This article looks at these challenges to the profession and suggests some commonsense solutions. It also highlights the negative impact that the loss of seasoned, knowledgeable, industry experts has had on independent audits, including the increase in critical audit deficiencies and adverse audit assessments recently observed by the SEC, PCAOB, and AICPA (“SOX 404 Disclosures, An Eighteen Year Review,” Audit Analytics, July 2022, https://bit.ly/3fCBDt8).
The Impact of Fewer Qualified Auditors on Adverse Audit Assessments
The loss of knowledgeable, experienced CPAs with strong industry-specific expertise has been cited as a principal reason for the increase in audit deficiencies observed in PCAOB inspections. In its most recent report, the PCAOB identified auditor inexperience and the shortage of highly trained accountants as the number one reason why adverse Internal Control over Financial Reporting (ICFR) is now at its highest level since the inception of SOX in 2002 (Audit Analytics, 2022, pp. 1–3). The increase in adverse audits was detailed further by Audit Analytics:
The number of adverse ICFR management reports increased to 1,595 in 2021, up from 1,401 in 2020. The number of adverse ICFR management reports represents 23.7% of all management reports filed for fiscal year 2021, up from 21.7% in 2020. This is the highest percentage of adverse management reports filed since the inception of SOX 404. (https://bit.ly/3fCBDt8, p. 5)
The number one internal control issue cited in adverse ICFR Management Only Reports was the lack of trained accounting personnel resources. The Audit Analytics report further noted that “A lack of trained accounting staff was cited as a control issue in 48.7% of adverse auditor assessments and 71.5% of adverse management assessments.” (https://bit.ly/3fCBDt8, p. 1)
Audit Analytics also highlighted the negative impact that inexperienced auditors have had in the financial services sector. Adverse auditor assessments of ICFR increased to 5.8%, and the percentage of adverse internal controls doubled, from 9.5% to 18.8%, between 2020 and 2021 (https://bit.ly/3fCBDt8, p. 1). Investments in high-risk SPACs and other instruments over the past two to three years have resulted in a wave of restatements and hundreds of billions of dollars of lost stakeholder value. John Coffee, Corporate Governance Law Professor at Columbia University School of Law, argues that “restatements are indicators of fraud,” which further undermines public confidence in auditors and in the integrity of corporate financial reports (Gatekeepers, Oxford University Press, 2006, p. 64).
Employee Benefit Plans Depend on Auditor Expertise
Experience matters, and the lack of expertise in the audits of employee benefit plans (EBP) is now a critical challenge for the profession. The number of EBP auditors has declined by around 40% since 2011, with an expectation of another decrease of about 40–50% in the next 10 years (Adam Lilling, conversation with author, 9/30/2022). The amounts involved are staggering; as of mid-2021, according to the Investment Company Institute, 60 million Americans held almost $8 trillion in employer-sponsored 401(k) plans.
Serious deficiencies in EBP audits were disclosed recently by the AICPA, which led to its release of new guidance for EBP audits (SAS 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, effective 12/31/2021). The objective of this standard is to “overcome … the lack of expertise and inexperience in audits by their members of employee benefit plans” (“Experience Matters: New Standard for ERISA Plan Audits Address Persistent Deficiencies,” Beth Garner, BDO USA, LLP).
Substandard audits, as evidenced by these increases in critical audit deficiencies, have the potential to color the public’s perception of the value that CPAs provide through independent audits—raising questions about the public’s trust and confidence in our institutions.
The Aging of the Profession
When a generation of talented professionals with specific expertise retires, it can represent a risk to public safety if there are not sufficient knowledgeable trained professionals to replace them.
Mandatory retirement ages are common at U.S. CPA firms; the average is between 64 and 65. Unfortunately, over the past decade, the retirement age of CPA firm partners has remained stable, or inched up a year or two higher in the largest firms (Rosenberg Practice Management Survey, 2021; see https://www.cpajournal.com/2022/01/19/state-of-the-profession/); thus, the careers of the most knowledgeable experts in the profession often end once they reach this age.
The average age of partners in CPA firms in America remains between 52 to 53 years old. This means that, unless there is a sea change in mandatory retirement requirement, the majority of U.S. CPAs will be forced to retire within the next decade or so. This applies across firms of all sizes, as reported in the 2021 Rosenberg Practice Management Survey:
In firms whose net fees are less than $2 million, around 18% of firms use age 65 as the required age for retirement. But what is more revealing is that year over year, the number of partners scheduled to retire within the next three years has doubled to over 15% of the labor force. …
In firms whose net fees are between $2 million and $5 million, a little over 50% of the firms have a mandatory retirement at age 65. About 15% plus of partners are expected to retire in the next three years. …
In firms whose net fees are between $5 million and $10 million, over ¾ of the firms have mandatory retirement which is on average at age 65. However, some firms require partners to retire at age 62. Only in one firm is mandatory retirement at age 70. About 14% of partners are expected to retire over the next three years. …
In firms whose net fees are between $10 million and $20 million, almost 18% of partners plan to retire in the next three years.
In firms whose net fees greater than $20 million, 95% of firms have mandatory retirement at around age 65; 12% to 13% of partners within these firms are expected to retire within the next three years. (Rosenberg Practice Management Survey, 2021, pp. 194, 181, 155, 116, 155)
Could Regulation Increase Public Confidence?
Although some may tout regulation as the answer to the shortage of qualified auditors, John Coffee, corporate governance law professor at Columbia University, would disagree: “No amount of regulation or legislation can protect the public absent an effective gatekeeping function” (Gatekeepers, pp. 17-18). According to Coffee, while accountants, attorneys, actuaries, and analysts represent the “4 As” of the gatekeeping profession, only CPAs can certify that the financial reports of publicly traded corporations are fairly presented in accordance with generally accepted accounting principles, based on the franchise given only to CPAs under the Securities Acts of 1933 and 1934 and the Investment Company Act of 1940.
The acute shortage of qualified, experienced, and industry-expert CPAs is not easily being tempered by new entrants to the profession.
The fact is that 90 million Americans hold shares in U.S. publicly traded corporations, as well as nonpublic investments made through their retirement fund advisors. A significant reduction in the number of highly talented, knowledgeable, and expert CPAs could raise serious issues about the integrity of corporate financial reports, as well as the effectiveness of the $54.9 billion public company auditing market (Ibis World, https://bit.ly/3H15V46). In an age of distrust, the potential impact of a loss in confidence in the financial integrity of business enterprise could be considerable, especially in today’s uncertain economic climate.
Who Would Hire a Retired Partner?
No one describes the inability of older people to get hired, or the crisis that is hitting the labor market, better than Wolf Richter:
Ageism is a real problem. And it could also be responsible for the low labor force [participation] getting stuck at this level. Boomers are now between around 56 and 76. This is a huge generation. And in tech, when the hiring manager is 32, and you’re 56, it’s tough getting that job; when you’re 62, it’s even tougher just to get anyone’s attention. Some succeed, but many don’t. Many of these people, often with a superb job history, may never get a job in their field again. Many of them made enough money to where they don’t have to work. They’d like to work, but it’s tough getting ignored or rejected time after time because of age. And they give up “actively” looking for a job, and thereby they’re removed from the labor force. They were dropped from the labor force due to ageism, not because they wanted to retire. And they might tell everyone, after they give up looking, that they’re “retired,” when in fact, they’d love to work in their field but are locked out. (Wolf Richter, Wolf Street Report, July 8, 2022)
The Intersection of DEI and Ageism
Professors Michael S. North and Ashley Martin studied the advances that are being made in workplace diversity and inclusion, including the support for women and racial minorities. Their research focused on how these efforts are outpacing and, in some cases, hindering support for older workers. In nine studies, Martin and North found that people who hold egalitarian beliefs “harbor more prejudice toward and allocate fewer resources to older individuals as compared to other discriminated groups” (A.E. Martin and M.S. North, “Equality for (almost) all: Egalitarian Advocacy Predicts Lower Endorsement of Sexism and Racism, but not Ageism,” Journal of Personality and Social Psychology, vol. 123, no. 2, pp. 373-399, 2022, as reported in NYU’s Stern Business alumni magazine, Spring 2022, p. 11).
Martin and North further report that age-based retirement expectations by multiple disadvantaged identities highlights that older people need to “step aside.” The authors “argue that egalitarian advocacy—efforts to create equal opportunity for all groups—predicts greater likelihood to support ‘succession’–based ageism, which prescribes that older adults step aside to free up coveted opportunities (e.g. by retiring).” (Martin and North, 2022) The researchers concluded that ageism not only gets left out of our conversations surrounding diversity, equity, and inclusion (DEI) efforts, but in some cases it is actually implicitly or even explicitly endorsed by DEI efforts.
Including All Generations
The acute shortage of qualified, experienced, and industry-expert CPAs is not easily being tempered by new entrants to the profession. But just as COVID has transformed the employment landscape and made working remotely an accepted practice, might a model be created that could eliminate the discriminatory impact of forced retirement and improve knowledge transfer to the next generation of professionals? In a recent book entitled The 100-Year Life, authors Lynda Gratton and Andrew Scott argue that “retirees” have one-third of their lives to contribute to society and the public good (Bloomsbury Business, 2017).
There is room for all; but who will lead? This author has observed that, within Japanese and Dutch corporations for example, there are incredible roles within an organization for individuals to mentor, train, and educate young professionals in addition to their traditional roles. The result is a win–win. Older professionals have more personal time to spend with family and other pursuits, maintain meaningful employment, and—most importantly—transfer the expertise and knowledge that was built over a long career to the next generation of professionals. Adding “age” to the factors of diversity, equity, and inclusion is an idea whose time has come.