The Shelf Life of Audit Experience

Key Takeaways

Researchers say audit experience can influence a chief financial officer’s behavior—but not forever. Returning guest Josh Gertsch has worked with CFOs in a variety of ways and unleashes his expertise on the topic. Listen in:

 

Season 3, Episode 12: The Shelf Life of Audit Experience | Transcript

Steve Soter: Hello, and welcome to Off the Books, where we're surfing the uncharted waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the risk, reporting, and compliance platform that simplifies your complex work so you can focus on coming up with excuses as to why you've already quit your New Year's resolutions. Check it out at workiva.com/podcast. My name is Steve Soter, accounting enthusiast, Diet Coke aficionado, and today's host. And I'm very glad to have you hanging ten with us. I'm also very glad to have Catherine Tsai hosting this episode with me. Catherine, can you please tell the fine folks at home who you are?

Catherine Tsai: Well, I'm not an accountant or Diet Coke aficionado, but I made a career out of asking questions and writing about it later, so I'm here to ask more questions.

Steve: Excellent. Catherine, what are we talking about today?

Catherine: Well, toward the end of last year, Forbes published an article talking about CFOs who have audit experience.

Steve: You are exactly right. We wanted to dig into that a little bit more, so we brought in previous guest Josh Gertsch. In the past, he's talked about his time in auditing, accounting, and finance with years of interacting with CFOs. So today he's going to enlighten us about what makes a CFO more or less aggressive.

Catherine: Let's dive in.

Steve: So, Josh, we're here to talk about CFOs, and even though you've joined us a handful of times before on Off the Books, can you tell the listeners who you are and about your interactions with CFOs over the years?

Josh Gertsch: Yeah. So I spent the first part of my career as a senior audit manager with one of the big accounting firms. And then later on, I've held a number of industry jobs where I've worked with the CFO. So when I was back in the professional services space, we worked with a lot of CFOs more on a quarterly, maybe like a monthly basis where we were working through their financial statements, their quarterly and annual filings, working through their risk assessment and SOX procedures. And on a number of them, we worked through primary and secondary offerings for them to go public or issue equities for some more capital that they were trying to raise. Later in my career, I held a number of roles like director of accounting, controller, director of finance, and in each of those I worked with the CFOs on different things. IPO readiness and going public, really optimizing and streamlining month-end close and reporting, working through different tax strategies, and just overall, how to report information throughout an organization, to the different business owners, working with the CFO, hand in hand on how we do that reporting and how we help drive decision-making throughout an organization.

Steve: So whether it's good or bad, you've clearly got a soft spot for CFOs in your career.

Josh: There's a spot for them. I don't know if I would call it soft.

Steve: That's fair. Well, Josh, there was an article in Forbes recently that caught our attention, and it asked this question. It says, are CFOs with prior audit experience more or less aggressive with their financial reporting? We were wondering maybe if you could unpack that a bit for us and tell us perhaps what you've observed in the multitude of interactions it sounds like you've had with CFOs over your career?

Josh: It's an interesting thing, and I think you'd have to kind of look at the progression of what the CFO position and role has been over the last few years. I think it's very different 10 years ago than it was today. You know, probably 10 years ago, a CFO was an accountant who probably had a lot of public accounting experience or a lot of financial reporting, technical experience. And was primarily focused on just keeping the books, complying with reporting regulations, and that was the day in, day out focus. You know, that's evolved over the years. Now, CFOs are really required to understand all the aspects of the business. They're expected to be kind of a thought leader. They're expected to really help drive the business forward, make the right decisions. So more of an operator is kind of what they've shifted into with a finance background to kind of make sure that stuff is still being done. So CFOs have had to evolve to, you know, not only do keeping the books, but they've had to look at tax, finance, reporting, treasury, cash flow, all that different stuff now. And it's a lot more comprehensive than it used to be. So I think that's impacted, depending on their background, depending on what their focus has been, I think they probably look through that financial reporting lens on how aggressive they want to be based on those experiences, if it makes sense. Depending on where they spent their time, I think it can lead to them being more aggressive or less aggressive in financial reporting.

Catherine: Was there any one thing that led to that evolution?

Josh: I think it's just kind of an evolution. You know, overall industries, it's like technology is here to help us. In the last 10 years, technology has come a long ways. We don't have to focus on doing all that stuff manually anymore, where before he may have had a team of 20 people to close the books, now it's a team of two because he has all these technology tools. It's opened them up to be kind of more of that strategic leader. And I think that's just kind of applied over the profession, like, hey, it's kind of just pushed them where they've had an opportunity to play a bigger role in the organization.

Catherine:  Have you observed that some CFOs tend to be more aggressive than others based on their experience?

Josh: Definitely. I definitely have. I've seen it both ways, honestly. When you look at what a CFO does, you know, they're over accounting, they're over finance, they're over treasury. They're over taxes. They're over systems and integration. Well, I mean, every CFO you go to is not going to have equal experiences in all those different pillars that they have. They're probably focused on one or two of those, and they have an opportunity as a CFO to kind of expand. So I think based on what their experience has been, I've seen it will tend to push them to be either more aggressive or less aggressive as it comes to financial reporting.

Steve: Have you ever felt like CFOs that had prior audit experience, well, I think they understand the risks. Have you ever felt like maybe they know the tricks or the behind the scenes kind of tools that can be used to, you know, maybe push things one way or the other?

Josh: I think they've had a lot more experience with the rules. You know, they've probably been in some of those tough situations where there's been a lot of pressure, where they've been questioned on it. They're probably more comfortable navigating that process than someone who's not. So depending on how much experience they've had, they're not going to be afraid to make a position and, you know, document it and support it and stand behind it. That said, though, I will say that because they've probably had a little bit more experience, they've seen a lot of good with that, but they've also seen when things can go really south. And so typically, I've seen, at first, as they kind of make that transition to CFO, they're probably a little bit more conservative as to the stances they're going to take. They're going to make sure things are well documented. They're probably going to make sure they're a little more conservative. They're probably not going to push it as much because they probably have been under scrutiny on this a lot more than maybe a CFO with a different background or different experiences.

Steve: So it's almost like that experience maybe helped them understand where the line was and at least up to that line, providing it's documented and supported, hey, they're going to push and push and push, but they've got a really good sense of where that boundary is. And then anything beyond that, they're going to stay away just simply because of what they've seen can unravel if you go too far.

Josh: Yeah, I think that's a great way to characterize it.

Steve: Without reading the entire article, I can summarize, of course, for you and our listeners the results. So it says that CFOs with prior audit experience are indeed less apt to report aggressively as compared to the CFOs without prior audit experience. But the report revealed that those CFOs with that prior audit experience actually became more aggressive over time. And it sounds like that aligns pretty closely with what you just shared. But interestingly, the report found that CEOs with prior audit experience were also less aggressive, but that the effect of their prior audit experience did not decay over time, meaning that they didn't become more aggressive as time went on, in contrast to the CFOs. And I'm wondering, again, this is a slightly different angle here, but does that surprise you based on your experience? And could you take a guess as to why or why not?

Josh: Yeah, I actually I think that makes a lot of sense, honestly. Like if you kind of take a step back and think about it, if you're looking through the lens of a CFO, you know, typically when he joins  an organization at the first, he probably is a little bit closer to their financial reporting. It's probably something he's been doing, or at least, you know, dealing with a lot more. But as time passes, his focus changes a lot. And as you focus on more strategic things, I think you're looking at any way to optimize the business or you're looking for any dollar where you can find it. You know, you have to be aggressive in driving a business forward. And so I think that aggression or that drive to keep moving the business forward to push it, to be as profitable as you can or to drive as much growth and strategy as you can, they have to be an aggressive player. And I think over time, that just kind of pushes down to that financial reporting where they're going to kind of push the boundaries a little bit. One, they're not doing the day in, day out. So they kind of have a tendency to push it and be like, Well, if there's a challenge, we'll go through it, you know? So I think there's a little bit of that. The reason that I believe, switching gears, that CEOs don't get more aggressive is it's never something that they're responsible for at the end of the day. It's not something that they're close to. It's something that the CFO is over, and they're going to look at the -- they're just going to kind of play neutral like, Hey, CFO, this is your realm. Although I know this area and I have a good understanding of it, I'm expecting you to make the hard judgment calls on it. So you tell me how far we can push this envelope. And if you say no, we're not going to do it. And if you say yes, I mean, great if you think we can do it.

Steve: Because no CEO is going to want to find themselves in a position where, hey, I'm telling you how it's going to be. I mean, that is like red flags all over the place, right?

Josh: Yeah, super dangerous.

Catherine: Steve, I was curious about what Josh meant by a CFO pushing the boundaries. Can you give us an example?

Steve: Sure. I think, you know, a lot of people like to think about accounting as maybe it's all black and white, but the reality is there's a lot of gray. And what I mean by that is that some cases, maybe there's a transaction or maybe there's some kind of acquisition or something that happened where you can push the boundaries just a little bit, like maybe interpret a provision of a contract to give you more favorable financial reporting results. So when we talk about CFOs pushing the boundaries, it might be them getting more aggressive in terms of accounting treatments in order to get to a specific result. And why that's kind of dangerous is because when you get aggressive with accounting, you could have auditors asking questions, you could have regulators up to and including the SEC asking a question. And you know, things can get pretty hot, pretty quick.

Catherine: OK, that makes sense. But what did you mean when you said a CEO telling the CFO how it's going to be, that that would be a red flag? What did you mean?

Steve: Oh golly. Well, it's kind of the same thing. Just maybe to a whole other level. Again, if a CFO is getting really aggressive, that's one thing. But when a CEO starts to mandate accounting treatments, that's a whole other level of aggressiveness because there's often this sort of ethos within accounting that, hey, there's some independence here. We are going to interpret the accounting rules and sort of let things fall where they may. So if a CFO gets aggressive, again, that's a red flag. But when a CEO who's not even really in accounting starts to get aggressive and starts to mandate accounting treatments in order to get to a certain answer, that is a really major red flag and in many cases goes against a lot of the certifications and other things that CEOs and CFOs need to make to both auditors and regulators.

Catherine: I see. Well, we don't want to raise any red flags with our sponsor, so we'll be right back with Josh Gertsch after this.

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Catherine: So the report also said that CFOs with more recent audit experience tend to have lower audit fees at first, but then those audit fees rise as a CFO's audit experience becomes more distant. So should we read that as, as a CFO, as she becomes more aggressive, is going to drive up the audit costs? Or do you think that maybe the longer you go, the less in tune you are with audit fees in the market? Or maybe you're just not as good at negotiating?

Josh: I think there's probably a little bit of truth to that. I don't know that it's how great you are in negotiating. I think what really happens is this. You know, when you're a new CFO, you probably have a pretty decent background in financial reporting. You know, you've probably been through an audit before or been a part of one. You know, you feel like you come in, that's your relationship. That adviser that works for you, they're negotiating fees with you. You know, when you first join a company, it's like, Hey, I can help save the company money. You're like, I've been here, I've done this. I'm going to go lay down the law with these guys, and I'm going to get the fees dropped, and everyone's going to give me a high five for it. I see that tendency a lot with newer CFOs. You'll see though as time goes on and the CFO has more experience, they're willing to pay a fair price for an auditor, I would say, because, one, they know if they do, the auditors are going to be more responsive. Issues are going to come up. The auditors aren't, you know, they have a lot of clients, and they're going to respond to who treats them fairly too. I think they see more value-add over time from the auditors so they don't press the fees as much as when they first kind of jump in and, you know, are going in a company.

Steve: It's interesting. You get what you pay for, and I've been on the client side in cases where we've both underpaid and overpaid our auditors. And there is definitely something to be said for paying a fair price that both you and the auditors agree is fair. There's a service element to it, for sure. Well, Josh, just last question. You've been on this podcast before talking about the benefits of a career as an auditor in public accounting. I'm curious, just along the same vein of what we've been discussing, is there a shelf life to that skill set?

Josh: Yeah, it's a tough question. I wouldn't change it. I would go back and do it again. But I do think the world is evolving a little bit. The way I would, the way I kind of compare it is, you know, I played sports as a kid growing up, and I played a lot of sports. I played basketball, baseball, football. I got exposed to a lot of different things. It was great. But nowadays, people with kids will understand that, you know, when they get into a sport, there has to be a lot more focus and attention there. It's not like we go from baseball to basketball. If they're good at basketball, they're probably playing it throughout the whole year versus, like, in a specified time period anymore. And I kind of take that analogy to being an auditor. I think in the past, you know, it's something where you got that broad experience. It was great to go get. It was great to move out, and that's great. But you know, is there a shelf life to that skill? I think the problem is what it is now is you really have to make that decision. But if you want to go broader, there's a lot of things you can do in accounting and finance, and those opportunities are there. But if you want to stay in it, you almost have to double or triple down on that skill set and be the best at it. So I don't know if my analogy is quite on par, but effectively I think it's just more focused than it has been in the past. There's a point where it probably doesn't make sense to keep building that skill. Or there's a point where you need to double down on it and kind of go all in on it.

Catherine: Well, I think the shelf life on this conversation has run out, so we're at the closing question of the day. Steve, I don't know if you want to ask this one.

Steve: We've been talking about shelf lives, Josh. So the question is, if you had to eat something that had expired, gone past its shelf life, Josh, what would that be?

Josh: SpaghettiOs with meatballs.

Steve: Oh, is there a shelf life?

Josh: I don't know. But I think about what's in my cupboard now that if I saw it there in five years, I wouldn't even hesitate to eat it. You know?

Steve: Fair, Catherine, how about you?

Catherine: This is so foul. I think it has to be something with a lot of preservatives so maybe Cheetos. I don't know. It's probably happened before.

Steve: Probably. I was going to say Spam because I actually don't believe Spam has a shelf life. I think it's like 100 years or something like that. So.

Catherine: And with that, this episode is past its shelf life, and I also want to correct something that I said. Cheetos do not have preservatives. I don't want to smear their good name, so I'll smear their orange pixie dust all over my keyboard. But I don't want to smear their good name, so make sure to enjoy them when they're fresh. Big thanks to Josh Gertsch from Workiva for joining us.

Steve: And big thanks to you, dear listener, for surfing along with us. I'm Steve Soter. That was Catherine Tsai, and this has been Off the Books presented by Workiva. Please subscribe, rate and review the show whenever you listen, tell your buddies if you like the episode, and feel free to drop us a line at offthebooks@workiva.com. Surf's up, and we'll see you on the next wave.