Study: Auditors Agree with Client 76 Percent of Time if CFO Came from Same Big Four Firm

By:
Chris Gaetano
Published Date:
Feb 12, 2018
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A recent study has found that, despite active efforts to improve auditor independence post-Enron, familiarity threat remains a major factor in public company audits, according to CFO.com. The study posed hypothetical accounting situations to 140 managers of Big Four accounting firms in the U.S. and Canada, who all averaged about seven years of auditing experience and received the same background information about the hypothetical client, as well as the same current year financial statement from said client. 

The client in question was a medium-sized biotechnology company. The study participants were asked to play the role of a continuing audit manager on the account. The company CFO, in this scenario, maintained that the value of goodwill should be unchanged from its previous level last year. Study participants received information that was negative enough to indicate a possible goodwill impairment, but not so negative that doing so would be an automatic conclusion. In other words, auditor judgment would need to play a role in deciding whether or not there should be an impairment. 

Beyond this information, participants were also told either nothing about the CFO, that the CFO was a former partner at a Big Four firm other than the one the subject worked at now; or that the CFO, until two years ago, was a partner at the same Big Four firm and had in fact worked with the subject on engagements involving this very client. 

What the study found was that 76 percent of subjects were inclined to take the CFO's position on goodwill if they had been a former colleague, versus 44 percent if they were not. This led the researchers to conclude that there needs to be more robust cooling off periods covering a wider range of management positions, as current regulation does not adequately mitigate familiarity risk. 

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