How to Add Value to Audits

Make your audit more than a commodity

You’re finishing another audit, and it’s time to issue the audit report. Your client (namely the CFO) is not happy about the two material control weaknesses you are communicating. You try to explain that professional standards require you to communicate significant deficiencies and material weaknesses in writing, but, still, the CFO lights you up with, “We get no value from audits. You guys come in here and issue the same opinion every year, and then you criticize our accounting system. Why do we pay you for this?” If you’re shaking your head at this moment, you’ve been there. So what’s a good auditor to do?

Add value.

Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

We know from our college marketing classes that profitable businesses differentiate themselves. But since audits are seen as commodities (we all issue the same opinion), how can we stand out?

Hire Pleasant People

Let’s face it. Being audited is about as much fun as seeing your proctologist. And the annual regularity makes it no more pleasant. So how can we (auditors) make the engagement more pleasing?

Hire pleasant people. Client interactions will either enhance your firm’s value or decrease it, and I have found that civility and kindness are things people have, or they don’t. Looking for these traits during the hiring process is critical. So make those phone calls to references to find out what the potential new-hires are really like.

Provide Unique Insights

Yes, we (auditors) must maintain our independence, and while we can’t make client decisions, we can and should communicate insights. For instance?

You are reviewing your client’s debt agreements, and you notice that six of their eight loans originated several years ago–all with interest rates of 3% higher than present levels. One simple management letter comment (to refinance) can save your client millions and easily pay for your audit fee. Insights like this one come from thinking as though you own the business.

Think Like You Own the Business

If you owned the business, what would you do? Are there any parts of the business you would sell? (You should be able to see trends in the numbers from your planning analytics, especially if you have five-year comparisons.)

Are there any products suffering from tighter profit margins? Maybe those sales should cease.

Does your client have excess cash in a non-interest bearing account while (at the same time) owing on a 9% interest-rate loan? Suggest paying down the loan.

Possibly you’ve noticed certain of the auditee’s customers are repeatedly late in paying their bills. Consider a management letter comment.

The company has no fidelity insurance, yet several cashiers handle cash. Win a few brownie points here.

My point: Don’t just audit. Think as though you own the business.

Audit Independence

But aren’t we (auditors) supposed to maintain our independence? Absolutely, and this is a must. Without independence, audits have no value. But, as you audit, you will observe deficiencies in the operations and internal controls. And audit standards don’t prohibit you from communicating those insights. The goal of an audit is the opinion, but a byproduct includes helpful comments. The audit opinion is usually provided for the benefit of outside parties (e.g., lenders), but management letter comments provide assistance to the auditee. And since the auditee pays the audit fee, it’s nice to give them value.

To maintain independence, the auditor must not make management decisions. So use the word “consider” when writing operational management letter comments. For example:

Consider examining the profitability of the widget division. Profit margins have decreased from 55% in 2012 to 34% in 2015.

In this example, we are communicating an observation. Contrast this with:

Sell the widget division.

Two problems with “Sell the widget division”:

  1. The comment sounds more like you are making a decision (though the client has the final say), and
  2. The comment creates a greater probability of future lawsuits — what if your client sells the division and the widget market rebounds?

How Do You Add Value?

What about you? What are some other ways that you or your firm adds value to audits?

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4 thoughts on “How to Add Value to Audits

  1. The Insight consideration you made is a very good suggestion for auditors. It means that we are paying care and attention to our clients business and management improvements!

  2. I always try it; sometimes it is just not possible. I once audited an NFP corporation which had not had an audit in many years. The accounting books, in BAD shape. I was very patiently, with constructive suggestions without violating my independence. The executive director (ED), a nice person, was most appreciative of my work. Well, that was what I thought. The new bookkeeper, who was related to the ED, told me that when the ED saw me coming in, the thinking was “a problem is coming.”