Challenge yourself to do things differently.
Subscribe to CPA Trendlines podcasts anywhere: Apple, Google, Spotify, iHeart, Deezer, Amazon Music and Audible, Player FM, Audacy, Gaana (India), and Boomplay (Africa).
The Disruptors
With Liz Farr
Chris Vanover is on a mission “to make accounting and auditing better.”
Initially, AuditClub helped firms mainly with quality control, but over time that grew into offering fractional support on a subscription basis to audit firms that can’t find the talent they need.
MORE PODCASTS and VIDEOS: Jason Deshayes: What We’re Doing Isn’t Working | Heather Satterley: You’ve Got to Meet People Where They Are | Bill Penczak: Stop Forcing Smart People to Do Stupid Work | Sandra Wiley: Staffing Problem? Check Your Culture | Scott Scarano: First, Grow People. Then Firm Growth Can Follow | Jody Padar: Build a Practice that Works for You, Not Vice-Versa | Ira Rosenbloom: With M&A, Nobody Wants a Fixer-Upper | Peter Margaritis: The Power Skills Every Accountant Needs | Joe Montgomery: Find the Sweet Spot of the Right Clients, Right Services and Right Prices | Marie Green: Your Bad Apples Are Ruining You | Megan Genest Tarnow: Hire for Curiosity Rather Than Compliance | Clayton Oates: One Way to Keep Clients for Life | Randy Crabtree: Follow These Three Rules to Keep Employees Happy | Erik Solbakken: Yes, You Can Work Less and Make More | Donny Shimamoto: Future Firm Growth Requires a Mindshift | Jennifer Wilson: Empower Young Workers to Build the Firm Everyone Loves | Mike Whitmire: Re-Think Your Hiring and Training Practices | Hector Garcia: Success Strategies of a Quickbooks YouTube Superstar | Blake Oliver: Why Tax Work Yearns To Be Free| Private Equity Explodes in U.K. | Brannon Poe: The Status Quo Must Go | Accounting Nerds, Unlock Your Super Powers | Disruptor: Jason Statts Shakes Up the Status Quo | Think Small to Think Big with Matt Wilkinson | When Financial Statements Go Extinct with Corey Schmidt | Can Geraldine Carter Save Accountants from Themselves? | Re-Inventing Accounting with Tyler Anderson
Exclusively for PRO Members. Log in here or upgrade to PRO today.
Audit firms are challenged to plan a year or even a month out, so AuditClub offers members weekly access. This weekly flexibility allows AuditClub to take a concierge approach to help their member firms out a week at a time. Plus, Vanover may have the secret sauce to getting employees to perform at their optimum levels daily.
At the end of every day, each AuditClub employee submits a daily scorecard, which outlines what that person accomplished, “as well as some best practices and some observations.” This daily scorecard requirement “propels people to actually perform at their highest level,” according to Vanover.
New employees quickly see that AuditClub’s model “works not only to support the CPA firms, but it also works to support them and give them that true work-life balance.” Team members work a maximum 36-hour, four-day workweek throughout the year “because we want our people to be at their best. And they need that rest, they need that time away so they can re-engage in their work that day.” Working too many hours, Vanover said, may correlate to problems with audit quality.
Besides providing an innovative approach to helping audit firms, Vanover has strong opinions about the two numbers that CPAs are “notoriously interested in:” billable hours and the 150-hour educational requirement, which add nothing to the profession, but deter people from entering or staying in the accounting. “If you kill the billable hour and you kill the 150-hour requirement, you might actually end up saving the CPA profession,” Vanover said.
10 More Takeaways from Chris Vanover
- Auditing and accounting are apprenticeships – people learn on the job. Becoming an auditor without taking a single audit class in college is possible.
- As people rise in rank from staff auditors to audit partners and managing directors, the number of overtime hours also increases. Younger generations are not interested in making partner if that means indentured servitude to the CPA firm.
- Even asking for a 10-20% fee increase, it would take five to seven years to get out of the profitability hole most firms are in. Firms are better off with new prospects and a different pricing model.
- Peer review is often presented as an obstacle to change, but if you think about risk the right way and manage risk in your practice, you should welcome the challenges from peer review. Questions from peer review mean you’re doing things differently, and if we don’t have the freedom and flexibility to introduce new ways of doing things, we will ultimately be disrupted or dead.
- Older partners are resistant to change because they’re happy with their current compensation and don’t see any problems with the current model, the firm of yesterday. If they don’t listen to ideas from the junior ranks to build the firm of tomorrow, they risk being disrupted.
- Older partners are also too busy with work to think about change, but tomorrow’s leaders will outsmart today’s leaders by reinventing how things are done.
- Older partners may also be reluctant to invest in the technology they don’t use but whose cost may cut into their retirement compensation.
- An active and questioning mindset will help propel your career. Don’t just ask why something is done in a particular way but present a viable solution.
- If you’re trying to innovate, you need the capacity to do so. At AuditClub, employees spend 25% of their time on innovation.
- Many firms are incentivized to require their teams to absorb the additional work rather than plan for contingencies The result is that their people will be burned out or will leave. This is a short-term solution with long-term implications.
About Chris Vanover
Chris Vanover is a high-performing and team-focused accounting and auditing executive with over two decades of unique public accounting experience, including distinctive auditing, regulatory and educational roles with Big 4 and regional firms, the Public Company Accounting Oversight Board (“PCAOB”) and multiple universities. Before AuditClub, Vanover was an audit partner at a Top 40 firm responsible for overseeing the quality control system for the audit practice across nine offices. Chris also spent a combined 13 years with a Big 4 firm. In addition to his client-service responsibilities, Vanover was also part of a Big 4 firm’s Chief Auditor Network within its National Quality Organization. In this role, Chris provided both PCAOB and AICPA auditing and methodology advice to engagement teams, assisted both national and local leaders with various audit quality initiatives, and created and facilitated numerous technical trainings.
Transcript
(Transcripts are made available as soon as possible. They are not fully edited for grammar or spelling.)
Liz Farr 00:03
Welcome to Accounting Disrupter Conversations. I’m your host, Liz Farr from CPA Trendlines. My guest today is Chris Vanover, co-founder of AuditClub. How are you today, Chris?
Chris Vanover 00:18
I’m doing fantastic, Liz. Thanks for having me on your show. Looking forward to the conversation.
Liz Farr 00:24
Oh, great, I’m looking forward to hearing all about audit clam and the things that you’re doing. Absolutely. Now public accounting in general has been really slow to change and audit has been especially resistant to change. But Audit Club is offering something completely different. Can you give listeners a brief description of what you’re doing?
Chris Vanover 00:51
Absolutely, yeah. So Audit Club is actually an audit service center for CPA firms and companies really trying to help them get their audit-related needs just done. So we went to market a few years ago and launched in about 2018. Really, with the mission to make accounting and auditing better. And that first effort into the market was actually working with managing partners and audit partners in charge, primarily in areas of quality control, whether that was pre-issuance review, a post-issuance inspection, technical consultations, kind of a national office on demand for local and regional firms. As we obviously provided those services, firms started to ask what more we could do. And that’s when we started to get inquiries around, Hey, I just lost my audit manager or my audit partner or audit director, I’m a local firm, I don’t know where to turn to for talent in today’s marketplace. Could you guys possibly help us out with that. So we started to obviously review work papers. And we’ve kind of expanded the service offerings more recently into what we call our audit club crew passes. And that actually provides fractional support, even at the lower levels anywhere from one to three years of experience to somebody with four to six years of experience. So we’ve really created a full service solution that audit firms, CPA firms, and just companies can tap into to get the accountants and auditors they want, but providing that fractional flexibility they really need today.
Liz Farr 02:14
Well, that’s great. Now, besides offering your audit services as a service center approach, you’re also offering your services as a subscription, rather than the traditional trading dollars for hours. How does that work?
Chris Vanover 02:37
Yeah, it’s it’s I love the question. It’s an area we did struggle with initially, because as you probably know, a lot of the CPA firms out there are a little bit antiquated and how they think. And so inevitably, we went out in the market with a subscription offering. And they quickly asked, Well, what do you rate per hour? And how many billable hours am I getting? So as a new firm, just trying to survive and get a foothold, we obviously acquiesced. More recently, about last summer, we pivoted to that actual subscription model, where you basically provide weekly access passes and sell them under a subscription basis where a firm pays a flat investment each week, depending upon the level of crew or chief that they’re looking for. And then they invest that money. And then we focus on just delivering them solutions. So we don’t actually report out billable hours, we start the day with what we call audit club connect, or we actually are speaking virtually with the CPA firm, partner or manager and saying, hey, what can we do today to help get you guys solutions that you need, and we get to work. And at the end of the day, we submit what we call a solution scorecard, that actually outlines what we actually accomplished that day, as well as some best practices and some observations, that really becomes a value report. What I like about the subscription model is that it actually puts a inherent pressure on our team to constantly perform at their best, because we are one week away from having no clients. And that’s a little bit of a scary proposition to have. But it also propels people to actually perform at their highest level.
Liz Farr 04:13
That’s really cool. And, and I like that you offer your services just on a weekly basis. Because I know from my experience doing audits, sometimes you didn’t really know until the day of the audit that you were gonna need some extra hands.
Chris Vanover 04:34
That’s right. Absolutely. And it’s one of those, you know, as we studied our customers and members, as we call them, and learned more about how they work. If you know anything about the CPA firm world, which I know you do, Liz, they are definitely they they’re challenged when it comes to actually figuring out what they have to do and when they have to do it. They have a general sense that they are they cannot plan a month out. They cannot plan a year out and so to give meaning that week to week flexibility has really opened up another avenue for us just to be able to be there more from a concierge approach saying, Hey, how can we help you today, and like I said, every week, we have to perform at our best, otherwise, we run the risk of losing them as a member of AuditClub.
Liz Farr 05:14
That really puts a lot of incentive on you and your team to really work hard. Now, accounting firms around the world have been struggling to find talent, especially since the pandemic, has that been a problem for you.
Chris Vanover 05:35
I know people are gonna probably second-guess this, but it has not been a problem for us. And it goes back to our mission to make accounting and auditing better. Our first foray out there was obviously trying to help improve the quality of the work papers, the reports, the audits that reviews, the compilations that firms were doing, helping them through peer review, helping them through a PCAOB inspection, whatever it was to help them elevate their quality journey. That was the fundamental mission of audit club from day one. The other part of it is not only just firm focused, but it’s also people focused. So by moving to this subscription access model, what we’ve actually been able to do is carve out a nine to five access model Monday through Thursday. And in doing so all of our people that are employed with us actually work a maximum 36 hour, four day workweek throughout the year, that has been eye opening and game changing for a lot of candidates who see it on paper, and they don’t believe it. But the minute they get in here, they still understand how the model works not only to support the CPA firms, but it also works to support them and given them that true work life balance. That’s usually nothing more than lip service that most CPA firms.
Liz Farr 06:47
You know, and this just seems so brilliant, you know, how do you manage your capacity to do that, do you? That must be a big part of it.
Chris Vanover 07:00
And I will say, you know, I’m particularly proud of the fact that again, we’re a young organization. So we haven’t necessarily had enough cycles to say what truly is our retention and our turnover mark. But when you look at the big four, and you see in their own audit quality reports that 35% of their senior Associates, and senior managers and managers are turning over in a given year. And that obviously, the drastic increase from where it was even five years ago. You know, we have not experienced any turnover yet. And on top of that every offer we’ve made to a candidate has been accepted. I don’t know of any other CPAs from right now that can probably make that claim. And from a capacity perspective, it’s interesting because this is where we struggled go into the subscription model was what do we do in a situation where perhaps we are oversubscribed? Like right now, as we’re recording, this is a historically busy time period for many CPA firms. So we have a lot of demand going on right now. But what happens in our situation is we actually have a few different levels of membership. One is called our annual subscribers. So our annual subscribers always get first priority in any given subscription week. And then we have what we call an A-Line upgrade, which basically takes our standard passes, and gives that shared access that they’re sharing with other CPA firms or companies becomes a private access model, where they actually have access to our team Monday, Tuesday, Wednesday and Thursday, throughout the day. That becomes our second priority. And then our third priority is our standard shared access passes. So we consciously limit the number of passes we sell in a given week, because if we’re going to sell a firm a pass, we want to make sure we’re delivering solutions for them. So this is not unfortunately, I we’re not robots, right. We’re not the chat GPT just yet, in terms of the audit club, we are people and we have capacity constraints, just like any other firm, but the way we manage that if we just say, Look, we’re going to limit the number of subscribers we have. Inevitably, that means we may have to turn down certain subscribers in a given week, just based on prioritization. And that’s just the reality of it until we have, you know, enough bodies to go around. But as you know, you know, and I know, it’s very hard to find talent, and so we’re capacity constrained just like any other CPA firm, but we’re gonna do our best to make sure these numbers are satisfied.
Liz Farr 09:21
That’s really great. And, you know, I wish that something like that had been around back when I had been trying to be an auditor. You know, there were a couple of times when they said, Oh, well gee, we just lost our audit manager. Liz, you did a governmental audit a while ago. You can be the in charge for this one. And I’m like, I haven’t audited for three years when you mean
Chris Vanover 09:51
Yeah. And one of the things you know we do contractually make sure we put in our language is the fact that you know we operate with due professional care. We are obviously built into the standards, AICPA and PCAOB. We’re backed by a licensed accountancy corporation. So our reputation is on the line, right. And again, that’s a differentiating point between us and other offshore service centers that are available out there. It’s a licensed accountancy Corporation, we’re backed by that. But we’re also all based here in the United States, okay. All of our people, our contracts are structured in a way where they’re all-encompassing, meaning if our current chief can deliver you a solution in the areas of accounting, assurance, quality control, regulatory matters or training, we will do it for you. But if we can’t do it under due professional care, we’re going to look to reassign resources, and or just be honest with you that, hey, we can’t be the be-all and end-all to everybody. So while we do have an all-encompassing approach, it’s also constrained by the fact that we do obviously want to operate under due professional care.
Liz Farr 10:54
That’s good. That’s really good. And that should be reassuring to anybody who’s thinking of hiring you.
Chris Vanover 11:01
Yeah, again, we’re like, so we can’t be the be all and involve everybody. And that’s important that we make that disclaimer upfront. Because some firms just assume that they can, you know, pick up the phone, and on Monday, they’re going to have the resources they need on that given day. And like I said, we’re not magicians, unfortunately, yet. But that’s just the reality of the professional we’re operating within, there’s definitely a lot to know. And, you know, you can’t possibly know everything. And so we shouldn’t be claiming that we know everything as well. But granted, it’s very difficult to find talent right now. So we always challenge the CPA firms and companies to say, what are your other options right now? Right. And you know, sure, you can call up a recruiter that doesn’t really have a vested interest and who you ultimately have on your team, you can pay a pretty hefty Headhunter fee, or you can invest those dollars in audit club and get access to an entire team of chiefs and crew that you can pick and play from whenever you decide.
Liz Farr 11:56
That’s probably a really good solution for a lot of firms. Now, most accounting firms rely on metrics like realization rate, and billable hours, both of which I think are completely bogus. What are the metrics that you use to assess performance?
Chris Vanover 12:17
Yeah, what I love this question, too, one of the most frustrating things in our infancy was every single month running QuickBooks, timesheet reports and sending those to firms and companies that were supporting, saying, Hey, here’s the number of hours we provided your firm during the month, and here’s what you have left, right? There was no value to that in my mind. Now, we still get a lot of firms and companies say well, how many billable hours are we getting? And we always say, Look, this is an access model, no different than us subscribing to your gym, or you basically providing, you know, paying an insurance premium. Right, you’re kind of guaranteeing that you’re gonna get access to the health care, or access to the gym, when you want it based on what you signed up for. It’s the same concept with us. It’s that peace of mind, it’s that convenience. We do not reflect hours here at auto club. So we actually none of our people reflect billable hours. It’s irrelevant to us. And the reasons they’re relevant is because we are focused on delivering solutions. As I mentioned earlier, we have that solution scorecard, right, especially in a day where our employees are dispersed across the United States. In a remote environment, it is very difficult to understand what people are doing that you’re leading. And one of the ways we do that is through the solution scorecards that are sent to the CPA firm and or company. At the end of each day. Each one of my chiefs or crew has to submit that. And so they’re telling you at that point in time, what they did in that given day. And we always say guys, would you feel if you’re in their shoes, that you’ve given them enough value for what they’ve invested in you. So that’s one of our metrics, at the end of the day is the solution scorecards. We also have an employee weekly report that gets submitted directly up to me as well, where at the end of the week, they say, look, here’s the contributions I made to our members. And here’s the contributions I made to audit club internally. And here’s the values that I espouse during the week, and the contributions I make. And also, here’s what I have planned for next week. And oh, by the way, what can audit club helped you do better? And so we’re getting that feedback mechanism constantly coming through every single week. So we’re taking the pulse of our employees. We’re understanding the value we’re providing to our members. And we’re also understanding what else can we do better to constantly up our game? billable hours, completely irrelevant. We also and I spent a few years at the Public Company Accounting Oversight Board, working on the audit quality indicators project. And one of the things that was very eye opening to me was the fact that firms are very good about measuring the outputs. Right. In other words, how many hours did they support a particular client for or how many restatements do they have? For how many material weaknesses did they miss? Or do they have any litigation, right, you can see those things on an output perspective. But going into an audit, the key differentiators are the inputs. It’s the people side, right? So a lot of what the PCAOB was proposing in that eventually, concept release, and now the proposed standard out there, talks about the concept of audit quality indicators and measuring inputs. And a lot of this goes back to I used to work for a gentleman named Bob Conway, who was a regional director at the PCAOB, former KPMG partner, and he was actually credited as the anonymous retired partner that submitted a recommendation to a cap back in 2008, the Committee of the Treadway commission to advance audit quality. And one of his suggestions was, look, guys, pilots have safe zones of operation, right? If a pilot all of a sudden steers to the left, too much, a bell goes off, right? Same thing happens, it’s fair to the right, so much a whistle goes off whatever it is, there’s an alert. We don’t have those same alerts, at least in local and regional firms that tell you, hey, you’ve now spent 15 hours this individual spent 15 hours today on your engagement, don’t you think there might need to have a little break to be able to be fresh and spot the issues? Right? There’s no alert that goes off typically, or hey, your partner that’s overseeing this engagement, is also overseeing the office as a managing partner, and has administrative duties? Well, should that be a flag, right? All these sorts of things that go into telling you, maybe they’re not necessarily going to correlate exactly to the outputs and the audit quality, but they’re generally going to give you some light in terms of where you may have a bust on an audit. So those are the things we look at internally is like, how many CPE hours are people getting? Okay? What’s their hours per week, you know, again, we’re 36 hours maximum, because we want our people to be at their best. And they need that rest, they need that, you know, time away, so they can re engage in their work that day. So there’s a lot of other quantitative and qualitative metrics that we look at here in audit club to make sure we’re performing at our peak build hours is totally irrelevant to this all.
Liz Farr 17:04
Yeah, I thought so too, when I was in, in public accounting. Now, and I remember there were even quiet times of the year when I had a billable hours budget I have to get to, and well, gee, you know, what can I do to stretch the work out? Because, you know, maybe I only have I have something I could do in two hours. Right? I need four hours. Well, can I stretch that out so that it looks better?
Chris Vanover 17:44
Yeah. And it’s interesting you point that out? Because I mean, I do think if you look at two things, we, as CPAs are notoriously interested in the numbers, right? And it’s ingrained within us. It’s in our DNA, get that right. But we’re focused on in particular, two numbers, one of which is billable hours. The other one is the 150 hour educational requirement, both of which add nothing to the conversation, but are actually on two different fronts, detracting people from actually either going into the profession, or making an exodus or people out of the profession, right? Because again, we say, look, good 150 hours, doesn’t matter where you get those extra 30 hours in, I came out of 120 hour education at Claremont McKenna College, graduated there had an offer to start with PwC back in the day, and I was just focused on how do I get certified the fastest. So I ended up taking PowerPoint, Excel, volleyball, right, just to get 30 credits, because that was gonna get my license the quickest. It didn’t make me a better CPA, right. And so there’s nothing empirical that says, other than maybe this gives you a leg up in terms of passing the exam, that it actually translates into better work product, better quality, all that sort of stuff. So we’d say okay, get your 150 hours. And then once they do, we say, Okay, now that your firm gets your 2000 billable hours this year, and again, to your exact point, everyone’s like, why am I doing this? Right? So all of a sudden, they start to worry about their billable hours. There’s no, that does nothing to motivate anybody from an efficiency or even effectiveness standpoint. So it gets people to be burned out, they leave the profession, right? Or they decide, hey, look, maybe the grass is greener, I’ll become a corporate finance guy, or I’ll do something else with an accounting or I’m gonna leave accounting altogether. So in my mind, if you kill the billable hour and you kill the 150-hour requirement, you might actually end up saving the CPA profession.
Liz Farr 19:35
I think you could be onto something there. Now, I came to accounting kinda late in life. So the 30 hours that I had to get just to get the credit so that I the right classes, so I could sit for the CPA exam that was on top of close to 200 credit hours, the already earned from being a semi professional student. But I can’t say that that class I took in Russian, or women’s studies really helped me become a better CPA. It made me a more interesting person, maybe, but better, and it just amazes me.
Chris Vanover 20:24
A whole 100 I can go on and on 150-hour requirement, and there’s been plenty of debate over the last few weeks in particular, on whether that’s a necessary thing or not, I think you know, my view on it, I don’t find it necessary. I do think, you know, auditing and accounting in general is an apprenticeship type concept where people learn on the job, I will tell you, I maybe I shouldn’t admit this on the air, but I never took an auditing class in college, really. So, and I was at a liberal arts college did a lot of accounting classes, where he wrote a lot of papers, things like that. But I never took auditing, and I didn’t take my first foray into auditing wasn’t until I interned with PwC and started realizing, okay, how this makes sense. On top of that, you know, I then did the Becker CPA CPA review course, for auditing, that’s where I learned a little bit more about auditing, but never took an actual auditing class. And lo and behold, I’ve been in this profession 20 plus years, and I think I’ve done a decent job at being an auditor, because of those people that have actually trained me in my years informed me. But the 150 hour requirement to me unless you’re going to actually put some skin in and in terms of its meaningful, you know, education that relates to what you’re actually pursuing as a career. What’s the point of it, it’s just to attract new people, it’s an added costs. And they have ironic thing is that people have actually put this rule into place, they’re not holding themselves up to it. If you really believe in the 150 hours, then everyone in the profession should be going back there to get their 150 hours.
Liz Farr 21:50
Yeah, yeah. I mean, there are a lot of people who have taken that extra 30 hours and taken classes that actually do help them. But if there’s no requirement as to the content, and I’m not quite sure what the point of it is,
Chris Vanover 22:11
I think it’s just an odd barrier to entry. And that we did reduce that, again, it’s done probably more to damage the profession, and it has done to help the profession. The flip side I can talk about earlier, you know, that’s the 150 hour requirement, the billable hour concept is also, again, what I think that drives people out of this business, right, and they think about, again, in the Big Four, they produce these audit quality reports every year. And because of the PCAOB, is efforts that I had started when I was back into PCB in 2011. As well, on this concept of audit quality indicators, several of these firms are now reporting overtime hours per individual, okay, and you can go right into there, you can Google this PwC, ey KPMG. A lot of the big players, they have their audit quality reports every single year on their audit profession. And, you know, if you’d look at one of the things, they disclose his audit hours, or overtime hours, and for PwC, and this is their 2022, Audit Quality Report, audit associates are working 220 hours overtime, goes up to 256 for audit senior associates, goes up to 295 for audit directors and managers. And it goes up to 349 for audit partners and managing directors II. Why is that 373 for audit partners and managing directors, you cannot tell me that the millennials and Gen Z’s don’t see that in the partners and go, Why don’t want to spend 15 years trying to make partner only to live a life that basically is in essence indentured servitude to the CPA firm.
Liz Farr 23:44
I think you’re right. Yeah, I, you know, when I was contemplating what I would do with my accounting career, I looked at all the people above me, and I thought I don’t really want their job. That’s crazy.
Chris Vanover 24:01
Yeah, so and so quite a lot of this is all predicated back on the whole concept of commodity pricing. Right. And because we as CPAs have done a really poor job of differentiating ourselves, you go to all you know, 10 different CPA websites, they all look feel and smell the same, right? And the customer has no idea what they’re actually buying when they buy an audit when they buy or review. Or if they buy a compilation. And they don’t care whether it’s in EY KPMG, moss, Adams, you name it, whatever firm it is, it doesn’t matter. They just need that one or two page report at the end. They don’t understand the inputs, they don’t understand the process and they don’t understand the value behind it. And that’s because we as a profession, have basically dug ourselves our own grave. And we said look, we’re gonna go out there and sell this audit for this and Joe CPA. They’ll do it for $1,000 less, and now Mark over there. We’ll do it for $2,000 less, so they compete on price as opposed to actually the value behind even though it’s compliance there isn’t there is a By behind the audit itself, that commodity pricing means your revenues are in essence kind of capped unless you get more volume. And now all of a sudden when your biggest expense is labor, well, this is a reason why people have 370 hours overtime. Because the firm doesn’t want to see that fixed cost salary all of a sudden become an a variable expense that then eats into partner income per share. So it’s a very greedy, archaic model, that I think a lot of the millennials and Generation Z are starting to rise up on and they’re starting to see through it and going guys, you can’t fool me. At the end of the day, this is a this is a ruse. And I’m gonna get out of here, while I have my own sanity still left.
Liz Farr 25:41
Yeah. And another thing that always puzzled me about the billable hour, especially in audit, was that most audits are on a fixed fee basis.
Chris Vanover 26:00
So what do billable hours have to do with anything, they really are just a measurement in essence of productivity that people are hung on to right, this is falling out of an industrial revolution type concept where people had a 40 hour workweek. And now all of a sudden, you can see how somebody is productive, because they’re on the clock for eight hours or 10 hours or 12 hours a day. But it doesn’t matter. And most firms, you know, again, I would even cast doubt on what’s been reported in these audit quality reports of 349 hours, because a lot of that time gets eaten and underreported. So I’m guessing does overtime hours. I mean, these are probably painting the rosy picture, but the reality is probably even far north of that. Okay, so these hours mean nothing. And, you know, I think what often happens is that these terms budget these engagements, and then also, they don’t even look at the actual hours. And when they do, it’s trying to justify, oh, why was that an anomaly? And how do I exclude it from next year’s fee proposal because they know the client won’t pay for it. So it’s like a self fulfilling prophecy that they can’t get out of it. You know, we’ve talked to a number of CPA firms where you look at their audit practice, and you’re like, nobody’s gonna want to buy this, right. And you almost have to start from scratch. Because you’re so far deep right now, in terms of your profitability, that even if you were to offer ask for 10 20% increases year over year, it’s probably still take you five to seven years to get out of that hole. So you’re better off just scrapping it, and entertaining new prospects that come along under a different pricing model. I think you’re right there. Now, one excuse that some audit partners throw up to counter changes in the way that they perform audits is, well, we’ll never get through peer review, if we do it that way. What is your response to that complaint? Interesting question. Obviously, a lot of what we do is predicated on standards and making sure we comply with the standards. I will say, you know, we’ve definitely have a number of inquiry calls with CPA firms and companies that are looking for support. And they question again, this is a different model, not everybody gets it. And so we struggle sometimes with those types of CPA firms, because we don’t see eye to eye in terms of how we bring value versus what they think it should be. So in those situations, where peer review is questionable, you got to do it this way. You also have to look at who’s leading peer review these days as well. And that’s a whole nother demographic where that number is also facing way down the wrong way. Right. And we’ve had, we at Audit Club have had conversations with the AICPA saying, if anybody could probably do effective peer reviews, it’s the people in our organization, just based on our experience, you know, whether it’s National Quality office, folks, national office, folks with Big Four firm roles, PCAOB experience, like we live in breathe audit quality on a day to day basis. But they’ve said, You know what, audit club, appreciate your commentary. But you do know that you have to actually issue your own audit reports to be able to consider a peer and therefore perform a peer review. So again, trying to solve a problem with a creative solution. And it’s immediately vetoed, because it’s not that traditional way of thinking, right? And this goes to your question, peer review, challenging something, because it’s done differently. I think every firm should welcome that challenge. Because by when you’re when someone asks a question what you’re doing, it means you’re doing something differently. And as long as you’re thinking about risk the right way and managing the risk within your practice, then you should have the freedom and flexibility to introduce new ways of doing things. If we don’t do that, then again, we we lend ourselves to just basically being either disrupted or dead at some point in time because we basically have conformed to how we’ve done things historically in the past.
Liz Farr 29:52
Absolutely. Now, what are some of the other roadblocks to change in public accounting? Owning in general and in audit specifically?
Chris Vanover 30:05
Yeah, I think again, it’s probably a little bit of the the old guard at this point, right where they’re hanging on because you know, they’re content making their average $600,000 a partner income per share. But then they’re resistant to change, because in their mind, it’s not broken. But what they’re failing to do is actually get the feedback, the ideas from the junior ranks and say, Hey, tomorrow’s firm, should be fundamentally different than yesterday’s firm, right? I mean, if you were, you know, think about a computer that you bought in the 1990s, obviously, that’s a lot different than the computer you have today. We all agree on that, right. And the same if we’re not progressing as a CPA firm, which most firms, I don’t think they’re progressing the way they think they are, you know, they’re going to be a little bit, they’re going to age out, and they either need to start adapting to a new way of doing things or risk being disrupted. And that’s just the reality of it. So that’s one of the things is people think, if it’s not broke, nothing to fix. I think the other part is, these firms are so knee deep in work right now, that they don’t even have the time to come up for air. So listen to a podcast like this, or read an article about how to reinvent their practices. Okay. But I’ll tell you, who’s reading and who’s listening, are tomorrow’s leaders. Yes. And they’re gonna outsmart the leadership up today, by inventing and reinventing how things are done. So these firm leaders, I think, are a lot of the guilt, you know, blame rests on them, unfortunately, the other part is the technology. And it just goes back to just being knee deep. They are not the ones that utilize the technology. And so you have a disconnect between the buyer of the technology versus the user of the technology. And until you have alignment between the buyer and the user, it becomes a very difficult selling proposition. And these firms are reluctant to make that investment because how they’re compensated from a retirement perspective is based on their income, and their billable book of business, unfortunately. So why, selfishly, as a partner, let’s say, I’m 65 years old, and about to exit this profession, why do I want to make an investment if it’s going to be at the expense of what I’m earning in my retirement? Right. So there’s just this conflicting reality of the space we’re dealing with that, again, is a function of the current guard that eventually will retire out and leave a new generation to follow. But in the meantime, you’re starting to see some movement from a disrupter level at, you know, more innovative firms that are coming along and saying, look, it doesn’t have to be done this way.
Liz Farr 32:52
Yes, and I’ve talked to people who have been trying to do different things in audit for more than 20 years. So there are people out there, there just haven’t been quite enough of them.
Chris Vanover 33:07
Yeah, and I do think I mean, technology plays a really critical part and we’ve strategically aligned ourselves with different, you know, software and technology, innovators in the space, you know, the likes of Audit Sight, which was just recently named as part of the cpa.com accelerator program. A couple of great guys, TC Whittaker and Jonathan Womack from Audit Sight, helping to automate workpaper generation, right. And there’s the guys from AuditFile who have created a fantastic platform, that we’ve also partnered with kind of combining that technology with the resource side of things. Okay. So we are, in my mind, what we’ve done and you know, more to come in a couple of weeks on this, but audit club is basically established an infrastructure that firms can rely on. Okay, and so as we think about what appeals to the generation coming before being made, that’s right, the millennial late millennials, and the early gen xers so sorry, Gen Zers. What appeals to them, right? Think about, these are the folks that are you know, watching YouTube. These are the folks that are listening to the podcast, right? They’re listening for disruptive influences. And they appreciate the fact that Uber came along, they appreciate that Airbnb came along, they understand subscriptions, they understand access, and they understand infrastructure. If you can harness all those things together, you ultimately create an environment where perhaps the antiquated CPA firm gives way to what we call an alternative CPA firm.
Liz Farr 34:33
We can only hope we can only hope. Now, besides hiring audit club, what are some other ways that younger, more innovative minded auditors can bring about change? You’ve already touched on a few of these things. What are some things they can do in their firms now?
Chris Vanover 34:57
Yeah, I think again, you need to have a pro-active mindset, you need to question the why. And you know, even go back to my days when I first started PwC, I was always asking why we were doing something good. And I think a lot of people take it for granted because they’re rolling forward prior work papers, and they’re copying and pasting. And then they’re just moving on, right? But they don’t really challenge the why behind something is done. And I think that critical mindset that questioning mindset is something that a young individual that’s just starting up in the audit ranks can really help benefit and propel their career, right? And again, it’s not just asking why, but also, you can ask the question, but also come up with perhaps what you think maybe a viable solution is asking the question plus solutions oriented thinking goes a long way, I will also say is, these individuals shouldn’t be afraid, when they learn of something that’s out there in the marketplace, whether it’s a technology, whether it’s a different way of doing things, is they should be raising that up the flag and letting others be informed about it, getting the information and saying, Hey, this is why this can truly help change the game for us as auditors in the trenches. So a lot of them are again, they’re just taking orders from the top right. And they’re not actually challenging the authority, because they’ve been brought into this saying, Hey, we shouldn’t challenge the authority. But I think again, the only way you get better at something is to have everybody on deck, asking the why. And figuring out how to do something different and better. I think that’s a really critical thing is to ask why you’re doing something. Because the way that I learned to audit was, was thrown? Well, here’s last year’s work papers, which were paper back then and just rolled them forward, do what they did last year. And I’m like, okay, you know, I just going through it. And I didn’t know what was most important, what was not important. I just didn’t really have the context. Because nobody had really sat down with me and taught me how to audit and what that meant. So I’m really, I’m really glad that the younger generation is feeling empowered to ask, Well, why are we doing it this way? Yeah, I think, again, the future leaders of tomorrow’s firms are asking the why. But there’s also you know, a generation that sits within these firms that is going to continue to just go through the motions. And I think that’s unfortunate. You know, you have to really think about, again, that going back to the why is you need to really challenge yourself to do things differently. And again, if you don’t do that, you’re going to kind of continue to operate under the Status Quo model. And that’s just not healthy, right? And again, going back to, you know, how do you find a new model or a new way of doing things? It’s because you’re trying to build a better mousetrap, right, the CPA firms have been operating for the most part, for the same way, under that traditional pyramid model for a number of years. And their biggest advantage is their leverage model. Right? The more people they can leverage, the more money goes up to the pyramid, right. And unfortunately, these firms also don’t give, because they’re so focused, going back to the billable hour concept, is they don’t give their people capacity to actually innovate. One of the things you know we do here at audit club is, we have a 7525 rule, which is very similar to what Google has, right? Where we say, look, 75% of your given week should be devoted to member activities, whether we have subscribers or not, we should constantly be finding things that actually bring value to our subscriber base. The other 25% of the time should be things that we need to focus on internally here at auto club. In other words, bring me some innovative ideas. What are you doing to help elevate our profile to be a brand ambassador? Well, what’s happening is these people are saying, look, you’ve got an 11 hour chargeable hour requirement. Tell me when, with the rest of your day, how are you going to devote anything to business development, to improve in our firm, to innovating what we do, they just don’t have, they’re not given the capacity nor the freedom, because there’s no actual value placed on those types of activities. And that’s really, really unfortunate. And it stalls, the innovation our professional needs.
Liz Farr 39:17
Yeah, I can’t tell you how many discussions I have with partners and people at firms when I tell them Well, look, there are other people doing different things. And this is the way of the future. And they’d say, Well, yeah, that sounds kind of interesting. Maybe I’ll do it when when I have more time maybe I’ll look into it then and well, when when are you going to have time?
Chris Vanover 39:48
Yeah, and the hard you know, it’s literally because we’ve we’ve been on firms for months now saying hey, look, you know, we’re a subscription model week to week flexibility, the fractional auditors you need, but end of the day, you also have to get in there and sign a contract. I can do your part, which we’ve automated the heck out of, and made it super simple for them to do that. But we still get texts on a Friday, saying, Hey, do you have any resources we can have, we’d love to have to have your folks starting on Monday. And it’s like, I’d love to, again, love the magician. But that’s just not simply how things work in this business, unfortunately. So it again, it’s because now they finally come up for air, and it’s at all I have a problem. And I need a solution. But they need to proactively plan for contingencies. And most of these firms, again, because of how they’re structured and incentivized would rather their existing people absorb the additional work, knowing full and well that that individual or people are likely going to now be burnt out by the time it comes to the end of March or the end of April, and exit your firm. So it’s a short term solution that has long term implications. I don’t think enough of them see that far ahead. And they just assume that they’re going to constantly be able to replace these bodies. And what you’re seeing right now is that that is just simply not the case anymore public accounting.
Liz Farr 41:08
And not to mention the risk of errors. If you’ve got three burned out people who are looking at this work paper, and they are all exhausted, how likely is it that some big mistake might get through?
Chris Vanover 41:28
Yeah, but and again, part of this is a time crunch as well. And it’s unfortunate that, you know, most companies out there have a December 31 year end, and they have either bank requirements or the SEC has, you know, their 60 day deadline for large accelerated filers to get a 10k file, you know, and I do take exception to the SEC, and even the PCAOB, because they have a part to play in this as well. Right? It’s not just on the firm’s. But think about the regulatory bodies. And I’ll have different public perspective here. The SEC, when I first started public accounting, there was a 90 day window to file a 10k. And that was back before we had as many standards from an accounting perspective, and as many standards as we have now with the PCAOB and the AICPA. So the complexity has only been magnified, but the deadlines have only been shrunken even further. And so you gotta go, guys, at some point, they also need to look themselves in the mirror and go, What can we do to help improve audit quality? Right. And you’ve seen, I’ve seen the headlines, but the last, you know, probably seven, eight months, since the new regime of the PCAOB, has taken foot at the PCAOB. They have been on deliberate campaign of issuing sanctions, weeding out the bad actors. I’ve got no problem with that whatsoever. But I do worry have they thought about the unintended consequences of that in light of a talent shortage? Right, that people go look, and we have too many conversations with members of ours that say, Look, we’re looking to get out of the PCAOB space. Now, how do we do that? Because they’ve been the fear of them has been struck inside of them. They’re like, Look, we’re not doing this anymore, because there’s too much regulatory risk. Well, who’s going to be left to do these audits of these public clients? Just the big four? And is that really what we want in America?
Liz Farr 43:12
I don’t know. That seems to be the model that we’re moving toward.
Chris Vanover 43:20
That’s why you see the rise, you know, the mega-mergers that are happening as well. And, you know, I think if I look out five years, I would love to be able to see that firms are able to do more with less individuals, because they have more creative solutions, whether it’s technology or resource angles to tap into, to where in theory, anybody just like you see a you know, people spinning up tax shingles, and being able to have their own businesses and tax practitioner, why can’t the same be done for those in the audit space?
Liz Farr 43:53
That’s a good question. And the audit is the one area where by statute CPAs have the monopoly? They do?
Chris Vanover 44:03
They should be commanding a price premium for that, and they don’t.
Liz Farr 44:08
Good point. Good point. Now, I want you to get out your crystal ball, and try to imagine what you see in the future for audit, what is on the horizon.
Chris Vanover 44:24
We’ve got a lot of exciting things on the horizon here at audit club in particular, but I look at the profession more broadly. There has been a concerted effort towards people moving to CAS and client accounting, advisory, whatever you want to call it, and away from the compliance exercise because they feel like eventually it’ll be you know, automated for the most part. And I will, I will say that at the end of the day, there’s a value proposition behind the audit. The audit is sorely needed to provide trust in society. And I think about, you know, chat and GPT and all those sorts of things with artificial intelligence. It’s still The user of those tools needs to decipher the true information within it. And it’s the same thing with audit. Audit and attest services provide trust and information that is disseminated to users of that information, you can automate certain parts of it. And that’s happening through the life. So like I said, audit Site Audit file, making the audit process smoother and simpler. But you also will always need resources to be able to make those judgments where it’s not an area of black and white. And everything in auditing is not, I do think we’ve heard it for years, we’re on a pathway towards continuous auditing, right? We’re everything on a month to month basis. And I think that’ll provide more valuable perspective to companies engaging with their auditors, when they’re able to take that data and say, Hey, here’s some anomalies, this is what it means about your business, right, and becoming more of an advisor from that perspective. So I do think that’s the evolution of auditing, and where we’re headed. But I also worry that we are on a path of self destruction to a degree. And there’s a lot of talk right now about how we make change, and what do we do. But unfortunately, what we need is a little bit less talk and a lot more action. So everything we do an audit club, is connected back to our mission to make accounting and auditing better. And I know firms are out there speaking about some of these issues, but they are in essence carriers and or battleships that are very hard to maneuver. So I think what you’re going to start to see is the rise of in my mind, micro firms that can band together and ultimately deliver quality assurance services for small businesses, and in a different way of doing things harvest, you know, harnessing technology, harnessing alternative structures, right. That, to me is a pathway towards solving the talent crisis, but also creating a better product at the end of the day as well. So, you know, we’ll see what happens. But those are just some of the thoughts that I had initially come to mind in terms of where we’re headed.
Liz Farr 46:57
And I think that some of those solutions will also go a long way to solving the talent crisis. I think so.
Chris Vanover 47:06
And again, I absolutely agree, I think one of the things we, you know, we think about and look, look at is the idea that we’re in an era where people really want to be a gig worker. But what happens most people again, they get ticked off at public accounting, they’re tired of their auditing firm, and they end up you know, doing corporate finance, or they do something else, or they just get out of it altogether, right, or they end up going to the gig economy. And so they go into Upwork. And all sudden, they end up just basically trading time for money, because they don’t know how to run their own small business to be able to help them be an entrepreneur with an audit. So I think from a talent perspective, the profession needs to do a better job of trying to figure out creative solutions that actually incentivize and attract people that are thinking of exiting the profession, you know, 75%, of CPAs hit the retirement age in 2020, you have hardly anybody going into accounting anymore? So we are on this self destructive journey here, if we don’t figure out a better way of doing this?
Liz Farr 48:08
I think you’re absolutely right. And I hate to end our conversation on such a down note. Maybe that will incentivize some people to take action.
Chris Vanover 48:20
Yeah, I mean, again, the negative sometimes draw out the inspiration, right? And so if people know there’s a problem, what you want people doing is focusing on figuring out a solution. It’s enough to talk about the problem, but what are the actual creative steps firms and individuals can take to actually create an effect change in this particular professional we’re in right now.
Liz Farr 48:41
That’s exactly right. Change, change, change, change. Now, this has been great, Chris, I want to thank you so much for taking the time out of your busy day to talk to me. If listeners want to connect with you, where’s the best place to find you?
Chris Vanover 49:00
Yeah, they can find me on LinkedIn, obviously, through AuditClub, or they can also just email me directly, chris@auditclub.cpa.
Liz Farr 49:12
All right. Well, thank you very much, Chris, and you have a wonderful day.
