The Big Chill
Public accounting's legal liability crisis has been described as the greatest threat facing CPAs. The profession's aggregate liability exposure is estimated to exceed $30 billion. The largest national firms have reported that net practice protection costs as a percentage of auditing and accounting revenues are 11.9%. The profession is experiencing the ill effects of this high legal risk in a variety of ways. For example, commercial insurers reportedly are abandoning the profession, and a recent study said that over one-third of the small CPA firms in Wisconsin surveyed were "going bare," that is, dropping their insurance altogether. Many smaller firms no longer provide audit services, opting to offer management consulting, tax and other services instead. Large CPA firms are said to be avoiding risky audits and industries. Finally, there are reports that growing numbers of experienced personnel are leaving large firms because of the legal risks. If this is true, it is of concern both to CPAs and to society, because a sound public accounting profession is essential to a healthy free enterprise system. In particular, there is concern that an exodus of experienced personnel from public accounting will harm audit quality. Although turnover is not new to large CPA firms, long known for their up-or-out policies, much of it occurs during the early career stages before employees achieve the rank of manager. Prior turnover research has investigated the effect of firm culture, control, supervision, gender and work and nonwork commitments but has focused on relatively inexperienced personnel and has not addressed legal liability's impact on managers and partners. NEW EVIDENCE NEEDED Because of the profession's allegations that legal risks will damage audit quality by driving qualified professionals from large national CPA firms, it is important to gather evidence on the relationship between liability and the turnover of experienced personnel. Such evidence can play a critical role in the debate over the social costs and benefits of the profession's tort reform initiatives designed to reduce CPAs' liability. To find evidence of liability's impact, we mailed questionnaires to randomly selected former managers and partners from the six largest national CPA firms who had resigned from offices in Atlanta, Chicago, Dallas, Los Angeles, New York and San Francisco within the past three years. Out of 211 respondents, all but 5 had either left public accounting or moved to smaller firms. The firms supplied the names and placed no restrictions on the researchers, except that the names be used only by the researchers and only to collect data on auditor turnover (for more on the survey, see the sidebar at right). ABOUT THE SURVEY We sent 904 questionnaires (150 per firm plus one extra to four firms) and received 221 responses, a response rate of 24.4%, which compares favorably with the published response rates on similar types of studies. Ten of the 221 questionnaires were not useful for statistical analysis due to incomplete responses. No second mailing was performed because the questionnaires were designed to be anonymous to increase the response rate and reduce bias in the responses caused by fear of personal identification. The response rate was not uniform across the six firms; three of the six provided approximately 80% of the usable responses. We found that although respondents from the high-response firms were more likely to report litigation as influential in their turnover decisions, liability remained a material concern for former members of the other firms. The percentages reported in the exhibit, however, may be statistically more representative of turnover decisions in the three high-response firms than the other three. Questions on personal characteristics such as marital status, gender and length of time in public accounting also were included. …