Where's the value in audit?

By showing clients that they can take advantage of the vast amount of industry and financial management knowledge that auditors have accumulated, they hope to be able to demonstrate that their services are more – and are worth more – than a simple tick-and-bash exercise.

But while new knowledge management tools now enable audit firms to offer more sophisticated feed-back – benchmarking clients’ payments systems, for example, or offering advice on credit control – many finance directors appear not to be convinced that they are getting what the auditors have on offer.

One Big Five audit client told Financial Director magazine: ‘Audit firms seem intent on trying to act as consultants rather than just signing off their audit report. They feel that they have to continually justify their fee but, in doing so, draw more attention to the poor value for money.’

This comment was made to Financial Director during the course of a reader survey of the audit process. The results offer some difficult reading for auditors, especially the Big Five.

Overall, FDs rated the quality of the service they receive from their auditors at just below 6.5 out of 10 – not bad, but hardly great. FDs who were audit clients of Big Five audit firms scored their book-checkers at less than 6.1 out of 10. FDs rated the value of the advice and feedback they receive from their auditors at just under 6 out of 10 (5.45 for the leading firms).

A third question asked readers to ascribe a value to the audit over and above compliance with statutory requirements: a third of FDs couldn’t rate it more highly than 2 out of 10; the average score was just 4.4 – and only 3.95 for Big Five clients. It makes you wonder where all the added value is going if the clients aren’t seeing it.

Two of the three biggest problems that FDs have with their auditors are fees and the quality of service. But, most damning for the Big Five accountant factories, more than half of the Big Five audit clients who responded to our survey complained about the quality of junior staff. About a quarter complained their auditors ‘don’t really understand our business’ – remarkable, given all the industry knowledge and benchmarking capability that the modern audit firm thrusts into the hands of its front-line staff.

Every audit firm emphasises that a professional services organisation is, at heart, a people business and they make much play of the need to get the right ‘personal chemistry’ in any audit engagement. It’s all the more surprising, then, that as many as 18% of clients say they have had problems with the audit partner.

Added to the problems with junior staff, it seems auditors still have more work to do to get the personal relationship skills as rigorous as their box-ticking skills: less than 10% complained about auditors’ inability to spot fraud or accounting irregularities.

Every single type of complaint – except over the level of fees – was at least slightly more prevalent among clients of the Big Five than of medium-sized national firms or local practices.

Overall, only one FD in seven said they had no problems with their auditors. For Big Five audit clients, that proportion of totally satisfied clients fell to more like one in fourteen.

Almost half of our respondents regarded audit fees as ‘too high’ (the rest said ‘about right’, while only a couple of generous souls dared suggest that fees were ‘very low’) – and 60% of them thought that fees would rise over the next three years. But it may be a surprise to learn that fees were not regarded as the most important factor in selecting an audit firm. Service is: 80% of respondents said that a personal service/approach was a ‘significant’ factor, while almost all others said it was of ‘some’ relevance. Overall, about half of the respondents said they benchmark their audit fees against the market; unsurprisingly, those who regarded fees as a ‘significant’ factor were even more likely to benchmark.

Oddly, perhaps, given the infrastructure behind the larger firms, the survey seemed to suggest that neither the range of non-audit services on offer nor the industry specialisation was any more important to clients of Big Five auditors than to other FDs. Instead, those that are currently with the large firms seemed to mark out their size, their international links or ‘truly global’ coverage, and their ‘big name/high profile’ – proving that there are some businesses that simply can’t be seen to be with anybody but a Big Five firm.

This survey showed that 30% of FDs have put their audit out to tender over the last three years. Usually this resulted in new auditors being appointed, though the incumbent firm survived in a handful of cases.

But the depressing news for any audit firm that has recently been put through the tender process is this: those clients are even more likely to put the audit out to tender again over the next three years than those that haven’t already done so.

Perhaps the opportunity to push auditors to demonstrate – and deliver – value in the audit process is simply too valuable to do it just once.

Andrew Sawers is the editor of Financial Director magazine.