Shortage of auditors becomes pressing

You probably already have noticed it when you have been exploring potential career opportunities for after your studies: the shortage of higher educated financial students in the Netherlands is increasingly noticeable. Recruiters from all kinds of financial companies approaching students on platforms like LinkedIn or and desperately want to get in touch with students via activities organized by themselves or associations like Risk. As a result of the economic revival after the financial crisis, the financial sector is booming again. While this shortage is existing all higher-educated financial functions, it is nowhere so worrying as in the accountants and auditors sector. This might sound appealing for accountancy students, but there are major adverse consequences for both auditors-to-be as for the entire economy.

Accountancy firms have always had troubles attracting sufficient auditors. This is due to the incredible turnover rate among auditors, especially for those working for the Big-4 (KPMG, Deloitte, PwC and EY). Worldwide, the average turnover rate for auditors for these firms is around 20-25% a year, whereas Dutch small audit firms face a turnover rate of ‘only’ 7%. In the Netherlands 46% of Big-4 auditors leave the firm within two or three years! These numbers might seem extraordinary, but are actually existing for decades and are the result of the staff structure of the firms. That structure is formed as a pyramid, with a small number of partners having a share in the firm in the top layer and a large group of fresh graduates in the bottom. Consequently, it is an up-or-out system, in which sufficient employees have to leave the firm in order to control for staff costs. To maintain the desired amount of staff within each layer of the pyramid, a turnover rate of 17% is most effectively. 

Accountancy firms have always had troubles attracting sufficient auditors.

In the last couple of years, however, this pyramid structure has been under severe pressure. Firstly, according to research conducted by Nyenrode Business University, because audited companies are increasingly annoyed by the fact that every year new staff members are assigned to their audits. Every year the wheel gets reinvented, as new staff has to learn about the organization and its processes. Consequently, new auditors ask the same obvious questions year after year, critics say, hereby wasting time of financial managers. Moreover, auditors from higher layers of the organization are constantly busy coaching new staff, instead of focusing on the critical accounts of the audited company. 

More importantly, the pyramid structure only works as long as there are sufficient accountancy students graduating from universities willing to work as auditors. Reports from employment agencies and the Dutch employee insurance agency (UWV), as well as experiences from accountancy firms, all show that there is a big scarcity of accountancy graduates. There are simply not enough students interested in becoming auditors. According to the Dutch CEO of PwC, Peter van Mierlo, this is a result of the questionable image of auditors nowadays. ‘Politicians, market authorities and media put disproportional pressure on the audit sector, which is why enthusiasm for the audit profession has decreased’, Van Mielro says. His opinion is supported by a global survey of the International Federation of Accountants (IFAC), which states that this is a worldwide problem for audit firms.

Politicians, market authorities and media put disproportional pressure on the audit sector, which is why enthusiasm for the audit profession has decreased

New legislation makes the problem even worse. Market authorities introduced stricter regulation on audit quality standards and government imposed additional requirements for the post-Master’s needed for becoming a certified auditor. These developments, in combination with the mandatory rotation of audit firms in order to prevent mutual dependence between de auditor and the audited firm, require audit firms to intensify their audits. Consequently, more work is required for performing a qualified audit. Hence, more staff is needed for a single audit, causing the staff shortage to become even more severe.

So far, the shortage of auditors seems just a problem for the audit firms. This problem, however, causes audit firms to reject new clients or to terminate current contracts. The Big-4 are more and more focused on the larger companies with attractive audit fees and increasingly ignore the lower segments. As a result, smaller private and public clients have to look for a new auditor, since they are still obliged to present certified financial statements to their stakeholders. This could lead to troublesome consequences, like many Dutch municipalities faced last year. Currently, the Big-4 firms are leaving the market for medium- and small-sized municipalities, which is why many municipalities have to find a new auditor. As the smaller audit firms are also constraint in their capacity, this search turned out to be quite challenging. With help from the national government all municipalities eventually managed to find an auditor for the audit over 2016, but they are already concerned for coming years’ audits.

With help from the national government all municipalities eventually managed to find an auditor for the audit over 2016, but they are already concerned for coming years’ audits.

The example of the municipalities is expected to occur in the market for small and medium-sized enterprises as well. So far, smaller audit firms managed to take over the clients dumped by the Big-4. However, the accountants shortage will become even more pressing for the smaller audit firms as it is for the Big-4, since these firms have more troubles to keep up with new legislation on audit quality and cannot always meet the new requirements certified auditor-to-be face for their post-Master’s training. Consequently, the smaller audit firms become less attractive for accountancy graduates. Not surprisingly, the smaller audit firms are now collectively protesting against the new requirement that graduates need 1,500 instead of 1,000 hours of audit experience in order to be able to become a certified auditor.

The consequences of scarcity of accountancy students could be disruptive. As a result of the limited supply of auditors, audit fees could increase significantly. Furthermore, companies who cannot afford or even cannot find an independent auditor could end up with major problems. They simply need a statutory audit of their financial statements, since it is required by law and/or investors. When managers are not able to offer an auditor’s opinion of their financials, they could be fined by (tax) authorities or even end up in jail. Moreover, investors will be reluctant in offering new credit as they will perceive higher risks in the company’s financial statements. Consequently, companies will face higher financing costs, despite their good intentions in finding an auditor. Of course, it is not as bad yet. But the first signs are already visible and experts are warning for the potential effects for the economy the shortage could eventually lead to.

The solution? More accountancy students! 

Are you an accountancy student and do you want to learn more from people with practical expierence? Come to our Accountancy Evening on October 16th! During this evening, interesting speakers will share there views and experiences with you. For more information, and to enroll, visit our website: 

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