“Growing Pains: Mid-Sized Auditing Firms Are Seeing an Influx of New Clients, But at What Cost?” —

• “The era of exponential growth among mid-tier accounting firms is upon us, driven largely by the trend of top-tier firms pushing to expand their advisory/consulting businesses. To manage the number of audits that could trigger independence impairments across service lines, they have taken steps to shed the bottom 10% to 20% of their audit clients.”
• “Meanwhile, mid-tier firms suddenly find themselves the recipients of these new business opportunities — opportunities that must be managed carefully.”
• “The environment is rapidly changing for mid-sized accounting firms and, possibly for the first time, introducing business triggers that force them to answer hard questions about risk processes.”
• “Finding independence impairments at various stages. Historically, mid-sized firms lacked focus on automating the evaluation of conflicts clearance and waivers. Some independence checks processes were simply emails asking if any partners had an independence issue with a new client the firm wanted to sign. These processes may have been sufficient when firms were smaller. But when a client windfall is created by a combination of industry split-ups, M&As and audit-needy clients who were denied or shed by the Big Four, the old method falls apart.”
• “The idea that risk processes need to be automated rarely arises until some conflicts start to occur. Whether as subtle as a general unease with the current process, or as traumatic as having a regulator find issue and force changes — conflicts take center stage during rapid growth. Mid-size firms are starting to ask: How will risk processes keep up?”
• “More private equity ownership of clients… And as private equity funds continue to buy more stakes in more companies, independence rules (which extend to all portfolio companies within PE funds) become more difficult to adhere to. Searching, tracking and monitoring complex private equity ownership data presents a perennial challenge to mid-tier accounting firms in their efforts to maintain independence with respect to a growing audit client base.”
• “Progressive mid-tier firms are beginning to employ third-party data sources to ensure structure around how they incorporate PE data into their risk management processes. Other firms are adopting a big-firm practice — namely, quarterly calls with the PE funds themselves to understand their changing portfolio company structure.”
• “Hitting the threshold number for audit companies. Accounting firms hit an increased level of scrutiny once their public audit client count crosses 100. For example, regulatory inspections increase from once every three years to once a year. As such, accounting firms try to balance their business between public and private companies.”
• “Accepting the wrong clients. If robust risk processes do not exist, an accounting firm might unintentionally take on the wrong clients, opening itself up to a malpractice suit. While accounting firms are often subject to expensive malpractice insurance premiums, they have the opportunity to cut costs by demonstrating that they have robust, centralized risk processes in place that ensure firms will take only the right clients.”
• “Effective processes help to confidently answer the big question at the heart of the acceptance issue: Who is the “right” client? To more easily answer this question in the future, the firm must define multiple factors: What is the ideal risk profile for a client? What is the firm’s risk appetite? What industries or geographies does the firm want to be involved in? Do the industries (such as cryptocurrency or cannabis) or geographies carry unique risks and unknowns? Anytime these questions are ill-defined or unable to be properly answered, the firm is opening the door to unidentified and therefore unmanageable risk.”

“Former PwC partner banned for 2 years in Australia for leaking information” —

• “A former partner at PwC has been banned from practising as a tax agent in Australia for two years in a scandal involving the sharing of confidential information about government plans to target multinational tax avoidance with the firm’s clients.”
• “Peter-John Collins, who was head of international tax for PwC’s Australian office, was a member of an advisory group involved in confidential discussions with Australia’s Treasury department about introducing laws targeting multinational tax avoidance and a diverted profits tax.”
• “Some of that information was later disclosed to PwC clients and potential clients, according to the Tax Practitioners Board, the industry watchdog, which on Monday deregistered Collins as a tax agent in the country for two years.”
• “The TPB also ordered PwC to improve its processes and training around potential conflicts of interest.”
• “A PwC official said the firm acknowledged that Collins had not complied with confidentiality agreements with the Treasury and that the company should have had specific conflict management procedures in place to prevent it from happening.”
• “Ian Klug, chair of the TPB, said: ‘Tax practitioners who breach this confidence will not be tolerated. Rules to manage conflicts of interest are equally important in protecting client interests, especially in a large firm.'”
• “Klug added that leaking information from confidential legal reform discussions ‘might be seen to elevate personal and commercial profit, breaching public interest, legal and ethical obligations.'”

“Auditors dialed back mandated disclosures: study” —

• “Auditors of large public companies disclosed fewer critical audit matters — a term for challenging or subjective material found in their client’s financial statements — in their audit reports after evidence emerged that investors interpreted increased CAM disclosures as an indication of business risk, according to a study completed this month by professors at the University of San Diego and Bucknell University.”
• “The new CAMs, or disclosures of key issues that surface during audits, were mandated by the Public Company Accounting Oversight Board for certain filers beginning in 2019.”
• “The ‘Disappearing Audit Disclosure Study’ provides “empirical evidence that auditors significantly dialed back the extensiveness of CAM disclosures in the second year of reporting,” and suggests the PCAOB and audit firms may need to rethink the approach to making audit reports more informative, the report states.”
• “The study also underscores the long-standing conflict of interest in the process whereby auditors are paid by the clients or companies they audit, even as they are responsible for disclosing potentially sensitive or negative information about those clients, Kate Suslava, one of the study’s co-authors and an assistant professor of accounting at Bucknell, said in an interview.”

“BDO in the spotlight over Home REIT audit” —

• “BDO is facing questions over its audit of troubled property investor Home REIT, after it was asked to look again at the social housing firm’s books amid accusations executives had been ‘round-tripping’ revenues and inflated the value of its property portfolio.”
• “Home REIT, which invests in housing for vulnerable groups, was forced to delay the publication of its annual accounts in December in order for BDO to deep-dive into its books with ‘enhanced audit procedures,’ following a slew of attacks from short seller Viceroy Research.”
• “However, BDO has now come under fire from activist investor The Boatman Capital which has laid out a series of demands to the firm and raised concerns over the independence of its audit process.”
• “The Boatman questioned the fact that Home REIT’s finance chief James Snape was previously a member of the BDO real estate audit team and asked for clarity on how the audit would be conducted ‘independently, without favour or undue influence.'”
• “‘We think it is reasonable for investors to ask for assurances that there will be appropriate professional distance and rigour between BDO as auditor and one of its ex-employees,’ the firm said.”