The First Question You Should Ask When Selecting an Auditor
August 2, 2018
Your organization is required to have a financial statement audit and you are the one tasked with finding a suitable CPA firm to perform the audit, whether that be an initial audit or finding a replacement auditor. The most common response in these situations is to phone or e-mail one or a couple of close contacts in the public accounting profession. That does not, however, address any of the important questions that you need to have answered prior to engaging a new auditor. You may be fortunate using the phone-a-friend approach to finding an auditor but it’s just as likely that you’ll find the entire audit experience to be burdensome, costly, and long (or, at least a lot more than necessary). In fact, it’s highly likely that you’re not sure which questions to ask- outside of price- let alone the most important one of all.
Prior to addressing the most important question, let’s quickly review the questions that you most likely will need to have answered.
1) Price- How much is this thing going to cost? Although price is important and you’re likely to get a wide variety of fee estimates if you solicit multiple bids or proposals, it rarely- if ever- should be the primary question or even the second or third most important question on the list. Price is a bit of a misnomer because the price on the engagement letter never includes the real cost of the audit to your organization. The real cost of the audit includes not only the engagement fee itself but also the hidden costs buried within the audit process. These hidden costs include hours and energy- the productivity cost to your organization- of working with the audit team as well as the impacts of delayed or late financial statement issuance or even the potential impact of an inadequate audit.
2) Expertise- While most audits generally have at least one staff member with limited experience, your expectation should be that on-site job managers and audit partners will have significant experience in your industry. Expertise is important in that it impacts your financial statement presentation, the quality of your audit, and efficiency (time required to complete the audit).
3) Certifications & Licensing- Believe it or not (and I have seen it), there are “firms” out there that offer audits without the proper licensing. This will often result in your audit being rejected by the primary audience for audited financials.
4) Deadlines and Time Requirements- Is there a deadline for your financial statements? Do you need your financial statements in order to secure financing or funding? These are important (and often) unanswered questions at the time the engagement letter is signed. Clients often assume that their auditor will commence the audit immediately or within a certain time frame after an event (such as when the books have been closed or a fiscal year-end). Engaging an auditor without a documented timeline for the performance, completion, and issuance of the audit is a high-risk activity- one that could cost your organization multiple times more than the engagement fee itself in terms of missed funding or other opportunities.
5) Location, Location, Location- Where do you expect the auditor to be when the bulk of the work is performed? Do you expect the team to be mostly on-site or off-site? Do you have appropriate accommodations (office or conference room space, internet connectivity, etc.) for the audit team?
6) Who’s in Charge?- If you think that the engagement partner will be on-site most of the time, you’re almost certainly mistaken unless you’re engaging a small firm to perform the audit. If the engagement partner is not on-site, who will be running the show and how much experience do they have. An inexperienced on-site manager will likely mean your audit experience is prolonged and that there will be lots of back-end questions long after the audit team has vacated the premises.
7) Technology- Does the firm have a commitment to utilizing the best in technology to enhance the client experience and make the audit more efficient?
8) Style- How will the audit team communicate with you most of the time and make requests? Are they friendly and likeable? Are they organized, courteous, and professional?
9) Firm Size and Reputation- While you certainly will want to steer clear of audit firms with poor reputations and you’ll want to find a firm that performs a high-quality audit, there’s usually no need to pay a premium or to put up with unnecessary and avoidable inconvenience to get audited by a “big player” unless you have special needs. A notable reason to overpay- and one of the few reasons to do so- is if you need a certain level of firm or “brand-name” to attract investors or sale all or portions of the business.
This brings us to the most important question and, by most important, I mean the one that most often derails the audit process simply because it is seldom asked, it’s a widely prevalent issue in firms both large and small- and it is the most likely to create additional hidden costs that go well beyond the fee estimate quoted in the engagement letter.
10) Capacity- Does the firm have the capacity to perform the audit and deliver it when it’s needed in a realistic rather than ideal set of circumstances? At this point, you might wonder “what is capacity and why should I care?” Capacity is simply the number of hours an audit firm has available to perform your audit in a given time window. The time from when you are prepared for an audit to when you need or would like to see it issued is your audit window. Does the firm have the necessary capacity, within your audit window, at all necessary levels (from staff to partner) to get your audit completed?
It’s a bit of an open secret but most firms today are scheduled near, at, or even in excess of 100% of their capacity and many firms are now over 100% capacity even during the traditionally “non-busy” times. Even worse, most of that capacity is based on an ideal, rather than a realistic set of circumstances. Amongst other things, in this unrealistic world, audit budgets are always plenty or more than enough time to get the audit completed, extenuating circumstances do not exist, clients are always ready for the audit when they are scheduled, audit staff as well as key client employees never get sick or have family emergencies, and personnel at accounting firms never unexpectedly leave for other jobs. Most commonly, audit firms in 2018 are like airlines in that they are constantly oversold except- in many cases- it’s not a two to four seats like out of 150- it’s more like 20 seats of 150. In the short term, the obvious answer to this situation is lots of overtime for employees but even that solution doesn’t go far enough because there are limits to productivity and the willingness of staff to work that seemingly endless overtime. Most often-unless you’re fortunate enough to be one of the most important clients of the firm you engage- the result is an audit that is inefficient due to lack of planning, places more responsibility on your staff, is delivered later than you initially expected, and results in large hidden costs to you and your organization.
If you’d like to work with a firm that works diligently to ensure that it has not only the capacity but also the other factors that are important in getting the audit completed, contact me at Culver CPA by phone at (901) 466-9797 or drop me a line by e-mail at firstname.lastname@example.org.