change your firm or go extinct.
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the disruptors
with liz farr
al anderson has been trying to change audit for nearly his entire career and has always been “willing to try things differently.” while he’s always loved auditing – and thinks to this day that auditing can be fun – what he didn’t love was “auditing by doing it the same way every year.” however, he sees far too many firms performing audits the same way they have for decades. anderson believes that “the firms that are unwilling to change eventually are going to be history.”
instant download: al anderson’s “the new manifesto for accountants.“
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in an effort to combat the rising tide of commoditization of audit and assurance services, anderson has been teaching a revolutionary framework for audit leadership to auditors around the world and has now written a book (to be released later this year by 卡塔尔世界杯常规比赛时间) that describes the five attributes of this framework.
these five attributes include:
- relevance: the audit is relevant to our clients because we are providing more than the compliance piece of the audit report.
- business-mindedness: firms are focused on the success of their firms as businesses and on helping their clients improve their businesses.
- quality: because the firm operates from a mindset of doing the work right the first time, quality starts at the beginning and is built into the fabric of what you do.
- innovation: innovation in audit isn’t just about using the latest tech tool, but requires auditors to think differently about alternative methods to accomplish the goals of the audit.
- empowerment: in an empowered culture, everyone has a key role in the firm, from the receptionist to the managing partner, and isn’t measured by how many hours you work, but what you get done.
the five attributes are built on a foundation of four basic understandings: understanding the client, understanding the industry, understanding the standards and understanding how to audit.
by marrying the four understandings to the five pillars, one firm anderson worked with improved staff retention to 100%, which had previously been “miserable.” they also passed peer review with flying colors when they had previously struggled. profitability “went through the roof,” and client satisfaction surveys showed that their clients were happier.
one thing anderson does with firms is to guide them through what he calls an r&d audit, where they start from scratch to innovate different ways to deliver a quality audit. they start by spending time talking about the client and the industry. in every case, “the partner on the engagement would come up to me and say, ‘i’m embarrassed about how little we know about our client.’”
10 more takeaways from al anderson
- we can characterize the challenges facing audit as opportunities rather than challenges. but those same opportunities will become problems if not addressed.
- those opportunities include the “keys to the kingdom” with access to clients’ data not previously available. but we’re not taking advantage of that data as a means to fully understand their businesses.
- another opportunity is the potential of using technology. our profession has been lagging behind in taking advantage of technology and new ways of doing things in the audit process. the result is that we replicate the paper world.
- a transactional approach, rather than a balance sheet approach, provides more value to the client because it reveals the bumps in the road that happen as a transaction rolls up to the general ledger so that it can be recorded correctly. an example is invoices that could go out earlier, which causes clients to lose a few days of cash flow. this isn’t revealed if you just tie the receivable sub-ledger to the general ledger.
- auditor independence should not be the roadblock to change that many practitioners claim it is. you can always make recommendations or offer advice or suggestions, but it is up to the client to make the management decisions.
- in our rapidly changing world, many firms are being sold to other firms because they didn’t build a long-term sustainable model by developing future leaders.
- auditors spend too much time being busy as opposed to spending time being valuable.
- five years of experience in public accounting often means one year of experience repeated five times.
- accountants themselves are responsible for perpetuating the view of the audit as a commodity. accounting standards are becoming more difficult to interpret and implement, but the value proposition to clients has been going down, so clients push back on fees. the response of the profession is to reduce the fees.
- the biggest bane to our existence is the chargeable hour. most audits are on a fixed fee, so this is a cost accounting system, not a revenue system.
more about al anderson
al anderson is the president of accountability plus, llc, a global leader in accounting and assurance advancement. he is the founder of a&a leaders leagues, a collaboration of leaders redefining a&a for the future. he is a frequent speaker and educator who works directly with auditors and firms to transform their a&a services. over his career spanning more than three decades, anderson worked from staff auditor to senior vice president at the aicpa before creating accountability plus, llc. he continues to participate in “auditing in the future” initiatives and is committed to his vision of redefining a&a. anderson was named one of accounting today’s 2022 top 100 most influential people. he has been named a top 100 influential people every year since 2017.
transcript
(transcripts are made available as soon as possible. they are not fully edited for grammar or spelling.)
liz farr
welcome to accounting disruptor conversations. i’m your host, liz farr from 卡塔尔世界杯常规比赛时间. my guest today is al anderson, president and founder of accountability plus, how are you today?
al anderson
just fine liz, good to talk to you.
liz farr
yeah, good to talk to you. again, we’ve talked quite a bit over the years. now we’ve got a lot to cover. so we’re just gonna jump right in. perfect. now, you’ve been working to change audit for decades. and you recently finished a book on this topic, which will be released in the near future by cpa trendline. and full disclosure, i worked very closely with al on this project. what are the biggest problems that you see with audit today?
al anderson
well, you know, you can characterize the the issues or challenges in our audit profession as problems, or or you can recast them as opportunities. and i actually do believe that there are opportunities, they certainly are a problem if they’re unattended to, in the real opportunity of auditing is the license, you get to really take the time to understand your client. and, and then how that translates to information on financial statements. the opportunity is we have the opportunity to check in have like keys to the kingdom to see everything that the client has, as we try to understand their business, we’re just not taking advantage of them. the other thing about our profession is is that every company in in across the land, small or large, has evolved tremendously as technology has continued to evolve. our profession has been lagging behind in taking advantage of technologies and new ways of doing things in the audit process. and those represent a huge opportunity for us. and so what i’ve seen over my career is is that, that we kind of nip at the fringes, if you will, we’ll do a little bit here a little bit there, we say we’re basically leveraging technology. and then all we did was replicate the paper world. so these opportunities are, are sitting out there for firms that really want to move toward the future. and upon doing so, they will without question be seen is much more highly valuable in the eyes of the client does receiving the audit?
liz farr
well, that’s an interesting way to put it as as an opportunity. because so many times audit is just a commodity. and businesses can’t really tell the difference between one company’s audit and another. so it’s just treated as a commodity. but what you’re saying is that we can do a lot more with audit than we have done. is that correct?
al anderson
absolutely. absolutely. and just a point on the commodity aspect is, is that i believe our profession has perpetuated the commodity side of it, because of the long the short of it is is standards continue to grow. and in accounting standards became more difficult to interpret and implement the value proposition to client saw seem to go down. so they questioned the fee. and we, as our profession just automatically started reducing the fee. because we were the messenger, we had to help the the client interpret these new standards, get them into play from an accounting standard perspective. and we didn’t necessarily see the value in either. so we basically saw well, this accounting standard really is not all that helpful to the lender, but this financial accounting standards board wants it. and so we got to help the client implement it, the client doesn’t see any value because they manage your business on a whole different set of metrics than gaps a gaap financial statements. so we basically started to fall into the trap that it was a commodity as well. and so we started lowering our prices. ignoring the fact that we clearly have the opportunity to provide a lot more relevance to what we do by providing ideas and thoughts and suggestions to our client. certainly not impair your independence, but we can certainly offer suggestions. but at the end of the day, you know we helped perpetuate the commodity. and we can we can also turn that ship around if we want to. and that’s why i go back to the earlier comment on these are opportunities if we choose to see them as such.
liz farr
that’s right there in your book starts out with four understandings that every auditor needs to master? can you briefly explain what these four understandings are?
al anderson
well, yes, i mean, when you think about an audit of historical financial statement, you see a set of numbers, right? and how can you interpret what those numbers mean. and even if they are fairly stages and all material respects without one, understanding your client, do the numbers make sense relative to what my client is all about. number two, understanding the industry in which the client operates, do the relationships in those financial statements make sense based on what i understand about the into the industry in which my client operates, or the economic environment in which they’re currently operating in whether the times are highly inflationary, whether it’s not inflation, or the there’s a downturn in the economy. the third thing is, if you’re going to issue an opinion on a set of financial statements, you need to understand the standards. most firms and most firms use, you know, cookie cutter, off the shelf methodologies that have a lot of words that are repetitive in nature in many respects, but really don’t help convey an understanding of the standards. they tell you what the standards say. but they don’t translate it into an understanding. and so you need to understand the standards and what they mean in totality, not just in a particular tunnel vision. and then, of course, the fourth. and equally as important as the previous three, is an understanding of how to audit, we have not changed the way we audit, a set of financial statements or accounts receivable in 30 years, we still send confirmations. there’s a whole new audit evidence standard out there that provides more opportunity to think about things differently. but we still audit the same way. we’re not thinking about new ways to audit to gain and gather the appropriate evidence from which to allow us to render an appropriate opinion. so understanding in the entity, the industry, the standards, and how to audit, those are four baseline foundational things that all auditors need to have in their hip pocket.
liz farr
i agree with you completely, you know, that certainly was not stressed to me, in my brief experience in auditing, there was more well, here’s last year’s workpapers and just follow what they did. i certainly wasn’t encouraged to go any deeper than that. and now, you mentioned this new standard for alternate sources of evidence, what kind of freedom? what kind of opportunities does that give auditors today?
al anderson
that standard in my view is basically a clarification of all of everything that was already sort of bound in the concepts of audit evidence to begin with. but it does provide clear permission for the auditor to think of non traditional ways of gathering evidence. you know, everybody talks about artificial intelligence, everybody talks about data analytics. and most firms don’t get past talking about it. they don’t start thinking about what, what what sort of data analytics would be very valuable to me, to help me determine whether a set of numbers or a number or the financial statements make sense, and that i could render an unmodified opinion on those financial statements. and so the audit evidence standards basically gives you more guidance on what constitutes appropriate evidence, and even opens the door for using evidence within the accounting records and the systems and the sub ledgers at the client. you know, it was always sort of like, why can’t just look at internal information. all right? well, you can because you have to think about whether it’s reliable, whether it’s complete, and accurate. and then, of course, how much that internal information could be influenced by management bias. all right. most transactional activity is really not impacted dramatically by management bias. it’s usually the estimates. so things like the allowance for doubtful accounts, the obsolescence, reserves, and things of that nature. that’s where management can weigh in much more heavily on what they think those estimates ought to be. and so it does give you the latitude to look at things differently and move your audit to much more of a transaction focus than a balance focus.
liz farr
that’s that’s a really important point. and i think that’s a pretty interesting way to look at an audit, because i was taught to just tie out the balance sheet and then everything else falls to the bottom. but you’re you’re telling us that we need to look at the transaction, then make sure that they’re flowing through the system correctly. and that can help guide us?
al anderson
well, you know, yes. and the reason that approach makes better sense is is is if you’re going to actually be more valuable to your client, and providing advice and excellent suggestions, you’re not going to be very valuable if all you do is tie out a our sub ledger to the general ledger and send a handful of confirmations. but if you do look at how transactions flow through the sub ledgers, and what it takes for the transaction to be reflected accurately, and then how that transaction and rolls up to the general ledger, you’ll start seeing bumps in the road. and you’ll start seeing opportunities where they could be more efficient and still strengthen controls, and they could do things better. and and they’re missing various opportunities. maybe it’s taking them too long to build a receivable. for example, when you’re doing receivables. at year end, and you get your receivable listing and tie it up to general ledger, you have no idea that that invoice that was invoiced on x date probably couldn’t have been invoiced five days earlier, or three days earlier, 10 days earlier. well, if you’re delaying if billing is being delayed by your workflow in your organization, you’re missing out on 10 days of cash flow. what’s more important to your client cash flow? or that the receivable subledger ties to the general ledger? well, reality the clients interested in cash flow.
liz farr
yeah, yeah. and i liked the way that you bring that back to what is most important to the client. now the bulk of your book describes a framework of five attributes of audit leadership, that we need to move the audit into the future. the first of these is relevance. what does relevance mean in audit?
al anderson
well, relevance in audit is really that i am providing more than just a piece of paper that says the financial statements are fairly stated in all material respects. it’s, it’s, it’s what am i gaining from understanding these numbers, how the client operate, how the industry is working. and, and i can basically give some ideas and suggestions. in other words, with in my previous example of the receivables of taking that balance and sending some confirmations, or or looking at the transaction flow, making sure things are getting recorded properly. and realizing that there’s a delay in billing. what’s relevant to the client, what’s most relevant to the client is if there’s a way they can improve their billing process to be more timely to improve cash flow that’s relevant. and so it’s really the value add, it’s the insight piece of it. we are much very focused in today’s audit world on the compliance issue in the report. and we need to focus, we need to obviously achieve compliance with standard there’s no doubt about that. but we got the client will never will rarely question our fees. if we’re actually giving them value, the relevance piece of it. that’s what they want is relevancy. think about your clients, your clients, they expect you to have good meaningful business conversations with them. they really don’t care about the nuances of what what that what the third paragraph on asu 842 lease implementation says what they want to know is what does it all of this mean to my business? and that’s the relevance component.
liz farr
that’s that’s really, that’s really that’s an interesting way to look at at audit because, you know, many, many of our listeners might push back and say, well, how can we provide advice because we’re supposed to be objective. we can’t we can’t possibly give them advice that’s, that’s going to impair our independence.
al anderson
well, i i got a couple of thoughts on that is, is that the the independence roadblocked is the easiest thing for any practitioner to raise as an issue, because they don’t want to change, right? they don’t want to take the time to even understand the independence standards to really know what you can and cannot do. and, and so it’s just an easy out for many practitioners to say, well, i can’t do it, i’m not going to do it because it impairs independence. i’m sorry, that’s a bunch of baloney. you cannot, you know, you can always make recommendations, you can always offer advice, you can always offer suggestions. and the client then can choose to react to your suggestions and your advice in any manner and fashion in which they want. and so they’re still making the management decision. advice is not making a management decision. advice is just that advice i’m giving susan, why don’t you try this? or why don’t you try a couple of different ways of looking at this, you know, the client says you’re, if you’re billing system is too slow, and it’s taking you 10 days to get a bill out the door. the client might say, well, what could i do differently? well, the thing that auditing does is you get a chance to see hundreds of clients. and you might see ways other companies are much more effective at billing. and so you share your knowledge base with them, and give them some advice, and they can do whatever they want. but advice is not, does not impair independence.
liz farr
that’s very true. and that’s something that you’re you’re right, that that is a stumbling block for many auditors, that keeps them from changing, because they don’t want to put in the effort to try to understand what all of this means. they’re, they’re just focused on getting the financials out without having to step back and think about what things mean. and what these numbers what the clients systems mean, in the broad, just in the broad picture of how their business operates.
al anderson
in the audit profession, spend way too much time being busy, as opposed to spending time being valuable. and and so every every body, every firm right now is talking about the continuous 12 month busy sees, all right. and in many of the firms out there have clients that they shouldn’t have. they’re terrible clients, they they’re purely commodity driven. they, they really don’t care, they don’t want to change, and we let them off the hook. and we do busy work on poor clients. when if we basically called out the, the dnf clients and worked with the a b’s and c’s and got the c’s to move up to a b or an a we would be much better off and then we would be busy providing value and relevance and not just being busy.
liz farr
that’s right. now the next of these five attributes is business mindedness. and you split this into two aspects. there’s an inward focus on your firm. and then there’s an outward focus on your clients. you explain what you mean by this? yeah, actually,
al anderson
my previous example, discussion about the dnf clients, that’s the inward inward focus piece of business mindedness is, is when you talk to staff accountants about why they leave a firm, oftentimes, they leave a firm is because the firm has a lot of crappy clients that don’t want to be a partner in the audit to help get the work done in other words, and really don’t see any value in it. so you’re basically going to, you’re not, you’re not really liking what you do, then you go to a client, who dislikes what you do even more. and so, how can you be excited about what you do so in the, to be able to provide relevance clients got one relevance, and the the larger the a’s and b clients are the ones that benefit from relevance are willing to pay for that relevance. and in so business minded this means is get the right clients. the other thing about business mindedness and an inward focus is you can’t be all things to all people. i mean, just look at the statistics on employee benefit plan audits, you know, when you do five or fewer employee benefit plan audits, you know, your your failure rate is like 70% i i forget the exact statistic, but it’s extremely high, right? well, you can’t, in today’s complex world, you can’t be a jack of all trades, you’ve got to be focused and specialized and build in your niche, and basically be great at it. and when you’re great at it in a niche, the clients will actually come to you because they know from their business network when they talk to contemporaries in that same niche, so you got to you got to call a vc firm, they actually understand what we do for business. and they are actually very valuable to us, in addition to being able to do a very effective and efficient audit. that’s heard, the outward focus on business mindedness, on the other hand, is really thinking about how the client could run their business better. i started this process 20 years ago with young staff accountants, when i when we set up an audit, i said, okay, when you work in this audit, one thing i’m gonna have you do is, if you’re working on receivables, and sales, for example, i want you to go talk to the sales manager. and i want you to talk to the sales manager about the business. what does the company do? well, what does the sales function of the company do? well, what would you change in your sales function? if you could? and what do you think the company could do? differently? and better? here’s four questions. all right. and the whole purpose of that discussion was to get your staff out there talking to the client, not about why this amount, does not agree with this amount that’s listed on this schedule, because i’d rather had them know how that schedule came about how the business was operating. and so you have to start building business acumen in the audit process by making it a natural part of their audit process, as you mentioned earlier is, is in your career, you got last year’s work papers? well, we’re teaching auditors an awful awful lot about how to copy as long as i put the same work papers that are in their, in last year’s work papers, and this year’s work papers, the salary approach, same as last year, i must have done an audit. alright. business mindedness is getting out of the conference room, business minded, outward focus is getting other conference room talking to people, it’s getting from out behind the screen, and actually talking to the people you’re working with. i see, i see staff accounts, when they were out in the field, when they had a question of the accounts payable clerk. they’d send that accounts payable clerk at the client there, they read an email, and then even get out of the conference room and go talk to him. auditing by walking around, especially in the manufacturer, or distributor, and just seeing what that shop floor looks like, and seeing how them just how inventory moves, is enlightening. that is when you start seeing the problems. and you’re talking to a client and that’s the business mind industry your client wants to wants to hear, how can i run? what do you have you seen in your previous experiences with other clients that i ought to be doing to make my business better?
liz farr
that’s right. and i know that when i did audit, i was never encouraged to talk to anybody besides maybe the controller, or on rare occasions, maybe the cfo, but i never talked to anybody else in the company. never. never.
al anderson
that’s unfortunate. learn a lot when you talk to people outside of accounting.
liz farr
yes, you do you learn about how the business actually operates.
al anderson
right? absolutely.
liz farr
now, the third pillar is quality. and now what does quality in your framework mean?
al anderson
well, quality is without question, the standard by which we measure our profession against, there’s no doubt about it, and we want to do quality work, right? but when you think of, of quality, there’s a concept called inspection. and there’s just and there’s a concept called quality assurance. and in what what most firms do is inspect quality in at the end. in other words, they have some person in the qc person who is the standards police person, where they’re basically reads all this stuff and said you didn’t comply with standards, right? so it’s all after the fact you’re trying to get the engagement, the audit out the door, and you’re running into these roadblocks with some quality issues. quality, in my mindset is an attitude. it’s a mindset of the staff that i’m going to get it right the first time, i’m gonna take the time i need to get it right. and, and not wait for the end of the line to catch it. and that in quality assurance is a real time process. it’s ongoing. it’s, it’s concurrent, as engagement takes place, you’re asking questions as you go. and, and the final review, at the the inspection process is then going to be purely perfunctory, because there’ll be a final check, of course, but quality starts at the beginning, and goes throughout the engagement and needs to be built into the fabric of what you do. and quality is not measured by the number of forms you fill out. and checklists you complete. quality is basically measured by how well you understand your client. back to those four understandings. how will you understand your client, the industry, the standards, and how to audit? if you got if you have those four foundational pieces, you will be jumps ahead steps ahead of your contemporaries in providing quality work at the end?
liz farr
absolutely, no, i was certainly never encouraged to take the time to do it. right it was, let’s get this out. and if it’s materially close, then that’s good enough. and we don’t really care about whether the transactions make sense or not. let’s just make sure that they tie to the documents that we get from the client. and that was really what we had to worry about. and whether we fulfilled at some level what the accounting standards said things have to be presented by yeah, that was that was about all.
al anderson
that is for sure.
liz farr
yeah. now, the fourth pillar is innovation. and innovation in in your mind isn’t just about being bringing in the newest tech tool. what else does innovation mean?
al anderson
well, you know, let’s, let’s start with this whole concept that most as you said earlier, most people immediately correlate innovation with the newest piece of technology that’s out there, right now, innovation is broader. and deeper than that, in this in is in the audit process, as it should be it should be? what mindset? are we building in our people to think differently, to be innovative to try things differently? in other words, how would you do this, as opposed to just as opposed to same as last year innovation is just starting with a blank piece of paper and saying, i’m going to audit this, this client. innovation is about the processes, its people process, and then systems, so innovating through your people innovating through your audit processes. and then you will find the system, the technology to kind of help you enable the people, your team. and the process is that you want to deploy to really carry it out as efficiently as possible. so innovation is is is everybody on board saying i am going to look at doing things differently. it’s talking about and being aware of what’s happening in the business, bo, being aware of what’s happening in the industry in which your client operates, and how the industry is changing and evolving. just think about how the industry has changed industries have changed and evolved over the years. and then what are the success metrics that these these industries use to measure, measure what’s going right or wrong? and these clients? how often did does an auditor even know what the key performance measures are at the client and what the client measures for success? well, if you know what the kpis are the key performance indicators and you know what those measures of success are, then you start looking at innovative ways to leverage that in your audit process. and i don’t have to use a new piece of technology i mean i can there the power of just a plain old spreadsheet today is so powerful and xl that i might not even need to throw new technology at it but i need to know what i want to accomplish and in not then be willing to be wrong. and one thing about innovation is every innovator idea is not always 100%, right? how many times do people that are known for innovation, start and try things fail, learn and start something else. so there is a concept of innovation that you got to build the concept that’s okay to fail. in my view, it’s not okay to not try to innovate, it’s okay to fail. if you’re trying to innovate, and you recognize it and you move forward, you’re not going to do a bad audit. but why not build a culture of innovation in firms that the people are, are really given a chance to try things differently, that they’re going to innovate with, ideas are going to be attuned to what’s happening in the marketplace, they’re gonna pay attention to what’s happening in stuff like artificial intelligence, there’s no doubt about it. and, and then, but artificial intelligence is one thing, how we’re going to leverage in the audit is another thing, and that bridging that gap from ai to how to use in the audit, is the innovation component that we all need to use. and that’s people that’s not just pure old ai, that’s people thinking it through people’s understanding how to, to leverage it through the audit process. so it’s people process and systems, all three of those working together with people and processes first, before throwing a piece of technology at it. i have clients asking me all the time, what, what technology should i use for you named a task workflow? alright. and as you know, i say, well, what do you want to accomplish? you know, most people throw technology at a problem without even really clearly defining what they want to accomplish. innovation is saying, here’s what we want to accomplish. and then what tools can i use to help facilitate that?
liz farr
that’s a really different point of view that most auditors have, and most of them by nature are conservative, and they certainly don’t want to rock the boat. you know, and i think that if i had suggested any innovative ways to accomplish the goals of the audit, the audit partner might have seen that as a direct threat to his authority. and i think that that’s really sad that leadership was so afraid of innovation.
al anderson
we know that they all they all kind of grew up. as, as this whole world has evolved. in other words, i’ve, i’m so old, i started out when audits did, we’re not fixed fees, right. so it wasn’t a big deal. and we placed a lot of emphasis throughout film all virtually all my career, i’m trying to provide value, we tried not to fall to the commodity piece of the equation. and at the end of the day, we were always willing to try things different and change. now, when you want to innovate in a firm, you basically don’t say, all right, let’s innovate, and go at it and have fun it is, you have to put a little bit of structure around it. and so because you could create chaos as well. so i like to innovate through what i call r&d audits, where we’ll take an audit, and throughout this the the standardized audit methodology and those programs and start from scratch, we’ll do an r&d audit will basically start from from blank piece of paper, a blank screen, whatever you want to call and really craft an audit. because medium sized or smaller firms don’t have the resources, the largest firms have to have formalized structured r&d groups. all right, right. but every firm can have an r&d audit, where they can go and say, let’s just try something different. right? and, and so that’s the real key to this thing is, innovation is a word. in most firms, vocabulary. innovation is not an action step. in most firms. innovation can be an action step that can be managed at the pace you want to go as a firm. and you do that by building into the concept of, of r&d audits where you, you’ll do one or two. most firms i usually stop if they want to do any more than three, then they’re generally larger firms, but one for smaller, smaller mid sized firms. i’d say well, i wouldn’t do any more than one or two r&d audits in any given year and just work on it. and just start thinking about ways of doing them differently. and it’s an investment, because there’s going to be mistakes, there will be an r&d audit doesn’t mean it’s going to be 50% less time. it also doesn’t mean it’s gonna be 50% more time. but you don’t establish an expectation, beyond, we’re going to try something different, we’re still going to do a quality audit. but we’re not going to be married to the same old thing.
liz farr
and i think anyone listening to you, it occurs to me how important it is to have those four understandings really dialed in. because you couldn’t even begin to do an r&d audit, to do things completely differently, unless you really knew once you really had a grip on those for understanding.
al anderson
you know, it’s interesting, that’s an interesting point you raised because i will tell you, when i, when i work with firms and r&d audits, the first thing we do is we spend about a half day to a day talking about the client, in the industry in which they operate to the first to understanding right. in, in, in every case, after we’ve done that discussion, the partner on the engagement will would come up to me and say, i’m embarrassed about how little we know about our client. all right, and just thinking about that is, is when you do this r&d audit, you drill down, start talking about the client, how they do things, what, what six, what success looks like in the eyes of the client, and just going through all this stuff, and you they don’t know. and then they’ve issued audit opinions for all these years, that the numbers are fairly stated. it’s no wonder it’s seen as a commodity and a purely compliance aspect, versus a relevant part of what the company needs to move their business forward. and, and so it, it is a real eye opener, the every firm that’s on an r&d audit, has been so appreciative of what they learned from it. and they’ve done an awful lot of good things to kind of change the way they’ve done lots of parts of their audit sequencing because of those r&d odds.
liz farr
that’s fascinating. and i really wish that something like that had been more a part of the projects that i worked on, more on that side worked on. now, the last pillar in your, in your system is empowerment. what do you mean by this? and why do you say at the end that this is the most crucial of the five? well,
al anderson
let’s, let’s start with the current biggest issue facing our profession. and it staffing right. and think about those staff that have left. how empowered were they, in their firm? to do things differently? how empowered were they to think about? well, you know, i know the traditional workday is eight to five, but i’m going to do pieces of this at night, in so so empowerment is really the culture of the firm that we are, we have an esprit de corps, to really, everybody has a key role in our firm from the receptionist at the front of the office, to the managing partner. and we’re all empowered to help make this firm better. and when we are all in it together, we’re not in nine not out for me, i’m not out for you. i’m out for let’s make everybody successful. and empowerment is is is really an empowered culture is crucial. an empowered culture doesn’t mean you do everything you wanted to. and without any question. it’s called empowerment with accountability. in other words, we have some guidelines. in other words, you’re empowered to do anything you want, but you still got to comply with understanding. okay. all right, you’re empowered to do this. and to think about this is that, that in today’s world, the way we do it, you know, because we’re so married to same as last year, when i was starting in public accounting, the whole concept was, you know, three years in public accounting is worth, you know, six to 10 years in industry, because you learn so much now five years in public accounting is not five years of auditing, there’s not five years of, of exponential growth in knowledge. it’s five years, repeated five times, it’s one year repeated five times, you do the same thing for five years, you copy these work papers, you fill out this checklist, you move this forward. and so you repeat it five times. so the exponential growth of your knowledge base is actually hindered. in the audit process, by the way, we do our audits today. and so you’re not an empowered workforce to think about these different and you can’t be empowered. if you’ve got shutters on say, this is this is the work paper i want. this is how you fill it out. these are this is wants you to copy last year’s work papers, and empowered workforce is the blinders are off, and you’re looking at the whole field of vision. and you’re asking questions, and you’re learning how to ask those questions. alright. and it’s not the yes, no closed end questions on a on a checklist in a methodology template. it is the open ended question that your that you are focusing on is understanding your clients business and talking about what’s happening in their organization. and then the skill and empowerment is then they become better at asking what i call the next best question. oftentimes, the staff will ask a question, and they don’t want the client really to answer it other than it’s not a problem, because then they’re going to have to deal with it. but sometimes, what an answer that to open ended question beckons a second questions, and oftentimes we don’t ask it. because when we’re not prepared for that, and empowered group that understands those four pieces, the client, the industry, the standards, and how to audit will now become much more adept at and asking that second best question. empowerment is creating the environment, that it’s okay to try things. it’s okay to be wrong. and it’s not okay to not comply with standards. we’re so is that is you’ve got the opportunity to do things, but you still got to comply with this team. all right. and we just don’t give firms company, the staff, the time to be empowered, because we’re busy being busy.
liz farr
it sounds like empowerment, would take a complete mindset shift from for current leadership, because they’re, you know, we hear so much about well, you know, if they’re not in the office doing their work, or if they’re not, in that conference room keeping busy, then how do i know they’re actually doing work? how can i tell?
al anderson
well, that’s, that’s a good example, because i think i think the the biggest bane to our existence in public accounting and auditing right now, is the chargeable hour. i mean, everything today is pretty much fixed fee. so there is no chargeable hour per se. it’s a cost accounting system. but more importantly, empowerment is not a measure of how many hours you work. it’s a myth. empowerment is a measure of what you get done. and so what we do with a lot of firms is we track we build what we call deliverables based accountability. in not, i don’t care, you know, if i sign you by wednesday, if i want you to have a certain set of things completed by wednesday, all right. and, and i believe that the level of effort that it should take you is reasonable in relation to my goal for to have you be done on wednesday. so if you get done with those tasks by tuesday, on a deliverable rules based accountability, you’ve got a day free to go do something personal. that just does not happen because we’re so busy. i’m charging hours, and it’s like chargeable hours, the hour does not directly generate revenue. i’ve gotten an engagement letter that basically tells me, here’s what my fee is. and so i already know what the top line is revenue for that claim. i just have to manage my costs to make sure that my that there’s a margin on this whole concept of fee realization is such a bogus concept because i get firms asking me all the time, what you know, what’s a good fee realization percentage? and i say 20% they say i’m not saying oh, no, let’s let’s talk to you about how ridiculous fee realization percentages are. the realization percentage is a function of your billing rate, right? so if my billing rate is $10,000 an hour, and i’m realizing 20% on that, that’s a pretty good hourly rate, if i believe and now, if i said my fee realization was 120%, you’re gonna say, wow, how do you do that? that’s wonderful. so easy. i have a $20 an hour billing rate. so fee realization is such a, for metric in our profession, it drives me nuts, how people still hang their hat on that. we don’t do anything. very few tasks, i should say, on a time and materials basis. all right. and frankly, i’m a big believer of the value building concept and everything else if i, i mean, i’ve got 30 years of experience, right? if it takes me five minutes to answer a question. it’s not because it was an easy question. it could be because i’ve got 30 years of experience. so why would i just bill for five minutes and bill for the value. so the in i know i am providing at least to compliance component of an audit. but even if i am not moving towards relevance, i know what the audit is going to what i’m gonna charge, i know what the market is, i just have to manage my cost structure to get it done. so i have a margin. in sure there is time and effort there. but the hours are based is it should be a cost accounting system, not a revenue system.
liz farr
that’s the big issue. i agree with you know, and even when i was starting out in accounting, and we’d get in our mailboxes once a week, this printout of a spreadsheet that showed all of our, you know, budget to actual hours and percent realization and percent productivity and all of that, i thought that that was just completely meaningless. because it really didn’t have any connection to the dollars that my efforts brought to the bottom line. i went alongside those spreadsheets about once a quarter, we would also get a printout that showed that the dollars that my efforts brought to the bottom line, and that i found was a much more useful metric. because i could look at that and see how that compares to my own compensation during the same period. and my rule of thumb was that i wanted to make sure it was about a three to one ratio. and when i was at that, when i was doing that, that meant that i was certainly being a good attribute to this firm. and that had absolutely nothing to do with my billable hour, or how many hours i put in, there was a complete disconnect.
al anderson
yeah, it’s it’s really based on what you deliver, deliver, because, you know, we tend to look at, you know, there’s firms i’ve worked with, what are these? say, well, so and so’s moving up the ranks? because, you know, they work a ton of hours. right? and, and there’s a firm i work with with the guy that is the best auditor works the least amount of audit hours, but he actually gets more work done than anybody else. and so if you think about what that individual delivered, versus time spent, the there is actually generating, if not equal, more margin for the firm, depending on if what he or she does with that extra time because they’re when they got their projects done. but oftentimes, those good people take on more projects, because they enjoy what they do. and you’ll find oftentimes, those reports that he referred to, especially the chargeable hours reports, those actually work. the exact opposite. they’re deemed motivational versus motivation. they’re demotivating. because oftentimes, a first year staff accountant, and if they’re behind budget by 100 hours, all right, how much? how many of those 100 hours? do they have the personal ability to fill by just taking on work, you need to be assigned to work now. they need to be proactive and say got time and all this other stuff. but so many of these reports are, are de motivational, that that’s why people are just leaving those reports to bad clients, all these things. it all piles up to say why am i so i’m not gonna stay in public accounting, i’m not gonna stay in order. and this is no fun. you know, i tend to believe i’ve always said this and people kind of scoff at me at times they say, you know, auditing is fun. but auditing, the way you do it is that, and we just need to make it fun again, because that’s when you really understand the business, the client, and the industry, once you operate again, back to those fundamental understandings.
liz farr
that’s right. and now we’ve we’ve already touched on this a little bit. but what are the benefits to affirm that weaves these four understandings and these five leadership attributes into the fabric of their firm? how is that good for them? well,
al anderson
i’ll just take an example of a firm i worked with this last year, their their staff retention was miserable. all right. and they’re losing people all over the place. and we came in, and we help them throughout this whole process of understanding the entities. and in and really building in the for the five pillars of relevance and everything else. their staff retention, went to 100%, nobody left. the only one that left was one person they fired, and three people came back. alright, so it’s a win for your staff, and your retention, the firm’s quality actually improved. they, they implemented all this, and they passed their peer review with flying colors. and in previous peer reviews, they did not do so well. so people were happy, quality was happy. and guess what the profitability of the firm went through the roof. and they did client satisfaction surveys, and their clients are even happier. so talk about a four way wins, staffer happy quality’s better, firm, profitability is better, and the clients happier, you can’t beat that with all four of those improving, just by thinking about marrying those understandings with those five pillars.
liz farr
absolutely, no, and and i wish that the firms that i had worked with, had implemented even just one of these, but you know, like, you can’t implement just one in isolation, it’s got to be all of them.
al anderson
well, that’s right. and this is a continuous process. i mean, i mean, we have, we have sort of mired our firms into a particular type of mindset and culture. and to turn it doesn’t happen overnight. but what happens is, is when the staff sees the partners starting to turn it, and starting seeing the benefits of it, they’re saying, i’m liking this, i’m gonna stick this out. and so so it this is, when we work with firms, i say, you know, i’m not this person who throws it throws a little bit of pixie dust, and say, magically, your fixed, you know, we’re helping them throughout because it is it is it took a lot of years to get stuck in this mode, it’s not going to get out of the mud, and fully moving forward, as has overnight, it does take a while. but if you don’t start now, you’ll never start turning the ship.
liz farr
and it seems like a really crucial part of this change is buy in from leadership do have problems with leaders bulking at these big changes.
al anderson
of course i do. i mean, we’re not all cut from the same mold. and, and for whatever reason, in all of my career from day one, i’ve been a change agent, driving change loved auditing from day one. but i didn’t love auditing. by doing it the same way every year, i was always willing to try things differently. and i can tell in a 10 minute conversation with a leadership group of a firm, whether they are willing to change roadblocks to change. and some firms i’ve had to work with i’ve had to kind of pull pull back the reins a little bit and slow them down a little bit. the change that they were trying to drive was creating chaos. and so it has to be a measured, not slow, but at a pace that makes sense. so staff can see it. but but there are firms and it’s just and i just actually believe that the firm’s that are unwilling to change eventually are going to be history. you actually look at a lot of the mergers and acquisitions that firms are having today. the reason a lot of firms are selling to other firms is they didn’t build a long term sustainable model within their existing framework in their firm, to build succession to build future leaders to build people that are going to move as the economy. and as businesses change, they basically kept the firm the same forever, and realized that there’s no one coming up the ranks, that’s going to be able to keep keep that even the current state of float long enough, so i can get paid out is the retiring partner. so i’m gonna sell lots of the reasons firms are selling, not the only reasons. but a lot of compelling reasons for selling is as they don’t have built in succession with them, because they haven’t positioned their firm to grow and move with, with the changing environment in which we’re operating.
liz farr
that’s a really in very interesting observation. and it echoes what i’ve seen in following the firms that i used to work with. now that i’ve been gone from public accounting for five years, and just seeing what has changed in some of those firms. some of them the names on the doors have changed a little bit, but overall, nothing really has changed. and i talked to somebody who said that, even though he was pretty much bought out his partnership interest was pretty much bought out he was staying on, because there just wasn’t anybody coming up who could do the work?
al anderson
well, we taught him how to fill out forms for years and just repeating the filling out the forms, and then all of a sudden, they have to talk to a client and they don’t know how to do it.
liz farr
that’s right. that’s right. now, i think that, you know, i have a biased opinion, of course, but i think that anybody who wants to stay in auditing, or is a little bit curious about it, should get a copy of this book. as soon as it comes out. i’m looking forward to getting this information into the hands of more people. now, l if listeners want to connect with you, what is the best way to find you?
al anderson
well, i am more than happy to talk with anybody about this. and because i’m very passionate about it, because i really do want to see change. so i haven’t i have a website accountability plus.com. also, you can feel free to email me which is my first initial last name. so it’s a anderson, a n d, e, r, s, o n, and accountability plus.com. and welcome, anybody to reach out to me because it’s something that i’m passionate about, i love to talk about. and i like to work with firms to help them succeed. because when i see staff members coming up to me, saying thank you for coming to our firm. that’s what keeps me moving. because those are the people i’m working for is is your staff, to really starting enjoying what they’re doing.
liz farr
i think that’s what it’s all about. that’s what it really should be about is figuring out how to make auditing fun. right? yeah. now, i want to thank you so much for coming on al. and it’s just been delightful talking to you, again.