We are often struck by the difference in perspective between how management and the Board of Directors view the value of an audit as compared to how the auditor’s see it.Often, the two sides are worlds apart.
The audit report is a standard form letter that auditors provide to express their opinion on a set of financial statements.This boiler-plated one-pager can cost a company anywhere from tens of thousands of dollars to millions of dollars. Yes, you read that correctly - millions of dollars.
Auditors are under a tremendous amount of pressure to meet ever increasing demands from regulators and professional bodies to improve the quality of the audit.To this end, they will argue that rates and fees must go up. The management view is – welcome to our world! Where our customers and competition drive prices lower and the pressure on becoming more efficient is paramount to survival.
We both worked as auditors at large national firms early in our careers and as CFOs and corporate directors in various industries in more recent years so we have seen both sides.We now regularly deal with auditors at a number of different firms and are often engaged to speak to auditors on various matters. It struck us that we have never heard of anyone in management giving their perspective on the value of the audit.So here goes five secret pieces of advice we would give all auditors as a frequent consumer of your services.
1.Stop doing what was in last year’s file
We are tired of seeing old approaches to a dynamic environment.Every iteration of the audit is an opportunity to become more efficient.Yet, year after year, we see the same approaches, tools, and techniques being applied by auditors.Risk assessment and business acumen are the lynchpin to delivering effective audits.Yet, we see too many situations where auditors spend a disproportionate amount of time doing work that doesn’t matter to the overall opinion, which we believe in large part stems from a lack of business acumen. Yes- there is pressure on fees.Focus on the high risk areas to ensure you get the assurance you require within your budgeted time.
2.The right partner makes all the difference
We’ve worked with a lot of firms over the years and a lot of partners.Finding a partner who is pragmatic and comes with strong business acumen is what management seeks.Audit partners that can recite the handbook and Generally Accepted Audit Principles might be technical geniuses, but have a tendency to focus on the trees and less so the forest.This “auditing from a perch” approach gets expensive as every rabbit hole leads to an extra billing of one sort or another.
Like most things in life, this is about relationships.In a former life one of us was appointed CFO of a large private company.The existing audit partner didn’t reach out to the new CFO for six months after the appointment! Needless to say when the audit tender went out, that firm did not keep the work.
The right audit partner is one who management and the board seek out for guidance and advice beyond the audit opinion itself.He or she is available and ready to help.When you find one of these partners, you actually notice that fees are predictable and without surprises.
3.Engage your client in the planning
On one engagement, the partner invited the audit committee chairman (Blair), the chief financial officer, and the corporate controller to their offices to conduct a day long joint audit planning session.That is the only time we have seen this.We thought the session was very effective and have been trying to spread this idea for years since then.
First, this integrated approach gave everyone on the audit team and the key members of the management side the opportunity to collectively meet, interact and talk about just the audit.In essence, we planned the audit together.We met with the firm’s specialists and discussed the appropriate scope of their involvement.For the auditors, they got a very deep understanding of our financial organization and more broadly, the issues and trends that were driving management thinking – business acumen.
Sometimes, getting management out of the office can unlock conversations that would not otherwise occur.Try this with a few of your clients and see what happens.
4.Management letters show you care
The easiest way for auditors to add value on top of the boilerplate audit report is to share their audit observations with management and the board of directors.We value your independent opinion.The management letter is a wonderful way of wrapping up an audit engagement and telling us what you thought of us.Make sure the letter is well thought out and contains actionable suggestions to improve our business.We won’t be offended and you can help us implement a process of continuous improvement.
Blair recently went through an audit tender with one of the companies he works with.The new auditors wrote the audit committee a 20-page management letter where the previous auditors had never written anything in the past 10 years. Now there is an auditor that actually cares about helping their client.This will likely also improve the quality and efficiency of the audit in years to come as better internal controls and more efficient processes decrease the risk of the audit.
5.Communication skills are lacking
Fees!The bane of every management – auditor relationship.Management believes that auditors inflate their hourly rates only to complain about their recovery. There is no question that most finance people working in management recognize that auditors are highly talented, intelligent and expensive individuals for firms to recruit and retain.So yes, audit reports are and always will be expensive pieces of paper.
What is unacceptable from management’s perspective is surprises. The least favorite surprise is the extra billing and it happens all the time. Sometimes, the extra billing is expected and the fault of management, but open and honest communication about the extra fees needs to be there as soon as the auditor knows about it.
This expectation gap arises when the audit plan quickly goes off the rails.The field staff work like crazy to fill out the file, irrespective of time budgets, and then at the end, suddenly the partner has a large work-in-progress that needs to be dealt with.Most audit firms offer to “eat” some of this loss, but inevitably they try to recover as much as they can from the client.
Why do we keep having this conversation after you’ve blown your budget? Please auditors, create an early warning system and manage our expectations throughout the audit. Give us your WIP versus budget as you are going through the audit.
If you’d like to get more ideas on how the auditor-manager relationship can be improved – contact us.This is what we do.To learn more about the ABC’s of auditing, why not take our complete introduction to financial statement auditing course