CPA firms are starting to feel more pressure again from the economy as the recovery ever so slowly ramps up, with international problems threatening to throw it off course, and regulatory requirements adding to their workload.
A group of CPA firm leaders discussed some of those challenges at the American Institute of CPAs’ Spring Meeting of Council and 125th anniversary in Washington, D.C., during a panel discussion Wednesday. Wayne Berson, the CEO-elect of BDO USA, noted that the economy seemed to be improving, at least until the recent JPMorgan Chase debacle. But he also sees pressures from the talent competition between firms. “That’s something we’re constantly dealing with,” he acknowledged. “I’m not sure if it’s a generational issue, but there does seem to be less loyalty at the staff level now. We’ve put in place a number of HR programs to try to deal with that.”
KPMG chairman and CEO John Veihmeyer noted that with all the economic uncertainty in Europe and with the upcoming Presidential election here in the U.S., people are holding back on investment, even though CEOs are feeling generally positive about their own companies’ prospects over the next nine to 15 months.
“The Eurozone people were starting to feel better over whether there was going to be a train wreck, and some of those possibilities are more back on the table now than they were a week or two ago unfortunately,” he said. “The other major uncertainty weighing on investment decisions is what’s going on here in Washington. A lot of things will be postponed until after the election in terms of the investments that otherwise would be made. The other black swan out there is concern over whether a conflict between Israel and Iran erupts in a way that could cause a negative impact on global trade flows and the local economy. There are certainly some concerns that are causing companies to be more cautious in their investment decisions, but I think it’s a generally positive view. However, it’s always ironic that every company says they’re feeling pretty good about their prospects, but they’re not sure about everybody else.”
Crowe Horwath CEO Chuck Allen said he sees the banking sector getting stronger and more transactions coming back, which creates opportunities for the firm’s advisory and tax business.
“Companies are starting to gradually spend again,” he said. He is also seeing a fair amount of activity in the performance improvement and technology business as companies replace the now-obsolete technology they put in place in the Y2K era. “As I look through the client base, it looks like things are starting to get better,” he said.
PwC U.S. assurance technology, entertainment and health industry leader Jean Hobby said she is seeing more investment activity in emerging markets like China and Brazil, and increasingly Africa.
Deloitte vice chairman and senior partner William Freda said his firm is investing in its recently opened Deloitte University training facility. The firm also made a big investment in offshoring. He said his firm has also changed how it operates, with more employees working remotely. “When I go around my firm, there’s nobody in their offices,” he said. “I hope they’re at their clients. I hope they’re not at home in their pajamas.”
However, auditing firms are coming under increasing pressure from regulators. Grant Thornton COO Lou Grabowsky said his firm is continuously improving its methodologies, particularly on the audit side. His firm, like the others, is not only subject to external inspections by the Public Company Accounting Oversight Board, but he said Grant Thornton conducts inspections of its own audits internally.
“We’re doing a lot to advance that, tracking indicators for quality within our firm and among our partners,” he said. The firm is also using data mining technology to analyze the root causes of audit problems uncovered by the inspections. The quality and consistency of problems are a concern, he acknowledged, and troubling from a regulatory standpoint. He worries when he sees “slippage” and people “falling into bad habits,” particularly if they haven’t been touched personally by auditing problems. “Quality is critical to our success and our clients’ success,” he said.
McGladrey managing partner and CEO Joe Adams emphasized the importance of firms understanding auditor independence, objectivity and skepticism, balanced with helping clients. However, he argued that “there are so many things coming at us with the PCAOB and Dodd-Frank, which are so much of a challenge to our profession and all of us.” The PCAOB’s proposal for mandatory audit firm rotation, also known as retendering, is only adding to the pressure. “Quality continues to be important, tone at the top is clearly critical, and then it’s investment in the people,” he said.
Adams noted that it is important to teach auditors to use their professional judgment and critical thinking. The firm is spending more time on post-mortems to find the root cause of auditing problems. “In many cases you find different things on each job,” he said. “It’s not one thing that breaks down. As we address the regulatory environment, we try to find solutions that really work, not just solutions to get to an answer.”
KPMG’s Veihmeyer is concerned that the increased regulatory scrutiny could make it more difficult to attract and retain qualified auditors. Some audit partners are afraid to sign off on audit reports and are leaving the profession for the job offers they receive from clients.
“We train people really well and they’re attracted to other organizations out there,” he said. “They don’t have to spend their careers with us, but they have to believe that this is a great place to build a better career.” He worries that the regulatory pressures could lure more auditors to careers outside the public accounting firms. The divergent regulations and proposals in various countries only add to those pressures.
Allen noted that every one of Crowe Horwath’s public company auditors has been through the PCAOB inspection process, and he said it is “draining” on audit partners. “The level of scrutiny and level of quality need to be higher than in other parts of the practice,” he said.
Ernst & Young managing partner Steve Howe said he believes some of the regulatory proposals, such as for mandatory audit firm rotation, are dangerous. He thinks some of the PCAOB proposals are worthy, such as changes in the auditor’s report and improved communication with audit committees. Howe sees improvements in the auditing profession in the U.S. since the passage of the Sarbanes-Oxley Act and believes firms need to band together and tell that story.
Proposals for rotating audit firms appear to be gaining ground in the European Union, perhaps because they did not have laws like Sarbanes-Oxley mandating the rotation of audit partners and interactions with audit committees.
“We need to get this debate to the worthy topics and avoid the uncertainty and delay,” said Howe. “In this country we have a good story to tell.”
