The failure of audit leadership
The current state of the audit is in jeopardy, and our profession has had a big stake in putting it there. As audit becomes more of a commodity, our fees are being driven down. Our clients can’t tell the difference between the audit we do and one done by the firm down the street because none of them provide relevant information. There's not a client in the world that pays attention to what a firm says on their website about how that firm adds value to the audit.
Our staff and leadership in audit departments have lost touch with the big picture of what an audit is supposed to be. The good news is that we have the power to change audit to make it relevant, and to move audit into the future.
A history lesson
To understand how we got here, let me share a little history lesson. When I started at McGladrey, we wrote audit programs out by hand, and actually thought about what it was we needed to do to carry out our audit procedures.
And then the firm got a copy machine. And that started the kindergarten arts and crafts period of public accounting. Because we were going to do the same as last year every year, we would make a copy of last year’s hand-written audit program, cut out the sign-offs, tape that on a new page, make sure to draw the lines for the sign-offs, and then we’d make a copy of that. Ta-da! We had our audit program for the new year.
So that actually served as one of the springboards to the standardized audit program. At the same time, the standards were starting to expand, so we needed some way to make sure we were covering the voluminous requirements.
We were fortunate that time was not much of an object. For at least the first five years of my career, I actually can't remember an engagement where our fees weren't going to be based on time spent. The unlimited time didn't promote a tremendous amount of efficiency, but we did spend more time talking to our clients, allowing us to add valuable advice.
It was an era when all of us — staff, partners and clients — had been raised in a culture of talking to others, of having conversations with each other on long road trips. But that’s not the case today. Talking is not normally the No. 1 choice of communication of the younger staff. They’d rather IM them, text them or use the latest communications app.
Technology was advancing, so we auditors started throwing computers at the way we did audits. We put our audit programs in Word documents, and we made them more legible than the handwritten copies.
What we’ve done is reproduce in a paperless environment what we used to do on paper. If you printed out the electronic file of your workpapers, wouldn’t that electronic file be almost a 100 percent replica of what that paper file looked like 25 years ago? We threw technology at the audit without really thinking that maybe something needs to change. Is that really a good return on our investment in technology?
At the same time, the fixed fee in the marketplace became much more prevalent, which is where we’re currently stuck. Efficiency matters now. So what we're doing in today's world of the audit is teaching our staff to fill out forms faster, as opposed to thinking about the audit.
And so, we've created an environment of filling out forms and filling out checklists, and if I fill out enough checklists, I certainly must have done an audit. The result is that our staff is not really getting the mentoring and coaching that they need to really help them understand this process, but they certainly are getting stressed out about efficiencies and time reports!
When the staff accountants in your firm do fundamentally the same as last year, every year, they don't really learn how to audit. What they learn is how to fill out the forms repetitively every year. So after five years of doing that, these staff accountants don’t have five years of experience, but what they do have is one year of experience repeated five times.
Three key questions
I started asking people all across the country a series of three questions. It used to be one, then two, now it's three:
1. What was the bottom line on your last audit? I’ve asked 400 people that question over the course of a few years. And just one out of 400 people knew the answer. And of course, at the end of the session, that individual came up to me and said, "Al, I'll have to be honest with you. They told me you always ask that question, so I went and looked it up." All of you managers and partners are relying on the work of your staff auditors, and they don’t know this one key metric. Then I started asking a second question.
2. How many pages are in your disclosure checklist? Of the 80-plus people I’ve talked to, none of them knew what the bottom line was, but over half of them knew the number of pages of their disclosure checklist. Then I added a third question.
3. How does the client make money? Of the 60 people I’ve asked, one gave me this answer: “That wasn’t my audit section. I don’t have to know.” How can you possibly do work in audit and not know what a client’s organization, their business or their goals are? I don't believe it's the staff's fault. I believe the leadership of that audit, and maybe of the whole firm, dropped the ball. We’re not helping our staff to better understand what an audit's all about, what a client's all about, and really what we are as a firm when we deliver audit services by just filling out forms.
Who are the leaders in audit?
Much of that has to do with who we’ve appointed as the leadership in our firms and who we anoint as head of A&A. Quite often, as I go around the country and meet these leaders, the head of A&A is the person who just loves to read financial statements and write review comments. It's generally the person that you won't necessarily take out to talk to a client. And quite often it's a person who really wasn't good in the field but was best at enforcing the rules.
Now, I will not underestimate the importance of quality in the audit. But if that's the leadership of audit, the mindset is going to be one of rules and what I call the "Forms Police." (Did you fill out all the forms? Did you fill out all the checklists?)
What's happened is that because we depend on these checklists and believe that technology is making a huge difference in our audit process, we’ve forgotten the importance of talking to our staff, and we've forgotten the importance of communicating what we really want to focus on.
We’re losing our best people because we’ve created a culture of checklists. Those who like to think and learn, leave. That emphasis on checklists and efficiency means the value to our clients is decreasing. We’re not taking the time to add insights. When we add those insights, it not only adds value to the client, it actually results in a better audit. And that inspires our good auditors to stay with our firms.
Which direction for audit?
Audit is at a crossroads today. I see two directions we can go: One direction could be basically total elimination of the audit as we know it today through technology. I actually think the likelihood of that is fairly low, at least in the next 10 to 15 years.
If we do nothing to change the way audit is headed, the other direction is to continue a further commoditization of the audit. I don't know how low the fees can go before no one can afford to be in the audit business.
But there’s another solution — we can drive change positively for our profession. This change won't happen overnight, and I want to encourage us to really think about driving that change, because we can influence it quite dramatically.
As I’ve spoken with auditors around the country, and thought about where audit is headed, I’ve unearthed a framework of five key attributes of successful leadership for audit. If we focus on these five attributes, I truly believe we can transform audit from the checklist exercise that it’s becoming into a service that genuinely adds value to our clients.
- Relevance. Relevance is understanding what is important to the client, and positioning management letter items to speak to those things that matter to them and drive their business. You’ve got to have leadership that actually believes that the audit is relevant, and you’ve got to communicate and create actions that support its relevance. We absolutely need to create processes that let our staff understand how the piece they do relates to the whole business. The commoditization of the audit diminishes dramatically if we actually do start delivering value and we demonstrate that value by our actions, not just by the words on our websites.
- Business-mindedness. Business-mindedness has two major components, and neither one is focused on getting the perfect fee realization. The first is about making sure the work the firm does makes sense from a business point of view. The other is thinking about our clients and how we would improve their businesses if we were running them. So business-mindedness means looking both inward and outward.
- Quality. Quality in audit means really understanding the standards, the industry and the client. It means understanding how to do an audit and building a quality culture at your firm. A quality culture means first-time right: It means making sure the work gets done right the first time and not just reviewing and catching the mistakes at the end.
- Innovation. Innovation goes far beyond adding new software. It is being willing to try doing things differently by building an innovation mindset into our firm culture. Innovation means being thoughtful about what your people need so they can do the job first-time right, not just how can the job be made easier for the head of A&A when they review the file. Innovative uses of technology aren’t just how many screens we have, but how can we leverage technology to get insights into our clients’ operations. It’s thinking, planning, communicating, acting and delivering differently to give them value.
- Empowerment. We’ve got to build an empowerment culture in our staff to try things differently and say it's OK to make a mistake and learn from it. Our staff have so many great ideas and so much intellect, but we've created an environment for auditors where those who like to think and learn are leaving the profession. And those who stay are the ones who like filling out checklists. There is so much potential in the power of all of us working together, but we can’t shackle that intellect to a 96-page checklist. Lead our teams to understand what’s important, give them the tools and guidance to deliver, and then don’t stand in their way.
Creating the audit of the future
The bottom line to think about is, are we leaving the audit profession in better shape than when we inherited it? Right now, we're not providing value, but I honestly believe it's not too late. The future of audit is ours to create, or a future that will happen to us. To change the future of audit will take leadership. We have to take ownership of the process.
Now I'm an optimist, and I think auditing can be fun. It can be at least challenging and rewarding, but you have to have a passion and an intellectual curiosity to really understand your business and your clients’ businesses. If you have that passion and intellectual curiosity now and move up to partner, hopefully you’ll be able say that audit leadership helped move you along. And then you can continue that trajectory for the profession.