Too often audits are seen as commodities–something the client has to pay for, but with no value. In this post, I tell you how to add value to audits.
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 how can you be different?
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?
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.
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.
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.
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 2014 to 34% in 2017.
In this example, we are communicating an observation. Contrast this with:
Sell the widget division.
Two problems with “Sell the widget division”:
What about you? What are some other ways that you or your firm adds value to audits?
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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