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Looking at the Long-Term Costs of Audit Layoffs During COVID-19

April 07 2020 • 7 min read

Looking at the Long-Term Costs of Audit Layoffs During COVID-19

Introduction

We are living in a historic moment. The novel coronavirus and COVID-19 continue to impact societies and economies around the world. The pandemic is challenging the status quo, and forcing innovative action. We witnessed the signing of an unprecedented economic stimulus package in the United States. And we’ve watched unemployment levels skyrocket, despite attempts to limit layoffs during COVID-19. Across every sector and industry, business leaders face a difficult decision: where to cut costs.

For many, the logical solution is reducing staff and limiting payroll expenses. But those who choose to layoff employees, particularly experienced auditors, will face more significant challenges when the nation rebounds. We would argue that now is the time to view employees, not as an expense, but as your number one investment.

As you read on, you’ll find:

  • Predictions about the economic impact of global shutdowns
  • The effect of coronavirus on the audit industry
  • Analysis of the long term costs of layoffs during COVID-19
  • Factors to consider when making staffing decisions during crisis

Understanding the impact of COVID-19

It would be difficult—if not impossible—to overstate the coronavirus’s impact on our global, national, and local economies. According to a recent report by the World Economic Forum, it could take the US economy three years or longer to recover. Experts noted that the “30% drop in the S&P 500 since its all-time high in mid-February is the fastest slide on that scale in its history; since Valentine’s Day, $10 trillion in shareholder wealth has vanished.” The economy, which was on the verge of rebounding, appears to be headed towards the sharpest one-quarter contraction in history.

Along with this loss of wealth comes the disruption of global supply chains. And, with a growing list of state-mandated stay-at-home orders, an inability for workforces to carry on business as usual. With these considerations, the World Economic Forum warns that we don’t yet fully understand the impact of the pandemic.

As a result, according to a recent survey, corporate leaders are taking proactive measures to offset financial damage.

The impact of the unknown

One of the more challenging aspects of the coronavirus is how much remains unknown. Information is still emerging, day by day, and hour by hour, making it impossible to make fully informed decisions. For many, though it is a difficult decision, it is one based on common sense: if there is less work, then it should follow that there are fewer workers. Unfortunately, this is a drastic oversimplification of the work ecosystem that leaves audit firms vulnerable.

Many business leaders have a contingency plan for emergencies. After all, crisis management is nothing new. But the nature of this particular crisis presents its own challenges. Because we don’t know when, or if, we can return to business as usual, we cannot plan for it.

Consider an example. What if, as a business leader, you have the financial security to support your staff through two months of depressed business? Now what happens if social distancing lasts for six months? Could that money have been better used? It’s an agonizing decision, one made worse by the extreme lack of information.

The thing about the economy is that one way or another, it will recover. At this point, that could mean going back to business as usual or discovering the path towards a new normal. And when it does, those who avoid layoffs and keep their core employees will be best positioned to weather the storm.

Layoffs during COVID-19 and auditing firms

Under normal circumstances, most internal auditors and risk professionals would be spending this time to prepare for yearly ERM exercises and developing three-year audit plans. But these are not normal circumstances, and financial firms will undoubtedly feel the impact.

First, there’s the impact on financial projections. Consider what Jim DeLoach, the managing director for Protiviti and a Forbes contributor, says. “COVID-19 has a significant impact on the estimation processes inherent in financial reporting,” he writes. “[This requires] finance functions to take a closer look at impairment, valuation, net realizable value, loss contingency, and exposure considerations.” While the full extent of the impact remains to be seen, we can be certain this is just the beginning.

Today’s audit firms will also have to recalibrate exactly what “compliance” means in the age of COVID. For example, risk factors disclosure. For many companies, COVID-19 is a significant negative impact in terms of “markets, customers, supply chains, health of directors and key executives, workplace disruption, operational outlook, debt service, and sources and sufficiency of liquidity, to name just a few areas.” So how do auditors adapt risk factor disclosures from generic, boilerplate references to a pandemic? Especially considering the unknowns when it comes to this virus?

Not only is the nature of the work subject to change, but the workflow and management will also need to be assessed on a case-by-case basis. Some clients will still expect timely, accurate service. Others will need to delay their audits to ensure accurate reporting. Regardless of the situation, they’ll have more questions than ever before about how best to navigate during this time.

In short, we’re sparring with the boogeyman. We have little information and a slew of hypotheticals. That means the top service many auditors can provide right now is reliable customer support. 

Finding balance amidst the chaos

As Tarki, Levi, and Weiss recently noted in the Harvard Business Review, “To be sure, a cost-cutting reflex is understandable. Leaders are obligated to make responsible decisions to keep their companies afloat. But those who manage the economic effects of this crisis in a clear and compassionate way create more value for their companies and will come out of this pandemic stronger than ever before.”

We’re not saying that compassion needs to come at the expense of your company. After all, you can’t care for your employees if you’re unable to keep your doors open after the pandemic. However, we would like to show the actual costs of layoffs as they pertain to the audit industry. 

Turnover costs

We all know, on a basic level, that high turnover rates are bad. However, quantifying the costs proves rather challenging. For example, some studies, including those by the Society for Human Resource Management, predict that replacing one salaried employee costs six to nine months’ worth of salary on average. So if you were to replace a manager making $40,000 each year, you could expect to pay $20,000 to $30,000 in recruiting and training expenses. Another study found quite a bit of variation in turnover costs based on the position and salary of the worker to replace.

Regardless of which sources you consult when it comes to estimating turnover costs, it is clear that recruiting, onboarding, and training a new employee takes time and energy. And, as Forbes Senior contributor, Bill Conerly writes, “Employee turnover is not just an issue for the human resources department. Operating units feel the pain of turnover in productivity, product quality, and customer service.”

So, as audit leaders consider whether or not to layoff or fire employees, they should do so with the understanding that they’re just offsetting the cost for themselves. Would you rather pay your trained and experienced employee six to nine months of their salary? Or use that money down the line, when your emergency accounts may or may not be drained, to recruit and train someone new?

Skilled worker shortages

When it comes to the audit industry, another basic consideration is the already challenging hiring landscape. Audit seniors have been particularly difficult to recruit as there has been very little supply and not enough reason for them to move. While the supply and demand dynamic will definitely shift as result of the pandemic, we see this being short-lived for two important reasons. First, any audit seniors that unfortunately find themselves without work are likely to take the opportunity to leave public accounting and find themselves work in private industry. We saw this happen during the 2008 financial crisis. We feel the bulk of audit seniors that become unemployed will likely be gone for good.

The other factor is obvious and that relates to utilization rates. It’s going to be very difficult for firms so predict the consistency and reliability of billable hours for their core teams. As billable hours trend downward, hourly effective resource costs go up. So it’s going to be very important for organizations to run lean without putting themselves back into a difficult recruiting environment should they need to scale up again.

Unpredictable workflow

Experienced auditors are already accustomed to the “feast or famine” state of the auditing industry. It stands to reason that workflow will only be more unpredictable in pandemic and post-pandemic times. Workload may slow to a trickle during the pandemic itself. But once the economy rebounds, firms need to prepared to launch an agile response. 

Looking past the pandemic

During these unprecedented and unpredictable times, business leaders face seemingly impossible decisions. With limited information, reducing payroll seems like the most logical way to cut costs. But this solution ignores the long term costs of recruiting, onboarding, and training new employees. Plus, it fails to account for the competitive nature of recruiting top audit talent.

Aside from being a business problem, COVID-19 is very much a human problem. Compassion should be at the forefront of business leaders’ decision making processes. For years to come, companies across industries and sectors will be defined by decisions made in the short term.

As the audit industry continues to navigate the complexities of the coronavirus pandemic, Makosi is here. We're working hard to support our clients and our candidates. We hope you stay safe, and stay well as we all adjust to the new normal.

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