How to measure the total cost of an audit and its impact on your business

Dickie Heathcott, Partner, Crowe Horwath LLP

Almost without exception, companies make the claim that they won’t make their auditor decision based solely on fees. While fees are important, those charged with corporate governance (typically the audit committee) should consider factors beyond quoted audit fees, which are only the tip of the iceberg.

“Of course you should select an auditor qualified to conduct the engagement according to professional standards. While the auditor must maintain independence, that should not prevent the auditor from being consultative. It is perfectly acceptable to talk to your auditor about business concerns such as improving access to capital markets, increasing revenue, using resources more efficiently, reducing costs and mitigating risk,” says Dickie Heathcott, partner at Crowe Horwath LLP. “An auditor with a deep understanding of the company’s industry and business concerns helps with the audit and can be helpful to management.”

Smart Business spoke to Heathcott about getting a return on your audit.

What should an audit committee consider in selecting an auditor?

Audit fees are a key consideration. Other important factors include internal cost, cost of capital and lost opportunities. For example, an efficient and effective audit can reduce the fee and the hours and energy spent by company personnel. In some cases, using a recognized audit firm can lower the cost of capital. Although management is responsible for preventing and detecting material misstatements, a qualified auditor can detect one that management missed.

How can the value of the audit be maximized?

It is important for the audit committee to understand the auditor’s approach, methodology and toolkit. An efficient and effective audit requires proper planning and design and as well as monitoring of its progress. An auditor should understand the company’s business, industry, customers and strategic plan as well as its company-specific IT systems, organizational charts and history.

The auditor’s approach to collecting information might involve technological tools for streamlining the process. Technology can provide clients with an efficient way to collect data, documents, spreadsheets and other material for the audit. It also can eliminate frustrating and time-consuming duplicate requests from the auditor.

How else can a well-run audit benefit a business in the long run?

An auditor who understands the company’s business can add value by pointing out risks that could result in accounting errors, internal control weaknesses and efficiency opportunities.

As an example, consider an undetected material misstatement. Restatement of previously issued financial statements can really jolt the capital markets and cause company-related uncertainty. As a result, the restatement might affect the cost of capital and result in fines and penalties. Furthermore, restating previously issued financial statements requires a lot of effort, not to mention filing, legal and auditor costs. A qualified management team, complemented by the right audit firm, is likely to get it right the first time, thus mitigating the risk and controlling this potential cost.

The choice of auditor can affect cost of capital in at least two ways. Investment bankers and capital markets typically want to understand the auditor’s reputation and whether the auditor is well-versed in the relevant industry. For example, having a successful initial public stock offering (IPO) might be difficult with an unknown auditor. Public companies and companies considering an IPO should consider whether the auditor is recognized and respected by those making a market in the stock. Similarly, terms on borrowed funds might be more favorable with a recognized auditor. The related cost of selecting the wrong auditor might be difficult to measure, but it has the potential to dwarf audit fees.

Whether your concern is growth, debt capital needs, equity capital needs, or simply building on an already solid reputation, an efficient and effective audit can help position your organization to move forward. Next time you are faced with a possible change in auditor, look beyond the audit fee.

Dickie Heathcott is a partner with Crowe Horwath LLP in the Dallas office. Reach him at [email protected] or (214) 574-1000.