Why Audits Go Wrong: Commercial Pressure and Audit Quality

When companies collapse shortly after receiving a clean audit opinion, attention often turns to technical failures. But what if the deeper issue is commercial pressure inside the audit process itself?

In this episode of the Why Audits Go Wrong series, we explore how commercial pressure, fee dependence, and client retention incentives can quietly erode audit quality. Wayne Basford and Judith Leung unpack the tension between professional skepticism and commercial realities, and explain how audit firms can drift from investigative auditing into “filing exercise” behaviour.

🎧 In this episode, you’ll learn:

•  Why commercial pressure can undermine audit quality 
•  How fee dependence affects auditor judgment 
•  Why low audit fees create dangerous audit behaviours 
•  How firm culture shapes professional skepticism 
•  Why regulators repeatedly identify commercial pressure in audit failures

Financial Reporting Conversations is brought to you by Basford Consulting helping professionals go beyond compliance and get financial reporting right.

For technical insights, training, and resources that make the unknowns in financial reporting known, visit basfordconsulting.com

🔗 Connect with us:
LinkedIn: Wayne Basford & Judith Leung
YouTube: @BasfordConsulting
Website: basfordconsulting.com

Transcript

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Welcome to Financial Reporting Conversations brought to you by Bass for Consulting.

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SPEAKER_01 0:18

Whether you're a preparer, auditor, director, or litigator, our aim is to help you get it right. When a company collapses shortly after receiving a clean audit opinion, the same question always appears. Where were the auditors? Most people assume the problem must have been a technical one. A procedure missed, evidence overlooked, or accounting misunderstood. But there is another issue that receives far less attention, and that is commercial pressure. Audit firms compete for clients, negotiate fees, and try to retain engagements. Yet auditing is also supposed to serve the public interest. Welcome to Financial Reporting Conversations. In this series, Why Audits Go Wrong, we examine the pressures and decisions that shape audit quality. In today's episode, we're going to explore how the commercialization of an audit can sometimes influence professional judgment and what that means for audit quality. As usual, I'm joined by Wayne Bassford. Let's, Wayne, let's start with a fundamental issue. Audit firms are businesses, they generate revenue and compete in the market. So why can that create a problem for audit quality?

SPEAKER_00 1:30

I think there is a phrase, do not bite the hand that feeds you. So we're in this really weird situation where the people that appoint the auditors, the people that decide whether we're going to go out for tender or you're going to change auditor, they're the same people that you're most likely going to criticize. So there's this balance, and there's two elements of this commercialization. Is one we need to actually retain clients. We're a business, we don't like losing customers. No business likes losing customers and auditors are the same. We're commercial, we need to make a return, like any business. Our clients want to pay the minimum for audits. So there is this wonderful problem between the world that we live in. That can I do my job properly? Can I annoy you and challenge you and say you are not doing your job properly? And that's me being an auditor, me being a professional auditor, and then you may go and change me as an auditor and get rid of me. Or am I competing time again on fees? I need to get fees, I need to keep my staff busy, I have my own needs of school fees, mortgages, and all of that stuff. I need to win clients, so I need to get into this commercial world of being competitive, but I need to make a profit of doing an audit. So how do I staff that audit? How much time do I spend on that audit if I've been beaten up by the client, by the finance controller, by the audit committee to minimize the fee, sharpen the pencil or all such euphemisms to reduce your audit fee?

SPEAKER_01 3:23

One of the phrases that regulators often use is fee dependence. Why is that such a risk?

SPEAKER_00 3:30

It's a risk, and and it's I think it's wrongly put in terms of some cases a firm is completely dependent on a large audit fee, and that creates problems. Could that audit firm afford to issue a modified audit opinion and run the risk of losing the client? But definitely, fee dependence needs also to be viewed at the individual partner level, and that can be a much lower level than the strength of the firm or the strength of the firm's balance sheet. You're a junior partner, you could be made redundant. We've made you a partner, and you've got to grow your fees. If you don't grow your fees to a million dollars, two million dollars, well, it's it's not our fault. You obviously are not cut out to be an audit partner. You're driven to keep your job. So being dependent on fees, having your major client can compromise audit quality. And you know, there is this weird euphemism that you actually promote yourself, you will be a grade A client. You will be a priority client. If you're with this larger firm, you're just a small fish in a big pond. But if you come appoint us as the auditor, you will be a priority client. And if you stare at that phrase a bit too closely, you can say, well, what does a priority client mean? It could mean we'll be softer on our views of your accounting treatments.

SPEAKER_01 5:07

You talked about the pressure to retain clients. How does that affect the audit? Can you explain a bit more?

SPEAKER_00 5:13

With commercial. Winning clients is a lot of effort. Retaining clients, every business model says it's retain clients. And well, if I force you to write the impairments, if I look too closely at your revenue recognition, if I make you do that disclosure, if I make you disclose those uncertainties that do exist about your ability to continue as a going concern, you're going to say, Well, I might put this audit out for tender. And again, this is the pressure on the on the new guy, the new audit partner. You've got a long-standing client of the firm, you've been past it, you've been rotated onto that land, and you've found problems with it. This is you know the weakness in auditor rotation, and then suddenly you get, and I I know this from past experience, you get, well, the other Mr. X was always happy with it. I can't see why you're too nervous, you're too technical, you're too uh pineckety. Maybe it's a time for us to put the audit out to tender. I've heard that, and it exists throughout the profession. I know I know where you actually then get phone calls to senior audit partners or even managing partners to say, you know that young partner that you've put on it, you know that partner that's just been too nervous asking these uncommercial questions. And there is a lot of pressure which erodes audit quality, and you know, and the and the question for all of those senior audit partners, those managing partners, when you get a call from a disgruntled major client, how do you deal with it? And do you then go and have a strict word and a heart to heart with that junior partner and say, now please please go easy? You know, we are a business. How does that work?

SPEAKER_01 7:17

Okay, so audit firms operate in a commercial environment and clients represent revenue. So the relationship between auditor and client can influence behaviour. And Wayne Wynn, I know that audit fees I've been under pressure in many markets for a while. What impact does that have on the audit itself?

SPEAKER_00 7:37

I've been doing an auditor for 30 years, and audit pressure and the race to the bottom and this firm undercutting that firm, and that is just an uncommercial fee. Is something I think I've lived with for 30 plus years, and I don't think it's getting any better. There's always a firm that's willing to undercut you, and in that world, well, you just cut car you cut corners, it's not a priority client, you don't allocate enough staff on it. You personally, as an audit partner, you don't prioritize it, you don't put enough of your time on that low fee. And there's a compounding aspect. You do your bigger jobs first, so you know, do you plan your worst job first, your low, low fee job, or do you plan it later? Is the planning sometime in September? Do you put your best staff on it? Do you put enough staff on it? Do you put enough staff to do the planning? It just spirals down when fees are bad, and then you have culture. Do you actually, and some partners have done it, I've seen it for ye again for 30 years, you encourage your team not to put time on the clock. Don't record it, don't I don't want write-offs. And that spirals down in quality. You have disgruntled audit teams, you have lack of staff retention, and it's all fee pressure. Fee pressure kills audit quality.

SPEAKER_01 9:22

Thanks, Wayne. So, you know, we you talked about not just fee as part of a firm, but partner fees. You know, I guess partners have their own KPIs and incentives. Can you explain how that plays out in discussion we're having?

SPEAKER_00 9:39

We the audit process is human and audit partners, they need they're typically uh ambitious people, they've typically got lifestyles they need to maintain or lifestyles they aspire to, and it's all about fees. You want the rainmakers, you don't want people that lose fees. So you've got to win audit fees. Now, an easy way to do that is be cheaper than everybody else. You've got to retain you win them, then you've got to retain them. The easiest way to retain them is not to upset your customer. And when you look at KPIs, when you look at how audit partners are promoted. I remember this is a long, long time ago when I was a I don't think I was even a senior, talking to a a newly promoted Price Waterhouse partner. And he's a Price Waterhouse partner, he's got and he was sitting, we were chatting, he was chatting to a team of us and saying, Wayne, you don't understand. I'm now am at the bottom of the rung, and for the next 10 years I've got to make my way through the partner promotion banding system, and they weak partners get appraised. How do you get to the next banding? How do you get to the next level? And in a lot of times, well, you just get more fees, you win more fees, and that just is very dangerous when you get to audit quality and then consequently audit failure.

SPEAKER_01 11:16

If you're finding this discussion useful, please take a moment to click like, subscribe, and share. It helps others in the financial reporting community discover financial reporting conversations and keeps you up to date with every new episode. So, the conversation so far, we've talked about the pressure to win clients, the pressure to main retain those clients and you know, pressure on the partner to sort of keep climbing that corporate ladder, maintain that lifestyle. How important is firm culture in managing all these pressures?

SPEAKER_00 11:49

Firm quality, audit quality, preventing audit failure, it's the responsibility of the firm's leadership, of the head of audit, of the managing partner, of the CEO. And you know, what culture do you project? Is it we're going to win fees? We would like to have a shout-out for X who's just won this client. We've got this fee budget. Here's the thermometer for the fee budget. If the entire culture is about fees, not quality, you go with the flow. If you've got a culture that says don't charge your time, don't we don't charge overtime, we don't want this culture, it it it rots, you know. And the culture, does your firm and every every partner that's listening to this, or every even every senior that's listened to this, what is the firm, your firm's culture? Have you ever turned down audit tenders? Do you actually call bad clients? Do you uh sit down at the end of an audit season? Do you sit there beaten up on the first week in October or whenever you come back from that school holidays and say, okay, that client, that client, and that client, we're gonna get rid of them. Now that's a culture of that drives quality over fees. Have you got a tech resource? Have you got a technical partner or have you got access to technical partners like me and you? Does your firm invest in quality training? Or does it just cram people in the room and say, well, I've ticked the box, have you got your CPD in? It's all this tone at the top. And whether you know you know it from an audit partner, you almost know it from a grad that's been within the firm six weeks. You know whether that firm's driven by profit or driven by quality.

SPEAKER_01 13:56

So you've sort of briefly touched about the impact on the teams. Um, how does fee pressure affect people actually performing the audit work?

SPEAKER_00 14:05

It destroys the people doing the audit work. And you go into this audit is supposed to be a risk-based approach, audit is supposed to be investigative, thought, questioning, and then suddenly when you put these fee pressures on, the audit turns into a filing system. All you're doing is collecting a random amount of information. In old days, it used to be well, just give me something, photocopy something to pad out a file. Now we just electronically randomly put it on the spine of caseware or another audit software. You're filing, you're doing the work too quickly, you really don't know what. If I ask that difficult question, if I I don't really want to ask that question, because there's not budget for me to ask that question. Um clients always write, clients aggressive, clients you know, client. I've read the minutes, I've read the minutes of the audit committee, and they're looking at putting it out to XYZ for tender. They've had a debrief last year that they were worried that we asked too many questions, they were worried that we asked those questions late. Well, this pressure just seeps through to the whole audit, you know. Don't raise the issue, just file it there. I'm sure the client's right. Tell me, just give me anything. The number of times I've seen in emails, as I'm going through uh various correspondence that I may look at, just give me something. I just need something. And that phrase I just need something rather than I need reasonable, supportable evidence, sufficient appropriate audit evidence is a s is a really scary scary thing. Uh yes, whatever, pigs fly, and yes, we will recover, and yes, you just write the explanation down, or nowadays you just get an email and put it on the audit file. We're not auditing, we're filing. And then you and I I look at these teams. The staff are burnt out, they're jaded, and they leave. And they they leave, and they are not leaving as qualified auditors, they are just leaving as overworked filing clerks, which doesn't want to look at an audit file again. I I was it was quite interesting when he passing some of these infographics, and you can see across the world. Remember, the number of auditors that are recruited as auditors and the number of auditors that go on to be audit partners is just a ridiculously imbalance, and so many diligent, clever people have been through the audit machine and they are jaded, they do not say, Oh, well, I wish I really want to go back to auditing, I'm gonna dust off my green pen, let's get back to auditing. They are jaded, they do not feel, they do not leave thinking I did a really good job, they left. And you know, this is the sustainability of the profession that is becoming a real problem. That when you when the partners, when the head of audit puts fees over quality, it just cascades down, it it rots the culture.

SPEAKER_01 17:41

That reflected on a conversation I had with someone I knew, and they were saying how they started in the big four and then started in audit and then was very glad that she could move to in a different part of the big four.

SPEAKER_00 17:58

I'm X3 of those big four. The model that I've watched in the last 30 years has been abused. Let's get hardworking, clever, competitive grads and let's overwork them, not pay them over time, burn them out, kill them in a busy season, and then let's go and recruit from somewhere else. Let's go and now we've we have our best graduate recruitment programs, we've got the best brands, we've burnt all those really good grads, let's go and recruit from the mid-tier. Now I've I've watched that for 30 years and it's now coming home to rest. The firms cannot get the quality grads, and everybody's gonna stare at that because the culture was wrong.

SPEAKER_01 18:49

So you're saying that's a symptom of fee pressure?

SPEAKER_00 18:53

My seniors would come to me and explain to me on an hourly rate, they'd earn more working in KFC than working for that big four. It was a sad that it was a fact. You just nod and uh just get on with it, just sign it, do some more wicked ticking. But that's the culture of the firms. And that culture is wrong.

SPEAKER_01 19:14

Moving on um to regulators, or regulators also frequently in their sort of inspection reports talk about commercial pressure. What are they saying?

SPEAKER_00 19:24

Same as everything I've been saying with this, that they you've you've accepted aggressive accounting treatments, you've failed to challenge management effectively, you've not been skeptical, or you didn't follow up on that? You didn't why didn't you ask those questions? You almost saw it, but you didn't follow it up. So it it again permeates. Did the auditor have enough time to do the audit? Was there enough budget to do the audit? Or did the auditor really want to probe and upset the client that might lose that client?

SPEAKER_01 19:56

So thanks, Wayne. So let's uh wrap up this episode and final question to sort of bring everything together. What happens when commercial considerations begin to dominate the audit decision-making process?

SPEAKER_00 20:10

I love my idea that the audit turns in it into a filing exercise rather than an audit. And that's all it does. So we need to make money, we need to retain the client, just give me some information, any information, I will tick all the boxes because I have to tick all the boxes, I will file some information in each one of the uh dividers within the audit file. I won't read it, I won't think about it, but I'll take the audit fee. So if I'm being cynical, which I might be, that is when commercial profit overrides quality.

SPEAKER_01 20:48

Thank you, Wayne. Audit firms must operate commercially, but auditing is also a public trust function. When commercial incentives begin to outweigh professional skepticism, the risk of audit failure increases. And understanding that tension is essential and if we want to understand why audits sometimes go wrong. And that is exactly what this series, this ep uh this series of podcasts are about, why audits go wrong. Thank you for joining us for this episode of Financial Reporting Conversations, and we hope you will join us next time when we continue to examine the pressures and decisions that shape audit quality and financial reporting.

SPEAKER_00 21:28

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SPEAKER_01 21:39

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