Midsized US accounting firms retreat from public company audits

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A number of midsize US accounting firms pulled back from auditing public companies in 2023, as a shortage of new recruits and a tougher regulatory environment prompted a rethink of the business.

The withdrawals left some small companies scrambling to find a new auditor ahead of the end of the financial year, and an accounting industry group said other firms could follow suit in 2024 as the Public Company Accounting Oversight Board steps up inspections of the trickiest audits.

Eide Bailly, a top-20 accounting firm based in North Dakota, told its five regional banking clients in November that it was pulling out of auditing listed financial services companies, according to regulatory filings.

Its move came after CliftonLarsonAllen, another top-20 firm, wound down the last of its public company audit work, which had focused on banking clients, earlier in 2023.

Jen Leary, CLA chief executive, said that the substantial investment required to serve public company clients, including building appropriate risk management infrastructure, was better spent serving small and midsize private companies and non-profits. “That’s our A-game,” she told the Financial Times.

The PCAOB, which oversees public company audits, has taken a more active approach to enforcing audit standards under the Biden administration, increasing the numbers of inspections it carries out and levying record fines on accounting firms.

Last week, the regulator said it would carry out more inspections in 2024, with a focus on banks, given the turmoil caused by rising interest rates. It is also in the middle of a rewrite of audit standards, with a view to tightening protections for investors.

Audit firms “are challenged to get people to want to do the work”, said Sue Coffey, chief executive for public accounting at the American Institute of Certified Public Accountants, which represents the profession. “PCAOB inspection is part of it.”

She said: “Firms have got a lot of other work that is important for their client needs and they are stepping back and looking at their business models and saying, ‘what space do we want to be in?’”

There are almost 1,600 accounting firms globally that are registered with the PCAOB, of which 258 audited US public companies as of May this year, according to Ideagen Audit Analytics.

Accounting industry consultant Allan Koltin said firms made decisions about where to focus limited resources based on the risks and rewards, and a more vigorous PCAOB had heightened risks that had long been part of the business.

“The PCAOB wants dabblers out, and they’ll get their way,” he said. “The firms, meanwhile, are asking, what’s the number-one risk that could get us wiped out, à la Arthur Andersen after Enron. The margins are good, but not great.”

Another factor: the number of people becoming licensed CPAs has fallen to the lowest level in at least 17 years, exacerbating a talent shortage fuelled by the retirement of baby boomer accountants.

Regulatory filings in recent weeks show some companies still working through the fallout from audit firms’ retrenchment.

On December 8, KPMG was announced as the new auditor for Forte Biosciences, a Dallas-based biotech, one of several public companies dropped earlier this year by MHM, the audit arm of the top-20 accounting firm CBiz.

In earlier filings by other clients, MHM confirmed that it “intends to no longer provide audits of client’s internal control over financial reporting” — a critical part of the audit of many public companies — and, in another case, was resigning “due to its own resource constraints”.

Some former clients of Armanino, another top-20 firm that exited public company auditing this year, have also announced new auditors recently. Matt Armanino, the firm’s chief executive, told staff that it was giving up work that represented 2 per cent of its revenue, blaming “current regulatory environment and changing market conditions”.

Armanino came under regulatory scrutiny after acting as auditor to the US arm of collapsed crypto exchange FTX.

Sandy Peters, a PCAOB adviser and head of global advocacy at the CFA Institute, said that auditors “must acknowledge that they have to have an appropriate level of expertise”, and the higher standards being imposed by regulators are vital. “Investors believe these standards are necessary and if audit firms do not meet them, we are going to be less protected.”