Why Auditing = Appalling Hours and Tremendous Turnover
It never fails. At my firm the end of August means two things; the beginning of the busy audit season (we specialize in government audits) and a massive race for staff to resign. With twelve to fifteen staff level accountants at our office, when three or four people quit, that means a massive workload increase for those that stay behind. The fear of being the one left to do all of the work actually perpetuates the rush to look for a new job before the long hours of busy season. As I understand it, most audit firms have extremely high turnover rates. With long work-hours, mountains of mundane paperwork, combined with long hours of brainless ticking and tying it isn’t hard to understand why the turnover can be 25% per year. As an outsider, not trained in the accounting field, it appears that experience as a public auditor is used as a stepping stone to building a desirable resume.
My question: Why does it have to be this way? Why can’t external audit hours be closer to 40 hours a week? Why must managers, partners, and staff work so much? As an economist my knee-jerk reaction is to look at the supply-and-demand analysis. It turns out that this analysis leads me to some obvious answers.
Supply: As we all know, the supply of qualified accountants is low and trending downward. CFO magazine notes…
Even though enrollment in accounting programs has risen over the past few years, the demand for CPAs currently outstrips supply by as much as 20 percent, and relief appears to be a long way off. “We’ll have an incredible shortage of accountants for the next 10 to 15 years,” predicts Allan D. Koltin, president and CEO of PDI Global Inc., a Chicago-based consultancy for accounting and other professional firms.
I attempted to attend an intermediate accounting class at a large local state college. There are only six 30 seat classes available and every business major needs to take the class. The class fills up before the end of the first week of registration. Since I have a couple of bachelors degrees already (economics and statistics if you must know) I am placed at the end of the line for enrollment. I will probably never be able to take classes at this university for accounting because of this. The school would like to offer more classes in accounting they are just extremely limited in the amount of qualified instructors (How many Accounting Phd’s are there?) If people can’t take accounting classes…they can’t practice accounting in any meaningful long-term way.
Demand: The demand for accounting professionals is skyrocketing. With Sarbanes-Oxley (SOX) in America, International Financial Reporting Standards (IFRS) in countries like China, India, and the EU, and the increasing use of audits as a qualifying step for the financing deals of private and public entities there is a marked upward trend in demand for accountants. The Bureau of Labor Statistics notes…
Employment of accountants and auditors is expected to grow faster than average for all occupations through the year 2014. As the economy grows, the number of business establishments will increase, requiring more accountants and auditors to set up books, prepare taxes, and provide management advice. As these businesses grow, the volume and complexity of information developed by accountants and auditors regarding costs, expenditures, and taxes will increase as well. An increased need for accountants and auditors will arise from changes in legislation related to taxes, financial reporting standards, business investments, mergers, and other financial events. The growth of international business also has led to more demand for accounting expertise and services related to international trade and accounting rules, as well as to international mergers and acquisitions. These trends should create more jobs for accountants and auditors.
Another stealth demand augmenter is the constant increase of workload year to year for the same job. It seems that every year the audit programs cover more areas and require more testing. Even with the mitigating effects of increased technology escalating efficiency, there is a net decrease in auditor efficiency due to the ever increasing regulatory and cover-your-ass auditing requirements. These non-legislative increases in workload lead to the need for more audit hours to complete the same job on a year to year basis.
In summation, auditors need to work more the 40 hours a week to be able to complete all of the work that is required to run a western style business. I know this is a dramatic over-simplification (that is what economists do), and leaves out many other factors that effect this situation. However, my bet is this analysis accounts for a large portion of the reason auditors work so many hours and burn-out so quickly.
Read more here, here, here, here, and here.
on September 3rd, 2006 at 12:30 pm
Interesting analysis and insights! I think you’re asking the right questions about the accounting/auditing profession (… perhaps because there the same questions I’m thinking about!). I’ve been wondering, though, whether the inability of accountants to make a decent living working 40 hours per week doesn’t have more to do with accountants’ inability to optimally self-regulate from the public’s perspective.
Let me explain by posing a question: Why has a *self-regulating profession* (i.e., the accounting profession) repeatedly failed to meet its own standards, and the public’s expectations, over the last 50 years? The typical economist’s answer is probably something like, Because the accounting profession has found it optimal to fail in this way. This kind of makes sense since every time the accounting profession fails, a new wave of law/regulation follows that provides an even better Full Employment Act for Certified Public Accountants. (Just kidding, kind of …)
There is evidence of this by the way. A friend of mine at a certain Big 4 accounting firm mentioned to me lately that “We’ve never made more money than we’re making now! It’s almost unbelievable.” I asked, What are you making money in? His response was, “You name it; we’re making money everywhere in our practice.” I asked, Is it good work? His reponse was, “No, it’s mundane as hell. We could use accounting para-professionals to do a lot of it if we had to.” One gets the idea that the combination of Sarbanes-Oxley and the lack of a certain other international accounting firm in the market since 2001 means paydirt to the remaining firms.
This explains the increased work in a roundabout way and, as it turns out, also might explain why accountants/auditors have to work longer hours to make a decent living: It’s because the increased demand is an artificial demand of sorts. Without the accounting profession’s failures, no new law/regulation. Without the new law/regulation, the accounting profession would naturally gravitate–a la Adam Smith’s Free Hand–to services the public valued most highly that the profession was capable of providing.
In the end, I think it would be relatively straightforward to put together an equilibrium model explaining why accountants (1) are working longer and harder (… albeit for more money), and (2) not really using the breadth and depth of knowledge and skills they have (or should have).
MMc
on September 7th, 2006 at 9:16 pm
[…] Malcolm on Why Auditing = Appalling Hours and Tremendous Turnover […]
on February 13th, 2007 at 8:36 am
MMc wrote:
“..failed to meet its own standards, and the public’s expectations”
Has the accounting profession failed to meet its own standards, or would it be more appropriate to say that the general public does not understand the standards? Wouldn’t it be fair to say that the vast majority of the general public as well as professionals who ought to understand the standards (users of financial statements) are STILL mistaken as to what those standards really are? Don’t the vast majority of people still (wrongly) believe that audits are designed to detect fraud?
on April 21st, 2007 at 8:03 pm
I despise every second I’ve been in public accounting. It is the strangest, most shovenist, political environment. It’s plump full of people who apparently don’t want to go home! I am doing my time and getting out. I will never understand the high demand for accountants, yet the low pay and insane hours. I work 65/hours a week and still around 50-55 during non-busy season…. and I’m considered somewhat of a “slacker”. That’s just ridiculous. I’ve been doing both tax and audit. I’m leaning towards focusing in audit so I can get out of public accounting and be a Controller in Private Industry. Does anybody have suggestions on audit versus tax? Or advice about making it through public accounting and still maintaining family and friend relationships?
on May 2nd, 2007 at 8:19 pm
Hopefully that’s just the case for you doing the busy season. I know it is hell for 3-4 months of the year, but the rest of the year shouldn’t be that many hours. I’d say 40 tops, at least during the summer months.
on June 30th, 2007 at 6:21 am
I hear about a lot of Big 4 people who leave eventually and can’t prepare a tax return….don’t know Quickbooks….etc. Is it worth the modern-day slavery?