Litigation

The cost (and risks) of becoming an audit partner

By Tracy Coenen

Ever since my days as a staff auditor at Arthur Andersen, I’ve wondered what it costs to become a partner at a large firm. It’s obviously not something that is widely discussed with staff, so the youngsters all remain clueless.

But Francine McKenna of re: The Auditors has finally answered my question. She points to a report by the Center for Audit Quality. The report says that the average capital contribution per partner is $418,365, which is no small sum for an individual to pay.

The big downside is that it’s easy to lose all that money if the firm is sued or otherwise collapses. Think about all those partners who lost their contribution when Arthur Andersen folded. That had to be painful. And you can bet that when they wanted to move to another big firm after the collapse of AA, they had to pony up again. (I wonder if the firms offered any special deals for them?)

The report also points out that this capital contribution to a big firm doesn’t generally appreciate like other investments will. Francine disagrees, saying that the rate of interest paid on the funds on deposit are higher than market rates, so there is some value there.

Francine offers some insight to this issue as a former director at PricewaterhouseCoopers… She says that when partner-level people came to the firm late in life (age 50 or over) they did not generally get offered partnership because it made no economic sense. Most partners finance this buy-in with a bank loan, and with PwC’s mandatory retirement age of 60, there simply wasn’t enough time to pay off the loan. And with ten years or less to work, they wouldn’t earn enough money there to make it worthwhile.

There’s a bit of irony to all this. Francine writes:

Poor, poor auditors. They’re really suffering.
High risks.
Big financial commitments.
Not getting paid as much as their law firm “equals.”

Don’t most consumers think of auditors as smart people who do well with financial matters? That’s not necessarily the case if they’re creating these types of scenarios for themselves, is it?

I’m sure the issue has been raised more than once that audit firms should consider changing the way partnership buy-ins work and are valued. But really, there’s no incentive for partners who’ve already made the financial commitment to agree to the change. Why should they make it easier for those coming after them to become partners? If all the older partners had to do it this way, they probably think that the younger up-and-coming partners should too.

Yet it’s this kind of thinking that will make the mega-auditing firms extinct. There are so many partners who live in a world far removed from reality… a world in which “this is how we did it 20 years ago…”

Refusing to change to meet the new demands of our economy and workforce will put them out of business. Mark my words. And mid-sized firms aren’t necessarily doing much better on this issue. This isn’t based on scientific evidence, mind you. Just on what I’ve seen while practicing accounting.

The world is evolving but auditors have big incentives keep doing business the way they’ve always done it. After all, there are billions of dollars in fees for non-value-added services to consider. (Yes, I’m saying that audits don’t add value. *gasp*)

Full post as published by The FRAUDfiles Blog on July 08, 2008 (boomark / email).