Study: ‘Opinion-Shopping’ Harms Auditor Independence

A recent study has revealed that most distressed companies have sought out auditors likely to provide a favorable opinion.

The benefit of a favorable opinion, however, comes at the expense of auditor independence and investor interests, according to CFO.com, which reported on the study published in the May issue of the American Accounting Association magazine, Auditing: A Journal of Practice and Theory.

Most of the 3,560 distressed public companies studied over nine years engaged in auditor “opinion-shopping,” the report says.

The result is a lower possibility of going-concern opinions but a higher incidence of financial misstatements. The research also says that the Sarbanes-Oxley corporate reform legislation did not affect the dynamic much. While opinion-shopping sharply declined between 2004 and 2006, it later returned to roughly the same amount before establishment of the PCAOB.

“This study highlights the need to develop mechanisms that curb clients’ opportunistic auditor switches, such as regulatory intervention in the choice of a successor auditor or other mechanisms that discipline excessive client pressure,” the authors wrote.

An estimated 57% of the studied companies “shopped” for opinions. Only 16% received going-concern opinions of the shoppers, compared with 28% among non-shoppers.

The report also says, “Audit firms and offices that more frequently accept opinion-shopping clients tend to exhibit poorer audit quality not only for switching opinion-shoppers but for other clients.”

Women C-Suite Ranks Increase, but Not Much

More women are holding the nation’s most important corporate roles, just not that many more, according to a survey by Korn Ferry, a global consulting firm and executive recruiter.

Women now hold 25% of the five critical C-suite positions. That’s an increase from 23% in 2018, according to the analysis of the nation’s 1,000 largest corporations across eight industries – consumer, energy, financials, health care, industrial, retail, services and technology. Still, women hold a majority of only one of those spots, chief human resources officer, and only 6% of CEO spots are held by women, unchanged from 2018.

“In every industry we analyzed, there’s a tremendous need for improvement to bring more women to the C-suite,” says Jane Stevenson, global leader of Korn Ferry’s CEO Succession Services. The onus is on both women to seek out experiences that can help them lead and organizations to create an environment where women can succeed, she says.

The Korn Ferry analysis reviewed the positions of chief executive officer, chief financial officer, chief information/technology officer, chief marketing officer (CMO), and chief human resources officer (CHRO). Among the eight industries, retail has the highest percentage of female CEOs (12%). In contrast, healthcare has the fewest, at 1%.

Women hold 55% of the CHRO spots across industries. The CMO role saw the biggest percentage increase of all C-suite roles, rising to 36% from 32% in 2018. The financial industry has the highest percentage of female CMOs at 53%, up from 45% last year.

About 45% of employees at the nation’s largest firms are women, according to various studies. But female representation diminishes considerably up the leadership ladder. It’s hard to pinpoint exactly how gender influences hiring and promotion, but companies must commit to developing a pipeline of women leaders, experts say. “It’s critical that both talented women and those around them focus on creating a clear path for advancement,” Stevenson says.

Deloitte Study: Only 19% of Business Leaders Say They Are Ready to Lead Social Enterprise

Amid rapid technological, economic and social change, it is important for social enterprises to move beyond mission statements and social impact programs to put humans at the center of their business strategies, a new Deloitte study says.

In “Leading the Social Enterprise: Reinvent With a Human Focus,”  the Big 4 firm examines various ways organizations can change the experiences of the workforce to “build identity and meaning for workers.”

A social enterprise is a cause-driven business that exists to achieve a social mission. In the report, survey respondents – nearly 10,000  in 119 countries – say the role of the social enterprise is more important than ever and noted a positive link between leading the social enterprise and an organization’s financial performance.

In fact, 73% of industry-leading social enterprises expect stronger business growth in 2019 than in 2018, compared to only 55% of those where the social enterprise is “not” a priority. However, only 19% of respondents reported being “industry leaders” in their organization’s maturity as a social enterprise.

“What’s missing for many organizations is the focus on the individual and the day-to-day challenges that workers are facing,” says Erica Volini, principal, Deloitte Consulting LLP, U.S. human capital leader. “The reality is that while technology is helping organizations gain competitive advantage, if not managed appropriately, it can simultaneously mean that workers lose their identity in the workplace. We see a call to action for organizations to reinvent their approach to human capital with the worker in mind to create opportunities for continuous learning, accelerated development, and professional and personal growth.”

The report says, “As organizations look to effectively lead the social enterprise, they must adapt to the forces restructuring work and the implications to the workforce – both in composition and capability – while embedding a meaningful experience for workers.”

This focus on the workforce comes as more than 86% of respondents cited reinventing the way people learn as important or very important – the No. 1 trend for 2019. Lifelong learning has evolved from a matter of career advancement to workplace survival. However, even with this emphasis on learning, only 10% of respondents said their organizations are “very ready” to address this topic.

Organizations are also being challenged to “up their game” when it comes to the employee experience. This emphasis comes as only 49% of respondents believed that their organizations’ workers were satisfied or very satisfied with their job design and only 42% thought that workers were satisfied or very satisfied with day-to-day work practices.

“Over the last five years, issues related to productivity, well-being, overwork and burnout have grown,” said Jeff Schwartz, principal, Deloitte Consulting LLP, U.S. future of work leader. “As a result, organizations need to shift from the traditional employee experience to a new category we call ‘human experience,’ where relationships are enduring, learning is continuous, and work has meaning centered around human identity.”

Organizations are finding themselves in a job-seekers’ market as the war for talent rages on. “As organizations’ workforce needs drastically change, leaders should shift from focusing on acquiring talent to accessing capabilities. While the change may seem nuanced, taking a more expanded view of where skills can be found – whether it’s in automation, the gig economy or current employees – can pay dividends in today’s fast-paced and high-demand business environment,” says Volini.

The survey also reveals that the way many organizations compensate and reward workers is out of date. Today, only 11% of respondents felt that their rewards systems are highly aligned with their organizational goals and 23% do not feel they know what rewards their employees value.

“The combination of shifts in the work, the workforce, and the organization have created a new mandate for HR to shape the future,” says Heather Stockton, principal, Deloitte Global, global human capital leader. “But HR cannot do this alone. The entire organization, led by the symphonic C-suite, needs to come together to help organizations truly take the lead in the future of work.”

Deloitte to Deploy Smart Monitoring Sensors by PointGrab in London

Accounting firm Deloitte Touche Tohmatsu Ltd. has selected Israel-based home and building automation company PointGrab Inc. to install smart sensor systems in its London headquarters.

PointGrab’s system will allow Deloitte to receive real-time data on desk occupancy, foot traffic, elevator usage and occupancy of public areas in the 270,000 square-foot building.

According to IoT Evolution, the program is the culmination of a four-year project to define the “workplace of the future,” to accommodate a range of different work activities and styles, with spaces that “fuel creativity and ultimately generate more collaboration across the business.”

PointGrab’s system is designed to enable Deloitte to optimize use of the building. It involves thousands of ceiling-mounted sensors, which provide accurate information about the location and number of people in each space throughout the building.

PointGrab uses foot traffic data to assist in more efficient building maintenance management. For example, the system can alert cleaning crews to focus on spaces with high foot traffic.

“The system serves us both for real-time applications like hot-desking and for space utilization reports of any given area within the premises,” says Dominic McGrory, director of workspace performance, according to IoT Evolution. “PointGrab sensors have a unique mix of high accuracy rates and advanced features, which enable us to truly understand what is going on at any given moment.”

Founded in 2008, PointGrab is based in Kfar Saba, a town northeast of Tel Aviv.

UK Starts Digital Tax Program

The UK’s version of the IRS has launched a digital tax program that requires 1.2 million registered businesses to keep digital records and submit their value-added tax (VAT) returns online.

Her Majesty’s Revenue of Customs, or HMRC, launched its Making Tax Digital program on April 1. The program requires businesses earning over £85,000 to use Making Tax Digital-compatible software for VAT periods starting on or after that date.

Nearly 100,000 businesses have already signed up to the new service, with over 4,000 businesses joining each day, according to Accountancy Daily, citing HMRC figures.

Those who are already exempt from online filing of VAT will remain so under the program, and people can file for an exemption if they can’t comply due to age, disability, location or religious reasons.

During the first year, HMRC has said it will not issue filing or record-keeping penalties when businesses are doing their best to comply.

Program director Theresa Middleton says, “Tens of thousands of businesses joined our pilot over the last six months and have helped us to test and improve the live service ensuring we have the right support in place to help people transition. Now is the time for those businesses affected by MTD (Making Tax Digital) who haven’t done so already to begin preparing to switchover and start experiencing the benefits MTD has to offer.”

HMRC has published new guidance on digital record-keeping: If a business uses more than one product to keep digital records, it will need to digitally link them together by March 31, 2020.

Accountancy Daily asserts that the switch to digital has been controversial. Originally, the plan was to require all businesses to file tax information online. It’s since been scaled down to focus on VAT returns.

“Originally, when MTD was to be introduced for income tax reporting purposes first, it was sold as a way to save businesses money,” Androulla Soteri, tax director at MHA MacIntyre Hudson, told Accountancy Daily. “HMRC no longer sings from this song sheet and it’s just as well, because MTD won’t cut costs. Every client we have will incur a physical or notional cost (in terms of lost time) in transferring to the new system.”

Soteri continued, “If MTD applied only to large enterprises this might not matter, but the threshold is a turnover of £85,000. As some software houses are charging up to £700 for the relevant software upgrade, and £200 a month thereafter, MTD is a considerable expense with no upside for many small businesses.”

Armanino Launches Blockchain Practice

San Ramon, Calif.-based Armanino LLP (FY17 net revenue of $242.7 million) has announced a new blockchain practice, which will offer a range of services for businesses interested in using the burgeoning technology.

“Blockchain technology and crypto assets have the potential to become a high impact innovation that brings value and security to businesses, and with a growing number of our clients currently in the space, it made sense to assemble a team well-versed in this new technology,” says Andries Verschelden, partner and blockchain practice leader.

The firm describes blockchain a technology that increases trust among customers, vendors and third parties through “transparent, secure and immutable transactions.”

The blockchain practice offers strategy, assurance and systems implementation solutions for businesses, including:

  • Proof of Concept – Assessments for blockchain, including distributed ledgers, permissioned blockchains, hybrid solutions and permission-less blockchains.
  • Design and Implementation – Full vendor selection, functional and technical design, configuration, testing, user training, system integration and ongoing support.
  • Security Review and Monitoring – Assurance on digital assets on the balance sheet, high-volume digital currency transactions, custodial holdings, smart contract and enterprise blockchain environments. Armanino was among the first to complete financial statement audits for clients with high digital asset transaction volumes.
  • Cryptocurrency On-Ramp – Crypto readiness systems review, crypto-specific accounting solution selection and implementation, technical accounting guidance, custody solutions, cold storage controls environment consulting, and digital asset tax strategy and process design.

More news from Armanino

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A Case for Mandatory Partner Retirement With a Soft Landing

Dom Esposito

By: Dom Esposito

Most, if not all, of the Top 10 CPA firms have mandatory retirement provisions in their partnership agreements. For the Top 10, mandatory partner retirement is narrowly defined and means just that – mandatory retirement. With a limited number of exceptions, when a partner at a Top 10 firm hits a certain age, usually 65, he/she must retire from the firm. If a Top 10 retired partner is enjoying good health and wants to keep active, it is not unusual for him/her to join Boards or small and mid-sized CPA firms as Top 10 partner talent, skills and networks are very valuable to these smaller firms.

 

Most, if not all, small and mid-sized CPA firms struggle with the notion of mandatory partner retirements. We understand the myriad of reasons or myths why this is the case but, as articulated below, we respectfully do not agree with many of them. Accordingly, many small and mid-sized CPA firms don’t have mandatory retirement provisions in their partnership agreements. Partners can be partners as long as they have their health and want to keep active. Even for those small and mid-sized CPA firms with mandatory retirement provisions, mandatory retirement is loosely or liberally defined. For these firms, mandatory partner retirement typically does not mean that a partner must retire from the firm at age 65. Instead it usually means that, at age 65, a partner must give up his/her equity in the firm and move to part-time status, in many cases, keeping the partner title.

In Our Opinion

In Our Opinion, the lack of tight mandatory partner retirement provisions, but not necessarily those that mirror the Top 10 firms, is a major reason why so many small and mid-sized CPA firms are merging up into larger firms. At many of these firms, an overwhelming majority of partners who approach age 65 continue to work as partners. Lack of young partners with quality relationship skills cause these firms to seek a transaction with larger, healthier and better managed firms. We don’t think this is healthy. At a minimum, it certainly isn’t the best way to perpetuate the firm.

The purpose of this newsletter perspective is to offer a small and mid-sized CPA firm a solution that provides mandatory retirement with a soft landing. Before we explain, let’s summarize some of the myriad of reasons or myths that many small and mid-sized CPA firms deal with when it comes to mandatory retirement provisions:

  • “I’m an owner in the firm and an owner should not be forced to retire.”
  • “The firm couldn’t survive without me. These younger people can’t bring in business and can’t handle my book.”
  • “I have a good chunk of the equity in this firm and the younger people can’t afford to buy me out.”

Unfortunately, firms that find themselves in this position usually also find that:

  • Many senior partners start slowing down as they get older but are not willing to acknowledge that they no longer are contributing to the firm as they were when they were younger. As a result, they do not want to see their compensation get reduced to an amount that better reflects current value to the firm.
  • Many senior partners do not transfer their client and network relationships in a timely manner. They hold on to everything they built-up over the years, risking that these relationships do not get transferred to younger partners in a timely and methodical fashion. These same partners view their deferred compensation buy-outs as entitlements as opposed to monies that they earned as “good soldiers” which includes transferring client and network relationships.
  • Young stars and future partners look around the firm and see a lot of “gray hair” hanging around and interpret this as an environment that will not provide them the opportunity to become partners. They ask themselves: “Why should I stick around this firm if there is little, if any, chance of me becoming a partner one day?”

Barry Melancon of the AICPA has been quoted in a communication to the Equal Employment Opportunity Commission that: “an accounting firm’s business model has thrived and prospered for decades while serving the public interest and provide for  a predictable progression of lesser tenured, and offer more diverse individuals into the partnership, and facilitate the orderly transition of a firm’s clients from senior partners to those who will succeed them.” We believe that Barry has it right!

Here are our thoughts on how a small and mid-sized CPA firm can require mandatory retirement (in a tight sense) and yet provide partners with a soft landing. In its partnership agreement, the firm needs to stipulate that:

  • There is a mandatory retirement age (65 works best).
  • A partner can earn his/her full deferred compensation amount at age 62 but stay until age 65. Between age 62 and 65, a partner’s responsibilities include the timely and methodical transfer of client and network relationships. A haircut to the deferred compensation amount can occur if the firm concludes that these relationships are not being adequately transferred.
  • At its annual option, the partner could be extended three times as either a partner or consultant. These extensions often are part-time and reflect market compensation.
  • Beyond the annual extension option referred to above, a consulting arrangement (usually at one-third the billing rate) is available to a partner if the firm believes it is beneficial to certain client relationships.

In Conclusion

You may ask if mandatory partner retirement is still legal? The short answer is yes!

While the Equal Employment Opportunity Commission has acted against Deloitte and PwC, it is not clear at this time if the Commission is going to be successful in doing away with mandatory partner retirement. In our view, the Top 10 firms will begin to find it very difficult to enforce mandatory partner retirement as their partners are increasingly becoming employee shareholders rather than partners who have control over their activities and function like business owners. On the other hand, partners at small and mid-sized CPA firms (at least equity partners) do have many more characteristics of a business owner and are therefore exempt from age discrimination rules provided by federal law.

To prevent the loss of their best and brightest talent who seek a path to partnership, we believe that small and mid-sized CPA firms should provide mandatory retirement provisions with a soft landing. Such provisions will also permit adequate time for an orderly transition of client and network relationships.

Reprinted with permission of the author.

Dom Esposito is the CEO of ESPOSITO CEO2CEO, a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers/acquisitions. “In Our Opinion” is a continuing series for leading CPA firms where Dom shares insights, experiences and wisdom with firm leaders.

Value Pricing: Necessary but Complicated for Accounting Firms

With the belief that certainty, reputation and scarcity are valued, two QuickFee professionals are urging accounting firms to switch from hourly billing to value pricing.

Bruce Coombes and Justin Cross, in an article posted on Karbonhq.com, write that customers do not like being billed an hourly rate without knowing how many hours will be needed, so certainty is important; customers will pay for the best services, so an excellent reputation is critical; and the basics of supply and demand dictate that scarcity is valued as well.

They believe that while value pricing is gaining ground in professional service firms, most accounting firms are still billing their clients by the hour. They recognize that the task is daunting, as it involves assessing the scope of the work and the value it will provide to clients. The key to determining that value and the price that is charged lies in asking the following questions:

  • What is the problem your client needs solving?
  • What will a solution mean to your client economically and emotionally?
  • Can you provide this solution?
  • How novel is your solution?

“There is much more upside when addressing a client’s aspiration than solving an affliction,” they write. Some clients are willing to pay more because the service is highly valued. Set fees also increase client satisfaction and retention.

“By working out what is of real value to your clients, you can remove low-value work and spend time on the work that really matters to your clients. You will earn more in less time and enjoy more positive interactions with clients who are having their problems solved by working alongside you.”

PwC in UK Bans All-Male Job Shortlists

PwC has become the first of the Big 4 to put a UK-wide ban on candidate lists for senior-level workers that do not include any women.

While 48% of PwC’s staff are women, they earn 43.8% less on average than their male colleagues, the London-based Daily Mail reported. The government is requiring companies of more than 250 employees to report their gender pay gap.

Laura Hinton, chief people officer at PwC, tells the Daily Mail: “Diversity in our recruitment processes is something we’ve been focused on for some time and as part of this we are ensuring we have no all-male shortlists and more diverse interviewing panels.”

PwC recently set a target to recruit 50/50 women and men. The firm also has a 35.9% pay gap for its black, Asian and minority ethnic (BAME) employees.

The move comes as the rest of the Big Four – Deloitte, KPMG and EY – had all called for greater diversity on their candidate lists. Last month Bill Michael, KPMG’s UK chairman, said the firm had a “no tolerance” policy toward all-male recruitment lists. While Deloitte and EY do not have an outright ban on all-male candidate lists, they said they too look for a diverse range of candidates.

Analysis: The Next Recession is Coming and Law Firms Aren’t Ready

An economic downturn is likely in the not-too-distant future and few law firms are prepared, according to an analysis by The American Lawyer.

Ropes & Gray chairman Brad Malt says: “No one knows when the expansion will end, but we know it will end, and we know how it will end: in a recession.” The economy has been growing since the Great Recession ended in June 2009, and normal boom periods end after about 5 years.

Malt, is planning to leave the top job after 15 years, and a possible recession is in his thoughts, he says. “It’s less recession planning than thinking about contingencies – not because we’re in a management transition, but because we always think about having a fundamentally sound investment strategy that fits with the stage of the economic cycle,” he says.

Legal observers say most firm leaders are less cautious. “Law firms tend to think very short-term,” says Janet Stanton, a partner with Adam Smith Esq. “At the end of the year, they strip the balance sheet, and all the profit gets distributed. There’s no long-term investments in technology or any kind of advance planning. Many firms don’t even have a long-term strategy.”

The American Lawyer analysis notes that the business environment since the recession has changed fundamentally. For one, cost-cutting by clients in those down times have not abated, and they are keeping more legal work in-house while tapping into services offered by alternative legal providers, including Big 4 accounting firms, Axiom and Thomson Reuters.

“In-house lawyers are behaving ambidextrously: they’re pushing out to alternative legal service providers with one hand and bringing in to their own lawyers with the other hand,” strategist Hugh Simons says.

In response, law firms have had to cut costs during the recession and they are taking in less work. Billable hours are down. “It’s difficult to imagine a recession that would be as deep and protracted as the 2008 crisis. But the steady erosion of client loyalty and partner loyalty has created an accelerant in terms of law firm fragility,” says Paul Weiss Rifkind Wharton & Garrison chairman Brad Karp. “In the past, partners at law firms that saw a sharp decline in profits would be inclined to ride out the decline. That, sadly, is no longer the case in many law firms. The relationship between law firms, on the one hand, and their partners and clients, on the other, has become much more transactional, which is an unfortunate development for the profession and poses a heightened risk for law firms.”

Another worry is bloated ranks of non-equity partners. The 2018 Georgetown Report indicates that while associates – whose ranks were slashed during the last recession – have seen their hours return to pre-2009 levels, partner hours have not, and non-equity partner hours have suffered most dramatically.

Those non-equity partners are at the biggest risk of layoffs, American Lawyer reports, and consultants suggest firms may want to act sooner. “They might as well start soon, because measured reductions earlier would be wiser than panicked personnel cuts later,” the analysis says.