August 5, 2021
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Can auditors be friends with clients? Matt Levine has the answer: No. Not if you want to stay out of trouble anyway. It makes me wonder if most accounting firms should get out of the business altogether.
Auditing, the way it’s meant to be done, is hard. Long ago, I remember my Principles of Auditing professor saying, “Not all accountants are auditors, but all auditors are accountants.” An obvious statement, perhaps, but I always sensed that he meant it as a point of pride. The subtext being that auditors have to bear responsibilities and hone skills that other accountants don’t. Auditing requires independence and objectivity. Or perhaps it’s better to say: backbone. The willingness to tell a client when they’ve made a mistake or flaunted the rules, and then be able to withstand the resentment.
So we have this archetype of an auditor who has an unwavering sense of duty to the end-users of the audited financial statements (i.e., virtually anyone). It’s a nice idea. In reality, the situation is far more complicated.
Most professional service relationships have a spirit of advocacy. A lawyer, for example, negotiates a contract for a client. A consultant recommends changing a business process to increase profits, and so on. On the other hand, auditors can’t advocate for the businesses they’re auditing because that would violate independence rules. But also, it defeats the purpose. If a business needs an independent audit, but the audit firm will just do whatever the client wants, then how can anyone trust the information? That requires auditors to take adversarial positions to their clients’, which can occasionally lead to awkward conversations and bad feelings. Still, the auditor wants to please and keep things friendly with the client because… that’s who’s paying for the audit. You see the problem.
I mean, of course you do; some of you experience it regularly. But somehow auditors have to forget who’s paying them thousands, in some cases millions, of dollars to perform a professional service for the public writ large… who isn’t paying them thousands, in some cases millions, of dollars.
In many ways, auditing is the bedrock of the accounting profession, providing its vaunted credibility. But with so much talk of advisory services these days—the type of services that demand advocacy—auditing can play spoiler. If you audit a business, you can’t really advise them, at least not in a way that clients want. They want to be dazzled with business insights and ideas and strategic advice. Clients are far less impressed by your checklist of audit procedures, encyclopedic knowledge of accounting rules, and fortitude in the face of their visible irritation.
So should accounting firms stick with auditing? It feels like too much hassle for most. There are all kinds of exciting things going on in the accounting firms right now; why focus on the type of service that requires strict neutrality, has a ton of liability exposure, and clients perceive as low value?
Still, what if you decided that your firm would be an audit only firm? You would invest heavily in auditing technology, provide greater assurance, maybe even attest to the existence of fraud, etc. Obviously, this hypothetical firm would take the public duty stuff very seriously and would generally have to demonstrate that it was better than other audit firms that also did non-auditing things. I think you could make a go at that.
It wouldn’t be easy. It would mean ignoring the advisory hype, maybe losing some clients and employees. But it could end up being an excellent accounting… erp… audit firm. And, yes, you’d have fewer friends.
CFO side gigs
One thing we’ve been talking about lately is what accounting firms will do next. But since lots of people have been quitting their jobs, maybe another discussion to have is what an accountant does next. There’s no shortage of things that an accountant can do. However, the most obvious option sounds like a good way to go:
On-demand finance chiefs, also known as fractional CFOs, work across industries but fill a particular need at startups after early funding rounds. Many firms at that stage don’t have a full-time CFO managing their finances because they mostly have basic accounting needs, but they increasingly need someone to fill the gap when more complex financial questions arise, investors and company leaders say. Such part-time CFOs help establish processes and make operational decisions, for example how to create financial forecasts or whether to expand to new markets.
What’s not to like? As a fractional CFO, you work with multiple companies, so you’re less likely to get bored. You’re not a full-time employee, which means you can set your own hours and do the work from wherever. And since you’re a CFO-for-hire, this likely means that you can charge your clients a lot (especially if you specialize in startups who’ve recently raised money). Or get a piece of the business. One fractional CFO said, “I always take an equity stake. The reason I do it is I’m not a bookkeeper.” Good! This is something more people should do.
Overall, there’s potential here for a good work-to-leisure-to-earnings ratio. And oh look, yes, that’s exactly what people are looking for:
Changing views about the nature of work, accelerated by the coronavirus pandemic, also have bolstered the fractional CFO industry, executives said. Claire Martell, co-founder and chief executive of Murdock Martell Inc., a fractional CFO firm, said some of her best hires include people who have been finance chiefs throughout their careers and are no longer interested in doing 70-hour workweeks. “It’s just less persistent and more manageable,” she said.
I think the main downside is the risk of fractional CFOs over-fractioning themselves. Don’t go overboard, people.
Fresh from Gusto
- Everything you need to know about the Small Business Administration’s PPP forgiveness portal that opened yesterday.
- My colleague Luke Pardue has done new research on a correlation between how states fare against COVID-19 and the speed of small business employment growth since the beginning of June.
- Reimagine Payroll: Transform Compliance Work into Recurring Advisory Revenue with Jaclyn Anku and me on August 9.
- Fraud: The Guy Who Stole $605K and Said It Was a Loan with Greg Kyte and me on August 23.
Read with Gusto
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