Accounting firms have seen a busy past few years. Sarbanes-Oxley, corporate
scandals and stock options backdating have brought a slew of changes to the profession. Yet one of the biggest issues faced by firms is a familiar one to many of their clients: finding good people. Many accounting managers cite the need to recruit people as their biggest challenge. Sure, dealing with ever changing regulations and scouring corporate financial statements for mistakes is taxing. But hiring ranks right up there with the day-to-day challenges, according to accountants. The upside: corporate scandals have boosted awareness of accounting, helping with recruiting.
The Business Journal’s Jessica Lee talked with accounting firms to get a pulse on today’s environment and the effect it has on their businesses. Following are their edited
responses.
What is the biggest issue facing the profession today?
J. Scott Farber,
Partner-in-charge,
Grant Thornton LLP
Irvine
The biggest issues are attracting enough high-quality people to pursue long-term careers in the profession and addressing the expectation gap between users of financial statements and auditors’ responsibilities.
The increased rigor within the profession, the requirements of Sarbanes-Oxley for public companies, and the increase in capital markets activity (initial public offerings, mergers and acquisitions and private equity investments) has resulted in a high demand for accounting services.
We continue to emphasize recruiting and retention to enable us to meet our clients’ needs with high-quality staffing and continuity.
The term “expectation gap” describes the difference between investors’ and others’ perceptions of the level of assurance provided by an audit, compared to the level of assurance prescribed with the auditing standards.
The auditing profession strives to provide financial statement users with reasonable assurance that financial statements are free of unintentional or intentional misstatements.
Studies have shown that a large portion of investors and other financial statement users expect auditors to provide absolute assurance against financial misstatements. Absolute assurance is not possible to provide, although reasonable assurance, rigorously tested, is possible.
Michael Bertolino,
Managing partner,
Ernst & Young LLP
Irvine
Our greatest challenge today is attracting the best and brightest people to our profession. The quality of our work depends on having highly competent and skilled people who believe in the importance of serving the public interest.
The good news is that people have a better understanding of the importance of what we do, and that means more graduates are seeking to join the profession.
Dean Samsvick,
Managing partner,
KPMG LLP
Irvine
Globalization is a priority for the accounting profession in this time of continued change, particularly as we witness the rapid globalization of businesses, capital markets and cross-border transactions and mergers and acquisitions.
This new era is characterized by increasingly complex transactions, an intensified regulatory and reporting environment and an increasing demand for the globalization of accounting and auditing standards. It is a challenging and exciting time for our profession.
On the domestic front, we continue to learn to better and more effectively operate in a much more regulated environment, while still meeting the demands inherent on a service business.
Rick Rayson,
Managing partner,
Orange County practice,
Deloitte & Touche LLP
Costa Mesa
It is difficult to select one single issue. There are a number of items that are having an important impact on the profession.
These include the increasing complexity of generally accepted accounting principles, the continued globalization of our clients and the necessity to make sure we can serve them with excellence wherever they operate, the regulatory environment and resulting impact upon rulemaking, and making sure the public is adequately informed about both the importance and limitations of the audit process.
Knute Kurtz,
Managing partner,
PricewaterhouseCoopers LLP
Irvine
The profession faces a number of critical challenges today. One area of concern is complexity around accounting rules and corporate reporting and standards, which are more rules-based and less principles-based,that is healthy for an increasingly globalized economy.
We are working with standard setters and regulators to address these issues. Additionally, there has been a tendency during the past few years for regulators to disregard auditor judgment. That fact,like the tendency toward more rules-based standards,has led the profession toward a more conservative approach. Both are unhealthy as the U.S. works to maintain a competitive edge.
Wayne Pinnell,
Managing partner,
Haskell & White LLP
Irvine
A main issue: standards overload coupled with a continued shortage in the talent pool.
Domestic and international accounting principles are being generated at a feverish pace while new audit standards continue to be issued that affect the auditor’s work on private companies and public companies with varying degrees of overlap and separation.
With increased standards, increased competition and continued demand for accounting talent in the private sector, public accounting firms and from regulatory bodies such as the Securities Exchange Commission and the Public Company Accounting Oversight Board, there is continued stress in recruiting, training and retaining talent to ensure due professional care is taken at all times.
How has Enron, stock options and the subprime mortgage industry meltdown changed the way auditors do business?
Rayson of Deloitte & Touche:
All of these events and others have contributed to increased scrutiny on the auditing profession and financial reporting in general. The investing public has an increased awareness of the role of the independent auditor and has high expectations for us.
Additionally, we are no longer a self-regulated profession and our regulator, the Public Company Accounting Oversight Board, performs annual independent inspections of the quality of audits of public company financial statements performed by Deloitte & Touche.
We believe this increased oversight has led to higher quality audits and enhanced confidence by the capital markets.
Bertolino of Ernst & Young:
Clearly, the concerns surrounding stock options and even executive pay, for that matter, are not doing much to help build the brand of Corporate America in the eyes of investors, and that impacts everyone in the business community in some way.
The lessons of the past five years have had a profound effect on our profession. One positive impact is a better awareness of the importance of what we do as a profession.
This has led to a resurgence of interest in the accounting profession by young people, and we are seeing an increase in the number of students enrolling in accounting programs.
We are doing everything we can to conduct audits of the highest possible quality and that is our obligation to the investing public.
Kurtz of PricewaterhouseCoopers:
Enron and a number of other large corporate failures resulted in our business now being regulated and subject to the rules and oversight of the Public Company Accounting Oversight Board. Becoming a regulated business has changed some of our working practices as we are now subject to new rules.
The stock option accounting issues resulted in a lot of companies adopting more formal practices surrounding stock compensation, as well as following stricter rules around the administrative side of employee compensation. Formalizing their procedures has made it easier to audit and identify non-compliance with accounting rules.
Farber of Grant Thornton:
The audit process has become more rigorous since 2002 with a more risk-based audit process and heightened focus on fraud detection.
The creation of the Public Company Accounting Oversight Board, which establishes auditing standards and regulatory oversight for accounting firms serving public companies, has influenced how accounting firms perform their work.
Additionally, the release of new accounting standards, some of which are highly complex, has increased the amount of work for preparers and auditors of financial statements.
Applying the new principles-based accounting standards is more difficult and requires more thought and judgment, as there are few rules to provide guidance.
Pinnell of Haskell & White:
Generally speaking, auditors have had a renewed sense of risk evaluation in terms of evaluating clients for initial engagement acceptance and being more aware to spend the appropriate amount of time on areas where abuses have been common or that are traditionally more complex such as revenue recognition, stock based compensation and debt/equity transactions.
Enron and the other failures as well as the recent stock option backdating scandal were wake up calls to the profession. Unfortunately, it will probably not be the last wake up call the profession sees.
Samsvick of KPMG:
The matters you reference only emphasize the increasingly complex world we, and our clients, operate in. They continue to focus us on the fact that their businesses continue to get more and more complex, and the risks they, and we, face grow more numerous and diverse.
That fact requires all of us to consistently focus on what we do and how we do it, to assure that our work is continually focused on the changing and complex risks our clients face from a financial reporting standpoint.
Have you seen a peak in Sarbanes-Oxley work? Are you going after smaller companies that now have to comply?
Rayson of Deloitte & Touche:
The years immediately following the passage of Sarbanes-Oxley (SOX) and the initial implementation of Section 404 were very busy times for Deloitte & Touche USA LLP and the auditing profession in general.
During the past few years, with more experience and additional regulatory guidance, I believe both our clients and our professionals have become more knowledgeable about and comfortable with SOX, and both parties have become, as a result, more efficient.
Non-accelerated filers now are moving closer to their required Section 404 compliance date.
We are certainly focused on assisting those clients in their compliance efforts.
With regard to new clients, we are always interested in speaking to any size company about our service capabilities. We have many larger clients today who started as venture capital backed and similar earlier stage companies.
Bertolino of Ernst & Young:
Sarbanes-Oxley has done a great deal to help restore investor confidence in financial markets and has underscored the critically important role that Ernst & Young and the entire accounting profession plays in helping to ensure the integrity of capital markets. What we do matters,from the global capital markets to the local economy here in Orange County.
There has been a lot of healthy discussion about how Sarbanes-Oxley should be applied to smaller businesses and many interested parties are having their voice heard in that regard.
It’s not a question of whether Sarbanes-Oxley should be applied to small businesses, but how.
Samsvick of KPMG:
The impact of our efforts with regard to Sarbanes-Oxley work is something we constantly evaluate. In May, for instance, the Public Company Accounting Oversight Board approved a new Accounting Standard, called AS 5, which is designed to make Sarbanes-Oxley more efficient and effective.
We are working with our clients to help determine the best ways to implement this new standard. It is too early to determine the full impact AS 5 will have, since its implementation will vary from client to client based on a variety of factors related to the client’s financial reporting.
It is also a bit too early to say we are past the “peak,” as we are still assessing the level of effort that will be necessary for the non-accelerated filers to comply with 404, and for us to audit the 404 efforts of those companies.
Kurtz of PricewaterhouseCoopers:
With AS5 we expect our clients will realize some time savings in their internal work to support SOX as well as audit related hours. We continue to work with companies that had a delayed implementation requirement and thus, will be 404 filers for the first time. Overall, we expect the total hours in our assurance practice to be lower as it relates to SOX than it has been in the past two years.
Farber of Grant Thornton:
Yes, there has been an increase in Sarbanes-Oxley work. However, most of our growth has been in providing internal audit services to companies that are already SOX-compliant, rather than in assisting smaller companies with initial compliance.
Pinnell of Haskell & White:
We do not believe we have seen the peak in SOX work as of yet. We have served several companies as either the SOX implementation consultant or auditor as the first wave of companies adopted the provisions.
We have been waiting for the second wave of adopters, being the smaller companies, who have had the luxury of a number of extensions.
Right now, it looks like the extensions are over and the rest of the public companies will need to comply during the next one to two years.
As we serve middle market companies, we expect to benefit from another wave of implementation and/or first time audit work.
