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When Playing It Safe Is Risky Business

Joanne S. Barry, CAE

The auditing firms of some of the largest financial institutions came out of the 2008 financial crisis relatively unscathed. However, the crisis raised a primary question about the role of the independent audit: If each of the banks that failed—or would have failed if the government had not bolstered them with taxpayer dollars—could hold up an audit report that was not in any way materially misleading, and these audits were performed according to generally accepted auditing standards, then, what is the value of a third-party audit?

In January, “Audits at the Crossroad: A Symposium on Evolving Standards and Practices,” a January 12, 2015, panel discussion moderated by Leslie M. Seidman, former FASB chair and current executive director of Pace University's Center for Excellence in Financial Reporting, will look for answers to these issues and other questions that address the evolving auditing landscape, such as how indicators of audit quality are assessed, recent PCAOB inspection reports and peer reviews, the role and responsibilities of internal audit committees, and the PCAOB's proposed changes to the auditor's report. But discussing the future of audit without considering the mega-factors that are transforming the very firms that provide this service would be an incomplete discussion.

The Future CPA Firm

The role of the CPA firm is changing. The smartest, and therefore the most successful, firms have already recognized this evolution and are strategically building the firms of the future. According to one statistic quoted in the 2014 Rosenberg Survey by the Growth Partnership, a national MAP (management of an accounting practice) survey of CPA firms, approximately 80% of the top 300 accounting firms in North America are in active discussions to buy or sell the firm. Accounting firm mergers have been exploding in frequency, and all indicators point to this trend increasing in 2015. There are two primary drivers for this: Successful firms are looking to grow, and they are strategically looking to add good staff and additional services (mostly consulting) to their already existing portfolio. The sellers are smaller firms that have no other succession plan other than to sell the practice, which really leads to the crux of the succession planning issue—human capital.

Human capital is one of the biggest challenges for CPA firms. Staff shortages have lead to an extremely competitive market, making good, experienced people hard to find and harder to keep, according to firm consultants interviewed for the survey. Add to that multiple generation gaps, between and across the baby boomer, Gen X and millennial generations, which have led to older partners satisfied with the status quo and reluctant to retire and younger staff expecting more flexibility and willing to go where the best opportunity is—which is often out of the firm (and perhaps in the future creating a “virtual firm” of their own). These reasons make it clear why succession is such an issue for small and medium-sized firms.

Firms need to shift their focus to succession planning, but it is more than putting “cultivate young leaders” on a to-do list; it requires creating an environment that strategically fosters innovation and pursues growth in niche specializations, building consulting portfolios in emerging industries, leveraging technology in creative ways, and providing leadership opportunities to young staff. That's what successful firms are doing. This is important even if the plan is to sell the firm, because, as Rita Keller of Keller Advisors says in the Rosenberg Survey, “If they don't have a well-run firm, the acquiring firms won't want them.”

But even successful firms may be behind. As August Aquila of Aquila Global Advisors points out in the Rosenberg Survey, “What is sorely lacking in the profession is original thought leadership. Too much of the so-called ‘thought leadership’ is simply an idea that is taken from another firm.” How true. The profession needs to adapt and evolve. Letting go of antiquated models will keep the profession relevant. The firms that survive and thrive will be the ones that can stay ahead of the pace of change.

Joanne S. Barry, CAE. Publisher. The CPA Journal, Executive Director & CEO, NYSSCPA, jbarry@nysscpa.org.

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