Ways to Increase the Value of Your Annual Audit
by
Member of the Firm
By implementing distinct strategies, you may increase the value of your annual audit. Maximizing value can be categorized into two broad areas: managing the fee charged by the audit firm, and comprehending the many benefits an audit provides.
Managing the Fee
Fees charged by independent audit firms in recent years have risen due to several factors.
Public and private companies are subject to new accounting standards and increased audit performance standards, such as the Statement on Auditing Standards No. 99 that directs auditors to assess the likelihood of fraud in the form of misappropriation of assets or inappropriate financial reporting. Public company audits now fall under requirements of the Sarbanes-Oxley Act of 2002 (SOX) that mandates understanding and testing of management’s system of internal controls, thus expanding the scope and hours needed by a firm to properly conduct an audit.
In addition, the demand for accounting graduates has increased due in part to the need for the additional work pertaining to the aforementioned issues at a time when there has been a general reduction in the number of students graduating with accounting degrees. And upcoming accounting graduates are required to complete an increased number of years of post-secondary education. This generates audit fee upward pressure. Managing the fee, however, is not out of your company’s control, and you should be implementing some of the suggestions offered below.
Often the auditor performs work that is more in the nature of accounting services. There is no reason this accounting work cannot be performed by your staff, reducing auditor time and the associated cost. Look at the audit adjusting journal entries the auditor proposed for the year just ended. Can these entries be formulated and booked by your staff in advance of the auditor’s arrival next year? More typical adjustments include calculating and recording:
As with any audit, timely, well thought-out planning will contribute to efficiency and ultimately lower costs. Insist on a planning meeting two or three months before the start of the audit to discuss, among other things:
The necessity for any interim audit procedures that may reduce the amount of auditor work after year-end, including gaining an understanding of internal accounting controls, fraud risk assessment, inventory observation, obtaining comfort with contract estimating, confirming trade accounts receivable, transaction review, discussion and resolution of unusual or non-recurring issues arising during the year, such as a joint venture. The timeliness of the audited financial statements is improved through interim procedures.
Obtaining a list of audit schedules needed by the auditors, but to be prepared by your staff, such as account balance analyses, transaction discussions, variance and ratio review. A due date and the medium of delivery (paper or electronic) should be agreed upon along with how the schedules are to be delivered (mailed, scanned, e-mailed, etc.).
The availability of a suitable workspace and your staff to answer questions. During the audit process, the ability of your staff to retrieve requested materials or reconcile audit differences will aid in the auditor’s efforts. Remind the auditor to ask your staff for help.
Agreement on a tentative timeline for completion of tasks and field work, delivery of draft and final financial statements, and delivery of the tax return. If a presentation to the board is needed, go ahead and set the date.
An end product of the audit is the financial statements, notes thereto, and supplemental schedules. The auditor often prepares these documents, but completing these internally can save significant auditor time. Your staff can model the documents after last year’s and insert the current year’s information. Excel-based financial statements and Word-based notes offer the auditor a convenient way to access and perform procedures to become comfortable with the presentation.
Submitting a request for proposal (RFP) for audit services is an option to ascertain if a lower fee can be obtained, or if the current fee is reasonable. It is crucial that when analyzing fee quotes, bidders are quoting on the same level of work. Otherwise, you will not have a fair comparison. Be specific in the RFP defining services desired. An RFP can be time consuming to prepare, receive, and evaluate, and the lowest fee sometimes does not result in the best value. The ensuing discussions illustrate this point.
Comprehending the Many Benefits
Value from an audit engagement is more than just a reasonable fee. Value is best illustrated by describing circumstances and outcomes that can transpire during the course of the audit and after the audit is completed. This value is enhanced when the auditor has an industry concentration in your realm of business, and you have an awareness of the value of what is being communicated. Some of the areas of value discussed below need to be evaluated in a public company audit scenario for independence issues arising from the implementation of SOX.
The audit methodology introduces a learned individual who, after obtaining an understanding of your operations, conducting various audit procedures, and drawing upon previous education and client experiences, can offer valuable operational efficiencies for your accounting, internal audit, and estimating departments. Understanding your operations results from inquiry, observation and re-performance of your internal systems and review of tailored industry checklists. Audit procedures are those tests performed to, among other things, verify the existence, completeness, and valuation of account balances or transactions, such as the audit test of contract profit gain/fade analysis to assess the project manager’s estimating abilities. Audit observations of deficiencies or inefficiencies in your company’s vendor payment cycle, calculation of payroll and overhead burden rates, accounts receivable collections, billing management, cash management, segregation of accounting function duties, and contract estimating should be brought to your attention. This communication is sometimes shared in a management letter at the audit’s conclusion, but often is relayed as verbal advice at the time of the observation. This communication elevates the likelihood of your company increasing profitability and reduces the chance of fraudulent activity in the accounting and reporting arena. But these suggestions can only increase an audit’s value if the auditor has the ability to recognize and communicate. If industry experience is absent, then the relationship should be re-assessed, as the full value of an audit is not being realized.
Also, you have an obligation to implement proposed suggestions having merit. Not following through leaves the audit’s value in this area on the table with no benefit to your company.
The introduction of the audit team into your company’s operation allows potential benefit of additional audit firm talent. The team should recognize areas that may warrant further discussions outside of the audit process and introduce you to personnel in their organization, such as tax- or consulting-focused experts, that can address your specific needs. To fully benefit from the relationship, ask your auditor to inform you of any beneficial observations regarding your business they encounter and you should inquire about specific issues of concern to you.
An industry-focused audit firm offers ability for you to learn of trends in your local and regional marketplace and financial benchmark with similar companies. Alerting your organization to relevant issues affecting your strategic plan and to ratios and budget line items that are out of sync with your competitors are extremely valuable. Remember, your ability to timely rectify identified areas of concern is limited to your knowledge of the problem.
Auditor industry knowledge can be critical with sureties and funding sources, as they can alert you to transactions, accounts, or accounting treatments not viewed favorably by these players. The auditor’s insight into financial statement preparation ensures the appropriateness of the document for the end user. It is important that comparability with prior periods and preparation in accordance with generally accepted accounting principles are addressed and the necessary information unique to your industry is properly presented.
The audit process can force your company to evaluate and make strategic business decisions that otherwise might be continually postponed. Incentive compensation computations, review of delinquent accounts, general corporate governance documentation, succession planning, and necessary personnel changes can be forced by the annual audit process. Audit inquiries often cause a re-assessment of policies and procedures resulting in a more efficient organization, and confirmation of the strength of an organization that can adapt to change.
Understanding that the annual audit does not contemplate an analysis of all financial transactions and is not designed to detect immaterial instances of fraud, a successfully concluded clean audit, performed by an independent firm, provides you and your company a certain peace of mind that the financial statements are fairly stated in all material respects taken as a whole and no material instances of fraud were detected.
Your accounting staff understand that a financial statement audit re-affirms your company’s belief that they are working to the best of their abilities to record, summarize, and report financial information consistent with management’s directive. This re-affirmation confirms the value the accounting staff believes they provide the company.
In summary, a properly conducted audit by an industry-focused auditor, with free exchange of ideas, will provide your company tangible and intangible values where the benefit will substantially exceed the fee charged. Though an auditor must maintain professional skepticism, he or she is not an adversary, but rather a business partner aligned with you to advance your company towards its goals, and the audit process is the catalyst.