Getting the Most From Non-Audit Professional Services

As regulatory oversight increases, audit firms are expecting clients to expand their pre-audit preparation efforts.

For the best return on investment, companies will use non-audit professional services wisely to solve pre-audit workload issues and to achieve long-term organizational improvements.

While the economy continues a slow but steady improvement, our industry finds itself at a phase in the recovery cycle that many of us have seen before. The uptick in transactions, especially in M&As and IPOs, is being muted by the pressures and associated costs of continuously expanding reporting obligations – an echo of Sarbanes-Oxley (SOX) 2002 implementation when audit firms and clients had to figure out how to deal with a raft of new requirements without bloating staffs or budgets. As I watch clients try to maximize opportunities in this modest rebound, I’m also observing how they’re using non-audit professional services to meet this higher bar of compliance. In my view, many companies aren’t getting the best return on their investment for these third-party services. In this newsletter, I’ll explore what’s driving this not-so-good practice and how companies can use non-audit service providers more wisely to solve immediate workload issues as well as to achieve near-term compliance and long-term organizational improvements. Let me say at the outset that I speak regularly to folks on both the firm and client sides, and I’m very sympathetic to the issues and challenges discussed below. To start, let’s put today’s highly scrutinized environment into context. Wherever you look, everyone – from regulatory agencies, banks and investors to analysts, shareholders and employees – is focused on greater auditor independence and transparency. In addition, stockholders have become more activist and challenging of boards of directors. Audit firms, public companies and private entities are all continually looking over their shoulders for the next new rule to drop. Some quick examples of new requirements that appear imminent:

• The Public Company Accounting Oversight Board (PCAOB) is considering requiring substantially more auditor narrative around processes and judgment decisions as well as having partners’ names on audits.
• After several years of discussion, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have indicated they will issue final rules in the coming months on a new global standard for revenue recognition. Once completed, the new rules will apply to all U.S. companies – private and public, large and small. (See my April 2010 newsletter on how the convergence will affect revenue recognition.)

This continual escalation in scrutiny has firms and clients playing a perpetual game of catch-up. Before SOX and in the early years of its implementation, it was routine for firms to fill gaps in client expertise leading up to an audit. That model isn’t the norm anymore. Like their clients, firms today are working with limited staff, and no expert anywhere sees a return to pre-2008 levels anytime soon. Of necessity, firms are applying available resources to meeting increased audit requirements. Additionally, many new regulations have limited what services firms may provide to both private and public companies alike that don’t violate auditor independence. As a result, firms and clients are grappling with two burning issues: who’s responsible for what to meet the upsurge in requirements and how can compliance costs be contained? What’s evolving from this nexus of expanded requirements, limitations on firm services outside the audit and enlarged workload is a new model in which firms expect clients to complete more pre-audit activities than in the past. From the firm’s standpoint, this new model will help contain compliance costs – a key client requirement. The operative word here is “contain.” As oversight has increased, total audit costs have risen an average of four to five percent a year. With oversight showing no sign of slowing, companies should expect to spend more effort getting ready for their next audit while possibly paying more for the audit itself. This is where non-audit professional services firms are increasingly being seen as the bridge to help companies meet their growing pre-audit workload. And this is where that not-so-good practice comes in. Before I go further, let me issue some disclosures: First, we at Blythe Global Advisors include this service in our portfolio of offerings so it goes without saying that if you need help meeting your pre-audit obligations, we’d be delighted to work with you. Second, irrespective of whom you choose to work with, the point of this newsletter is to offer my perspective on where I think companies can get a better return on their precious discretionary dollars. It’s my observation that too many companies – in a well-intentioned attempt to react quickly to the latest reporting requirement – tend to hire individuals piecemeal and then assign them to isolated tasks. Individuals hired as “accountant,” “accounts receivable technician,” etc. can process an overdue stack of invoices quickly but they don’t – and can’t – solve deeper problems. Talented as these people are and hard as they apply themselves, folks hired under such circumstances work in silos down in the weeds with no connection to what others are doing or the company’s strategic needs. Simply put, the lens is too narrowly focused. Companies need a partner that looks at a task more broadly and in context – connecting it to what the company is trying to achieve and how those achievements will ultimately be reported to regulators and stakeholders. Such partners will develop a plan that synthesizes the organization’s needs. They will then build a hand-picked team that will be supervised to ensure best practices are applied in a forward-looking manner for the best return on investment. Here’s a quick example of a recent engagement where we helped a client understand the underlying disconnections in their organization, get their processes compliant and save money in the long run. Our client is a fast-growing success story, but their accounting function has been unable to keep pace. Both receivables and payables were severely backlogged. From contractors to investors to the company itself, it was unclear who was owed what. A temporary staff — each hired for a specific skill and each spending long days poring over assigned documents — moved a lot of paper. Unfortunately, the processing of transactions did nothing to help management better understand their financial picture. At that point, the company turned to Blythe Global Advisors. We took their inputs, reviewed their processes, put the information into a single database and produced a report that identified organizational deficiencies from which we developed a plan. It was only then – with plan in hand – that we assembled a select team that brought receivables and payables up-to-date while resolving the company’s deeper issues and helping them become audit-ready. As with every engagement, we used our closed-loop service delivery process that is collaborative, geared to long-term value-add outcomes and covers the entire engagement cycle. At this point, I’m sure some of you are saying, “Okay, but aren’t you more expensive?” The answer is yes – and no. I’m pretty sure our fees per person were a bit higher. On the other hand, our staff was smaller because the skills were more targeted. We solved the company’s problem for a better return on investment. And we set them on a path toward compliance and audit-readiness – a future cost-savings. If your need is truly limited to augmenting your permanent staff to meet deadlines, individual supplemental professionals can probably help you. But, if that backlog is a symptom of a more profound problem that’s connected to an entire function or a critical process, then you should consider a non-audit services firm that will apply a holistic, Big Four perspective to the issue. As I said at the outset, I’m very sympathetic to the pressures facing both audit firms and clients. Everyone is doing their best while looking over their shoulders. In our environment of continual change, clients and firms must adapt their relationship to our new normal. The good news is there are service providers that can help clients be ready when their auditors call. The better news is that all this is happening in an improving economy. If you would like to discuss anything in this or any of my newsletters, please contact me. I’d be delighted to talk with you.

To discuss this important topic further or if you’re looking for general accounting advice and counsel, contact marc@blytheglobal.com