Latest / The Accounting Podcast / Ex-Big Four Auditor Explains Massive Audit Failures
Transcript
- Attention: This is a machine-generated transcript. Thus, there may be some spelling, grammar, and accuracy errors throughout. Thank you! Blake Oliver: [00:00:00] We've seen some pretty massive audit failures in the last few years. What is going on from your perspective as a former audit partner at the Big Four? Chris Vanover: [00:00:10] The fundamental structure of public accounting firms is flop. You have literally 80% of the work being done by people that typically have less than two years of experience. Where can you go in any profession? I mean, you wouldn't go to a doctor and say, Hey, I want you to perform brain surgery on me with two years of experience, right? Blake Oliver: [00:00:32] Hello and welcome to The Cloud Accounting Podcast. I'm Blake Oliver. We cover a lot of audit failures on our show. That's why I was excited to talk to Chris Vanover, who was an audit partner and director of the Chief Auditor Network at PwC for many years. We talked about why accounting firms struggle to maintain audit quality and how Chris is helping to change that with AuditClub, which seeks to transform how CPA firms deliver audits. So, Chris, you are the are you the CEO of AuditClub? Chris Vanover: [00:01:03] I am the CEO of AuditClub. Blake Oliver: [00:01:05] Formerly an auditor. Chris Vanover: [00:01:06] Oh, many years in auditing. I spent about a combined 13 years with GWC board, which was in their national office and then spent. The fear is that the Public Company Accounting Oversight Board and then actually was an audit partner overseeing quality control for regional firms. So all this before launching AuditClub. Blake Oliver: [00:01:27] What was your firm, PwC. Chris Vanover: [00:01:29] That could be. Blake Oliver: [00:01:30] Sued? Okay, good. So I can ask you this question then about like Wirecard and Luckin coffee at EY. You know, we cover on our show a lot of big audit scandals and failures, and we've seen not in the U.S. but more globally, some pretty massive audit failures in the last few years. What what is going on from your perspective as a former audit partner at the Big Four? Like how can this happen and what do we do about it? Chris Vanover: [00:01:59] It's $1,000,000 question, right? I think I'm probably even $1,000,000,000 question at times. I think if you look about and again, it goes back to me, the fundamental structure of public accounting firms is flawed. You have literally 80% of the work being done by people that typically have less than two years of experience. Where can you go in any profession? I mean, you wouldn't go to a doctor and say, Hey, I want you to perform brain surgery on me with two years of experience, right? The nurse may be helping you from an intake perspective, but you're eventually hoping that doctor, even though you're out of it, is the doctor doing the surgery? Blake Oliver: [00:02:34] Yeah, we don't. We don't. We don't want the residents doing the brain surgery. Chris Vanover: [00:02:38] No, but yet we give 80% of the work to these folks that are supposedly supervised by people that, yes, they have a genuine desire to get to the right answer, but they're working 2320 400 hours a year. There's not a possibility for them to actually review the work papers the way they should be reviewed. But you can't possibly say your first year or second year associate should shoulder the responsibility of identifying those issues. It's complicated stuff. So it's flawed in terms of the structure of the profession in general. I will also take aim, though, at the FCC and the PCAOB on this as well. When I first started auditing, it was a 98 deadline between January one and March 31st when ten cases had to be filed. All of a sudden they shrunk that down to 60 days for large accelerated filers. Well, the accounting and auditing is only got more complex, right? Can't possibly shove more into the busy seasons and there's just not healthy for the people experience. And I think this is exactly why you're seeing bad news out of Australia where somebody unfortunately committed suicide because they're working so hard. That's the flaw right now. Public accounting is that we as CPAs have dug ourselves our own grave at the end of the day, and nobody can get out of it because they just got bad habits that they've commoditized the entire industry. Blake Oliver: [00:03:58] Yeah. Yeah. Chris Vanover: [00:04:00] If you're a commodity, how are you going to possibly go find a wirecard fraud when you don't have the budget or the dollars to invest the time to get it done right? Yeah, that's that's what we're trying to change. I mean, we went to a four day workweek because, again, I want my people to be able to do the things they need to do and be at their up at the highest quality. And the only way that you do that is actually making sure their brains are recharged and refreshed. Right. It's just a strange strange in my mind, how we operate. Blake Oliver: [00:04:27] Yeah, I've always wondered about that because I've never been an auditor. I didn't go into audit like I. I'm very proud that it was my highest score on the CPA exam, but I couldn't. Chris Vanover: [00:04:36] I couldn't do it for you real quick. All right. So that was your that was my lowest score on the CPA exam Tax was my highest. Go figure. Blake Oliver: [00:04:43] That's funny. It was my best score, but I leaving the exam room, I couldn't tell you like the first thing about how to actually do one. Right. And so I've always wondered, like, it just feels, though, as I observe it, that so much in audit is still incredibly manual and tedious and there's very little technology being used like spreadsheets. Okay, great. But that's a 30 year old technology now, right? And it sounds like there's a lot of room for improvement, but the big firms haven't really done a ton of improvement because it's a labor based model. And there's like not really an incentive to invest heavily into reducing a lot of that. Chris Vanover: [00:05:24] And I would say, I mean, Blake, I do think there's been a lot of dollars invested at the Big Four and some even the top ten firms from a technology perspective, and that eventually they're starting to find some dividends from that investment. Right. But what's unfortunate is, to your point, is a lot of these local and regional firms choose not to invest in it because of the structure of their firm at the end of the day, Right. That's somebody who's partner income that's going to be impacted and nobody wants to happen on their watch in spite of the fact that it may pay dividends for years to come. Right. So, again, this goes back to just laws in terms of how humans just generally perceive things individually. Blake Oliver: [00:06:03] Yeah, And that's the partner model, right? Is when your when your compensation, when you retire is based on your current book of business, you've got every incentive to get as much top line revenue in the door and you don't really worry about the costs as much because that's not how it's computed in most cases. Chris Vanover: [00:06:22] Yeah, but you're right. I mean, end of the day, like if you compared an audit today versus what it was done, you know, 20, 30, 40 years ago, for the most part, it is very manually intensive. There's a lot of labor involved in it. Yes, there is some technology that helps facilitate things, but it's just one of those things that has continued to operate in a very archaic way and in my mind that change needs to come. Otherwise we risk really running people out of our profession. And you're already starting to see that is nobody wants to go into it. Well, why? It's just not sexy. That's the reality of it. So how do you again, make it to be more appealing to the everyday student out there right now? Now, why did it appeal to me one years ago? How do we get that same quest to want to be involved in this profession? But we're just we're we're tripping. We're tripping over our own feet here. Blake Oliver: [00:07:12] We've got a lot going for us, right? Like what? What drove me to accounting was obviously job security because I went in during the Great Recession. So a lot of people like me did that. Right. But also I like the variety and all the different kinds of things you can do in accounting. It's it's really more than you can do in law or in medicine or in most professions. We have a lot of freedom. But then, like you said, we we kind of like trip over our own feet by making the the the hours, you know, just too many hours. Right. And now that we can do everything remotely. But, you know, that's what I'm seeing is like there are firms that are still traditional that are, you know, pulling everybody back to the office, working 68 hours a week. But then you've got this whole slate of firms that are in the cloud that are letting people work remotely. They can recruit from anywhere. And for those firms, you know, the the opportunity is endless. Like there's more work. Chris Vanover: [00:08:04] Than you know. I think you're right. It's like, you know, it's very difficult because these these firms are relatively difficult to maneuver. Right? They've already been in place and it's hard to create change. I think we're in a fortunate situation in terms of bringing to fruition our accounting firm at the time we did. Right, where you have a lot of different technologies at play, you can choose what that looks like, almost like a choose your own adventure and you're not wedded to bad past practices, right? Whereas a lot of these firms right now, it's like, well, they've got a lot of bad practices out there that they can't get away from, and it's going to take time. But newer firms that are open to just doing things differently, I think you're going to see some of that, and I think that's a good thing for the profession. Blake Oliver: [00:08:42] So what led to AuditClub? Chris Vanover: [00:08:45] I think I had a pretty unique skill set out there and it really dawned upon me that there are a lot of local and regional firms that simply don't have access to individuals in my skill set, some of them don't know. That they don't have that and some of them don't know that they need to have it. And so that's really a kind of created a club back in the day was just the idea of being able to provide access to highly skilled individuals on a more fractional basis for to help the local and regional firms ultimately with the mission to improve public accounting. Blake Oliver: [00:09:18] And you said people like you, so they're looking for somebody who has audit partner experience. So are you overseeing? Audits that they are conducting. Like how does it how does it work? Because when I when I heard about you guys, I assumed it was an incorrectly. I take it that you were providing like staff level work on audits. Chris Vanover: [00:09:43] So we do have that element of it. But our initial go to market strategy was actually to develop relationships with the managing partners, with the audit partners in charge. And a lot of them came to us and said, Hey, we need you, Chris, or we need your partners to help execute an audit, whether it be at a manager or above level. Typically it might have been, Hey, we just got this notification from the Public Company Accounting Oversight Board. We're going to go through remediation. We have no idea who to turn to. We'd never done it before, but we know your team can help with that. So it was like these really strategic high level projects that were typically done at the partner directory level. Inevitably, when you start deliver those services, firms start to go, What else can you do for us? We started to make our way down the ranks and that's where we started getting inquiries from even just firms out in the middle of the Midwest or the East Coast that would say, Hey, we just lost our audit director, we just lost our audit senior manager or our manager. We have no idea where to turn to for talent in our local market. Can you guys help? So that's where we started in ourselves and that mix as well. The flip side of it is, is we do offer our audit service center and we have a strategic technology provider that we're walking lockstep with and actually allowing us to create work papers that we then can label back to CPA firms. So it's meant to be kind of a holistic ecosystem where they can turn to AuditClub and know that they can get a solution, deliver with peace of mind, and not have to worry about going out, hiring a recruiting agency or going to play for unknown talent end of the day. And instead of getting one individual that you have no guaranteed return on, you get access to our entire team of. We'll be called sheet monitors to help you with the process. Blake Oliver: [00:11:21] Chief Auditors So fractional. This sort of sounds like fractional CFO. Chris Vanover: [00:11:26] Very similar concept. Yeah, but. Blake Oliver: [00:11:28] But chief auditors and said okay. And then you're leveraging technology to help put together work papers that would have been done manually by this firm in the past. Chris Vanover: [00:11:37] Exactly. Yeah. Blake Oliver: [00:11:39] And so you're providing what level are you providing through the process all the way from like chief auditor down to. Chris Vanover: [00:11:46] Generally speaking, our chief auditor passes are going to be anything as a manager and above all, okay, so that's where that comes into play. And then the Audit Service center is typically those routine non complex tasks that a lot of the large firms, the big four, the top ten, are now outsourcing out to India, Argentina, the Philippines. We actually maintain that here in the United States. And through that technology, we're able to kind of facilitate a very efficient process where that work paper goes back to the firm. And the nice thing is, is they have no real need. I don't want to say this because if the standard setters are listening, they don't necessarily have a need to go out there and review it themselves because they know that a licensed CPA firm has already done that for them at the end of the day. Blake Oliver: [00:12:27] Yeah, well, and that is ever more, I guess, urgent. As the talent crisis worsens, managers, directors leaving, deciding not to stick around to become partner, what does it look like? What is the talent crunch or talent crisis or shortage look like from your perspective? Because you're talking with mid-sized accounting firms very frequently. Chris Vanover: [00:12:49] And and we are. And I think it always kind of makes me I get an interesting response when we talk about the talent crisis, because a lot of them, they don't necessarily know how to think differently to solve their talent problems. And I think, again, AuditClub is one of those angles that they can use if they just think a little bit differently, a little bit more outside the box in terms of how do they get their work done. It may not be, hey, we we need a senior associate or we need a manager on a contract basis. It can actually be more, hey, we're going to tap into audit as an extension of our team to help solve our talent crisis and ultimately three of our people to then go focus on other areas that still need to get done. But a lot of them are still so trained that they've got to go to a recruiting agency. They got to go find an independent contractor, right? Well, now they've got an entire team that they can pick and choose which months they want our support in and which ones they don't. And they can upgrade, they can downgrade, they can skip a month, they can again change their passes based on what their needs are in a given month. And that's a that's a fundamentally different concept for a lot of these firms. Blake Oliver: [00:13:58] Well, it makes a lot of sense because when you go out and get a full time person, you have to have enough work for them to do to cover their cost and make a profit. And often in a in a smaller firm or a mid-sized firm, it means you load them up with stuff that's not what they really want to be doing. And this is something I've heard complaints. I've heard from people who have worked at firms, mid-sized firms or smaller firms, is that I'm doing tax, I'm doing audit, I'm doing bookkeeping, I'm doing literally everything that we offer. And it's always changing. And that is. It's challenging. Yeah. Chris Vanover: [00:14:29] And it's dangerous for a lot of these firms and a lot of these firms. You know, they're jacks of all trade. And that's a very difficult angle to play these days, especially how specialized everything is within the other accounting space. And that's dangerous from a quality of perspective. And again, we set out with a mission to improve public accounting, and we started that from a quality NGO's like how can we get into these firms and really help them elevate the quality of their audits? I think we've done that and a lot of these firms are on a journey whether to go in through a corrective action plan with the CPA, whether they're going through remediation at the PCAOB. There is a lot of noise in these work papers that needs to get improved upon to really help the capital markets at the end of the day. The other part of it, though, too, in my mind is that all we've done is said, look, AuditClub is an infrastructure that you can tap into to help supplement your actual accounting firm, no different than you may outsource HR or you might outsource payroll, whatever that is. It's the same concept here. You're just basically saying, give me the infrastructure and support us in a unique and different way. More than anything I would love. I think there is a potential where firms no longer have to be as large as they are because they can tap into infrastructure like AuditClub offers and allow somebody that perhaps is disgruntled based on their current experience, public accounting, to actually be able to take the reins on their own and use AuditClub as an infrastructure going forwards. Blake Oliver: [00:15:55] And we've seen this with firms offshoring bookkeeping work or outsourcing it or partnering with a technology partner to do that instead of doing it themselves so they can focus on their core business, which is But then you don't have to turn away audits because you can say, all right, I'm going to spin up AuditClub and be able to handle this and know it's not going to be overwhelming. I mean, how much infrastructure do I need to have as a firm like I'm a CPA? I don't have a firm anymore. But let's say I went and spun up my sole practitioner, CPA firm again, you know, could I could I do audits? Could I could I be the audit partner and have AuditClub do all the work? Is that I could. Okay. Chris Vanover: [00:16:39] I think absolutely. I think a lot of people struggle because a little bit less in the tax space. I think tax lends itself to being able to go out there and hanging up your own shingle, right? Blake Oliver: [00:16:48] Yeah. Chris Vanover: [00:16:49] And audit space, you know, you're really reliant upon a team of associates and seniors and under the old antiquated model to get the work done and be able to sell it at a margin that you can still make your partner income at the end of the day. Right. Well, now you're saying, look, technology has changed the game. You know, have an infrastructure that's changing the game. Why couldn't they go hang up their own shingle and ultimately be able to support whatever clients they want with whatever industry, knowing that they can operate pretty lean and still have the freedom to have their own career freedom while still being able to maintain the benefits of being within public accounting on their own terms. At the end of the day. Blake Oliver: [00:17:27] Where do you work? Where are your people? Chris Vanover: [00:17:30] We've got people across the United States and only in the United States. We have actually a new hire joining us in about two weeks coming out of the state of Florida. We have one of my partners is out in Maryland, another partner, Illinois, a couple of people here in California. So we actually are pretty distributed and it actually works to our advantage because inevitably what we're selling is access to our people, and it's supporting CPA firms across the country. Being able to open up those time zones reduces any friction that may happen if you're just isolated within a particular area of the country. So we do have people across the United States right now. We also are, in essence, to help run that audit service center that I talked about earlier. We're building out this network of college accounting students because, again, one of my passions is education. And obviously, you might have seen the numbers. The number of enrollees going into accounting programs these days is dwindling. You have a large number of pending retirements happening as well in the accounting profession. So if you look at the numbers over the next 5 to 10 years, it's horrific in terms of how are the stuff going to get done. So my one of the passions that I have is as an educator in the college ranks as well, and I teach adjunct at different universities in Southern California, is how do we inspire that next round of people that actually want to go into the accounting profession? Blake Oliver: [00:18:46] So, Chris, I think I asked you, where are you located? Chris Vanover: [00:18:48] I'm in Southern California. Blake Oliver: [00:18:50] Whereabouts? I used to live in Irvine. Chris Vanover: [00:18:52] Yeah, I'm in Orange County. So down by San Juan Capistrano area. Blake Oliver: [00:18:55] I grew up in in Irvine. I went to elementary school there. Well, what do you do with your free time now that you're no longer grinding away? Chris Vanover: [00:19:03] Yeah, so it's a lot of family time. My wife and I went on a nice little cooking class last weekend. We're fortunate because her mom lives down the street from us, so we get free babysitting, which is nice. I got. I got a nine year old daughter and a seven year old son. They're into volleyball. Baseball's carting around the sports fields and sports sports these days. But, you know, I've taken the Angel games and the Rams games. Play a little volleyball myself, play softball, all that good stuff. But you got to find that balance, that's for sure. Blake Oliver: [00:19:34] Well, Chris, it's been really great talking to you and we can connect. Yeah. Excited to hear about what you're doing. I mean, innovation and audit is something that's long due. And I'd love to stay in touch with you in, you know, connect with you and hear how things are going in the future, too, for sure. Chris Vanover: [00:19:51] Good catching up with you, Blake. And I look forward to connect with you again soon.