The goal of an audit is to provide reliable financial information that can be used to shape the direction and major decisions of a company. A good auditor can ensure that, but he or she must be able to effectively communicate for the client-auditor relationship to work.
“During an audit, it’s essential that the auditor and the client communicate freely, exchanging ideas on how to address issues that arise,” says J.W. Wilson, CPA, director of accounting and auditing services at Clarus Partners. “The auditor should explain problems and solutions in a way that’s very easy to understand by those who aren’t auditors. It’s also important that the company feels connected to its audit partner, and feels as if it could build a solid working relationship for the future.”
Smart Business spoke with Wilson about what to consider when choosing an auditor, the process of selecting an auditor and how to gauge the auditor’s performance.
What are the criteria companies should use when choosing an auditor?
The criteria are different depending on the company’s size, the industry in which it operates and where the business is heading — if it’s going public, looking to sell, etc.
Industry expertise is important. Auditors who work with similar-sized companies in specific industries can provide better advice because they understand what’s going on from a legal and regulatory perspective.
Look for an auditor with a good reputation, which can be determined by asking your colleagues, bankers and other advisers.
Audits take a significant amount of time from the employees involved. Good auditors are respectful of the employees’ time. They only ask for what they need and don’t waste time.
The fee is an important consideration. It should at least seem reasonable given the scope of work. Ask how they bill for work outside the scope of the project, and whether they’ll provide a multiyear bid, which can be important for budgeting and forecasting purposes. It’s good to know what an audit will cost for the next three years. It’s difficult to switch auditors since each has their own process.
How can companies research potential auditors? What resources should they use?
Talk to your business partners such as accountants, bankers and attorneys as well as CFOs of other companies that you have a relationship with. Find out who they use or have talked to in the past.
You can always search for firms on the web. For private companies, the American Institute of Certified Public Accountants website has peer-reviewed reports for firms — every three years accounting firms are required to have a peer review to determine if their quality control measures conform to applicable accounting standards.
Public companies should be looking for accounting firms working through the Public Company Accounting Oversight Board, which oversees the audits of public companies.
After selecting an auditor and having an audit performed, how can companies determine whether or not they received a quality audit?
Companies should set up criteria to determine if the proper services were provided using criteria similar to what was used to select an auditor. It’s a good idea to get feedback from the people who deal with the auditor on a daily basis. Ask those involved: How was the communication? Was the work done in a timely manner? Did the auditor do all the work that was expected?
That feedback will determine whether you want to continue the relationship. If, for example, a company made a three-year commitment to an auditor and decides it wants to end that relationship, there’s a yearly engagement letter that, though binding, includes an out for each party. If an unsatisfied company wants out of the agreement, the audit firm would either offer a remedy or let the client company go in a different direction.
Assuming the firms available have equal auditing ability, pick the firm that, through proposal process, you feel you can build the best relationship with over the long haul.
Insights Accounting is brought to you by Clarus Partners