Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

What’s going on in the big firms? Part IV, or, what’s the turning radius of a ship or large CPA firm?

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What is the turning radius of a fully loaded oil tanker?

It’s measured in miles.

What does that have to do with accounting?  The common question is how fast can you change direction, whether on a huge ship or a huge organization?  I think there are some similarities.

With a fully loaded supertanker there is a tremendous amount of weight, which creates huge inertia when you’re under way. Turn the rudder as far as you want, it still takes time to change direction.  Same description applies to a large CPA firm.

I took a couple minutes to research the distance it takes for a huge ship to change direction. For a fully loaded container ship it’s about half mile.  For one of the biggest oil tankers, it’s about 2 miles.  Takes 5 miles to stop.

PCAOB inspection report on Deloitte

PCAOB released their inspection report on Deloitte.  Michael Rapoport, of the Wall Street Journal, describes their report in Accounting Board Finds Faults in Deloitte Audits:

The 26 deficient audits found were out of 58 Deloitte audits and partial audits reviewed by PCAOB inspectors.

That’s 45% that had problems of some sort. Worse than this year’s reports for PwC and KPMG.

PCAOB just reported E&Y had 13 engagements with deficiencies out of 62. See Going Concern for summary. 

What are the main issues for Deloitte?  Just what you would expect:

The inspectors found that, in various audits, Deloitte didn’t do enough testing on issues like inventory, revenue recognition, goodwill impairment and fair value, among other areas.

If you want a smart aleck commentary on the PCAOB report, you should check out Caleb Newquist’s post at Going Concern, As it Stands Right Now, Deloitte Was the Worst Big 4 Audit Firm in 2010.  (If you haven’t added Going Concern to your RSS feed, you really should.)

I earlier discussed a post by Francine McKenna where she describes an internal document from Deloitte.  The document says they know they have a lot of work to do before the improved quality work will show up in the PCAOB inspection reports.

How long does it take to change a CPA firm?

I’m intentionally a one-person CPA firm. I can make changes fast. Really fast. 

It was much harder to make changes when I worked in a firm with a dozen people.  

I cannot image how tough it would be to change the quality or audit approach or anything else in a firm with tens of thousands of people.

For the U.S. operations in 2011, Deloitte’s website reports the firm has 4,419 partners with 36,768 professional staff and 10,075 support staff, for a total headcount of 51,262.

How do you get 51,000 people going a different direction?

I’m pouring a lot of time into keeping up with all the changes taking place in the profession. It is taking an amazing amount of effort just to keep up. It will take lots of effort but I know I can handle all the change coming down the road.

I’ve been wondering for quite some time how a medium-sized firm, say several hundred people, can keep everyone up to speed.  The challenge is compounded tremendously when you talk about the biggest firms.

What is the turning circle of a professional firm with over 50,000 staff?  How in the world do you get them to make tremendous improvements in quality?  How do you possibly keep everyone current on all the professional literature?

I don’t have any idea.

Based on the internal documents that Francine McKenna has read, the senior leadership at Deloitte are struggling with the same questions.  Seems like all the big firms need to figure that out.  Soon.

Don’t laugh at them too hard.  The same comment applies to the medium and small firms.  And sole practitioners.

Written by Jim Ulvog

December 29, 2011, 8:41 am at 8:41 am

Posted in Audits

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