Why Does Audit Have Busy Seasons?
This is a question I get frequently from students and young accountants. They fully understand that tax has busy seasons because they are used to the standard 4/15 deadline for filing personal tax returns, but don’t know the specifics on audits. Today, I’m going to walk through the reasons why auditing services typically have busy seasons that may require auditors to work longer hours to service their clients.
Reason #1 - Deadlines
Depending on the Company being audited, there may be a deadline to finalize a set of audited or reviewed financial statements. The nature and importance of the deadline will vary depending on the client's circumstances. Here are some examples of different types of deadlines:
A public company working with a Big 4 accounting firm will need to file a 10-K with the SEC within 3 months of the Company’s year-end. That same company also needs to file a 10-Q with the SEC for the following 3 quarters approximately 1.5 months after the quarter ends. Compliance with these deadlines is very important for these large companies.
A smaller company with a line of credit issued from a lender may be required to provide a set of audited financial statements within 90/120/180 days of the end of the year. Otherwise, the lender may demand payment on the outstanding funds. Some lenders won’t stick to this as a hard deadline because having the statements for a few weeks won’t change anything on their end, but others might, which is why it’s important for these companies to get their statements within the deadline if possible.
A growing company may have never had an audit before and is in need of one as a condition of a private equity investor group to invest funds into the Company. The Company wants this funding ASAP to maintain its growth track and is targeting the end of next month to get everything done. Additionally, it will need an audit every year going forward as a requirement by the investor group, sometimes with a deadline similar to the lender ones noted above.
A non-profit organization may have a board of directors or a set of bylaws that requires the Company to have an annual financial statement audit to ensure the Company is complying with financial reporting requirements, even if it isn’t large enough to need one by law. Some grant funders will also require a nonprofit to have audited financial statements in order to qualify for certain grants, which are the driving force behind many non-profit organizations.
A large number of companies will have their year ends set for 12/31, with a smaller number of companies having a 6/30 year-end (and a much smaller number having other year ends). When you consider this with the number of options above that require the audit to be done within a certain amount of time after the year end, you get a lot of work that needs to be done for many clients in a specific portion of the year, which creates a busy season.
Reason #2 - Capacity
After learning everything about #1, the follow-up question tends to be “shouldn’t they just hire more people?” The answer to that question is “Yes they should, but it’s also more complicated.” Because a firm will typically have one large busy season for audits and then some time periods that aren’t as busy, but still used to service a good number of clients, it’s difficult to have enough staff to make the busy season times 40 hours for everyone while also not wasting money on unneeded staff in the offseason. Some firms may be able to find temporary help during busy seasons to alleviate some of these troubles, but those solutions aren’t ideal in terms of cost and experience for many firm business models. The solution that many firms have used is to simply set the understanding that auditors will work in a high-stress environment for many hours during a portion of the year and will be compensated with experience and (sometimes) bonuses and higher salaries. Because firms can’t easily expand capacity by hiring more people, it means that the people who are working there will need to work more to make up for it and get the job done.
Reason #3 - Firm Specialization
After reading #1 and #2, you may be thinking that it would be ideal for accounting firms to only take clients that fit a schedule that suits better working hours by having a balanced amount of year ends and deadlines so that no single time of the year is that much busier than the rest of the year, that way they can hire enough staff to work year-round. Unfortunately, it doesn’t work that way due to the sheer number of 12/31 clients, and the need to have a solid understanding of client entities in order to audit them effectively under professional standards. A small audit firm that has a lot of local non-profits with 6/30 year-ends cannot pick up a bunch of government clients with a 9/30 year-end and just do the work. There needs to be a level of understanding of how clients work, and a certain amount of expertise held within the firm to service certain clients. This is why you see firms specializing in clients of a certain size or industry, and it’s also the reason why you don’t see a group of auditors working 40-hour weeks for the whole year just rotating through different sized clients and industries.
Unfortunately, until the model of public accounting firms changes, many young professionals will need to work extra hours to service their clients that have these deadlines. Fortunately for you, understanding why busy seasons exist at your firm is the first step in creating a better working environment and experience for yourself, even if it is just a change in attitude.