ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
For several years battles have raged in several courtrooms concerning whether accounting firms have a legal obligation to pay junior accountants overtime. We are sympathetic to the position of the accounting firms, but worry about the soundness of their legal reasoning and conclusions. Do accounting firms have to be consistent in different domains? For example, does the logic in legal briefs and oral arguments have to be congruent with ethical principles and auditing standards?
There are a number of accounting overtime cases, including Campbell and Sobek v. PwC (California) and Litchfield v. KPMG (Washington). Essentially the facts in these cases are the same. Plaintiffs are unlicensed employees of a Big Four firm in the attestation unit or division who serve as associates or senior associates. They worked long hours but were not paid overtime; the plaintiffs seek damages in the amount of the unpaid overtime work.
On September 20, in Ho v. Ernst & Young, the court partially certified a class of junior tax accountants at E&Y in California. These overtime cases now include other areas of accounting besides attestation.
Details of these cases can be found at: Orey’s BusinessWeek article “Wage Wars,” Francine McKenna’s “PwC Hit with Overtime Lawsuit Wave” and “Auditors Want Overtime: California Lawsuit Against PwC Could Change Model,” Caleb Newquist’s “Plaintiffs File Brief in Overtime Lawsuits Against PricewaterhouseCoopers,” and Kim Lacata’s “Another Accounting Firm Hit With Overtime Suit.” Similar suits were filed in Canada as well, where three of the four large accounting firms settled.
We are sympathetic to the position of the large accounting firms because these firms generally have been open and honest with potential recruits. While they do promise busy periods involving long hours with no overtime pay, they historically have held out the prospect of other rewards (e.g., bonuses, extra vacation time, etc.). If these cases pivoted about contracts, they would be a slam dunk in favor of the large accounting firms. Recruits cannot claim they did not know what awaited them.
Further, if the plaintiffs prevail, it is easy to conclude that the Big Four will most likely change the pay model in the future. The base compensation will be significantly reduced so that the base pay plus estimated overtime will equal the current levels. If the plaintiffs prevail, they and their attorneys will be the only ones to benefit.
Be that as it may, we have read some of the legal filings and are disturbed by the defense counsel arguments. Federal and state labor laws require overtime pay, but allow for various exemptions. One exemption is for “professionals,” but unlicensed accountants may not be viewed as “professional.” Only licensed CPAs can perform audits, so the license appears to be a demarcation whether this exemption can be applied.
Defense attorneys in many of these cases utilize the administrative exemption, which essentially states the firm does not have to pay overtime if the employees have duties and responsibilities that require them to exercise discretion and independent judgment. This is a peculiar thing to argue for a junior accountant working on an attest function, because he or she does not have the authority to issue an audit opinion. How much discretion and judgment can these individuals exercise without simultaneously having the authority to form and write audit opinions?
The Code of Professional Conduct Rule 201 states that a member shall “exercise due professional care in the performance of professional services.” If the accounting partners and managers have to monitor the work of the associates, then their knowledge and wisdom seemingly is insufficient to form audit judgments.
Standard No. 10 by the PCAOB bolsters this perspective. This standard requires the auditor to supervise team members. By this the PCAOB means that the auditor must inform team members about the objective of their work and how and when the audit procedures will be carried out; further, the auditor must review the work of team members to insure that the procedures were carried out and that the audit objectives were achieved.
Francine McKenna wonders out loud whether the auditors are willing to “Say Anything” in court to win a case. While we are tempted to agree, for now we shall just say that the firms are inconsistent. They say one thing in their legal discourses and the opposite in their accounting discourses. Of course, there is always the issue of magnitude. Unlicensed associates employ some degree of discretion and judgment in their work, but is this large enough to qualify for the administrative exemption from the Fair Labor Standards Act and similar state statutes but small enough not to run aground against Rule 201 and Standard No. 10? We doubt it.
Finally, we’ve talked with former students and often they say the work tends to be routine and at times even robotic. If that is so, then how much discretion and judgment are they exercising?
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
Interesting article. My roommates told me that people have sued the big four before and it pretty much ruins any career that the person ever imagined having. This once again comes down to people not taking responsibility for their actions. If you didn’t know what you were signing up for, then it’s your own fault.
I worked for a mid-size CPA firm and was paid overtime – even as a licensed CPA – until I became a supervisor. I made about $5,000 per year in OT. With the promotion to supervisor I was offered $4,000 over my previous base pay. I insisted that a promotion also meant an increase in pay – and they grudgingly obliged. The next summer they let me go. I guess they didn’t appreciated complainers.
Interesting case…I came through a small firm that let us work as many hours as we would like to work, and paid us straight time for each and every hour that we worked. We had total flexibility in our schedules, so that if we chose to go fishing that day, no one said anything – as long as the work got done. Boss was totally upfront about it going in and his attitude was “its good for you to work extra hours and its good for me, too” so work away.
Clearly, the model that one needs to follow is to climb the ladder and get to partner – that’s where the big bucks await, eh? I chose to go out into industry. I think I make a little more NOW than my contemporaries still in the firm life, but if they make partner, they should surpass me.
Either way, I learned soooooo much from my firm that I am forever in their debt for it.