DRIVEN TO DISTRACTION [research]

Acquiring non-audit-related consultancies can take away from an accounting firm’s core mission.

Only a few years out of college, a fresh-faced Andrew Imdieke was appointed director of internal audit at Borders Group Inc., then a multi-billion-dollar company that operated more than 500 bookstores. It’s a pretty impressive job title for someone in their mid-20s, but Imdieke acknowledged he was a little green for the role.

“I had only been at Borders for around three months when my boss was terminated and the audit committee put me in charge,” said Imdieke, an associate professor of accountancy and Ernst & Young Faculty Fellow at the University of Notre Dame’s Mendoza College of Business. “I like to think I did a good job based on the qualifications and experience I had at the time, but putting me in that position was probably a bad decision.”

Imdieke decided to embrace the challenge. A few months in, the chair of the company’s audit committee asked him what he believed to be the company’s biggest risk.

“I panicked a little, but also had a moment of clarity,” Imdieke recalled. “I told him, ‘I don’t know if you have seen my résumé. I do have some public accounting experience, but none is with publicly traded clients and none is in retail. And you have put me in charge of internal audit at a large, publicly traded retailer. So, if you want to know what I think Borders’ biggest risk is, well, I think you’re looking at him.’”

The line got a laugh — and it still does when Imdieke tells it to undergraduate students in the accountancy courses he teaches at Mendoza. The board members assured Imdieke that they knew he was relatively inexperienced but also that they believed he was highly motivated and could act independently. He stayed in the role for more than three years and compares it to drinking from a fire hose. The experience piqued an interest in audit quality that has shaped the trajectory of Imdieke’s career.

Imdieke is a Midwesterner through and through. He grew up on a farm in central Minnesota and attended college in Michigan. After graduating from Hope College with a bachelor’s degree in accounting, he joined the Detroit-area public accounting firm Plante Moran. While he enjoyed his time in public accounting, his roots as a now third-generation professor (his mother was an elementary education professor and his grandfather an industrial education professor) led to a different vision for his future. He wanted to research and teach at a university in the Midwest — a place like Notre Dame.

Imdieke accepted the job at Borders as a stepping stone back to academia. He intended to stay for about a year before enrolling in graduate studies, but with the rich experience he was getting at the company, he stayed more than three times that long. When he finally enrolled at Michigan State University for his doctoral studies, Imdieke was able to draw on his corporate experience to chart his path, conducting research into firms’ successes in addressing weaknesses in internal controls.

“It’s been more than 10 years since I was an auditor, and internal control audits have improved since then, but the experience made me skeptical,” said Imdieke. “There is a lot of variation in how seriously companies take internal controls. The benefits are hard to quantify to management. They want analyses that show a positive net benefit. Otherwise, there is little desire to prioritize controls, especially at a financially distressed firm like Borders was at the time. The message I got was, ‘How do we fix internal controls without spending any money?’ And that can be the mentality of a lot of firms.”

Bridging Academics and Practice

Since coming to Notre Dame in 2016, Imdieke has continued to research audit quality. His work received significant recognition in 2023 when he was awarded the Deloitte Foundation Wildman Medal. The American Accounting Association awards this medal annually to recognize a study from the preceding five years that has made the most significant contribution to the practice of public accountancy.

Imdieke’s medal-winning research examined the effect of consulting firm acquisitions on audit quality at the Big 4 accounting firms — Deloitte, EY, KPMG and PwC. In recent years, acquisitions have been rising, but there are different types of consulting practices a firm can acquire. Some are focused on auditing-related work such as enterprise resource planning systems. The study showed that when accounting offices acquire audit-related consulting practices, audit quality improves. However, when firms acquire consulting practices that are not directly related to auditing, quality declines.

Published in Accounting, Organizations & Society in November 2020, Imdieke’s research paper, “The Revival of Large Consulting Practices at the Big 4 and Audit Quality,” undermines an argument sometimes made to justify non-audit-related acquisitions — that an increased focus on non-audit services could improve audit quality by providing knowledge spillover. The logic is that when auditors speak with consultants who are working with the same clients, they learn more about their business. While this type of information sharing could sometimes occur, his research shows that the benefits can be outweighed by the costs, depending on the reason for the acquisition.

“Simply put, it can be a distraction,” said Imdieke. “A strong focus on consulting acquisitions could result in less focus on audit quality.”

For practitioners, the findings have practical applications. Lower-quality audits can damage a firm’s reputation, making it harder to attract new clients or retain existing ones. Errors can also have costs. Poor audit quality can lead to fines from regulators, censure by the Public Company Auditing Oversight Board or lawsuits by investors who have been misled. So, why would an accounting firm engage in practices with so much potential downside?

“Auditing is very profitable, but there are only so many clients that need an audit,” said Imdieke. “Consulting opportunities are somewhat endless, and that’s what’s driving these acquisitions. If you want revenue growth, there is greater potential in consulting than auditing.”

Imdieke and his co-authors found that material misstatements — meaning errors or omissions that are not in line with Generally Accepted Accounting Principles — increased after the acquisition of non-audit-related consulting practices and decreased after the acquisition of audit-related ones. To provide context for these findings, the researchers conducted semi-structured interviews with 17 audit practitioners at Big 4 firms.

“Practitioners provided insights about the culture of commercialism tied to the growth in consulting, and that helped the article stand out,” said Imdieke. “It helped us understand what motivates Big 4 firms to drift from their mandate by acquiring consultancies not directly related to a core function. That added some really interesting context that resonates with academics and practitioners alike.”

His interest in bridging academics and practice made receiving the Wildman Medal especially meaningful. “For me, it is one of the greatest honors — if not the greatest honor — an accounting researcher can get,” said Imdieke. “I want to pursue ideas that have an impact on accounting practice. As accounting academics, we sometimes wonder how much practitioners read our research, but that’s also on us. Research should be written in a way that is understandable and accessible to practitioners.

“When I decide whether to work on a project, I think about the future of the profession and how my research could inform the decisions accounting firms make.”

Illustration by Carmona Errata. Photo by Michael Caterina/University of Notre Dame.

Andrew Imdieke is an associate professor of accountancy and EY Faculty Fellow. His research focuses on internal controls over financial reporting and factors that impact audit quality.

Published

“The Revival of Large Consulting Practices at the Big 4 and Audit Quality”
Accounting, Organizations, and Society
Andrew Imdieke, Dain Donelson, Matthew Ege, Eldar Maksymov