Auditors are attempting the impossible. They’re out to make audit sexy. And they’re spending millions in the process.
Their strategy is based on so-called ‘added-value’ audits that deliver real business worth to clients. A demure bunch, auditors know they’ll never be as sexy as the real belles of the accountancy ball – tax, consultancy and corporate finance. But fed up with toiling in a ‘mature’ market, and irritated at just playing Trojan horse for their more glamorous colleagues, they’re convinced better margins are possible off their own bat.
They have their doubters. The cynics see their attempts more as plagiarising the leading business gurus and re-dressing their services in fancy packaging.
They also doubt if anyone can ever earn a bigger buck from audit – a view that finds some sympathy with at least one Big Six audit chief, who believes clients will lap up what’s new but pay the same old prices. The jury is still out.
Whether they succeed or not in making more money, practitioners have clearly initiated substantive changes in the audit world. Big Six auditors have been leading the way. Taking a leaf from the pages of their management consultancy chums, they have spent two years re-engineering their audit functions.
Teams and roles have been redrawn, new industry matrices devised. And right-first-time philosophies embraced. The result is a greater focus on the needs of their clients, with benchmarking and risk analysis services to the fore. Though unlimited liability laws still militate against pushing added-value too far, auditors believe they are more alive to the needs of business.
In the process, the audit has taken on a far greater assurance role.
Recognising the importance of offering more than straightforward old-style audit services, accountants are no longer auditors, but instead business assurance providers.
A wide range of risk assessment services is now part of the audit package clients can buy into if they choose. And excitingly, thanks to new methodologies, the provision of internal audit services is also a fast-growing part of the business, something that was economically unfeasible until very recently.
The auditors are pleased with their efforts. To a man, they believe clients now get a better quality audit at a lower price than five years ago.
And the margins? Are they improving as a result of the added-value auditors are now delivering? No one is saying, and with clients listening, that’s not surprising. But the clear suspicion is that, like audit prices, they too have fallen. Which was not quite the point.
Pushed, some will claim that for the first time for a while margins are ‘stable’. This is more of an achievement than it might sound. Auditors have been operating in a buyers’ market and the competition to provide audit services has been intense.
But there is a concern that the great re-engineering of the audit process is offering clients the world but getting little in return.
Rodger Hughes at Price Waterhouse puts it far more strongly. ‘It’s commercial suicide,’ he says (see box, p16). ‘Marketing audit this way raises expectations on the clients’ part, but they aren’t going to pay any more for what you’re offering. It’s just not sustainable. Nor is it realistic.’
Hughes’ point may be borne out by the joint Accountancy Age/Harrison Willis study of why and how clients buy audit services, published on these pages today. When we asked 500 public and private companies how they rated the audit service they receive, 78% replied ‘Satisfactory’. (‘Excellent’ said 7%’ ‘good’ said 11%.)
If three-quarters of FDs and chief executives can say no better than that, it just may illustrate that clients are an extremely hard-bitten bunch who demand the earth by rights. Trying to get them to pay more for added-value audit may always be a lost cause.
As the accountants’ fee figures are not broken down between straightforward audit and the newer add-on assurance services, it is hard for outsiders to work out precisely the financial dynamics in play.
It is likely the assurance services command a better fee when offered on a stand-alone basis, say a one-off treasury risk-assessment project.
Ironically, they may not do so when offered as part of the total audit-assurance package.
Fee levels will vary, with each job depending on negotiation with the individual client over scope of work and terms of engagement. Ultimately, how much the auditor feels must be offered as part of its audit, and how much a client feels it can demand will determine the audit envelope and fee. The robustness of a client’s own internal systems will also play a part in fee levels: the better the system in place, the more reliance an auditor can place in it and less his own audit costs.
What is clear is that re-engineered audits are not tempting clients to switch auditor. The enormous upheaval of bringing in someone new is generally too daunting for even dissatisfied clients. So much for the competitive edge that Big Six marketeers claim for added-value audits.
Of course, failing to re-think audit would have been the quickest way to lose market share. And in a world where clients constantly downsize and re-engineer, accountants must do so too.
As ever, how much clients will pay for the new audit services is likely to be determined by the prevailing supply/demand forces. Andersens’ Philip Randall may well believe ‘value should be the basis of billing’. More likely, clients will continue to exert downward fee pressure whatever the value they receive.
Arthur Andersen
‘We are on the cusp of a revolution in assurance services,’ predicts Philip Randall, national partner at Arthur Andersen. Major advances in IT plus a desire from companies for wider assurance than traditional audit has offered are driving that revolution, he says.
‘The days of auditors using glorified adding-up machines to do mechanised book-keeping are long gone. Clients are now approaching the stage when their financial accounting will be paperless and Just-In-Time to an extreme degree. These will be companies whose only transactions in the balance sheet will be fixed assets, long-term debt and financing, and cash.
‘Electronic commerce will mean it can process all its trading activities in real time. It wouldn’t have stock, it wouldn’t have debtors. We need to be able to cope with that, and we’re working on it right now. Real time assurance will be the name of the game.’
The other part of the audit revolution – wider assurance – is already happening, but according to Randall still has a way to go. ‘The old audit mentality was “find and fix”. The new mentality is “anticipate and prevent”.’
It’s about analysing the business risk and aligning the audit process much more to the management perspective, he says. ‘We’re reviewing the business from a process standpoint – using benchmarking, performance measurements and best-control practices. This takes the client a stage further into analysing the root causes of risk and overcoming control deficiencies.’
Given client conservatism in the audit market, Randall acknowledges Andersens will continue to find it hard to make strides in the Top-350 market. But he sees great potential – with non-audit as much as audit clients. ‘The contracting out of internal audit has strong growth potential. So do IT assurance and treasury risk assurance.’
Coopers & Lybrand
Ed Smith, Coopers & Lybrand’s head of business strategy and planning, admits the firm still has another three to five years to go before its audit process overhaul is complete.
Last May, the firm combined its UK audit functions under a Business Assurance umbrella, a title first seen in the US in 1992. But a rigorous training schedule is likely to ensure that Coopers’ redesign will still be going well into the new millennium. The firm’s long-term project to re-engineer audit has two distinct roots – Global TEQ and CLASS.
Global TEQ (Total Engagement Quality) tackles how Coopers relates to the audit client while CLASS (C&L Audit Support System), which has set the firm back $25m to date, considers how to develop a ‘new breed of software’ to make the process more efficient.
Smith foresees the end result as a super-efficient ‘factory approach’, with back-office processing centres handling basic accounting work, leaving the auditors more time to concentrate on the client. The system is due to be adopted by all member firms by this June.
Technological advances have allowed Coopers to refocus not only on providing business assurance but also on the type of clients the firm ideally wants to work with.
It is increasingly moving away from the owner-managed sector in favour of international clients.
Smith explains: ‘The whole strategy is to move away from the narrow definition of the audit of financial statements to the provision of assurances on financial data, systems and controls in those systems.
‘We are creating a rational portfolio of products which involves looking at the core competencies and skills the practice has and building on them.
Audit is a vital part of the business but we have to be selective about the type of clients we will accept.’
Deloitte & Touche
Martin Scicluna, chairman of Deloitte & Touche, embraces eagerly the challenge of continuous audit improvement. ‘What better criteria for accountants to be judged on than quality. And the pressure clients are under means the drive towards better audit quality will always be there.
Accountants are not living in reality if they think they can stop trying to drive down costs and introduce efficiencies.
‘As the financial director of one of our clients, Reed-Elsevier, tells me: “Like weeding your garden, cost control is a never-ending job”.’
Since 1995, Deloitte & Touche has been improving its audit methodology globally – ‘so international clients are comfortable with what they get in, say, London and Singapore. A single global methodology is essential. And as businesses grow more internationally, the audit will grow in importance’.
The concept of a lead client-service partner has been crucial to driving up standards, says Scicluna.
‘He’s given sufficient authority to operate across national boundaries. He settles the fees. And he insists on standards being met on a worldwide basis. It means we’ve effectively removed the national boundaries.’ Equally crucial has been introducing a global client service assessment system.
‘It ensures what we’ve promised is actually being delivered.’
Like others, Scicluna’s eye is also focused on internal audit. ‘There is great potential here – to provide the internal audit as well as the external audit. The two can be very complementary.’
Audit margins are ‘stable’ currently, he says. Other types of assurance work can offer more attractive prospects. ‘You don’t make money without being willing to take risks: the issue is about managing the risk.’