A Trinity University study published in December 2014 notes that during the busy season, auditors at the Big Four auditing firms work (on average) 20 hours per week above the threshold at which they believe audit quality begins to deteriorate. The study goes on to say, “We find that auditors perceive workload fatigue as having the largest negative impact on morale … [with] understaffing and staff turnover being two of the biggest impediments to delivering a high-quality audit … Our findings provide support for the PCAOB’s concern that excessive workloads could be a “root cause” of audit deficiencies … ”

The heavy workloads have a ripple effect on the public accounting business model. Heavy workloads cause high turnover that drives down staff experience levels. Compounding matters, the Big Four business model for auditing is highly leveraged, with relatively high staff-to-partner ratios. As a result, the most experienced professionals (the partners) have heavy workloads that pose a heightened risk, but the inexperienced audit staff may not receive the supervision needed to compensate for the audit staff’s relative inexperience.

As it stands currently, there is considerable stress and strain in the system for auditors who are short on the hours and/or experience needed to achieve the level of quality that is expected by the Public Company Accounting Oversight Board. Struggles with work-life balance and pressure from the PCAOB inspection process compound the stress levels. Unfortunately, a lot of very talented professionals exit the profession every year as a result.

Other industries and geographies have acted to curb the ill-effects of excessive workloads. Rules exist to assure that airline pilots and commercial truck and bus drivers are not overly fatigued. The European Union has imposed strict limits on physician hours. Physician and medical resident workloads in the U.S. are also receiving considerable attention. Should concerns about quality of service be limited only to professions involving human safety? What about protecting investors, retirement nest eggs, and the efficiency of our capital markets?

It is important to consider whether the existing Big Four business model makes any sense in light of the following challenges now facing the auditing firms:

Today’s accounting and auditing rules are exceedingly complex. 

Technology has increased the complexity of commerce well beyond the days of shipping widgets. 

PCAOB inspection reports indicate that auditors are falling short of PCAOB expectations. 

Greed is a constant threat to the moral compass of public company managers and executives. 

Auditors need to be ever-vigilant and extraordinarily capable to prevent audit failures. 

The Big Four risk of loss from litigation due to a single failed audit can be staggering. In some instances, the losses can pose a threat to the audit firm’s survival.

At this juncture, the audit profession is either at or approaching a practical limit on the amount of audit quality that can be squeezed from the existing business model. Litigation settlements and PCAOB inspection results suggest there is more work to be done to improve audit quality.

If experts in the field of quality were asked to design a business model to achieve audit quality, the result would likely be the antithesis of the model that exists today. So how did we wind up where we are today?

The genesis of today’s Big Four business model

Various myriad factors contribute to the current state, but three stand out in particular.

Intense pressure on profitability. Successful large companies have capital structures that generally enable them to ride out the peaks and valleys. The large public accounting firms don’t operate that way. Instead, at the audit firm’s fiscal year end, the large public accounting firms pay-off any interim lines of credit and distribute substantially all remaining cash on hand to the partners. That final distribution, plus advances on profits during the year, constitutes the partner earnings for the year. If cash doesn’t accumulate as planned, partner compensation is negatively affected on a dollar-for-dollar basis. As you might imagine, there is intense pressure on audit firm leadership to meet the partners’ expectations for earnings.

In an ideal world, we would have the public company year-ends spread evenly across the quarters. That way, the public accounting business model would be considerably more efficient.

As a consequence, the audit firm staffing model is very lean. If turnover runs high or unexpected incremental work comes in, there is no one waiting on the bench to fill in. Battlefield promotions are part of each audit firm’s standard operating procedure. In a twist of irony, audit firm profits are higher when turnover is high—not when audit quality is high. This is because in the near term, revenues are relatively fixed in nature while personnel costs vary with headcount.

The intense pressure on profitability also contributes to the inherently inefficient cycle of hiring and headcount reductions. Some will argue the “up or out” process is how the cream rises to top. But the audit firms also lose a lot of talented people simply because the workloads are excessive. I would much prefer to see a business model built on reasonable workloads, low turnover, higher experience levels, and greater involvement from the partners and senior managers.

Commodity pricing. Audits continue to be relatively undifferentiated products except for instances where industry experience is relevant. This lack of differentiation has led to excessive competition on price rather than quality. The audit firms are stuck in the middle. The audit firms must comply with professional standards or risk criticism from the PCAOB, or worse yet, legal liability from a failed audit. The fees collected under commodity pricing, however, may not be sufficient to conduct quality audits using reasonable workloads. To get the necessary audit work done, the audit firms are left to squeeze their professionals for high levels productivity. The pressure on productivity, however, poses a clear and present danger to audit quality.

The PCAOB’s Audit Quality Indicator initiative is aimed at providing the buyers of audit services with more information that will facilitate the differentiation of competing auditors based on factors having a bearing on audit quality. It is my belief that audit committees, seeking to mitigate their own personal exposures associated with a failed audit, will pay more for an audit if they truly believe the selected auditor affords greater protection from a failed audit. It’s about empowering informed consumers of audit services with information having a bearing on auditing quality—so that the forces of competition can work their magic.

Seasonality. This is an age-old problem for the auditing profession. The skewing of workloads toward calendar year-ends is inherently inefficient. The audit firms staff up for the peak season demand in December through March, then struggle to keep the professional staff productive during the off season. The audit firms have tried to spread more of the year-end audit work over the course of the year, but there are practical limits to doing so. The audit firms seek to fill in the valleys with off-calendar year-end audits of governmental entities (often having June 30 year ends). Such work is done at steeply discounted rates, however.

In an ideal world, we would have the public company year-ends spread evenly across the quarters. That way, the public accounting business model would be considerably more efficient.

An opportunity too big to pass up

Conventional wisdom suggests that it would be cost-prohibitive to conduct the stub period audits needed to transition nearly three-quarters of the public companies to off-calendar year-ends. Public companies already complain about the rising costs of compliance as it is. Plus, some may argue that stub periods would be inconvenient to describing year-over-year trends.

But there is a case to be made for the big audit firms paying for those  stub period audits themselves, because the benefits to the audit firms themselves would be enormous and the pay-back period on the audit firm investment would be swift. (Please note that it will not be necessary for the audit firms to secure long duration contracts to realize this benefit. If all firms participate, all firms will benefit, irrespective of any auditor changes that might occur during phase-in. That is, unless a firm were to suffer a significant loss in market share, but that is a separate issue).

There are two components of immediate benefit to the audit firms:

First, audit firms would not need to staff up for the peak period demand. The same overall demand could be satisfied with a smaller work force if the work was evenly spread across the year.

Second, the low rate per hour work used to fill in the valleys would be replaced by higher rate per hour public company work.

These are not one-time benefits; they are annuities with a substantial value. It is entirely conceivable that the present value may be considerably larger than the cost of the stub period audits, making the year-end change a very attractive investment for the auditing firms. Bear in mind that the cost of a “three-month March 31 stub period audit” should not cost as much as the just-completed calendar year audit. There have to be some economies of scale to be realized. Similarly, the cost of a “nine-month September 30 stub period audit” should be about the same as the annual audit that would have been conducted and completed just three months later. So, in that case, the annual costs are merely shifted and incurred 90 days earlier. The truly incremental cost may not be that great after all. Additionally, the year-end shifts do not need to all occur during the same year. The shifting of year-ends could be phased-in over multiple years. Consideration can also be given to grouping specialized industries around common year ends. (Some may raise concerns about tax compliance costs and the challenges of changing statutory year ends around the world. These things all need to be considered, but they should not be excuses for doing nothing at this stage. Further analysis considering these issues should be conducted first.)

This concept presents a great opportunity for a very fair and just “quid pro quo.” In exchange for distributing the public company year-ends evenly across the calendar, the audit firms could be required to right-size staff workloads, reduce turnover, and increase experience levels. Additionally, the audit partner workloads could be right-sized to give the partners a fighting chance to achieve the level of audit quality that is expected. Achievement of these metrics could be built around defining “safe zones of operation” that could be readily incorporated into the PCAOB’s aging quality control standards, an update for which has been on the PCAOB’s standard-setting agenda for a decade.

Beyond the up-front monetary benefits to adopting this kind of change, there is a second wave of benefits that further contribute to the attractiveness of this opportunity:

Higher experience levels and better continuity of staff will improve productivity, audit quality, and audit firm profits.

The audit firms will achieve a better yield on their investment in training (both formal training and on-the-job training). As it stands currently, the audit firms invest considerable time and money training professionals who will soon leave the firm. This is inherently inefficient. 

Better audit quality will drive down practice protection costs (malpractice insurance, settlements, and legal fees) 

More reasonable workloads will ensure that public accounting attracts the best talent to the accounting profession. As it stands currently, work-life balance concerns communicated quickly via social media are scaring talented students away from public accounting as a career choice. 

Next steps. Hopefully, this discussion will stimulate investigation and quantification of the costs and benefits of this potential opportunity. There is no shortage of hard data to be analyzed and modeled in order to understand how the costs and benefits balance out. But there are great opportunities for the academic community to work collaboratively with the Big Four, the Center for Audit Quality, PCAOB (including the PCAOB’s economists), and the Securities and Exchange Commission. If the analysis demonstrates this to truly be an opportunity worth pursuing, hopefully the SEC and the PCAOB will then work to transform this concept into reality through the legislative and rulemaking processes.


Robert A. Conway is a retired KPMG audit partner. He worked for 26 years at KPMG, including 17 years as an audit partner. After retiring from the KPMG, he spent nine years at the PCAOB where he led domestic and international inspections of Big Four audit firms. During his last six years at the PCAOB, he also had leadership responsibility for the PCAOB’s Los Angeles and Orange County offices. He is currently the Professional Practice Director at CNM LLP, a 70+ professional boutique CPA firm specializing in technical accounting consultations for complex issues and outsourcing services for SOX 404 compliance.