I have worked with the largest US audit firms for decades. Over time, as Sarbanes-Oxley and Dodd-Frank legislation took hold, along with the creation of the PCAOB, increased stress on audit firms has been the result. The Big Four are the most visible and prominent, and as such, appear to have had a challenging time adopting to the new post-Enron, post- Arthur Anderson normal.
Private company audit practice. Big Four audit firms have created a new niche they call, variously, “private company audit practice.” In fact, my recent experience at a large multinational company that was private, found that the Big Four auditors assigned to us had both private and public clients. The methodology and tests appeared no different than those applied at public companies, at least that was my assessment. Second tier firms, such as McGladrey, assigned only private company auditors to the engagement after we replaced our Big Four auditor.
Internal workload. I estimate that well over half of the work done internally by my finance team was in support of protecting the Big Four from liability. It used to be that the Management Representation Letter was sufficient. Now audit firms require extensive internal analyses, documented positions, and white papers that consume internal resources.
The Big Four appear to be getting more rigid and less flexible over time, as oversight and potential derogatory regulatory assessments are now more threatening than in the past. Several years ago I had an experience involving an accounting treatment dispute with a Big Four auditor that ultimately led to an extensive discussion since I felt quite strongly about our internal accounting treatment position. After numerous meetings we were told that we could not receive an “Except For,” relative to this issue, nor could we simply default to a “Qualified Opinion.” I was left with the impression that either the report would be issued clean or it simply would not get signed off. When I suggested perhaps I change our audit partners I was warned that even such a suggestion compromised “auditor independence” and could preclude getting to completion of a successful audit.
Auditing is a commodity. GAAS and GAAP are codified for all CPA’s. An audit is a highly structured project. You will not get a vastly superior audit by utilizing the Big Four compared to second tier audit firms, or even some smaller audit firms, though reference checking is strongly recommended.
But the Big Four are global. From a command and control standpoint, the Big Four do not impose decisions upon the other statutory audits for your company’s subsidiaries around the globe. Chartered accountants must make their own decisions, independently, else risk losing their certifications. On the other hand, affiliate audit structures, such as McGladrey, have vetted good audit firms, and consequently these firms will generally strive to keep their affiliate status by working hard on cooperation, communication and goodwill.
The Big Four can be pricey. A brand carries a premium. The infrastructure of a Big Four audit firm is extensive, including many more professions and functions in their firms than just auditors – lawyers are hired to protect the Big Four from liability for example.
The PCAOB has the Big Four on the defensive. In an October 8, 2014 Wall Street Journal article, auditors at the largest U.S. accounting firms failed to follow proper procedures in more than four in 10 audits, according to the latest inspections by the U.S. government’s audit watchdog. Another argument that you don’t necessarily get quality simply by paying more and buying the brand.
All Big Four and second tier audit firms have strengths and weaknesses without a doubt. But if you view your audit as a commodity, want to perhaps shop and reduce audit fees, and don’t feel compelled by stakeholders (banks, shareholders, board members and financial media) to go with a brand, give consideration to alternative audit firms that just might suit your company better.
Rodd Mann | DBA (candidate) | CPA | MBA | BBA | APICS CPIM | Six Sigma Hands on Champion | Author | Consultant