Corporate finance teams and their outside auditors are powering through this financial reporting season with fewer staff on hand to deliver accurate financial statements to investors.
Accountants are leaving jobs in record numbers, at both corporations and audit firms, joining the broad swath of workers re-evaluating what they want from their careers. Some are leaving the profession entirely. Others may take advantage of a tight labor market to seek higher salaries and more flexible schedules.
In the rush to meet Securities and Exchange Commission filing deadlines, with more work piled on the shoulders of fewer people, important checks may be skipped, errors go unnoticed, and assumptions unchallenged.
“If you choose to file on time there is absolutely going to be an elevated risk that your financial statements will be materially misstated,” said Bruce Pounder, executive director of GAAP Lab, an advisory firm. “That’s not good for anybody.”
The turnover only piles onto an ever-shifting set of pandemic-era reporting risks that could weaken the reliablity of corporate results even as new regulators leading the Securities and Exhange Commission are eager to crack down on what they see as abuses from accounting for blank check companies to how companies report errors to auditor independence.
Roughly 4.3 million Americans quit their jobs in December, when 10.9 million jobs were open, according to data the federal government released this month. How many of those resigning were accountants and auditors isn’t clear, but the unemployment rate for these professionals averaged just over 3% in 2021, lower than the national unemployment rate, Labor Department estimates show.
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“We are not immune from what many people are calling the ‘great resignation',” Paul Knopp, CEO of KPMG LLP, told Bloomberg Tax when he announced an across-the-board wage hike at the Big Four accounting firm on Jan. 25. “We think this will not only help us retain the great talent that we have, but it will help us attract more talent to KPMG.”
The resignations have only compounded the challenge of a shrinking supply of accountants that predates the pandemic. The number of accounting graduates in 2018 dropped nearly 7% since the number of students earning bachelor’s and master’s degrees peaked in 2012, according to a 2019 report from the American Institute of CPAs, the most recent data available.
Hiring hasn’t kept pace with resignations, and staff are leaving even in the middle of financial reporting season—what once would have been taboo, said Wendy Cama, managing partner for audit and assurance services at Crowe LLP. “There’s just not enough people available.”
The high turnover and unfilled jobs has compounded pandemic-era shifts in how accountants work, replacing team camaraderie with people working alone, for long hours, connected only by laptops.
Crowe may have to shuffle work around to meet the deadlines that publicly traded companies face. The firm’s clients meanwhile have turned to outsourcing to bolster their accounting teams and in-house expertise, Cama said.
To combat the crunch, the four largest U.S. accounting firms have relied in part on their sheer size and flexibility to assign staff from offices around the country, even from around the globe. They’ve also gone on a spending spree to fill openings and keep existing staff at work.
Ernst & Young LLP said it has spent more than $2 billion since 2020 to raise pay and provide bonuses and other perks to attract and retain staff. PwC LLP, which views hiring experienced accountants as a priority, said it brought on more than 2,000 new hires to its tax and audit practice in January alone.
Both Deloitte LLP and KPMG said technology investments that streamline and centralize some aspects of the audit will help the work. “Not only do we expect this strategy to drive quality long-term, but it’s also paying dividends here and now,” Becky Sproul, a KPMG audit partner, said in a statement.
Regulators at the Public Company Accounting Oversight Board are watching. George Botic, the board’s director of inspections, said at a Jan. 21 academic conference that the turnover of experienced staff is an emerging audit risk, repeating a similar warning he delivered in December.
The board has urged auditors to up their game in the face of unprecedented market risks while SEC enforcement officials have warned companies to ensure their internal controls are up to date and can deliver trustworthy results to investors.
The rate of turnover now is nearly double what it would be in a typical year, and demand for accounting services has never been higher, said Gary Boomer, a strategist with Boomer Consulting Inc.
“I’m worried about the firms and their shortages,” Boomer said. “It only puts more pressure on the people that are there.”
The pandemic unleashed a torrent of complex work for corporate accountants, including reassessment of the value of leased property and more frequent impairment testing. Lingering supply chain disruptions and inflation both impact the financial statements.
Companies also had to alter their internal controls—safety checks designed to ensure accurate reporting—to address the risks of remote or hybrid work. The checks can be as basic as requiring multiple people to complete a task such as paying a vendor, which may frustrate shorthanded finance teams.
Small- and mid-cap companies with smaller accounting teams could be particularly vulnerable to the pressures of vacant accounting roles compared with larger businesses and even bigger CPA firms with more resources to spread out the work, said Daniel Taylor, associate accounting professor at the University of Pennsylvania.
“The fear is that an internal control weakness leads to a material misstatement or that it leads to the possibility of something greater, like a fraud,” Taylor said.
Even small accounting errors, often paired controls failures, can tank a company’s stock price. Restatements spiked last year amid the boom in special purpose acquistion companies, or SPACs, after a more than decade-long decline following the adoption of corporate governance reforms that mandated annual controls testing for the largest companies.
Companies need qualified staff and sufficient time to get the accounting right and to ensure that internal controls work as intended.
Fall short on staff, skills, or time and the risk of material misstatements rises. The same is true for auditors who risk missing an accounting error, said Pounder, the consultant with GAAP Lab.
Filing delays cause separate issues: keeping critical performance details from investors and running afoul of listing requirements and corporate mandates set by the SEC, which offered a rare but temporary deadline extension at the start of the pandemic.
Corporate managers, facing enormous market pressures to meet reporting deadlines, are unlikely to miss them this filing season, said Yelena Barychev, a partner with Blank Rome LLP who advises corporate boards.
Still, institutional knowledge lost with department staff can slow down audits, said Janet Malzone, national managing partner for audit at Grant Thornton LLP.
“So could it take a little longer, could we all spend more time? Yes. And that’s what we’re all going to have to do,” Malzone said. “A lot more effort, a bigger, heavy lift, because we all still want that outcome of high-quality financial reporting.”