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The Accounting Podcast

Audit Crisis: How Flawed Incentives and AI Are Reshaping the Accounting Profession

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In a recent episode of The Accounting Podcast, we explored alarming trends in audit quality shaking the foundations of our profession. The numbers are stark: the Public Company Accounting Oversight Board (PCAOB) found that Ernst & Young (EY), one of the Big Four firms, has a staggering 37% deficiency rate in its audits. Even PricewaterhouseCoopers (PwC), the “best” performer among the Big Four, has an 18% deficiency rate. These deficiencies are so significant that, according to the PCAOB, the auditors should not have issued their opinions.

As audit deficiency rates remain stubbornly high and scandals shake investor confidence, the accounting profession must confront systemic issues undermining audit quality—including misaligned incentives, inadequate staffing, and outdated practices—to restore trust in financial markets and secure their future relevance.

The Alarming State of Audit Quality

When we discuss a crisis in audit quality, we’re not exaggerating. The deficiency rates reported by the PCAOB paint a troubling picture of the state of auditing in the United States:

  • EY has a 37% deficiency rate—the highest among its peers.
  • PwC, despite performing “best” among the Big Four, still has an 18% deficiency rate.
  • BDO, a top 10 firm, has an alarming 86% deficiency rate.

But what do these numbers mean? A Part 1.A deficiency indicates that the auditor “had not obtained sufficient appropriate audit evidence to support its opinion(s) on the issuer’s financial statements and/or ICFR.” In other words, it means the auditor should not have issued their opinion, and potentially, investors should not rely on it.

This is not just a minor oversight—it’s a fundamental audit process failure. When nearly four out of ten audits at a Big Four firm like EY are deficient, or when 86% of BDO’s audits fail to meet standards, we’re looking at systemic issues that threaten the foundation of our financial markets.

The most common deficiencies relate to basic audit tasks:

  • Performing substantive testing.
  • Testing controls over data accuracy.
  • Evaluating the effectiveness of internal controls.

In essence, auditors are failing to perform the core responsibilities that investors rely on them to perform. These high deficiency rates directly erode investor confidence. When investors can’t trust the audited financial statements, the entire financial reporting and investment system becomes compromised.

Why are these deficiency rates so high? We need to examine the business models and incentives driving audit firms to answer that.

Misaligned Incentives and Flawed Business Models

At the heart of the audit quality crisis lies a troubling truth: audit firms’ business models are fundamentally misaligned with the goal of producing high-quality audits. Instead, they incentivize practices that prioritize profit over thoroughness and accuracy.

One primary strategy audit firms employ to maximize revenue is understaffing. Having the fewest people work on the audits leads to overworked staff and rushed audits, increasing the likelihood of errors and oversights.

EY provides a stark example of this strategy in action. The firm boasts the highest revenue per employee among the Big Four at $383,900. While impressive from a business perspective, it raises serious questions about the firm’s ability to allocate sufficient resources to each audit.

Another concerning practice is the lack of transparency around materiality thresholds. Auditors use these thresholds to determine what issues are significant enough to report. However, these standards are not publicly disclosed and can be manipulated. It’s possible to cover up something undesirable by deeming it “immaterial.” This lack of transparency allows auditors to ignore or downplay significant issues, further undermining the reliability of their opinions.

However, the biggest problem is that auditors lack the financial incentive to detect fraud or significant issues. They have every incentive to do the audit quickly, even if it means overlooking critical problems.

These misaligned incentives and flawed business models directly contribute to the high deficiency rates. They create an environment where cutting corners is rewarded, and thoroughness is penalized, contradicting the fundamental purpose of an audit.

The Supermicro Scandal: A Case Study in Audit Failure

The recent Supermicro scandal provides a vivid example of how systemic auditing issues can lead to significant market disruptions and erode investor confidence.

Supermicro Computing, a major player in the tech industry, recently announced an accounting delay that caused its stock to plummet 19% in a single day. This followed a report by Hindenburg Research, which alleged dubious accounting practices at the company.

Based on a three-month investigation, the Hindenburg report uncovered glaring accounting red flags, including:

  • Undisclosed related-party transactions involving nearly $1 billion were paid over three years to suppliers partly owned by the CEO’s brothers.
  • Rehiring executives involved in previous accounting scandals less than three months after paying a $17.5 million SEC settlement for widespread accounting violations.

But where was Deloitte, Supermicro’s auditor, in all of this? Despite charging $4.5 million annually for their services, Deloitte failed to identify or report these significant issues. Their audit letters for 2022 and 2023 were nearly identical, focusing only on inventory valuation as a critical audit matter.

Adding to the concern, an AI system developed by Hudson Rock had identified potential accounting risks at Supermicro two years before these issues came to light. As my co-host, David Leary, points out, “If AI can surface these audit problems before companies can, people aren’t going to want to pay $4.5 million for an audit.”

The emergence of AI challenges the traditional audit model and demands a reevaluation of how we approach financial oversight.

A Call for Reform

The audit profession stands at a crossroads. The alarming PCAOB deficiency rates, misaligned incentives driving audit firm business models, and high-profile failures like the Supermicro scandal all point to a systemic crisis in audit quality.

This isn’t just an issue for accountants and auditors—it’s a threat to the integrity of our entire financial system. Investors rely on audited financial statements to make informed decisions, and when those audits fail, the consequences can be catastrophic.

The emergence of AI as a potentially more effective tool for detecting accounting irregularities further challenges the traditional audit model. Significant changes are needed—from realigning incentives to embracing new technologies—to restore trust in the audit process and secure the future relevance of the profession.

But change won’t happen without a concerted effort from all of us in the accounting world. We must confront these challenges head-on, push for meaningful reforms, and reimagine what high-quality auditing looks like in the 21st century.

To hear our full analysis, including potential solutions and ways you can make a difference, listen to this episode of The Accounting Podcast.

From Zero to CPA in 18 Months

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Consider this: Kenyth Holdefer, who once worked in the mortgage industry, obtained both his bachelor’s and master’s degrees and successfully passed all four CPA exams, all within just 18 months. His extraordinary journey challenges traditional pathways to CPA certification and offers a potential solution to the accounting industry’s talent shortage.

Ken shared his story on The Accounting Podcast, revealing how he started his accounting journey with just 12 college credits. “I googled ‘quick bachelor’s degree,'” he said, highlighting his unconventional approach.

Fast-Tracking Degrees Through Competency-Based Education

Ken needed a swift career change. With its competency-based education model, Western Governors University (WGU) offered a solution.

“They have a different education model,” Ken explained. “If you know the material, there’s no reason to do a bunch of assignments and papers on stuff you already know. If you can prove you know the material by passing the test—basically, there’s a final exam—and if you pass it, you pass the class.”

This model allowed Ken to complete his bachelor’s degree in just three months—a process that usually takes four years. After a short break, he completed his master’s degree in 30 to 35 days.

Balancing this intense study schedule with a full-time job and family responsibilities, Ken often studied from 7 p.m. to midnight after putting his kids to bed. Remarkably, the total cost for both degrees was under $10,000—a fraction of what students typically spend on a single degree.

But can such an accelerated program prepare someone for the CPA exam and the accounting profession? Ken’s success suggests that it can, but it requires tremendous self-discipline and motivation. “You have to be very self-motivated to do this,” he emphasized.

Ken’s Intensive CPA Exam Preparation

With his degrees completed, Ken faced the CPA exams. He approached this challenge with the same intensity as his education.

Ken quit his job in January and dedicated six months to full-time study before starting at an accounting firm in June. He scheduled all four CPA exams at one-month intervals, aiming to take them all before receiving any scores.

“I took it extremely seriously,” Ken said. “I documented everything I was doing, how many hours I was studying because I wanted to pass them all on the first try.” His routine was grueling: studying 8 a.m. to 5 p.m., Monday through Friday, treating preparation like a full-time job.

He explained, “I glanced over all the material, learned a little about everything, and then really focused on the multiple-choice questions and task-based simulations within two weeks of taking the exam.”

Compared to traditional CPA exam preparation over 12–18 months of part-time study, Ken’s method was revolutionary but challenging. “It was a lot of four-hour nights of sleep,” he admitted.

However, the benefits are clear: a dramatically shortened timeline and total focus on exam preparation. Ken’s success proves this approach can yield impressive results for highly motivated individuals.

Implications for the Accounting Profession

Ken’s rapid journey to CPA challenges the accounting industry. With 75% of CPAs nearing retirement, the profession faces a talent shortage. Could accelerated pathways be the solution?

Faster, more affordable routes could attract a diverse pool, including career changers like Ken. However, the profession must ensure that speed doesn’t compromise quality. The CPA license carries weight due to its rigorous standards. Any changes must maintain the high level of expertise expected from CPAs.

Ken’s success suggests it’s time to think creatively about educating and certifying CPAs. By embracing innovation while maintaining excellence, we can ensure a bright future for the profession.

Want to dive deeper into Ken’s extraordinary journey and join the conversation about revolutionizing the path to CPA certification? Listen to the full The Accounting Podcast episode.

California’s Bold Move to Solve the CPA Crisis: A Blueprint for Public Protection

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Is your financial security at risk due to a shortage of accountants? It might be. The CPA profession faces a talent crisis that threatens both balance sheets and public safety. With fewer than 1% of accounting firms saying they can find enough staff, we’re seeing the fallout in the form of financial misstatements and eroded public trust.

But there’s hope on the horizon. The California Board of Accountancy is taking bold steps to address this crisis, authorizing the staff to draft potentially groundbreaking legislation to streamline licensure requirements and grant automatic mobility for CPAs.

In a recent episode of The Accounting Podcast, we discussed this development with Amber Setter, Chief Enlightenment Officer for Conscious Public Accountants.

The CPA Shortage: A Looming Threat to Public Safety

The CPA shortage isn’t just an industry problem—it’s a public safety crisis. Amber argues that this talent drought directly threatens the core mission of the accounting profession: protecting the public interest.

“We are living in an era where it’s not like this pipeline issue is going to happen. We’re living it,” Setter emphasizes. The consequences are already visible and alarming. With insufficient staff, firms struggle to maintain adequate levels of review, a crucial safeguard against errors and fraud. This shortage compromises the very foundation of financial integrity that the public relies on.

State boards of accountancy, tasked with protecting the public, find themselves in a difficult position. How can they fulfill their mandate when there aren’t enough qualified professionals to do the work? As Setter points out, “Right now, the public’s not being protected without an adequate amount of people to do the work.”

California Leads the Charge: A Blueprint for Reform

The California Board of Accountancy (CBA) is taking bold steps that could revolutionize CPA licensure. Their order to draft legislation addresses the shortage head-on while maintaining the profession’s high standards and prioritizing public protection.

The CBA’s proposal includes several potentially groundbreaking changes:

  1. Eliminating the 150-hour education requirement
  2. Streamlining the initial licensure process
  3. Granting automatic mobility for CPAs from other states

These changes represent a significant shift from the status quo. By removing barriers to entry while maintaining rigorous standards, the CBA aims to expand the pool of qualified CPAs without compromising quality.

The action has garnered overwhelming support. A recent CBA survey with over 7,000 responses found that 89% of respondents agreed that a bachelor’s degree in accounting should fully meet the educational requirements for licensure. This level of consensus is rare and speaks to the situation’s urgency.

Commenting on the significance of this move, Amber said, “This is a huge domino. I would hope other states are already calling California up saying, ‘Hey, what are you doing? We want to do this too.'” Her enthusiasm underscores the potential for California’s actions to catalyze nationwide change.

The automatic mobility provision is particularly crucial for public protection. By allowing qualified CPAs from other states to practice in California without additional hurdles, it ensures that businesses and individuals have access to a larger pool of professionals.

Has the AICPA Lost Sight of Public Interest?

While states like California take decisive action, national organizations are dragging their feet. The contrast is stark and concerning, raising questions about whether the profession’s leadership has lost sight of its primary duty: protecting the public interest.

The AICPA’s National Pipeline Advisory Group recently issued a report on addressing the CPA pipeline problem. However, the report lacks specific, immediate recommendations for change, which is troubling. While research and stakeholder input are valuable, the urgency of the current crisis demands immediate, substantive steps.

The consequences of this inaction could be severe. As the shortage persists, the risk of financial misstatements, undetected fraud, and erosion of public trust in financial reporting increases.

The inaction at the national level underscores the importance of state-led initiatives like California’s. State boards of accountancy, being closer to the ground and more directly accountable to the public, seem better positioned to address the crisis effectively.

Rethinking Accounting Education: A Call for Radical Reform

The CPA shortage crisis isn’t just about licensure requirements—it’s also an indictment of our current approach to accounting education. The disconnect between education and practical skills is a major contributor to the current crisis. Many accounting graduates struggle with basic tasks despite excelling in theoretical coursework. This gap between academic success and practical competence directly impacts public protection as new CPAs enter the field ill-equipped to catch errors or identify potential fraud.

We need a radical overhaul of accounting education to address the shortage while maintaining high standards. One bold proposal is to require only a bachelor’s degree in any subject to sit for the CPA exam rather than mandating specific accounting courses or degrees. This approach would force accounting programs to compete for students by offering valuable, practical education that prepares them for the CPA exam and real-world challenges.

Critics may argue this would lower standards, but the opposite could be true. By exposing accounting programs to market forces, we could drive innovation and improvement in curricula, ultimately producing more qualified and practically skilled CPAs.

Implementing such changes would face challenges, particularly from entrenched interests in academia. Many states would need to change legislation to enable these reforms. However, as California’s example shows, bold action is possible when public protection is prioritized.

The CPA profession stands at a critical juncture. The shortage of qualified accountants isn’t just an industry problem—it’s a clear and present danger to public safety and financial integrity. This crisis demands urgent, bold action to fulfill our profession’s core mission: protecting the public interest.

To gain a deeper understanding of these critical issues shaping the future of accounting, listen to the full episode of The Accounting Podcast, then reach out to your state board of accountancy. Express your urgent concern about the CPA shortage and its implications for public protection. Urge them to consider bold reforms like those proposed in California. Let’s act now to ensure a robust, capable, and trusted accounting profession for generations.

The Hidden Cost of Big Four Hiring Bias

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Imagine being told your 20 years of diverse accounting experience don’t qualify you for a job because you never worked at a Big Four firm. This is absurd, and it happens every day in our profession.

In a recent episode of The Accounting Podcast, we examined the hiring bias that is creating an artificial barrier in our field. It’s not just a minor inconvenience – it’s limiting diversity, overlooking valuable talent, and perpetuating a dangerously narrow view of what constitutes “success” in accounting.

A Barrier to Diversity and Talent

Scroll through job postings for corporate accounting roles, and you’ll quickly notice a pattern: “Big Four experience required” or “Big Four experience preferred.” This requirement is so commonplace that many in our profession barely question it. But we should.

Why should one to three years of experience on a resume dictate your entire career trajectory? Demanding Big Four experience in job postings is lazy, and it borders on discrimination and classism.  

This hiring bias creates an artificial barrier that significantly narrows the talent pool. It overlooks the wealth of experience and skills accountants gain in smaller firms, industry roles, or alternative career paths. 

Consider the CPA who wrote to us. (Listen to the episode for details.) They have two decades of diverse experience across multiple industries, including exciting projects with buyouts and public company purchases. Despite this rich background, they are potentially disqualified from roles simply because they never worked at a Big Four firm.

The impact of this bias extends beyond individual careers. It homogenizes our profession, limiting the diversity of thought, background, and experience crucial for innovation and problem-solving. This practice also disproportionately affects professionals from underrepresented groups who may have had fewer opportunities to enter Big Four firms early in their careers.

Big Four Experience vs. Operational Expertise

The emphasis on Big Four experience stems from a perception that it provides a unique skill set essential for success in corporate accounting roles. But does this perception align with reality?

Our listener’s feedback paints a different picture: “I have worked with employees of Big Four firms during audits, and frankly, they are disconnected from the reality of operational accounting.” The listener continues, “They can review the heck out of internal control issues, but none of them ever worked with a badly implemented ERP system with an AR module failing and unable to reconcile cash for eight months because of poor IT support.”

As our listener points out, the skills honed in Big Four firms, while valuable, don’t necessarily translate directly to the day-to-day challenges of operational accounting. Audit experience focuses heavily on reviewing past transactions and assessing controls. But operational accounting requires implementing and managing systems, solving real-time problems, and navigating the complexities of business operations.

If you require experience from the Big Four, you might be overlooking candidates with hands-on experience in favor of a resume line item that may not indicate readiness for the role.

Moving Towards a More Inclusive Hiring Approach

Our profession needs to broaden its definition of what makes a successful accountant. We must move beyond the Big Four checkbox and adopt a more holistic view of professional qualifications that values diverse backgrounds, operational expertise, and adaptability.

What might this look like in practice? We should emphasize problem-solving skills and adaptability over pedigree, value diverse experiences and skill sets, consider candidates’ proficiency with various accounting systems and technologies, and assess their ability to handle operational challenges.

By adopting this more inclusive approach, we’ll tap into a broader talent pool, bring more diverse perspectives into our teams, and build teams better equipped to handle complex, multifaceted challenges.

Professional organizations like the AICPA and state societies could play a crucial role in this shift by discouraging the practice of requiring Big Four experience in job postings and promoting more inclusive hiring practices.

Embracing a New Era in Accounting Recruitment

The Big Four bias in hiring isn’t just a topic for academic debate – it’s a real issue affecting careers and shaping the future of our profession. 

This shift isn’t just about fairness. In a rapidly evolving business landscape, we need accountants with varied experiences and skill sets to drive innovation and tackle new challenges.

The accounting profession must embrace a more inclusive approach that values diverse backgrounds, operational expertise, and adaptability.

Listen to the full episode of The Accounting Podcast, where we explore the hidden costs of hiring biases, share more real-world examples, and discuss practical strategies for implementing more inclusive hiring practices. Whether you’re a hiring manager, a job seeker, or simply passionate about the future of accounting, this episode offers valuable insights to help reshape our profession.

It’s time to redefine what success looks like in accounting – and it starts with how we hire. Join the conversation and be part of the solution.

The 40% Solution: Reclaiming Your Time as an Accounting Firm Owner

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As accountants, we’re no strangers to long hours and busy seasons. But what if there was a way to reclaim a significant chunk of your time without sacrificing the quality of your work? 

I recently sat down with Kwame Agyei, founder and CEO of Appoynt, on The Accounting Podcast to discuss just that. Kwame, a former accountant himself, shared his idea of the “bottom 40%” solution, which could offer a new perspective on managing our firms.

Understanding the “Bottom 40%” Concept

The bottom 40% refers to the tasks that, while necessary, don’t directly contribute to your core services or business growth. These might be administrative duties, data entry, basic bookkeeping tasks, or even managing your calendar and inbox. The key is to identify those tasks that:

  1. Take up a significant amount of your time
  2. Don’t require your specific expertise
  3. Feel like they’re “dragging you down” or preventing you from focusing on more important work

By pinpointing these tasks, you’re not just identifying time-wasters – you’re uncovering opportunities to delegate, outsource, and ultimately reclaim your time to focus on what matters most in your firm.

Once you’ve freed up this time, you have two options: take on more work to grow your business or use that time to improve your work-life balance. The choice is yours, but addressing your bottom 40% creates the opportunity to make that choice in the first place.

Common Tasks to Consider Outsourcing

Now that we understand the concept of the bottom 40% let’s explore some specific tasks that many accounting firm owners might consider outsourcing. Outsourcing can often provide significant time savings and efficiency gains in these areas, allowing you to focus on higher-value activities.

Virtual Assistant (VA) Services

A virtual assistant can handle a variety of tasks, including:

  • Email management
  • Calendar scheduling
  • Travel arrangements
  • Basic data entry
  • Document preparation

The beauty of a VA is that their role can be tailored to your specific needs. At about $1,000 per month for 20 hours a week, it’s a cost-effective solution for many small firms.

Accounts Receivable Management

With the right service, you can automate the process of chasing invoices, using customized workflows based on your preferences. This could include sending reminder emails, making phone calls, or even adjusting the approach based on your relationship with each client.

The potential impact is significant. For example, Kwame says that one firm increased its collection effectiveness from 63% to 78% and reduced its Days Sales Outstanding (DSO) from 23 days to just 12 days. This not only improved cash flow but also enhanced client relationships by ensuring consistent and professional follow-up on outstanding invoices.

Overcoming Hesitations About Outsourcing

Outsourcing can feel like a big leap, especially for accounting firm owners used to handling everything in-house. However, many of the common concerns about outsourcing can be addressed with proper planning and due diligence. Let’s into some of the most frequently cited hesitations and how you can overcome them, according to Kwame.

Security Concerns

As accountants, we deal with sensitive financial information daily. Reputable outsourcing companies address this by using virtual machines with data servers local to the client’s location. This means your data is kept on secure servers in your country, adhering to local data protection laws.

Trust Issues

Building trust with an outsourced team takes time. Start small and gradually increase responsibilities as you build confidence. Communication is key, especially in the early stages. Share your thoughts and concerns freely to help your outsourced team understand your preferences and work style.

The Long-Term Impact of Outsourcing

As you become more comfortable with outsourcing, you’ll likely find more tasks you can delegate. What starts as offloading a few simple tasks can snowball into a significant transformation of your workday. You might start by having a VA manage your calendar, then progress to letting them manage your email inbox, and eventually have them draft responses to routine client inquiries.

This evolution allows you to shift your role as a firm owner. Instead of getting bogged down in day-to-day tasks, you can focus more on strategy, client relationships, and business growth. Alternatively, you can use that reclaimed time to improve your work-life balance.

Practical Steps to Get Started

Here’s how you can get started:

  1. Identify Your Bottom 40%: Log your activities for a week. What tasks are eating up your time but don’t require your specific expertise?
  2. Start Small: Begin with something simple like having a VA manage your calendar or upload expense receipts.
  3. Choose a Reputable Provider: Look for an outsourcing company that understands the unique needs of accounting firms and has robust security measures.
  4. Communicate Clearly: Over-communicate early to help your outsourced team understand your preferences and work style.
  5. Be Patient: Give the process time to work. Significant improvements often become apparent after about three months.
  6. Gradually Increase Responsibilities: As you become more comfortable, start delegating more tasks.
  7. Monitor and Adjust: Regularly review the performance of your outsourced tasks and make adjustments as needed.

The 40% solution isn’t a magic bullet. But it is a powerful tool that can help transform your accounting practice. By identifying and outsourcing the tasks that are dragging you down, you can free up time to focus on what matters – whether that’s growing your business, improving your services, or simply enjoying a better work-life balance.

So, take a hard look at your daily tasks. What’s in your bottom 40%? And more importantly, what could you achieve if you reclaimed that time? The answer might just revolutionize your practice – and your life.

Want to explore this topic further and hear more insights from Kwame Agyei? Listen to the full episode of The Accounting Podcast, where we explore these ideas in greater detail. You’ll gain even more practical tips on implementing the 40% solution in your firm and hear real-world examples of how outsourcing can transform your practice.