October 1, 2016
I am feeling pretty disappointed. Not surprised – just plain old disappointed.
Most every month, I attend a continuing education program for CPAs, so I can get some continuing education hours to maintain my license requirements. This week’s program was very eye-opening. There was no entertainment. The speaker droned on for an hour and 40 minutes, and I remember very little of what he said. But there was one point that came up during the presentation and I’m not too happy about it.
The presenter was discussing issues related to auditors, meaning accountants who audit the financial statements of companies.
The presenter asked the question to a room full of CPAs: “How many people think the audit firm should be rotated every five years?” The intent behind the question inquired about preventing an audit firm from becoming too cozy with the client? Of 40 CPAs in the room, I was the only one to raise my hand to say I believe CPAs should be rotated every five years. And by the way, I was probably the only non-practicing CPA in the room.
Instantly, others in the room began sniping how it takes 3 years to become profitable on an audit and how during the first couple of years, there’s a big learning curve about the client company, so it’s not until later in the engagement cycle that the yield on the engagement begins to escalate.
I wasn’t thinking about profitability for CPAs. I was thinking about the business community and the economy at large. I believe that CPAs should be rotated on smaller accounts. Rotation is not really practical at the large firms who work on Fortune 500 companies so they do rotate the partner-in-charge of the engagement along with some of the people on the team every five years for exactly the same reason: To prevent them from becoming too cozy with the client.
I’ve heard that Costco does something similar with their buyers. Somewhere, it was reported that Costco rotates its buyers every two years. Think about how many dollars are at stake for a company who has the opportunity to sell to Costco. Think about how much graft and corruption there could be, and how much payola venders would contribute to buyers at big box retailers if the company looked the other way. To prevent this, and to keep prices as low as they can be, Costco seeks to mitigate those problems by rotating their buyers very frequently. And this way, (theoretically) buyers never become too friendly with the suppliers.
We live in a world of double-standards and rationalizations which are promoted by the parties who stands to gain. For accountants who talk about independence and professional ethics, it looks like a lot of those ethics are more shaped to protect their revenue streams than to look out for the good of the consuming and investing public they are chartered to protect.
I am not naïve, but I don’t like these realities in critical situations.