A financial statement audit can be a daunting endeavor for any company. The process is made easier and less stressful by having a well-prepared internal finance team, knowing how to prepare your company’s financial records for audit and thoughtful selection of an external accounting firm. Many companies may have been using the same accounting firm for years and will be familiar with the financial reports, schedules and reconciliations required to complete a financial statement audit. However, many small or growing companies may have never needed audited financial statements until a change in strategy necessitated their first financial audit. Conversely, a more mature company may be looking to make a change, prompting a review of new external audit firms.
In both cases, hiring the right firm becomes a challenging additional step in the audit process. The following five tips on hiring external audit firms can help take some of the stress out of choosing a firm to perform your company’s financial statement audit:
1. Interview prospective external audit firms like you would interview anyone else to work for your company.
Choose five or six external audit firms to interview, and do not be afraid to ask questions. This will allow you to compare firms of different size and reputation. You may need audited financials for several reasons. For example, you might be in the process of IPO readiness and looking to take your company public on a stock exchange. Or you might be applying for a business loan or preparing to sell your company to an outside buyer.
You want to find the most qualified firm for the job at a cost that fits with your company’s budget and in the timeframe required. Get to know the potential audit team, including the client liaison and the partner who will be overseeing your audit. Ask for referrals or a client list and try to determine if you feel comfortable moving to the next stage of the process. The more information you get at the beginning, the fewer doubts you will have once the acceptance and audit processes begin.
2. Recognize that sector experience is important.
Sector experience on the external audit team will prove invaluable when discussing detailed document requests during an audit. It can also be a differentiator as you narrow your list of finalists for the engagement. Sector experience will also be immensely helpful when and if your company chooses to engage the new firm for future work such as tax preparation or consulting services.
It is very important for your internal accounting team to speak the same language as your accountant. You should also have confidence that the firm you choose has the experience and expertise to successfully deliver accounting services for your type of business.
3. Be specific about why your company needs audited financial statements.
Once you have decided on a short list of external audit firms to interview, it is time to start thinking about the questions that the potential auditor will be asking you.
If you need audited financials in order to meet SEC requirements as part of a public strategy, the firm may engage their IPO or SEC experts to prepare the correct registrations, statements and schedules. If you need audited financial statements for a potential sale of your company, the firm may engage its Mergers and Acquisitions team or a sector-specific team to ensure that all your company’s financial statements are presented with representations on your company’s balance sheet that a potential buyer wants to see. Give the auditor as much information as possible, and let them put together the most complete proposal for your audit.
Learn more about the audit process in our related blog post: “Notes from the Field: A Financial Audit Checklist“
4. Review each proposal thoroughly, especially the scope of services and the estimated fee chart.
Once you have had the chance to interview several firms, you should ask for proposals from the three firms that have impressed you the most.
Look at each proposal carefully since this may be your first chance to see the estimated cost of the audit and what services are included in that cost. In one recent case, I noticed a quarterly review was included in the cost of the audit for my client. A quarterly review is something that is required by the SEC, but we had never discussed it with the firm during the interview process. The firm knew my client was planning to go public, so they included the first post-audit quarterly review as part of the initial audit cost. This not only saved a future expense for my client, but it showed that the audit firm paid attention to what we told them in the interview process and offered a good faith effort to win the business.
5. Be honest with yourself about rankings and reputation when comparing external audit firms.
Financial reporting and accounting firms are not a one-size-fits-all type of service provider. There are the Big Four, the Big Ten, mid-size firms, regional firms and small firms. The Big Four may be the most well-known firms in the country, but that does not necessarily mean that you should only consider them. Cost, sector experience, office locations and many other factors may be more important considerations for your company than size and name recognition. In fact, your company may want more specialized or personal service for your assurance and accounting needs, so a Big Four firm may not be the right choice for you. On the other hand, you may want to engage a Big Four or Big Ten firm if you believe that a national ranking and a name brand are necessary for your company’s future. The interview process will help inform your decision-making on what type of firm to engage. But be honest about whether the firm’s brand name or annual revenue is important to your plan for success.
If you’re considering hiring an external audit firm and you’re not sure how to manage the process, then we can help. 8020 Consulting feature a team of 90+ finance and accounting consultants who can create provable impact, whether in an interim capacity or project management role. To learn more about our services, download our free guide: