The reason I throw in the partner lifestyle is simple math. Take a bit of an extreme example, but if you’re trying to protect Partner payouts (which is a paramount concern for these for-profit partnerships) and the client’s are renegotiating audit fees down, then people have to cram audits into smaller and smaller sizes with less resources. This puts pressure on staff to get work done faster (though people will call this “more efficient”) and not upset the client. What a staff may have previously questioned gets a pass because they feel that maybe they just don’t understand so in the interest of moving forward and not rocking the boat, they’ll just plow ahead.

Bottom line is, with these for-profit pressures and firms competing for business while trying to maintain a return for their owners, there will ultimately be an adverse affect on audit quality at a time when we need it the most. As for your comment “shouldn’t the work be the same regardless of if it is a good or bad year”, well there’s a difference between theory and practice. To assume that auditors perform the same level of due diligence and thoroughness in a good year and bad year regardless of the economic and budgetary pressures is naïve.

With regards to the employee lifestyle and partner lifestyle going hand in hand, I have to disagree. To a certain extent, this may be true since employees are their only asset and they are needed to do the work, but they are obviously the first in line to get it on the chin. Most employees will turnover anyway so there isn’t a strong incentive to keep them happy in the long run, just certain ones that may make it to manager. Turn and burn has been the modus operandi for many years and the big 4 are the main game in town. You may say, “this is capitalism, deal with it”, which again strikes at my fundamental assertion that the way the model is set up currently is broken. When you put the protection of the public good mainly in the hands of capitalist pressures and profit maximization you get results like Andersen.

Again, to quote above, People may ask about all the audits that maybe going right, well most people focus on the number of patients a doctor’s killed as opposed to how many he’s treated well.

It is a buyers market, and the counter to that is “you get what you pay for”. So therein lies the rub — the payer and the client are not the same… so the payer is getting what they pay for and the client is getting cheated. This argument I can see.

As for maintaining partner lifestyle that you toss in there — the firms are also trying to maintain employee lifestyle. They go hand in hand. Some partners are getting canned, most all partners are losing a pile of $ in comp this year. Some employees are getting canned, most are losing some benefits… some are finding enjoyment out of new benefits (sabbaticals for example) and few are losing compensation.

Also — not saying you professed this… but shouldn’t the work be the same regardless of if it is a good or bad year…

I don’t think that’s a structural problem with who pays as much as it is auditors lacking a pair. I think the current, low rate, high utilization model will lead to a number of audit failures and a number of non-frivolous lawsuits. You can’t cut hours and increase utilization when fraud risk is rising, not declining. It makes no fundamental sense from an audit planning perspective. I’ll sit back and laugh when these partners get burned.

“The auditor works for the shareholder. There is no conflict that needs resolution as long as things work as I wrote above. The solution is good corporate governance, not some different auditor-auditee model.”

There is always going to be an inherent contradiction within the auditor-auditee model as it currently stands. When things are going good, this is not as acute, because no one cares whether you did a bang up job in the audit, they’re still making 20% year over year returns. When things are going south (insert scandal and accounting mess up) then people are going to look at these audits with greater scrutiny and start realizing all the shortcomings. When you’re getting paid by the entity you’re auditing and when you’re trying to lowball your fees to try to beat out the next guy all while trying to maintain partner standard of living, you’re going to have issues. I know a Senior Manager that was telling me that it’s a buyer’s market, ie the company holds sway and keeping them as clients are paramount- if we lose the client we could lose our jobs.

People may ask about all the audits that maybe going right, well most people focus on the number of patients a doctor’s killed as opposed to how many he’s treated well.

If you let a budget drive the audit, then you’re not following GAAS and you would likely be negligent. Risk should drive audits which should drive budgets. However, I understand your point TT. Each side will come to the table with their evidence and they’ll try to persuade the court that GAAS was followed or was not followed or that GAAP was followed or not followed. The court system is a mess. That, more than culpability, explains why auditors settle out of court.

I want to be a lawyer. It’s why I’m starting law school in two weeks. I’ll let you know what I learn.

I would assert, once again, that “certify” has a meaning and it means exactly what a judge decides it means. If you think “certify” means follow GAAP or GAAS or whathaveyou, then fine. If you think “certify” means follow the AICPA rules to the extent engagement budget permits and then issue an opinion that is carefully worded to minimize any liability should you have missed something, then I can see where you’re coming from. Roll the dice and take a chance. (Which is exactly what the firms have been doing, anonymous@12.) Pay a settlement if your roll comes out “craps”.

If you think otherwise, or if you think somebody somewhere with the power to destroy your firm might be thinking otherwise, then you might want to enhance some audit quality processes. You might start with letting the audit procedures drive the budgets, rather than the reverse. But that’s just me and, since I don’t even work in the Big 4 anymore, I don’t really have a dog in this hunt.

Again, once you’re in the province of lawyers and judges, you’re in another dimension, somewhat divorced from this one, where the people who wrote the regulations and laws cannot opine on what they mean, and only the legal guildmembers have the ability to interpret them. One side will hire teams of accountants (yay for litigation engagements!) who will perform lots of forensic analyses and conclude that the auditors acted reasonably and had a reasonable basis for their conclusions/opinion. The other side will hire teams of accountants (yay for expert testimony engagements!) who will perform lots of forensic analyses and conclude that the auditors were incompetent and/or part of the conspiracy. But the newspapers will have their own way with the story and Fran will have a blog post or three.

Even worse than that vision is the nightmare where 12 members of a jury, carefully chosen to have no previous knowledge of accounting, GAAP or GAAS, none of whom could find a way to get out of jury duty, will get to decide whether your firm is liable under the judge’s interpretation of “certify” in the context of a civil or criminal proceeding. Your “experts” will argue with the other side’s “experts” and the jurors will wonder what does “generally accepted” mean if the accountants can’t agree on anything? Meanwhle the future of your firm will ride on the jury’s ability to figure it all out before their jury pay runs out.

In any case, salient quotations from the case in question have been posted elsewhere on this blog. Why not search ‘em out and decide for yourself?

– Tenacious T.

What the Arthur Young case really set out was that auditors have a “public watchdog role” and it reaffirmed that there was no auditor-client privilege or accountant-client privilege. The auditors job is not to be the advocate of its client like a lawyer is to its client. The auditors has a duty to the shareholder, the creditor, and the potential investor/creditor. I think what TT is saying is that GAAS and GAAP are all well and good, but a court will do what a court wants to do. My argument is that precedent has been established by the courts to recognize both GAAS and GAAP. Don’t burn your CPA material just yet. Wait until you pass or fail too many times to care.

I don’t disagree with SCOTUS being ultimate benchmark for competent financial statement audits but it leads me to wonder….how many public accounting firms to this day have truly lived up to this standard if this is the ultimate be all, end all standard?? hmmmm???

When we are talking about audit opinions, we’re more or less talking GAAS not GAAP. If GAAS was somehow in violation of the law, then yes, courts could take issue with it. However, the AICPA is careful in how GAAS is worded so that it is in compliance with applicable laws, rules, and regulations. Saying that your audit complied with GAAS is actually a legitimate legal defense. It’s accepted by the courts–the precedent has been established.

This is why when a firm is asked about an audit failure, it releases the standard line that its audits complied with GAAS. Why? The courts have ruled that GAAS provides some form of floor for negligence. Above the floor, it’s much harder to prove the audit firm was negligent and therefore liable. If on the other hand the firm did not comply with GAAS, negligence is much easier to prove. The firm is tipping you off to its legal defense. I’m not a lawyer, but this is my understanding.

Also, has anyone thought for a second that settling would also be in the best interest of the plaintiff in many of these cases? Proving negligence is in fact hard. It’s not an easy thing to do. It takes time to work itself out in court. If the settlement wasn’t in the best interest of the plaintiff, why would they settle? Most of the time, at least I would wager, we’re not talking about average investors suing. Instead, I would wager a majority of these lawsuits are launched by large institutional investors and creditors who can actually wait to see a payout. Settlement, in many cases, is an acknowledgment that there is too much risk in the legal system. The plaintiff can go home with nothing; the auditors could go home without jobs.

Which is why the Big 4 almost always settle. If you’re BDO Seidman, you can’t afford too, and you bet the farm once too often.
Francine