, according to letters sent to the SEC as part of a public consultation that ended last month.
Accounting firms have a point! They have lots of professional auditors, they do this all the time, they have resources, etc. No one will bat an eye if you hire an accounting firm to audit something.
And because these are legacy auditors, they have clout to throw around. The Big Four are making the case to the SEC that auditors of ESG data should be subject to virtually the same regulatory oversight that auditors of financial statements are. This could create a massive barrier to entry for non-accounting firms who wish to audit ESG information. This is the “moat” that Warren Buffett and other people like to talk about. Accountants have a moat around auditing; in other words, the competitive advantage of: we do this thing, we hire and train these people, so we’re the best ones to keep doing the thing. This is a big advantage! Most people look at all these advantages and agree that the people with the moat are the best.
So, I don’t know if the SEC will agree that auditors of ESG stuff really need to be CPAs and/or subject to oversight by the Public Company Accounting Oversight Board (PCAOB). Still, maybe that’s what I had in mind last time I wrote about this. I said:
I was an auditor for a little while, so maybe I have a bias, but I don’t want to imagine trying to start an ESG auditing firm without any actual auditors. In contrast, an audit-only firm getting into ESG auditing could be very interesting.
Now. Auditing is a discipline that has to be learned, so if you have a bunch of ESG experts who want to start an audit firm, that will be plenty difficult. But auditing may not be as difficult to learn as, say, learning and understanding how carbon emissions are calculated and whether those calculations are reasonable. That’s immensely difficult to learn, understand, and being a subject matter expert in that area will be very important in auditing ESG. In other words, these non-accounting ESG firms have a point, too!
In each case, it’s easy to imagine how each group would try to establish further credibility. Accounting firms can try to hire every ESG expert they can to use their ESG audit engagements, thus giving them credibility as ESG experts. But likewise, the boutique non-accounting firms can hire audit experts to get their procedures nailed down, thus giving them credibility as auditors. And at least one person thinks that will be important:
Investors likely won’t care which type of firm verifies companies’ climate data, as long as the SEC requires them to meet the same level of professional and attestation standards that public accounting firms are required to meet, said Sandy Peters, senior head of financial reporting advocacy at the CFA Institute, which represents investment professionals.
Maybe I’m wrong, but the question of who can be an auditor seems to be part of the accounting profession’s evolution into … something else. It seems pretty clear that accounting and auditing ESG data will be an important part of the future, but who can be an auditor? An accountant or a non-accountant? The answer, for now, seems to be: Yes!
I’m not sure if the ol’ sole proprietorship model is on that list, but maybe it should be? Over at my old haunt, Adrienne Gonzalez published a letter to the editor that might hit a little close to home for some of you:
Those who have been sole practitioners are dying or retiring in droves. New accountants coming into the job market are being wooed by larger firms to the point we can’t hire them. In addition, where historically many accountants who, after 10 years or so decide to become a sole practitioner by either buying out a retiring person or just hanging out a shingle, this type of accountant doesn’t exist anymore.
I am overworked to the hilt as new prospects call on me all the time because their accountant died, retired, or tripled their fees. I can’t hire anyone because I can’t compete against the top 100 firms for talent.
I simultaneously admire and am nonplussed by the lone wolf accountants and bookkeepers. To choose to go it alone, knowing what you know about the job of an accountant, is a bold choice. But why choose it? Trust issues? Don’t play nice with others? Unusual eating habits? There are all kinds of solitary pursuits: writer, artist, serial killer. So why choose to be an accountant solo? Actually, I know why. Accountants can make a living. A very good living, even.
Still, the scope of the job is such that you can’t know it all, can’t do it all. Even if you manage to get someone to do the administrative work, there’s still … everything else. So a lone wolf tries to make their first staff hire and finds out they can’t because … there are a lot of options out there. I think, also, millennials and the generations below them seem to be more interested in and focused on collaboration. It’s easy to picture an up-and-coming accountant acquiring a practice and quickly finding a partner to help shoulder the load, and spruce things up a bit.
Then again, not every firm that gets started has the goal to scale up to multiple partners. But the image of the harried solo accountant sitting at a huge desk surrounded by mountains of paper, guzzling coffee, feels outdated. Just as outdated as the firm that requires staff to bill 60 hours a week and come in on Saturdays during the busy season.
In other words, the sole proprietorship firm will evolve, too. A tightly run practice that effectively uses tech, sets boundaries for clients and growth, with a small support staff sounds pretty good, when I think about it.
Fresh from Gusto (and friends)
A Safe Harbor 401(k) can help boost savings and reduce administrative work. Unlike traditional 401(k) plans, Safe Harbor 401(k) plans automatically satisfy most IRS nondiscrimination tests, and in exchange, require a company contribution. Help your clients open a Gusto-integrated 401(k) from Guideline by August 19, 2022, and pay no employer fees your first month.
- Gusto’s economic data is now available for you to use. Chart graphs on employment trends, average hourly earnings, conditions by state, and more.
- Expanding remote work accessibility for people with disabilities.
- How to Help Clients Find R&D Tax Credits with Josh Lee, CEO of Ardius, a Gusto company, and Kenji Kuramoto of Acuity on August 18.
- ICYMI: Foundational Marketing for Growing Firms with me and Gusto Chief Revenue Officer, Tolithia Kornweibel.
Read with Gusto
- There’s tax stuff in the Schumer-Manchin deal.
- More on the ethics exam cheating scandal at EY.
- Free checking isn’t free.
- Polish institute classifies cats as alien invasive species.
- Adios, Choco Taco.
Empower your team with Gusto’s training programs built with accountants in mind. Get People Advisory Certified to build your skill-set (5 CPE credits). Enroll in the People Advisory Accelerator Program to grow your firm’s revenue (4 CPE credits).