A few words about underreporting hours in audit firms
January 22, 2017
Underreporting hours may not be seen as a significant issue, but there are very good reasons why audit firms have policies prohibiting it. In this article, we will talk about underreporting time, how it is impacted by auditor experience and professional commitment, and what can be done to reduce underreporting time by less experienced auditors.
People working in public accounting are familiar with this situation, but even for people in other organizations where tracking time is an integral part of business (e.g., consulting firms), this will be of great interest. Underreporting time is sometimes called “eating hours” and is likely present in some shape or form in all audit firms. Underreporting hours happens when staff working on an engagement do not record all hours they incur.
So what’s the big deal, you may ask? Academic research shows that there are negative consequences of this practice. Specifically, the authors of the paper “The Effects of Auditor Experience and Professional Commitment on Acceptance of Underreporting Time: A Moderated Mediation Analysis” (Current Issues in Auditing 2016) cite the following issues with underreporting time:
- Firms prepare budgets for their audits. Typically, unless it is a brand new client, the budget is based on the prior year’s actual hours. When staff of the last year’s audit underreport hours, the current year’s budget will likely be understated (incorrect). This may force staff of the current year’s audit to also underreport time if they see they are going over the budget (going over the budget is generally not perceived as a good thing).
- When actual hours are underreported, budgets will be understated and the audit price that the firm sets for the client will be low. There are, of course, other considerations (e.g., discounts provided to clients by audit firms to win or keep clients), but the starting point for the audit pricing may nevertheless be incorrect.
- Firms use reported time to make resource allocation decisions. Think about hiring (or terminating) staff, making promotion decisions, and so forth. This in turn impacts employee turnover. For example, a firm may think it’s fully staffed, while in reality the staff work a multiple of 1.x hours (pick a number for the “x”), which leads to burn out and eventual staff’s departure from the firm.
- Reported time is used to understand the effectiveness of audits (over or under budget, etc.).
- Firms may use reported hours to bill clients extra. If all hours are not reported by staff, firms may not have a basis for extra billings.
As you can see, underreporting time is important to firms. Most of them have policies in place preventing staff (and partners) from “eating hours”, but this does not mean that the underreporting never happens.