The Accounting Podcast (formerly the Cloud Accounting Podcast) is the world's #1 accounting, bookkeeping, and tax podcast! Join us weekly for a roundup of accounting news, analysis, and interviews. Plus, earn free NASBA-approved CPE credits for listening with the Earmark app. Learn more at https://earmarkcpe.com.
Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!
Blake Oliver: [00:00:10] Hey, everyone. Welcome back to the show. I'm Blake Oliver.
David Leary: [00:00:12] And I'm David Leary, and.
Blake Oliver: [00:00:15] We're talking today with Chris Vanover of CPA club. Hey, Chris.
Chris Vanover: [00:00:19] Hey, Blake. Hey, David.
Blake Oliver: [00:00:20] Chris, you had the most incredible summary of the PCAOB fine against Witham. They did a bunch of Spac audits last year. Short story is, uh, they didn't do them quite right. And the Public Company Accounting Oversight Board fined them $2 million. That's a lot of money. And this comes on the heels of a very similar sanction against Marcum for their audit quality. Give us the short story here. Like what? What happened at Witham? What is going on over there?
Chris Vanover: [00:00:55] Yeah, I think it actually starts with the actual Marcum order that came out last June. And I think this is really the pcaob's shot across the bow, right where they're really starting to hammer firms with respect to whether they actually have the resources to execute the audits. And I think that's really the underlying crux of the issue here is, yes, there's a ton of stuff in this Witham disciplinary order in particular around, you know, they botch things around not consulting with external external resources. They also, you know, failed to audit estimates appropriately, whatever it might be. But the crux of the issue is, is they didn't have enough people to actually get through the significant number of audits they decided to take on.
Blake Oliver: [00:01:42] Yeah. How many audits did they take on? It was a lot.
Chris Vanover: [00:01:48] Yeah. So I mean this goes back to 2020. And at that time they had only actually issued 76 issuer audit reports. You fast forward into 2021 and they actually issued 445 issuer audit reports. So there was almost a 500% spike in the number of issuer audits that they actually were reporting on during that period.
Blake Oliver: [00:02:10] But the firm didn't grow 500% in terms of headcount.
Chris Vanover: [00:02:14] No, I mean, this is a $550 million firm. So it's not a small firm by any means, sits in the top 25, but the actual number of partners that they brought in between 2020 and 2021 went from 15 responsible for these audits to 23 in 2021. So they increased by eight partners, but their workload increased 500% at least.
Blake Oliver: [00:02:37] That's crazy. And and you you pointed out that five engagement partners were each responsible for 40 or more issuer audits, representing 62% of all of their issuer audits. Just five partners. How how many audits is normal for a partner to handle?
Chris Vanover: [00:02:57] Yeah, I mean, it's a good question, Blake. And again, it's not me pointing this out. This is actually just coming straight out of the facts within the disciplinary order itself. And that is not normal by any means. And this is obviously on the heels of the Marcom order as well that came out last year. You know, in that situation, you had one partner on Marcom that had 75 issuer clients, and then another person who serves what they call the engagement quality review, which is required by the PCAOB standards. He actually had 118 issuer audit clients. So again, 40 or more. That is definitely a recipe for disaster. And you typically would not want to see even somebody maybe touching ten or more audits in a given season.
Blake Oliver: [00:03:40] And one of the partners at Witham worked more than or something like 100 hours a week for more than one week.
Chris Vanover: [00:03:50] Yep. I mean, I think I saw it was 200, wasn't it? It was ridiculous. It was 200, I think. Not quite 200. So the one partner to to Blake's point was working in the course of over a two week period, 100 hours in each of those weeks just to get these things done.
Blake Oliver: [00:04:04] So 200 hours in two weeks.
Chris Vanover: [00:04:06] So think about that. This is just faulting the partner. But imagine what the ripple effect is for the senior managers, the managers, the seniors and the associates on the engagement. Because I can tell you, very rarely did I ever see a partner leaving after me when I was a director or a senior manager at PwC. So you know full and well that the people below him were probably also working those types of hours.
Blake Oliver: [00:04:28] Yeah. Well, this is all coming. Go ahead. David.
David Leary: [00:04:33] I was gonna say so. At what point do the partners can they push back to their their peers or superiors and say, I don't feel comfortable signing off on these audits? Right. At what point is it personal responsibility?
Chris Vanover: [00:04:48] I. You know, I think that's a good question, David. Um, you know, there's a couple of faults at play here. I think, first and foremost, look at the fact that both, you know, the SEC has accelerated deadlines over the last 20 years and what once was allowed 90 days to file a 10-K quickly went down to 75 days for a lot of accelerated filers. Right. So they've compress the timeline. And because of that you have a more, you know, the magnitude of the work that you have to get done within a short period of time is obviously amplified. Now to your question about, well, should they push back? Absolutely. They should push back. And theoretically, there are, you know, at the larger firms, people are actually looking at workloads and saying, does this make sense? But oftentimes it's a little bit of, um, you know, a facade, right? Because the work still needs to get done. And I don't think that partner is going to want to sit there and say, hey, guys, sorry, we can't actually execute your audit by the time you wanted it. So go find somebody else to do it right. That's just not how things operate in this world, unfortunately.
Blake Oliver: [00:05:45] I'm wondering how. This happened in the first place. How did the firm take on so many audits? Only add five engagement partners, and think that this wasn't going to be a disaster? Or did they do it? Do they? Did they do it intentionally? You know, did like are we we can only speculate, I suppose. Right. But maybe, Chris, you can speak more broadly given your experience in the audit profession, like how does this sort of situation happen and how can firms avoid it?
Chris Vanover: [00:06:20] Well, I think it comes down to taking advantage of opportunity, right? Um, when you are a partner leading a firm, right, you have a goal of maintaining a certain partner income per share. And so your inclination is obviously you see the revenue and you're going to go figure out, okay, here's the revenue. Now how do I backfill to solve for that revenue demand. But the reality is, is there's not enough talent to go around these days to where that revenue demand could ever be satisfied with the resources that are out there in public accounting. But also and I think, you know, Blake, at one point you commented on this was, you know, if you look at average partner income, you know, it's well, it's almost $600,000 and it's even higher at the larger firms. Right. Well, does that really reconcile with the fact that we have a profession right now that can't attract talent because our starting salaries are too low and they can't compete with the likes of engineering and whatnot. Right. So wouldn't it behoove a firm to say, hey, look, I'm going to invest in bringing more people on to support engagements like these, pay them at a higher salary, but it comes at the expense of the partner income. And that's where I think a lot of this has to do with, you know, I'm speculating here is this partner greed?
Chris Vanover: [00:07:25] Hmm.
Blake Oliver: [00:07:26] Yeah. I don't get it personally. But like, maybe that's why I didn't hack it in public accounting. I could never work 100 hours a week. No matter how much you paid me. I couldn't do that for two weeks, and I. Well, maybe I'd do it for two weeks. It depends how much you paid me for those two weeks. But this is on and on and on. You know, for a long time. This went on for years.
Chris Vanover: [00:07:49] Yeah. And again.
Chris Vanover: [00:07:50] It's not unique to, you know, with them or market in this case right now, they obviously are the poster child at this point in time from the pcob. But I think in my view is the PCB is actually doing a good service here to the investors and the users of the financial statements, because not enough people are talking about this hours concept. Right? We're talking about the 150 CPE hours, which is great. I'm sorry, 150 hours for becoming a CPA license. And that's getting a lot of attention. But no one wants to tell the real story about what's actually happening inside these firms and what they've become in terms of the excessive workloads and what that does to the profession and what it does to audit quality. And you're seeing it here is the PCB is finally starting to sound the alarm on this and say, look, if you look at these reports, the primary root cause of this is actual excessive workloads.
Blake Oliver: [00:08:38] Now you credit the Pcob with doing this, which they hadn't done in the past. But Roman, uh, Vered had a good comment on LinkedIn on this topic. He said, is a $2 million fine enough because it's not. The revenue on these audits was something like half $1 billion. So yeah.
Chris Vanover: [00:09:00] Well, so total revenue for with them is $550 million over.
Blake Oliver: [00:09:04] Okay. Total revenue for the firm per year.
Chris Vanover: [00:09:07] Obviously per year. Right. Okay. Yeah. Now, a portion of that is obviously going to be attributable to these audits, most of which were these special purpose acquisition company audits that have hefty fees associated with it. But Romans, absolutely correct. And I'm a firm believer in what he said. This fine is not commensurate with the actual penalty at the end of the day, right? What they did wrong, you need a higher fee. And a lot of these firms are thinking, well, this is the cost of doing business. You know, Markham got a $3 million fine with them, gets a $2 million fine. Okay, that's chump change for these guys, and they would gladly pay. It's like the whole Nike, right? If you saw that Nike pay the fine. Right. We'll just pay the fine because in the process we garnered $100 million, whatever it might be in revenue.
Blake Oliver: [00:09:48] It's it's like the, you know, speeding ticket for the guy who owns the, you know, McLaren in my neighborhood. He doesn't care. You know, he'll get he'll.
Chris Vanover: [00:09:58] Get irrelevant to.
Blake Oliver: [00:09:58] Them. Yeah. Especially if it's the, uh, the automated ticket. Right. With the the the van parked on the street that takes a picture. It'll just pay it. Just pay the fine. Right. And. Yep, it's a speeding ticket.
Chris Vanover: [00:10:10] And I think that's that's.
Chris Vanover: [00:10:10] What's happening here is. Yes, it sounds like in the headline $2 million. $3 million. It sounds really, you know, punitive. But the reality is, again, comparing and contrasting to what these firms actually bring from these audits. You know, at the end of the day, they're laughing all the way to the bank.
Blake Oliver: [00:10:25] Now, were any of the individual partners punished by the PCAOB, are they allowed to continue to do this stuff like, you know, or or yeah.
Chris Vanover: [00:10:34] I didn't I didn't.
Chris Vanover: [00:10:35] See anything specific about the particular partners other than citing that there was five of them that were responsible for upwards of 62% of the audits. Um, I'm not sure exactly what happened with individual partners. This was more of a firm level sanction against with them in this case, and similarly with Markham. Um, but it wouldn't surprise me if eventually it'll catch up with them as well. And they may be barred from, you know, being associated with a public company accounting Oversight Board registered firm.
Blake Oliver: [00:10:59] I feel like if you don't have penalties against the individual partners, then the behavior will never change because it's just basically an expense for the firm. Right? This just becomes, you know, the cost of doing business, like you said.
Chris Vanover: [00:11:12] You know, I had a chance to work at a, you know, a large regional firm back in the day. And I will tell you, you know, a lot of these firms, they evaluate the partners on the book of business and the revenue, and they tangentially will say, yes, I'm evaluating them on audit quality. But the reality is, is buyers of audit services aren't out there buying audits because of quality. They're out there shopping for the lowest possible price. And that's what has to change, right? People have to understand the reality of the situation here. What a firm advertises on their website in terms of audit excellence is in stark contrast to what the reality is with these PCAOB inspection reports.
David Leary: [00:11:45] Aren't these the two firms that have done 91% of all the Spac deals is that am I in my brain? Is this the same two firms?
Chris Vanover: [00:11:53] They yeah, they've done a ton of the Spac deals. And again, those have been a hot ticket the last couple of years given the market dynamics. But yeah for sure. So a lot of them.
Blake Oliver: [00:12:01] So these firms jumped on it when the big four wouldn't touch the specs.
Chris Vanover: [00:12:06] Yeah. I mean, this is just a theory of, you know, being a bottom feeder and ultimately finding opportunities, but.
David Leary: [00:12:11] It's the nature of doing an audit on the backs harder.
Chris Vanover: [00:12:14] They are extremely complex. Yeah, absolutely. They're not easy by any means. And there's very challenging accounting to them. Um, and so I would say you have to be qualified to do it. And ultimately, you know, you have the resources to support you within a firm. Not to say you couldn't become, you know, an expert or a subject matter expert in this area. Well.
Blake Oliver: [00:12:33] Even if you're a subject matter expert, sometimes there's just too much work for one person, which seems to be what happened here.
Chris Vanover: [00:12:40] And I think that's the main.
Chris Vanover: [00:12:42] Point I'm trying to make here is that, you know, if you look at Mark and you look at with them 100 hour workweeks, obviously that's not sustainable, nor should it be supportable. But even, I mean, this is publicly available data out there. There's audit quality reports that the big four firms, as well as other regional firms release. And you can go in there and see that the likes of Orkney at PwC Audit Associates log an average of 220 hours overtime annually. Senior associates 256 audit partners, managing directors 349 hours at EY. It's 373 hours. One regional firm even mentioned that their staff had an 816 hours of overtime. That's almost a 2800 hour work year.
Chris Vanover: [00:13:22] Okay, that's like 15.
Blake Oliver: [00:13:24] Hours per week of overtime.
Chris Vanover: [00:13:27] Yeah. And you have to also realize that it's not just this is per year, but a lot of that overtime is compressed within certain periods of the year.
Chris Vanover: [00:13:34] Right.
Blake Oliver: [00:13:34] So more than 15 hours 2020 to 30 hours a week potentially. Yeah.
Chris Vanover: [00:13:42] And there is crazy.
Chris Vanover: [00:13:43] There's it's absolutely mind boggling. And that no one wants to talk about this. Right. And this is the fundamental issue with audit quality is because people are overworked and they're missing things that are critically important to actually executing a qualified audit. Right. And this is what you're seeing. And I go back to the example, like you would never get on a plane if you knew that your pilot hadn't slept in the last 12, 13 hours. Right. There's safety measures in place, but we have absolutely no safety measures in place in our audit profession to actually check people and give people, as buyers of services, of CPA services, insight into how they're actually operating within the firm. And that's detrimental. It's dangerous to our profession. And it's why, you see, you know, all these deficiencies being pointed out where, you know, the PCAOB, 60% of broker dealer audits had deficiencies in them. Okay. Um, Department of Labor came out a report in November saying that 30% of employee benefit plan audits had major deficiencies. Right. The PCB expects 40% of firms to have a part one A deficiency coming out. Well, why is that? Well, go. And people want to shortchange this and talk about, you know, let's talk about these other things that we think might be causing it. Well, it's like guys, the reality is it's probably the hours it comes down to it. Yeah.
Blake Oliver: [00:14:56] You can't do quality work.
Chris Vanover: [00:14:57] Simple stuff.
Blake Oliver: [00:14:58] Can't do quality work if you're overworked and tired. Well, Chris, thank you for this summary, this excellent analysis of this pressing issue in the audit profession. Hope to have you back on the show soon.
Chris Vanover: [00:15:13] Yeah, good talking to you guys and we'll talk soon.