The Problem With Value: Professor Bob Graff

Picture 23Bob Graff is a retired PricewaterhouseCoopers partner living in South Korea. He worked in the Systems and Process Assurance practice (SPA). It was called CAAG in 1986 when he first started doing technology consulting for clients. He has been associated with the Korean practice since 1995 until his retirement last year. He is currently lecturing to the next generation of Asian business leaders at Solbridge Intl School of Business, Daejeon, Korea. This guest post was written exclusively for re: The Auditors.

The Problem with Value

One of the factors which lead economies to repeated brinks of disaster is the pursuit of value.  Not that the pursuit of value is wrong, but rather when the definition of value is not shared by the concerned parties inappropriate professional behavior results.

Much has been written and fingers pointed at examples such as banker’s bonuses, underwriter’s creation of dubious investment instruments, auditor’s failure to fulfill their responsibilities and, outright fraud.  Generally, one is lead to believe individual self interest motivated the actions, or lack of, of those individuals involved.

While it is understandable we view such actions in terms of greed, this reasoning leaves us with only regulatory and punitive actions by which, through fear of detection and punishment, we attempt to ensure an environment where we can trust the actions of others. Quite frankly, regulation and penalties have proven to be ineffective (or we would have solved this by now).  What is needed is a new approach.  Not to replace post-event regulation and punishment but to augment them with inducements to encourage the behavior we desire.

As human beings we look for single solutions to complex issues.  I do not believe there is a single solution but, there may be a common issue.

I believe the root of the problem lies in our unquestioning acceptance of the term “value”.  A quick internet search on the term value will lead to at least a dozen different branches where value is defined and yet we use the term as if it were mutually and universally understood.  I believe this common acceptance is unwarranted and in fact creates the undesirable situations mentioned above.  Let me propose a definition of value.  “That which moves us toward our goal(s) has value.  The degree of value is determined by the priority of the goal and the extent to which we move toward it.”

Let me use the auditor /client relationship as an example of how the lack of a shared understanding of value can lead to inappropriate behavior.

The auditor/client relationship is initiated through the RFP – proposal process.  In this process the client states requirements and the auditor responds with an understanding, solution, and pricing offer.  From this point forward the relationship is tainted and the seeds for inappropriate behavior are sown.  Why, because in almost all cases the framework of the relationship is now based on the stated requirements and price – not the desired goals and anticipated value of the service.

This is inadequate because the client has defined the requirements in terms of what they see to be the solution to a problem not in terms of what their goal(s) are.  The auditor further compounds this by replying in terms of solution (not outcome) and attaches their goal in terms of price.

A number of issues follow.

Changes in the client’s goals change the adequacy of the stated solution (or realization the initial solution was inadequate) and the auditor is forced to expend additional resources to achieve a changed solution.  (They may choose to accept this increase or add additional charges to compensate.)  In this case, the client does not really understand the auditor’s position as they believe they contracted for a goal achievement (value) which has yet to be delivered.

In another case, clients fail to see the value in the delivered service and look to maximize their investment in the relationship by asking for “value-added” service.  The auditor responds by delivering beyond what was stated in the contract, typically by performing services which they believe the client will value.  But again, without a clear understanding of what the client values this effort will be haphazard at best.

At the end of the day both parties feel unsatisfied.  For the client (the more basic the service, such as audit) the lower the switching cost and higher benefit from cost shopping other firms.  However, the auditor has now made an investment in the client and will take steps to retain the relationship and money stream.  From this point forward the risk of a downward behavior spiral expands.  As once the auditor demonstrates flexibility in service or cost the client will push to find the limits.

Most of us in the profession have witnessed this dynamic with frustration.  I have heard many professionals question the value of their service, driving them to cling to regulation, methodology and, technique rather than search for the value they deliver.

What can be done?

If misunderstanding value is contributing to the problem, an improved understand of goals should lead to improvement.  But how to achieve this improved understanding?

The client is not likely to initiate additional effort without demonstrated benefit.  But the auditor does stand to gain from an improved understanding of goals and so, it will be the auditor who must make initiate this process.

Here are some common sense steps auditors can take:

  • Enter a dialog with the client prior to responding to the RFP.  Go beyond understanding the stated solution to seek out their goal(s). What is the outcome they want?  Few, if any, clients want a new system, audit, or survey just to have it done.

  • Align your proposal to the client’s priorities and goals and find where you have common goals (yes, your goals are important too.).  Some of the most enjoyable and successful engagements I have participated on were those where we had common shared goals (i.e. SOX implementation or SAS 70 attestations).

  • Start proposals with a clear value statement.  What goal will the client be closer to at the end of the engagement.  This will lead to better scope creep control, expectation management and project success.  As a test, take a current proposal and count how many pages are devoted to the project value and how many are spent describing technique and methodology.  (What priority does the client place on your process vs. his goal achievement?)

  • Have periodic status update meetings, not focused on % solution complete or solution problems, but rather on goal achievement.

With a clear common understanding and communication of the goals and values desired a significant step would be taken to ensuring the mutual behavior desired by all shareholders.

10 replies
  1. David
    David says:

    I think the value of an audit service is the assurance that an auditor provides that the financial statements are fairly stated. According to the AA’s reported history, Arthur Andersen built his firm’s reputation by refusing to provide an unqualified opinion on a firm that eventually collapsed after another auditor okayed the statement. Thus, there was value in getting Arthur Andersen to approve your company’s financial statements. And that’s how the firm built its reputation. I think the question is how to get the profession back to where standards matter.

    Maybe the size of the firms is a detriment. Why should anyone work to build standards as Andersen did when all the work that one partner does to build standards can be undercut by another partner within the firm or another office within the firm? You have to get back to the situation where a firrm builds its practice by having standards, not by its lack of standards.

  2. JD
    JD says:

    “I have heard many professionals question the value of their service, driving them to cling to regulation, methodology and, technique rather than search for the value they deliver.”

    Very true. However, the root of this problem is beyond the control of auditors.

    As David helpfully states (along with a nice bit of history) in his comment “the value of an audit service is the assurance that an auditor provides that the financial statements are fairly stated”. This is well understand by most people but unfortunately for all of us, that is too often not the value that the market puts on an audit.

    Instead, too many people behave as if the value of an audit were simply to have someone with deep pockets around to sue when things go wrong – regardless of whether there was anything actually wrong with the audit.

    The solution? If auditor liability was limited to a small multiple of audit fees then the market might procure audit services based on the expected and desired rigour of the service rather than the deep pockets requirements.

  3. Bob Graff
    Bob Graff says:

    “That which moves us toward our goal(s) has value. The degree of value is determined by the priority of the goal and the extent to which we move toward it.”

    Giving assurance only has value in relationship to goal(s). The interested internal and external shareholders likely have different goals. However, it is the agent (management) who makes the auditor selection and reward decisions and all too often demands “value added” service because they do not see the value of assurance. That is why it is critical to understand management’s goals relative to the stated solution.

    Each client will be different and I offer no universal solution. However, consider management’s value perception difference when providing a SAS 70 royalty audit under these two scenarios.

     We are required to do so by our content provider (solution based) vs.
     The report will ensure our continued access to the content (goal based).

    If your client asks for value added service you have not yet identified the value (to the client) of the service you are providing!

    While size does increase exposure, wrapping the profession in standards and regulations is like requiring a pledge of allegiance. It only gives an unwarranted sense of quality and value.

    Search for value and you will find it.

  4. Tony Rezko
    Tony Rezko says:

    Outstanding post, Professor, and one I think ought to stimulate thought and conversation on all sides.

    I believe that within the firm culture, a key focus the firms need to emphasize is our duty (as auditors) to the public. This may be similar to your pledge of allegiance example, where it is only as good as our intent to carry it out, but it is not emphasized where I work (D&T). Everything is client service, deliver value to the client, etc., etc.

    And of course those this is important. But I’ve never read a professional brochure or internal letter from the CEO, or had a training mentioning anything about our responsibilities as they pertain to the public, or our role in building shareholder confidence. We might not like that added responsibility, and some readers of this site might not want it, but it’s a fact of life and one of the reasons our clients pay big bucks to have a Big 4 opinion.

  5. jd
    jd says:

    @ Tony. You are 100% right about the importance of the public duty for auditors but i don’t agree that’s what clients are paying for. They pay because they have too. Which brings me back to the point that the orginal post on value can be nothing more than a side show whilst the real value of auditing is not appreciated by those paying the bills. Am I missing something here professor?

  6. Bob Graff
    Bob Graff says:

    JD, Jd and David, Tony let me respond.

    Recall, “That which moves us toward our goal(s) has value. The degree of value is determined by the priority of the goal and the extent to which we move toward it.”

    I am writing about the problems created by a lack of common understanding of the tern “value”. We all want value, right?

    A common and clear understanding of value should lead to an equity based engagement, where value added service is not requested.

    JD – I am describing a relationship where unprofessional behavior could be avoided, and therefore litigation would not be considered. I disagree with ,‘’the root of this problem is beyond the control of auditors”. In fact, you have complete control. Stop the problem before it occurs by learning the client’s goals. If you find you have congruence with the goals fine, move ahead, if not disengage.

    Tony- Move beyond those that portent to teach you. They are but the minions of those who cannot see beyond tomorrow. Their objective is to maximize today at whatever risk may come the morrow,,

    At last, let me not forsake standards but let me belittle them. Without the standards of grammar and syntax language would be without meaning. Without music notes and rhythm there would be no Copan or Bach. And so it is for accounting standards. But standards only define the playing ground and rules.

    While Beethoven might appreciate and understand Sting he is as different as USGAAP is to IFRS. In other words, standards do not make a solution. They only define the context of our existence.

    Value is what you need to find!.

    Without which, there is no differentiation between a low cost provider and you. Do you really want to do your negotiations with the Purchasing Officer?

  7. Audit Partner
    Audit Partner says:

    It will always be hard to for clients to get real value from any CPA firm where partners are essentially the best sales people and 85% of the hands-on work is performed by inexperienced auditors with less than 2-3 years of experience. Virtually every large CPA firm uses this model. There is no where for the client to turn and no incentive for industry change b/c of it. Everybody does it. The only thing a client can do is attempt to pick the best of the lot.

    And regarding the Andersen comment, the issue was not unique to them. If you follow this blog, you surely know that to be the case.

  8. vatp46a
    vatp46a says:

    @7 makes a good point and it leads to another one about value: what is valued by the client isn’t what’s valued within the Big 4 (unfortunately).

    All of the firms pay lip service to quality and value but when push comes to shove, the most successful people in the Big 4 are incented to sell, sell, sell and someone else will grind through busy season.

    If stabbing a fellow partner in the back in order to cannibalize their business development opportunity – well, the winner writes the history book.

    I think that the arguement for value can best take hold only after there is a common definition of value.

  9. Anonymous
    Anonymous says:

    I think Bob makes a ton of sense. It is also important to note that as consultants, sometimes we provide value in ways the client did not foresee. We provide value by challenging them even disagreeing with them at times. We provide value by offering different views and approaches. One problem with clients as well as with managing people — is that it is tempting to define one’s need or the value they seek by telling someone “how” to achieve the goal rather than to tell them the goal/value and then listening to them and letting them figure out the “how” part.

    I would add that most people on this blog seem to be auditors – and as such they have a special view of the world of consulting. Their view is influenced heavily by shareholder value, regulations, standards and guidelines. Auditors are not true consultants so much as they are a service provider for those required to use them. Their value equation is a bit skewed by these influences — and I think that it becomes multi-variate in ways that are much harder to reconcile than a standard service provider/client relationship.

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