A new report from CFO magazine highlights the dangers of hiring former executives from the same firm that conducts your external audit. “Requiring top corporate executives to be only a year or two removed from a prior job with the company’s auditor is insufficient,” writes author, David McCann. The report is based on a study published in the journal Accounting Horizons, which finds that former audit executives who now work for a client of their former firm may have clouded judgement.
The new research, the first post-SOX experimental study of the alumni effect among North American auditors, tests the willingness of managers at the Big Four auditing firms to adopt a client’s position on a conjectural accounting matter. The study’s key finding: 76 percent are inclined to do so if the client’s CFO is a former colleague at their Big Four audit firm, while only 44 percent would do so otherwise. And the alumni effect occurs even if it has been two years since the CFO left the audit firm.
