PwC’s California Overtime Case Settles But The Big Four Business Model Will Change Anyway

After more than eight years of back and forth, PwC recently agreed to settle the Campbell v. PwC overtime class action lawsuit pending in California. Two former unlicensed PwC accounting associates, with the support of law firm Kershaw, Cutter & Ratinoff, filed a motion on October 24, 2007 that sought to certify a class of all associates and senior associates employed by PwC in California.

When I first wrote about it on October 25, 2007, the case had been pending for a year. It was the first case to reach the class certification stage against one of the Big 4 accounting firms, according to KCR’s Bill Kershaw, who was quoted by CFO.com at the time about the rationale for bring the case:

For years, the Big 4 accounting firms have ignored Federal and State laws mandating the payment of overtime to unlicensed accountants,” said Bill Kershaw, the KCR attorney representing the plaintiffs. “This is in stark contrast to smaller accounting firms, many of whom comply with California’s overtime law and pay overtime to their unlicensed associates as non-exempt employees.

The case was finally going to trial in March. I wrote on December 16 of last year that PwC was risking significant reputation damage if it went to trial. I recommended PwC settle even though I would have loved to see a jury trial. In a trial, PwC’s “trade secrets” and audit quality inconsistencies would become public record. PwC has taken positions in the overtime litigation that directly contradict its positions taken in other matters, such as the settlement of SemGroup, an auditor malpractice case, and that are contrary to public policy and regulatory requirements.

But that’s not all. When Big Four partners go on the stand, they tend to come off as arrogant and display a complete disconnect with what the public expects of them.

The explicit risk of a trial is that testimony by PwC executives like US Chairman Bob Moritz and Global Chairman Dennis Nally (both executives are on the Campbell witness list) will be embarrassing, incriminating and could even could force a complete change in the firms business model in California and nationally.

Campbell v. PwC was the elder statesman of the numerous certified class actions against the Big Four firms that have been filed in the last few years. One remaining, Le/Kress, will go before the same judge in California as the one in Campbell after the prior judge on the case retired in 2014. (I wrote about the loyal PwC alum who filed a deposition in support of his old firm while working in a financial reporting position at a PwC audit client.) Others like the consolidated cases under In Re Deloitte & Touche LLP Overtime Litigation are pending.

These overtime cases cover periods up to the present when the largest public accounting firms operated in a way that made them vulnerable to these suits.

Those times are coming to an end.

There’s been a steady drive towards further “professionalization” of audit/accounting, to make it more like the legal profession. These initiatives are supported by the Big Four public accounting firms and the universities that feed the human cogs into the Big Four machine.

In 1989, the membership of the accounting trade association, the AICPA, voted to recommend that states require candidates to complete 150 hours credit hours to sit for the CPA exam versus the previous 120 hours, or 30 credit hours per year completed typically in a four year degree. Requirements of state boards still vary, but usually consist of a US bachelor’s degree with a concentration in accounting (not necessarily an accounting degree) plus 30 more hours, known as the “150 hour rule”. At this time, almost all of the 55 states and territories that regulate CPA licensing require 150-hours of college credit to take the qualifying exam.

Heads of university accounting programs and their faculty generally like the 150-hour requirement because it drives expansion of accounting programs. Masters of Accounting programs become mandatory for anyone who wants to work in public accounting at one of the larger global firms. More accounting professors can add teaching graduate students, not just undergraduates, to their resumes.

The 150-hour campaign has been a long one, pushed in particular by many academics who believe accounting deserves more prestige but the industry likes it, too. In 2008, at the beginning of the most recent financial crisis, the AICPA responded to ongoing discussion guided by the national Association of State Boards of Accountancy (NASBA) regarding the 150-hour rule by stating:

Leaders of the AICPA, accounting educators, education accrediting agencies, and many in the profession have endorsed the 150/150 model for many years and continue to do so…The attention focused on auditors and CPAs by widely publicized accounting scandals, Sarbanes-Oxley, the formation of the PCAOB, the SEC’s Advisory Committee on Improvements to Financial Reporting, and the Treasury Department Advisory Committee on the Auditing Profession (ACAP) clearly suggest increased complexity, globalization, and that the accounting profession needs strong not weak requirements for licensure and high quality accounting education and auditing standards.

The largest public accounting firms like the 150-hour rule because a Masters degree program may meet the requirement of the legal decision points for exempt vs. non-exempt in overtime litigation against the firms. (Per my sources, the Big Four firms have begun to insist on Masters degrees as a condition of recruiting at more and more university accounting programs.) That’s because if, for example a job requires an extended course of specialized study like law or medicine, it may be considered a “learned” profession, and often automatically considered exempt from overtime.

One trend that is worrying the profession is despite record numbers of accounting students in the recent past, the number taking the CPA exam has been flat the last few years. That concern has led to an initiative by the industry trade association, the American Institute of Certified Public Accountants (AICPA) to develop proposed revisions to the uniform CPA exam to make it less knowledge-based and more practice-based, more like the law profession’s bar exam.

The new CPA exam, like the bar exam, will be all you need to know start practicing once you pass it. It will reflect what a graduate knows at time of completion of his/her education, not what a more experienced professional should know to sign audit opinions for public companies at a larger firm, for example. The AICPA is now conducting a comprehensive research project known as a Practice Analysis to develop the next version of the CPA Exam.

This process ensures that the Exam maintains its relevance to today’s market and the changing CPA profession. As part of the Practice Analysis, the AICPA is releasing an Invitation to Comment on Maintaining the Relevance of the Uniform CPA Examination [leading to the Development] of the next version of the CPA Exam, launching in 2017.

CPA licensure requires the “three Es” — Education, Examination, and Experience. An ethics assessment, a fourth requirement, exists in some states as well. Of these requirements, the CPA examination is uniform (that is, it is the only exam that is accepted for CPA licensure by all U.S jurisdictions), while the others vary among jurisdictions. Passing the CPA examination is not sufficient in itself to qualify for licensure as candidates must meet all their state’s requirements for licensure.

The CPA examination provides reasonable assurance to the boards of accountancy that individuals who pass possess the level of technical knowledge and skill necessary for initial licensure.

Many students now attempt to pass the exam before even starting full-time at a firm after graduation. That goal is aided by the longer time they spend in school given the 150-hour requirement and the increasing number of internships they can do — up to four if they start interning after their freshman year. These internships are paid and pay overtime, unlike the eventual full-time job and could potentially be experienced at same firm each year before going to work for that firm after graduation. The largest firms also pay for CPA exam test fees and review courses with the only requirement that the candidate remain employed with the firm after graduation for some period of time.

The accounting profession wants to be elite, like law, even though the public accounting business model at the largest firms is built on the volume of recruits and expects a high turnover in the first few years. Heck, the auditor overtime class actions show that more than fifty percent of their class members leave the firms within the first five years. The class action members also say that exam failure rates are high and that the firms are not that concerned about repeat failures.

That will have to change.

I predict the largest public accounting firms will mandate a Masters Degree in Accounting to be hired and disqualify anyone with only an undergraduate degree, whether or not they have the required 150 credit hours. The largest public accounting firms will expect passing grades on all parts of the new bar-exam style CPA exam before a full-time start. In addition to passing the exam, most jurisdictions also require between 1–2 years of experience doing audits on the job in a public accounting firm to be licensed as a CPA. If graduates start full-time employment with the exam already nailed, within 1–2 years, depending on state law, everyone is licensed. (I wouldn’t be surprised if the firms start lobbying to reduce experience requirements on the strength of their significant, quality ongoing in-house training programs that meet continuing professional education requirements to remain licensed now.)

When all this is in place, the largest public accounting firms will have closed the window on vulnerability to any new class action overtime lawsuits brought by entry level auditors.