Please ensure Javascript is enabled for purposes of website accessibility

Kill the Audit Industry, Says Ex-Auditor

Broken lightbulb isolated on white

In the WaPo opinion pages yesterday one Duncan Mavin, who got his start in the 90s, says the best way to solve the audit industry’s many conflicts is to kill it altogether.

He starts the piece summoning the ghost of Enron, as all writers do when discussing what happens when audit goes wrong. Bringing things back to this decade, he then talks about what’s going on at PwC Australia even though auditors weren’t the ones using confidential government data to bill clients for tax avoidance plans. It doesn’t actually matter whether it was auditors or literally anyone else at the firm, he says, because the entire industry is broken.

The affair underscores a key criticism leveled at the industry, especially the “Big Four” firms — Deloitte, KPMG, Ernst and Young, and PwC — that it’s a business in which conflicts of interest are inherent. For starters, auditors are paid by the companies they’re auditing. If they find a problem, they risk losing a client. There’s plenty of incentive to look the other way.

The Big Four also run massive consulting arms, which generate billions of dollars in fees by providing advice to clients on technology, taxation, accounting and more. Often, audits are a loss-leader that firms use to secure more lucrative consulting contracts. At EY, a recent effort to split the business in two — ostensibly into an audit firm and a consulting one — failed in part because nobody wanted to be in the less profitable audit firm. EY’s top brass recognize the conflict, but they simply can’t wean themselves off it.

To quickly confirm what he’s saying, let’s look at the biggest of the Big 4: Deloitte. In 2022, Deloitte brought in a record $59.3 billion in global revenue. Of that, consulting had the largest piece of the pie at $25.8 billion (up 24.4% from the year prior), with audit coming in at $11.4 billion. $27.9 billion of that came from Deloitte US and more than half of that $27.9 billion came from consulting (54.0%). And that’s with our sticky independence requirements. In seven years, Deloitte’s global revenue grew by $24 billion, or 69% (nice).

Remember the entire foundation of Project Everest was the idea that if only consulting were free from independence requirements, somehow EY would score the biggest and best clients and convert those relationships into revenue. Carmine Di Sibio famously said the firm was leaving $10 billion in consulting fees on the table if it didn’t split, an amount that would effectively double what consulting is bringing in now. Well, what it was bringing in before Everest crashed and burned. Different topic.

OK, so we know there are conflicts. What’s this guy’s solution?

Many alternatives have been discussed over the years. One is having the government or stock exchange employ its own inspectors, the same way that government inspectors certify the food or transportation sectors? This could work, in theory, but the concept probably hasn’t gotten off the ground because it would require an enormous number of staff being added to government payrolls.

A similar suggestion is that stock exchanges or governments could hire the audit firms, so they would no longer be paid by the companies they assess. But how would governments decide which firm to hire? And would this really improve the quality of the auditors’ work?

Here’s FloQast CEO (and former Big 4 senior auditor) Mike Whitmire talking about that idea in 2019. He too suggests we kill the audit industry but says to hand the job over to the PCAOB.

Well here’s Duncan’s even crazier idea:

The solution I favor is to scrap the mandatory audit requirement altogether. Big, influential investors — pension funds and so on — could still demand their own auditors trawl through the books of companies they invest in. Some professional investors might even have to do more of their own due diligence!

This radical solution comes with some potential problems, of course. The most obvious is that absent mandated audits, corporations would get away with bad behavior. But isn’t this happening anyway? Also, yes, more smaller investors — regular people — would be a little more in the dark. But history tells us they probably shouldn’t rely too much on audits that are fundamentally flawed.

He goes on to say that emerging technology will at some point in the near future be cheap and easy enough that if investors really wanted to comb through hoards of company data, they can deploy AI to do it in a fraction of the time it would take a human or a team of overworked auditors.

A machine could do just as much digging as a 20-something CPA without any of the potential conflicts. Once this becomes a widely available option, surely it will be time to end the audit charade once and for all. In the meantime, doing away with audit requirements would be a step in the right direction.

I can hear the 20-something auditors cheering right now.

12 thoughts on “Kill the Audit Industry, Says Ex-Auditor

  1. There was a time when auditors weren’t around, and the Great Depression was the result. We also used to not have SOX around… but then Enron and Worldcom happened. Since then it appears that the legislation has worked.

    Audit firms have to remain independent from their auditees. Yes these firms generate significant consulting fees, but those generally come from non-audit clients. If there’s a feeling that independence requirements aren’t either good enough or enforced, then work on solving that problem. Removing the entire audit function simply because there are parts that could be improved is not logical. This harkens to the same idea that we get rid of the police all together… that hasn’t worked out too well for places that embraced the idea. As imperfect as the system is, throwing it away will make things worse.

    Last, 30ish years ago the modern ERP was going to kill the accounting profession. Now AI is going to do it. Color me skeptical.

  2. Tell me the writer doesn’t know jack about auditing without telling me you don’t know jack about auditing. Next time the writer will ask AI to give medical treatment for their grandchildren because hospital fee is too expensive and healthcare administration process is too complicated.

  3. Really a good thought.The only solution is the appoinment by regulator without competition in fees it should be prefixed.the work quality be judged by scrtinising the reports of the audit firm.independence be judged by some parameter.
    A super senior citizen

  4. This is hilarious. Yes, let’s have the PCAOB do the audit. They will never finish, because there is always another test or another analysis that could be done, and they are so risk averse they can’t ever say that have enough evidence.

  5. Mandatory auditor rotation every 5 to 7 years is the answer. When you know the future year revenue stream is going to come to an end, your audit quality “goes up” by definition as you don’t want a “restatement” coming from the new auditor. That is just a fact.

  6. 100% truth! I used to work in audit and I remember thinking computers could easily do the work.

    1. without auditors, then who will you blame when your company went into bankruptcy due to fraudulent misstatements? will you blame the computers, or the programamers?

  7. I think that each company should be required to contract the audit firm for a 5 year time period and at the end of the 5 years a required change of audit firm. Then the audit firm would not have a conflict because it is guaranteed a revenue stream for 5 years and the independence would be improved with no concern about renewal of the contract. One of the problems with audit standards is that the big 4 firms also design the rules.

  8. SOX is a redundancy of internal controls. More “signing off” is simply that. AI will be a useful tool. It seems as if things are clean, auditors keep digging. If things are messy, auditors keep digging. It’s so clear that the staffs are overworked during “busy season” (I hate that term, when are we not busy?)
    There is no value in exhausted staff working 15 hours a day. Maybe a different solution is to audit off the end of the year, break up this Big 4 consolidation back to the Big 8. What’s wrong with more competition, or maybe embrace the next tier of firms.

Comments are closed.