Is your external auditor a liability to your company?

How online benchmarking can help your decision process

By Richard B. Lanza, CPA/CITP, CFE, PMP & Dean Brooks

The decision of what external auditor to use comes with significant costs and risks—more now than ever before. While the selection of an external auditor is more complicated than say ordering a piece of equipment, wouldn’t you like to have more information before making that decision? Common concerns in the post-Sarbanes-Oxley environment include:

Competitive position and industry experience. Where does your industry go for its audit expertise? An audit firm experienced with specific topics can often accomplish more in less time, and be relied upon to raise critical issues before they become a problem. Are you working with the best experts for your particular field?

Cost and availability. Fees are going up, and audit firms are being more selective in who they will take as clients. Clients that pose potential problems are being quietly let go, for someone else to deal with. Is your relationship sustainable, and are you getting the right price for the work that is done?

Red flags sent by the auditor. All audit firms are not the same. The PCAOB focuses on the auditor, as much as on the company being audited, so you need to carefully assess who is the best business partner for reporting activities. For example, do you want to be with an auditor that has a high consulting to audit fee ratio for your industry or disproportionate unqualified opinions for the industry. These are all red flags that may highlight them, and hence your company, for further scrutiny/

Historically, in most firms, these questions were answered in an ad hoc, informal way. Most prospective clients have chosen to interview different firms, ask friends and colleagues what they know, read news articles, and so on. The process is hardly perfect, but it leads to an answer.

A better method by far would be to systematically survey the industry and the available auditors, on a variety of questions, and score the results to arrive at a clear, thorough, objective answer. The survey would include questions like these:

• Look at auditor fee trends (consulting vs. audit fees), restatements by auditor, unqualified (clean) opinions to disclaimer or qualified opinions, industry concentration of your auditor to the competition, disengagements of your auditor in your industry.
• Look at fee rates for all audits in your industry, by auditor.
• Review the composition of fees by auditor for your industry.
• Review industry concentration for your auditor in relation to others in the industry.

In the Internet age, these resources are available, and virtually anyone can collect the data, but time is still a scarce commodity. For example, suppose we wanted to identify all of the audit fees reported via SEC disclosures in the utility industry from January 2004 through today. It can be done, but it is rather tedious. The internal auditor has to know what companies in the industry to investigate, and where their disclosures are stored online. Then it would be a matter of spending the hours to manually download from the Web each of these documents, check each of the fees, copy the actual text, and then organize the information for analysis.

Happily, we are now seeing the emergence of services that collect all the data and make it available in a convenient form. AuditAnalytics offers a Web-based subscription service that allows users to review any and all SEC audit disclosure data.

Below is an example of the AuditAnalytics tool, showing audit fees for some utility companies. This search could be modified to look at a limited company size range, a particular state, even just one particular office location (to review all the clients of auditors in your city, for example). Fine-tuning of the analysis can be done with a few keystrokes.

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SEC documents track every kind of disclosure, and the AuditAnalytics database faithfully reproduces this information. Here is an example of looking at changes in auditors, and the reasons for such a change based on various filter conditions.

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Many economy-minded internal auditors will ask, “Why should I pay for access to information I could get for free?” As with many decisions of this kind, the real issue is how much value this kind of information might add to the process of choosing an external auditor. Particularly in the present audit climate, making the right choice can be priceless.

To learn more about external benchmarking, check out the webinar events surrounding external data by clicking here.

Richard B. Lanza, CFE, CPA-CITP, PMP, president of Cash Recovery Partners, L.L.C., in Lake Hopatcong, N.J., provides audit technology and project management assistance to companies. He focuses much of his time in developing computerized audit and fraud tests. Lanza is the founder of the non-profit Web site, www.auditsoftware.net. His e-mail address is: rich@auditsoftware.net.

Dean Brooks is president and owner of Ekaros Analytical Inc., a publishing and consulting company that focuses on audit and analysis. He has edited and published numerous audit-related books, and is co-author of the “Buyer’s Guide to Audit, Anti-Fraud, and Assurance Software.” His e-mail address is: dean@ontics.com