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Management Strategy in a Large Accounting Firm

Author(s): C. Richard BakerSource: The Accounting Review, Vol. 52, No. 3 (Jul., 1977), pp. 576-586Published by: American Accounting AssociationStable URL: http://www.jstor.org/stable/246077.

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2/12

THE ACCOUNTING REVIEW

Vol. LII, No. 3

July 1977

anagement

trategy n

L a r g e

ccounting

i r m

C.

Richard

Baker

ABSTRACT:

A

participant observation methodology is employed in this paper to in-

vestigate the management strategy of a large public accounting firm. The author directly

observed partners and managers

of an

audit practice office going about their daily tasks

over

a

3-month period.

A

descriptive model

of

the

management strategy

was

developed

from the observed

matrix of

daily interactions.

The

results indicate that there are three

components to the management strategy: Doing, Representing and Being. Doing is

defined as those activities which the firm undertakes to maintain and improve its rela-

tionship

with its

clients. Representing

is

defined as those activities which the

firm

under-

takes to maintain and improve

its

relationships with outside parties other than clients.

Being

is

defined as

the

image

of

the

firm. The

three

components

work

together

to

manage

the environment

in which the

public accounting

firm

operates.

HE concern

of this inquiry

is with

management

strategy in a

large,

international

public

accounting

firm. The

large firm must

deal with a

variety

of difficult problems

in its

efforts

to grow

and

remain successful; for

exam-

ple,

government regulation

of the profes-

sion,

demands from clients,

an increase

in

legal liability

and the vagaries

of

a chang-

ing

technology.

Borrowing

from the

terminology

of

Emery and Trist

[1969],

the interrelatedness

of many

of

these

problems

tends to suggest

a

turbulent

field environment.

Emery

and Trist

observe

that

organizations

which

face

a

turbulent

field environment

typically

re-

act by changing

their

values and/or

their management

strategies.

They

ar-

rived

at this conclusion

through

case

studies of industrial

and other organiza-

tions

in the United

Kingdom.

If

agreement

may be reached

to the

effect that large public

accounting

firms

face,

if

not

a turbulent

environment,

at

least a complex and changing one, then

this

question

may be posed-Are

such

firms

tending to change

their values

and/or their

management strategies?

Al-

though this would

be an interesting

re-

search

question,

it may be more prudent

to ascertain

first what

the values and/or

management

strategies

of a large public

accounting firm are

since there are

so

many firms.

This paper

examines the

management

strategy of one firm

using a

participant

observation approach.

Emery and Trist

define strategy

as

the

process

of selecting

where one

wishes

to be at a future

time. By impli-

cation,

the

time frame

is

more

likely

to

be

long

rather than

short. They

distin-

guish

between

values and strategies

in

the

following

way:

Values are

regarded

as coping

mechanisms

that make it

possi-

ble to

deal

with

persisting

areas of

uncer-

tainty.

Values are not

strategies; they

have the conceptual

character

of 'power

fields'

and act as

injunctions.

Thus,

values transcend

strategies and

probably

C. RichardBaker is Assistant Professor

at

Columbia

University.

576

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3/12

Baker

will

determine

what

strategies

will

be

chosen. At

the

management

level

of

an

organization,

values and

strategies

co-

alesce and act together to propel the

organization towards

the achievement

of

its goals.

Following

the

work of

Piaget

[1970]

and

McDonough

[1975],

the author

has

argued

in a

previous paper

that

values

and

strategies

form

a

template

on

ex-

perience which acts

to aid individuals

in

organizations

who are faced

with

com-

plex

decisions and

complex

environ-

ments

to

structure

their

everyday

lives

[Baker, 1975 .

McDonough suggests

that

this

structuring

mechanism

remains hid-

den

from

the

majority

of

organizational

participants,

and

that

the

researcher who

inquires

into the

strategies

of

an

organi-

zation often

will

be

frustrated

in

any

attempts

unless

he or

she

employs

an

observation

research

method

combined

with

a relational

form

of

analysis [Baker,

1976]. The

following

section describes

the

use of

participant

observation

in the

investigation of the

management

strategy

of

a

large public

accounting

firm.

PARTICIPANT

OBSERVATION

Participant observation

is a method of

research

wherein the

researcher

gathers

data

by

directly observing

persons

inter-

acting

in

a

social setting.

The researcher

typically has

little or no

experimental

control

over the

setting.

The adjective,

participant,

indicates that the

re-

searcher

is

physically present in

the

setting;

it

does not

necessarily imply

that

he

or she

becomes

an

actual

member.

Participant observation

as

a

research

method was

developed by

anthropolo-

gists in

the early years

of this century

[Malinowski,

1922;

Radcliffe-Brown,

1922].

The method

subsequently has

been used in sociology, political science

and

organization

theory.

The

primary

subject

matter of partici-

577

pant

observation

is a

single,

self-main-

taining

system.

The

system

may be a

small

community, a

large

society, a

formal organization or an institution.

The

procedure under

the

method

is

first

to

become

socialized

into an

ongoing

social

system, to learn a

set of

roles and

to

form

relationships.

The

next step

is to

make

the

implicit

knowledge

gathered as

an

observer

in the

system

more

explicit.

The

researcher

constructs

hypotheses

about

parts of the

system

from

recurrent

themes that

come

to his

or her

attention

and

tests these hypotheses against a

variety

of

data. The

data

can

include

what

the

researcher

sees,

what others

tell

the

researcher,

how he or

she

reacts

and

how

others

react to the

questions.

The

two

phases to

an

observation

study

are

data

collection

and data

analysis.

DATA

COLLECTION

Site

Selection

The

site selected for

the

observation

study

was a satellite office

of a

metropoli-

tan

and

regional

headquarters

office

of

a

large

public

accounting

firm.

The

satel-

lite

office

was

chosen

because it

was

typical of

medium-sized

practice offices

of

the firm

throughout

the

country.

The

office was

located

on

the

top

floor of a

modern office

building,

and

had

been

in

that

location for

about 6

years.

The

firm

had a

general

practice in

audit, tax

and

management

consulting,

with

a de-

gree

of

specialization in

real

estate,

savings

and

loan,

entertainment

and

banking.

There

were

four

partners

in the

office, (three

audit,

and I

tax);

there were

twelve

managers (six

audit,

four tax

and

two

management

consulting);

and there

were

nineteen

seniors and twelve

staff

accountants.

Staff

accountants also

were

borrowed

from

the

metropolitan

office,

so the actual number of professionals

who

serviced

clients of

the office

varied

throughout

the

year.



4/12

578

Observation

Method

Observation

of

organizational

partici-

pants began in

mid-Spring because

the

firm members were frequently in the

office

handling

a great

variety of prob-

lems during a

typical day.

Audits were

underway, were close

to completion

and

also were

in

the

planning

stages. Tax

return

preparation,

billing of clients

and

negotiations

concerning mergers

of

clients

were

observed.

In

the

busiest time

of

year (that

is,

January

through April)

much

of

this activity

would

have

been

curtailed due to the concentration on

auditing. In

addition, it

was difficult

to

obtain

permission for an

observation

study

then

because

firm

members have

sufficient

problems

during

the

busy

sea-

son without

having

the

additional

burden

of an outside

observer.

Initially,

observation

arrangements

were

made by officials

of the firm;

after

a

short

time,

the

researcher

became an

accepted

figure

in

the

office and

was able

to

arrange for

observation periods

with-

out review

by

management

officials. In

fact,

several

members

of the firm

ex-

pressed

interest in

being included in

the

study.

The

mechanics of

observation were

as

follows.

The

researcher

would meet

the

member of the firm

at about

9:00 a.m. in

the

accounting

member's office.

Initially

the

researcher elicited

information

about

the

background

of the

firm

member;

for

example,

where the

person

attended

college,

when

the

member

joined

the

firm

or

when he

or she was

promoted.

These

questions

served:

(1)

to elicit com-

mon

background

information

on

all

persons observed

and

(2)

to

put

the

per-

sons

observed at

ease. The

firm

member

was

encouraged

to go

about his or

her

normal work

routine.

The Data

More than

600

pages

of

observation

The

Accounting

Review,

July 1977

notes were taken

during the

course

of the

study. Appendix

A presents a

sample of

notes

which

have been altered

slightly in

three

ways: (1)

improved grammar

and

sentence

completion; (2)

name changes

to protect

confidentiality; and

(3) organi-

zation of notes

into

interchanges (a con-

versation

on the

phone or in

person; a

correspondence via

memo, letter or

tele-

gram; or a

meeting of a

group as

the

basic

unit of

analysis).

The

sample

comes

from notes taken

during observation

of

an audit

partner during

one

full

working

day.'

DATA

ANALYSIS

A

day in the

life of an audit

partner is

full

and

varied,

ranging

front internal

firm

matters of

administrationto

compli-

cated

merger

negotiations and

problems

of

accounting theory.

A

given

interchange

by

a

member

of a

firm

can

be

representative of

one or more

continuing

relationships.

For

example,

Interchange 10

in

Appendix

A,

in

which

the

managing partner

of

the

metropolitan

office

of the

firm called to discuss

a

request from

another

CPA

firm,

consti-

tutes evidence

of a

continuing

relation-

ship

between

the

managing partner

and

the

partner of

the

other

firm

as

indi-

viduals.

It also

represents

a

relationship

between

two

large

CPA firms and indi-

rectly constitutes evidence

of the

relation-

ship

in

a

legal

sense

between a CPA

firm

and

society.

The first

step

in

data

analysis

is to

transform

the list of

interchanges

into a

list of

relationships.

When

this

was

done,

it was found that

207

observed

interchanges

constituted

evidence of

241

continuing

relationships.

The

next

step

was

to

categorize

the

241

relationships into

eight categories:

l

This is only one sample

interchange

out of

a

total of

207 interchanges

observed over

an approximate

5-month

period.



5/12

Baker

Intrafirm,

Firm-Client, Firm-Business

Community,

Government-Related,

Pro-

fessionally

Related, Other Firms, Educa-

tors

and

Societal.

Table

1

presents

a

numerical

breakdown of

the

categories.

The bulk of the

relationships

fell

into

one

of these

four

areas:

(1)

Maintenance of

the

firm, (2) Firm-Client

Relationships,

(3) Firm-Business

Community Relation-

ships

and

(4)

and Firm-Professional

Community-Government

Relationships.

TABLE I

CATEGORIES OF RELATIONSHIPS

Categories

Instances

Intrafirm

85

C1 ent-firm

96

Business

Community-firm 34

Government-related

11

Professional

7

Other firms

3

Educators

3

Societal 2

241

Since the focus of this

inquiry

is

on

the

managerial

strategy

of

the

firm,

the

next

step

in

the data analysis

was

to

ascer-

tain costs and

benefits,

or

perhaps

diffi-

culties

and

pleasures,

inherent

in

main-

taining

relationships

with its

principal

constituencies. This

step

is

referred to as

reciprocity analysis. Costs and benefits

were

evident

in

the

observation data;

Interviews

were

used

to

expand

the re-

ciprocity analysis

where

needed.

The final

step

in

data

analysis was to

develop

a

model of the

management

strategy

of the

firm

in

an

interactive

manner.

A

descriptive

model was pre-

pared

and then

submitted to

members of

the

firm

for

validation or

correction. In

the following section, a summary of the

data

analysis and model

development is

presented.

579

FIGURE

1

METHODOLOGICAL

UTLINE

An

ongoing

social system

l

l

Observation

I-

*Observation

data

IObservation

I

L -J - - - -

- ~ List of

social

interchanges

List of

relationships

Categories of

relationships

Reciprocity analysis

A

model or

theory

ANALYSIS SUMMARY

Through

the observation

and

field

work

described

above,

a model of the

manner

in

which

a

successful

large public

accounting

firm

manages

a

complex

and

changing

environment has been

devel-

oped. There

are three

components

of

the

management strategy-we have called

these

Doing,

Representing

and

Being.

Doing

Doing

may be

defined as

those

activi-

ties

which

the firm

undertakes to

main-

tain

and

improve

its

relationship with its

client.

This

strategy

is

characterized

by

an

economic

contract

between

the firm

and the client. The contract specifies the

delivery

of a

tangible

product

in

exchange

for

a

monetary

fee.

For

the

client,

the

contract is

optimal

when

the

tangible

product

takes

the form of

marginal

cost

savings

or

marginal

revenue

increases.

Therefore,

the

client

looks to five

primary

areas for

delivery of

tangible product:

1.

Tax

return

preparation

and

tax

planning

2. Management consultation in regard

to

accounting

and

management

information

systems



6/12

580

The

Accounting Review,

July

1977

3.

Training of and

search for qualified

accounting and

financial

executives

4. Advice

and expertise

in matters

pending before

governmental

agen-

cies such as the SEC, FTC, CASB

and others

5.

Ready

access

to the securities

and

debt

markets via the medium

of

unqualified

financial

statements.

Members

of

the

firm may not fully

comprehend that

there is

a

range

of

services contemplated

in the

concept

of

delivering

a

tangible

product;

hence,

they may consciously consider only area

five as the principal product

of their

firm.

Thus,

in a questionnaire

or interview

they

might

discuss only

their strategy

with

regard to audits.

A

questionnaire

or

interview therefore

would not

uncover

the full

range

of

activities

comprehended

by

the

Doing strategy.

It

was observed

in

four

cases, and

corroborated by partners,

that clients

will move

quickly

to amend

or dissolve their relationships with a CPA

firm

unless they

are receiving

satisfactory

service

in

the

five areas listed. It

is

the

responsibility of the

audit manager

and

audit

partner

to see that the firm

provides

satisfactory

service.

Representinhg

Representing may

be defined

as those

activities

which the

firm undertakes

to

maintain and improve its relationships to

outside parties

other

than clients.

In-

cluded

in

this

category

would

be mem-

bers of the

business

community,

includ-

ing

bankers and lawyers,

governmental

agencies

as

potential

clients

or users

of

information supplied by

the

firm,

and

professional

bodies

such

as

the

AICPA

and

FASB.

The

primary

strategy

de-

signed

to facilitate

Representing

gen-

erally is referred to in the firm as prac-

tice

development, '

which can include

a

variety

of activities.

First, there is overt

marketing. Mem-

bers of the firm

were assigned

to investi-

gate and make

contacts in a

specific

industry.

Collateral to this

effort was the

establishment of firm-wide industry spe-

cialists to act

as a clearing house

for

information

about the

industry. Quar-

terly

reports were given

at a meeting

of

partners

and managers

regarding the

success

of the marketing

effort.

Second, there

is a publishing effort

to

enhance public

relations. The firm

pub-

lishes

a variety of documents

which are

distributed to

clients and potential

clients. Included are magazines, news-

letters,industry

accounting guides,

guides

to

computerized

accounting systems,

tax

guides and guides

for doing business

abroad. Additionally,

members

of

the

firm are encouraged, by

explicit

reference

in

performance

review

forms, to

publish

articles

in

professional

journals. The

publishing

effort

adds to

the image of the

expertise

of the

firm and

creates

an

insti-

tutional presence.

Third,

there

is a service effort.

Mem-

bers

of

the

firm are

strongly

encouraged

to

join professional,

charitable

and

civic

organizations

and classify

such partici-

pation

under practice development.

We

observed firm members

participating

in

churches, hospitals,

Rotary,

the Heart

Fund,

the

Kidney

organization

and

others.

Also included in the Representing

strategy

is a

network

of

relationships

to

the

business

community comprised

of

ties

to

lawyers,

bankers

and

securities

underwriters.

There

is a

great

deal

of

reciprocity

in these

relationships;

each

party

is able

to recommend

clients

to

the

other.

The

goal

of such

relationships

is

to

position

the

firm as an

indispensable

part

of

the

societal

infrastructure.

Being

Being may

be

defined

as the

image

of



7/12

Baker

581

the firm. The

goal

of

both

the

Doing

and

the

Representing strategies

is to

create

dependence on the part

of the client or

on the part of the business

community

and society. Being

is the

means

whereby

dependence

is

created.

The

principal

strategy of Being may be termed sym-

bolic

marketing,

which is designed to

control the image and name of the firm.

This

strategy is composed

of three

elements: Integrity, Expertise and Ser-

vice. Integrity may be further subdivided

into: Confidentiality, Competence, Ob-

jectivity and an Institutional Profile.

The firm strives in all its activities to

achieve these

qualities

and

if

it

cannot

achieve them in fact it strives to achieve

them

in

manner. Members

of the

firm

seem

to

know intuitively that their image

is most important in their relationships

with clients and others.

The audit manager and audit partner

are

the principal members of the

firm

who are responsible for the maintenance

of

the

name and the image of the

firm.

The manager is responsible for the dis-

cipline and training of the professional

staff, the maintenance of expertise and

the completion of the audit

routines

which signify competence, confidentiality

and objectivity. The partner is responsi-

ble for deciding when the name

of

the

firm

may be signed, for

maintenance of

the institutional profile and for devel-

oping the image of service to client and

others.

CONCLUSIONS

Until

recently,

the three

components

of

the management strategy-Doing,

Representing, and Being-were finely

tuned and operated well together.

The observed

CPA firm

has been well

organized because of these strategies to

deal with

its environment. The contin-

uing complexity of the environment

FIGURE

2

THE

BALANCED

ENVIRONMENT STRATEGY

Doing Representing

Delivery of the tangible product Inculcating the infrastructure

Tax Practice development

Consulting

Placement

SEC

Capital market

Being

The image and the name

Symbolic marketing

The Environment

The client Business community

Government Profession



8/12

582

The

Accounting

Review,

July

1977

FIGURE3

RESPONSE

O A

CHANGING

ENVIRONMENT

Doing

Representing

Being

g

/

The

Environment

Tactical

Response

1.

Audit

committees

2.

Peer review

3. Audit model

places

some

doubt

on the future

stability

of these strategies.

There

has always

been an

incipient

conflict

between the delivery

of

a

tangible

product,

through

the economic

contract

with the

client,

and the

delivery

of social

value,

through

the social

contact

with

government

and

society.

In the past,

the

Being

strategy

has

been

able to manage

this

conflict

through integrity,

expertise

and

service.

Seemingly,

however,

the

Being

strategy

is either not

sufficient

to

deal

with the complexities

of

the

en-

vironment,

or, perhaps

what

may

amount

to the

same

thing,

there

is

quite

a

different

concept of

the social

role

of public

ac-

countants

on

the part

of

juries, courts

and the

government

than

that held

by

accountants.

It is

evident

that

the con-

struction

of

reality

in

these

matters, on

the

part

of

the

members

of the

firm, is

quite different from that of others who

may choose

to sue the

firm.

Several tactical,

if

not

strategic,

re-

sponses seem to be evident. One such

response is the advent of audit commit-

tees on a

widespread basis. In discussions

with partners of the observed firm, we

learned that the motivation behind estab-

lishing such committees is to create a

buffer

between the

firm

and

the

client.

Therefore the firm would prefer that

audit committees be

composed only of

nonemployees of the client. The conflicts

between

social value

and

tangible product

then

could

be

mediated by third parties.

Another response

is

peer

review.

The

observed

firm

instituted

an

internal peer

review system which is a process whereby

partners

and

managers

from one

practice

office

review

the

work

of

partners

and

managers from another practice office of

the

firm.

In

discussions with

partners,

several drawbacks to the

peer

review

system

were

raised; for example, what

is

the enforcement mechanism? Also, the

system

seems to be

largely

ex

post

rather

than a more

preferable

ex

ante.



9/12

Baker

A

third

response

of

the observed

firm

is an

attempt to

restructure the

standard

audit model

by

moving from what

may

be

termed

an

audit of

the

books

to

an

audit of the

business

The advantage

of

this

response

is

that it produces

audit

results that

are

typically

more

congruent

with the

delivery of

social value

(that is,

business

success

or

failure

may be

more

predictable),

while

providing

the client

with a

tangible

product.

The

purpose of these

responses seems

to

be

to

restore an

equilibrium

condition

among the

Doing,

Representing

and

Being

strategies and

the

changing en-

583

vironment by

establishing

buffers

that

will

act

to reduce

potential

conflict.

The

basic

management

strategy

of the

ob-

served

firm

is to maintain this equilib-

rium

condition. This

strategy has

not

changed

in

the

face of a

complex

en-

vironment; rather,

tactical

responses

have

been

employed

to

restore the

equi-

librium.

Other

large

firms seem

to be

respond-

ing to a

complex

environment in a man-

ner

similar to the

observed

firm.

Virtually

all

the

large firms

favor the

creation

of

audit

committees

[the Wall Street

Jour-

nal,

1976].

REFERENCES

Baker,

C.

R.,

''Structure

As a

Construct

in

Accounting

Research,'

Research

Paper No.

93

(Columbia

University, Graduate

School of

Business,

1975).

Participant

Observation As a

Method of

Accounting

Research,

Proceedings

ofthe

1976

Amneri-

can

Accounting

Association

Mid-Atlantic

Regional

Meeting

(1-3

April

1976).

Buckley, J.

S.,

In

Search

of

Identity

(California

Certified

Public

Accountants

Foundation,

1973).

Diesing,

P.,

Patterns

of

Discovery

in

the

Social Sciences

(Aldin-Atherton,

1971).

Emery,

F. E.

and

E.

L.

Trist,

The Causal Texture

of

Organizational

Environments,

in

F. E.

Emery,

ed.,

Systems

Thinking

(Penguin,

1969).

Glaser, B. G. and A. Strauss, The Discovery of GroundedTheory: Strategies Jor Qualitative Research

(Aldine,

1967).

Malinowski,

B.,

The

Argonauts

of

the

Western

Pacific

(Routlege,

1922).

McDonough,

J., One

Day

in

the Life

of Ivan

Denisovich:

A

Study

of the

Structural

Requisites

of

Organization,

Human

Relations

(1975).

Miller,

D. W.

and M.

K.

Starr,

The

Structure

of

Human

Decisions

(Prentice-Hall,

1967).

Piaget, J.,

Structuralism

(Harper,

1970).

Radcliffe-Brown, A.

R., The

Andaman

Islanders

(The Free

Press,

1922).

Schatzman,

L.

and

A. L.

Strauss,

Field

Research:

Strateqies

for

a

Natural

Sociology

(Prentice-Hall,

1973).

The

Wall

Street

Journal,

Big

Board Plan to

Require

Audit

Panel

for

Each

Listed

Firm is

Slated

for

Vote,

(23

September

1976), p.

4.

Made

Public

the

Findings

of

Arthur

Young

&

Co.,

Hired

to

Assess

Marwick's

Auditing

Stan-

dards and Performance (24 November 1975) n 10

APPENDIx A

Interchange 1.

The

partner

arrived

at

his

office

at

approximately

8:45

a.m.

He

began

to

sort

through a

large

stack

of

mail.

In

the

mail

was

a

copy

of

a

memo

he

had written

concerning

an

agreement

with

a

local

university

graduate

student

to do some editorial work for the firm.

From

time to

time

the

firm

prepares

accounting

and

auditing

manuals

per-

training

to

particular

industries

and

in-

tended

for

the

use of

staff

members of

the

firm.

The

partner felt

that

the

material in

this manual

might be of

some

benefit

to

decision

makers in

the

entertainment in-

dustry.

He

therefore

arranged to

have an

outside person, the student, reedit the

manual

into

a form

more

appropriate

to

clients

and

others.



10/12

584

The

Accounting Review, July

1977

Interchange

2: The

partner

recalled

that he

had

been asked

by the

managing

partner

of the

metropolitan

office

to

move

from

that office

to

the satellite

office.

The partner complied even though it was

a

considerably

longer distance

from

his

home.

Partners

are

owners,

but they

are

also employees.

Interchange

3. The

partner

asked

a

manager

to come

into his

office. The

managing partner

had asked

all partners

to provide

him

with

some current

billing

information.

The

partner

must contact

the managers

under

his or her

supervision

to get such data. This is an inconvenience.

The partner

stated that

he felt

that the

designated

administrative partner

of the

firm should

handle such

matters.

Interchange

4.

While the

above

man-

ager

was

in

the partner's

office,

the

partner

asked

him

to handle

a confiden-

tial matter.

A prominent

financier,

who

owns

a controlling

interest

in

two major

corporations,

had

contacted

the partner.

The contact occurred because one of the

partner's

clients,

which was

also a major

stockholder

of one

of the companies

that

the financier

controls,

had

asked

the

partner

to negotiate

for it

in

an

attempt

to

sell

its

block

of stock

to

the financier.

The

financier was

not

interested

in

pur-

chasing

the

block

of stock

from the

minority stockholder,

but

he

was inter-

ested

in

an alternate

and potentially

complicated transaction. If the partner

could design

an

effective

method

to

consumate

the transaction,

his firm

would

receive substantial

remuneration.

Several

difficulties

were involved.

First,

the trans-

action

might

not be

feasible.

Second,

it

might

not

be in the

best

interest

of the

original

client

(i.e.

the minority

stock-

holder.)

Third,

the

financier's

companies

were audited

by

another

CPA

firm.

The

partnerasked the manager to sort out the

details

and

the

options

and come

up

with

a

proposed

solution.

Interchange

5.- The

partner

talked

on

the phone

to a

manager in another

office

of the firm.

The conversation

concerned

another

large

CPA firm. The other

firm

has a client. The principal stockholder of

this

client owns

20%

of

the stock

of

a

company

which

is a client

of the

partner

and

the

manager

who

are talking on

the

phone.

The principal

stockholder

also

owns another

company.

He

wants

to

merge the

200 0-owned

subsidiary

and

this

other

company.

Since the two

smaller

companies

are,

in

effect,

subsidiaries

of

the larger company

which

is audited

by

the other CPA firm, there must be co-

ordination between

firms.

In its

audit

opinion

of the

parent

company,

the

other CPA

firm

included

a

limitation

as

to scope

of audit.

The partner

believes

that the

SEC

will disallow

the

merger

due

to the scope qualification.

Interchange 6.

The partner

went

to

lunch

around

11:45 a.m.

Contrary

to

lunch time

activity

of

many partners,

which consists of business meetings, this

partner

goes

jogging

at

a

local

school.

Several

seniors

from

the tax

department

accompany

him.

Interchange 7:

After

lunch, the partner

called

a

manager

to

remind him that

the

partner,

the

manager,

and

another

man-

ager

are

supposed

to attend

a

conference

on the

entertainment

industry

sponsored

by

the local

CPA society.

Interchange 8: The partner has several

colleges

as

clients.

He

recalled

attending

a conference

of

a

college

and

university

financial

officers'

association.

He

re-

viewed

a

memo that

he

wrote about

the

conference

in

which

he

discussed

the

potential

of such meetings

for

practice

development.

Practice

development

is

a

term

used

in

the

firm to

indicate

market-

ing of

the

firm's services.

Interchange 9: Another partner in the

office

(the

designated

managing partner

of

the office)

came

in

to ask

if

the

partner



11/12

Baker

would take a

visitor from the executive

office of the

firm to lunch the next day.

The

partner

said that

he

would. The

visitor

was from the 'research

depart-

ment

of the

firm. The function of

the

research department

is to

aid the practice

offices when they

have technical

prob-

lems.

It is also to

establish uniformity

in

the

practice

of the

firm

throughout

the

country.

Interchange

10.

The managing partner

of the metropolitan

office called to

state

that he had received a

request from

another

CPA

firm

(the

same

firm

as

was

involved in the Interchange

5

above.)

The

other

firm

requested

assurance

in

regard

to the

financial

statements

of

the

20%-

owned subsidiary

mentioned

in Inter-

change

5. The other

firm

wants

to

safeguard

itself

against

any

unforeseen

disclosures

in

regard

to the

subsidiary.

The

partner

felt that

it would

not be

appropriate

to

give

such

assurance

with-

out

doing

further

audit

work and

charg-

ing

a fee.

This

is

because

the last

audit was

completed

several months

previously.

Interchange

11.

The partner received

a

phone call from

a manager. The manager

stated that

an

acquaintance of his,

who

was

a financial analyst, had

asked if

he

could be introduced

to some

financial

executives

of

a

client

company.

The

manager

had

told

the analyst that

he

would have to

ask permission from

the

partner. The partner did not think it was

a

good

idea

to

allow the analyst to

trade

on

the

name

of the

firm.

Interchange

12: The controller of

one

of

the partner's

clients called on

the

phone. This

discussion was

in

the

nature

of

a

friendly chat.

The topic centered

around

a

potential

merger

candidate

for

the client.

The

controller

was

calling

to

check

out

the

general feasibility of

the

merger and to keep the partner informed.

Interchange

13. The partner read

a

letter

from a client. The letter

was

com-

585

plimentary

of the

work that

a

manager

had done

for the

client. The

researcher

asked the partner

if such letters

were

common.

He replied

that they

are

not

common, but

occasionally

they

are

re-

ceived.

Ititerchatige

14.

The partner

read

another letter.

This one

was

from a

se-

curities

underwriter.

Underwriters

typi-

cally buy

some

or

all of the

stock of

the

company

they

are

working

with.

Since

this

is a

risk-laden

business,

the under-

writer often

turns to

the auditor

for

additional

information

and

assurance,

especially

pertaining

to

events

transpiring

since the

last audit. Public

accounting

firms

have developed

a standard

letter

which they

send

to underwriters

in

such

circumstances.

The letter

is referred

to

as

a comfort letter.

The underwriter

in

this

case

was

asking

for

greater

assurance

than

the

standard comfort

letter.

The

partner

was not willing

to

give

such

assurance

without

further

audit tests

and

charging

a fee.

Interchange

15.

The

partner

began

reviewing

a tax memo

prepared

by the

office's

tax

department.

The memo

was

detailed

and

lengthy.

The

partner

said

he

did not like to read

such memos.

He

prefers

to obtain

the same

information

by

reviewing

the working paper

files.

He

stated that he

thinks the

lengthy tax

memo

is somewhat

of a wasted

effort.

Initerchanige 6: The partner received

a

phone

call from the treasurer

of a

client.

The treasurer was concerned about the

disclosure

of

director

compensation

for

an

Australian

subsidiary.

The partner

indicated

that

he did

not immediately

know the answer,

but

he said he

would

contact

the

Sydney

office

of the

firm

to

find out.

He considered

the best means

to

do

this

and

decided

to send a telex. He

drafted the telex message and had his

secretary

read

it

to the

telex

operator

in

the

metropolitan

office.



12/12

586

The

Accounting

Review,

July 1977

Interchange

17: The

partner

began

reviewing

the

working paper

file for

the

audit

of a

client. The

working

paper

file

represents the

evidence

of an

audit. It is

physically a sheaf of legal sized papers

held

together

by a

brass

brad. The

papers

are

prepared

according to a

relatively

standard

formula within

the

firm.

Dif-

ferent

firms

apparently

have

slightly

different

procedures.

According

to the

partner

the

style

of

working

paper prepa-

ration

has not

changed

dramatically in

the 20

years the

partner

has been

with the

firm.

Staff

accountants

initially

prepare

the working papers. Then they are con-

solidated and

reviewed

thoroughly by

a

senior accountant.

Some sections are

prepared by a senior. These as

well as the

other, more

routine sections, are also

reviewed by the

manager. The whole

package is more cursorily reviewed by

the partner, with

certain problem sec-

tions attracting more of his

attention.

The

partner

also

attempts to catch

any

points

in

the papers that

might cause

difficulties or

embarrassment

in

the

event

that

the

papers would ever come

to be

evidence

in

a court of

law.

The

partner

continued

reviewing the

papers

until

about 6:00 p.m. at which point

he pre-

pared to leave the office for the day.

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