Firms Tell the PCAOB There’s an Offshoring Brain Drain

Focus on Use of Shared Service Centers

As noted in a December 2023 Spotlight – “Observations From the Target Team’s 2022 Inspections” [PDF] – the term shared service center (SSC) refers to an entity – affiliated with one or more audit firms – that mostly provides resources and services remotely to core engagement teams. SSC personnel traditionally serve in associate or senior associate roles in an engagement team. The services provided are typically more traditional standardized audit procedures, such as testing the mathematical accuracy of schedules prepared by a public company. SSCs may be based inside and/or outside the U.S. and may or may not be subsidiaries of a U.S. audit firm.

Through QC inspection procedures, we considered the audit firms’ policies related to the use of SSCs and have noted that audit firms were increasing the use of SSCs to perform certain audit procedures. For example, we have noted that one audit firm has a goal for all U.S. engagement teams to increase the use of its SSC to approximately 20% of total audit hours [Ed. note: 20% is low compared to what we’ve heard is happening at many firms]. The work is currently focused on low risk and low judgment areas, but we are seeing greater use of SSCs in areas such as IT general controls and manual control testing. Another audit firm’s use of SSCs increased approximately 28% during 2023 to approximately 84,000 hours, or approximately 6% of total audit firm issuer and broker-dealer hours. In addition, we have noted the SSC resources are providing direct audit support to engagement teams for standardized and/or low judgment audit procedures.

During our culture initiative interviews, respondents raised concerns over pressuring engagement teams to use SSC resources. Respondents described their view that the use of SSC resources is removing foundational skills and experiences from newer firm personnel, potentially depriving these personnel of basic skills leading to difficulties in reviewing those areas as they progress in their careers. One respondent noted, “Our staff now will never see cash testing, as it is done offshore. We are going to see the impact of that when they are managers.”

• Respondents from three audit firms mentioned the use of SSCs as a factor that benefits audit quality in terms of standardization of work that does not require significant judgment. The SSC model also allows for consistency, but respondents acknowledged there is a learning curve in ensuring those SSC resources are well integrated into the overall audit team.
• One respondent indicated pressures exist to utilize SSC resources to not only maximize efficiency and drive quality, but also profitability.
• Another respondent noted that revenue growth is emphasized, but not at the expense of audit quality [Ed. note: X]. However, there are also pressures to “get the [profit] margins right” which include specific metrics to send work overseas.
• One audit firm has invested in sending members from U.S. engagement teams to the SSCs to meet with resources to support integration as well as having those SSC resources work in the U.S. for a period to gain knowledge to bring back to the SSCs.

It’s unclear from this Spotlight whether or not the PCAOB is actually concerned about the outsourcing explosion (we use explosion purposely here as it will inevitably blow up in someone’s face at some point) but it’s our humble opinion they for sure should be.