Auditor Angst

Want to drive your auditors crazy? Try this: First, meet with them ahead of the annual audit and agree on a date when your work papers will be ready. Then, when they arrive for the audit, tell them you're "almost ready" and hand over just enough material to keep them busy until lunch. Repeat as necessary. Later, suddenly remember a contract or revenue-recognition problem that you haven't previously discussed (the more complex, the better). Finally, as the deadline nears, demand a 24-hour turnaround for the 10-K draft and complain loudly when the auditors tell you it can't be done.

This scenario may sound like a joke, but in fact auditors say it's exactly what many CFOs do every year. Michael Deutchman, managing director at Los Angeles–based accounting firm Kabani & Co., says he dreams of walking into a client company where "we can test the records and see right away that they are what they're supposed to be."

But in reality, he laments, "there aren't a lot of CFOs who run companies that way." More often, says Ben Neuhausen, national director of accounting for BDO Seidman, "the client takes forever to pull together documentation, and then they present it three days before audited financials are due to their lender, or a week before the 10-K has to be written. Somehow they think the auditor will work a miracle."

The miracle is that despite the chronic unreadiness of auditees, the relationship between auditors and their clients is actually improving. Most auditors — more than 60 percent of those recently surveyed by CFO — say they have a better relationship with clients today compared with three years ago, when the pain of Sarbanes-Oxley compliance was still raw. In part that's due to new interpretations from the Securities and Exchange Commission that loosen the strictures of Sarbox, leading most auditors to feel they can offer more guidance — "the fun stuff," in the words of one senior manager. New guidance about how internal controls must be audited, in the form of Auditing Standard No. 5 (AS5) from the Public Company Accounting Oversight Board (PCAOB), has also made things better.

Still, ask auditors what keeps them awake at night and client-related issues will top their replies. More than half the nearly 100 auditors surveyed by CFO said that unprepared clients create high levels of stress. One-third said the same of clients who are difficult to work with. The hassle from clients, in fact, far outranked other strains, such as the pressure to generate more revenue.

No one expects a return to the cozy pre-Sarbox days, when auditors were practically an extension of the finance team. But, auditors wouldn't mind a little more cooperation and appreciation. "The ideal situation would be clients who understand their own accounting and make the time to get us what we need," says Bruce Rosen, partner-in-charge of assurance services at New York–based auditing firm Eisner. How often does that happen? By way of reply, Rosen laughs — and laughs some more.

Look Who's Not Talking
This is not to say that auditors are unsympathetic to their clients' problems. "Most clients want to be ready, and they do the best they can," says Russ Wieman, national managing partner of audit and advisory services at Grant Thornton. Still, there is plenty of room for improvement. Some 10 percent of CFOs admit they are typically unprepared for audits, while another 37 percent are only sometimes prepared (see "Can This Relationship Be Saved?"). A lack of qualified staff in corporate finance departments is frequently to blame. "There's no question that many companies do not have the accounting talent" to cope with increasingly complex accounting rules, says Wieman.

Unprepared clients mean longer audits, longer hours, and, sometimes, auditor burnout. "Some of our toughest decisions are when one job hasn't wrapped and the next job is starting — what do we do?" says Eisner's Rosen. Auditors have the option of leaving the audit unfinished and circling back when time permits, something Eisner stipulates in many of its engagement letters. In reality, though, the firm will bend that rule for clients with SEC or other filing deadlines, says Rosen, since few auditors want to be known for making a client miss a deadline.

Another big problem, say auditors, is that CFOs fail to seek their input before making major accounting decisions involving such matters as debt agreements, leases, or asset sales. More than half the respondents to CFO's survey ranked this among the top three things clients do that reduce the efficiency of an audit. "Tell the auditors [about major decisions] when you're in the planning stage, and give them the agreements to look at," advises Neuhausen. "Don't present them at the end of the year as a surprise."

Of course, clients claim that such cases are innocent omissions, and they often are. But Neuhausen says that sometimes he "gets the sense that CFOs think if they just present it as a fait accompli, the auditors will just go along with whatever they did and they can slip it by them."

Complexity Cuts Both Ways
As for longer engagements, auditors are quick to admit that clients aren't the only ones to blame. Accounting complexity now throws up many hurdles, making it difficult for auditors to breeze through assignments. More and more of their questions need to go to the national office, or at least to another expert in the firm. "I've been an audit partner a long time, and 10 years ago I didn't consult that much, because things weren't that complicated," says Wieman. Today he brings in subject-matter experts far more frequently, thanks to complex pronouncements such as FASB Interpretation (FIN) 48 for income taxes. "There are a lot of things out there that individual auditors can't be expected to know on their own," he says.

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