Sealed bids: you get what you pay for

Most of the work an auditor performs is visible only to the audit firm and
the relatively small number of people in the organisation being audited. It is,
therefore, not surprising that the value a good audit brings is not fully
recognised by much of the outside world.

A good audit not only fulfils the primary role of helping to sustain public
trust in the capital markets, but it can bring much wider value to the business

A good audit team will typically add value based on experience gained from
having investigated a wide range of companies in great depth. They will
understand how good businesses make money, how bad businesses lose money and
they recognise the signs of good management and bad management, good controls
and bad controls.

There are encouraging signs that, at least within companies, there is an
increasing recognition of the value which good audits bring.

In audit proposal situations, for example, there is an increasing trend for
the audit selection to be made more on the grounds of perceived quality, with
price being a secondary factor.

In some cases, audit firms are being asked to place their fee proposals in
sealed envelopes, to be opened only after the selection committee has made its
decision on the basis of auditor quality.

Increasingly, selection committee chairmen may direct colleagues’ attention
to the drivers of quality, leaving a negotiation on fee to be had with the
chosen firm at the end of the process.

This represents a welcome shift in emphasis from a few years ago, when
decisions on audit appointments were often primarily cost based. Clients are
still quite properly looking for value for money, but now they are concentrating
more on audit quality and value added before addressing the fee.

The change promises a renewed understanding of the importance of a quality
audit – and that the damage which can be done by a poor audit far outweighs the
benefit of any marginal cost saving.

It is sometimes hard for chief executives and finance directors to receive
full recognition for delivering a consistent, sustained performance.

In contrast, underperformance and bad surprises are readily punished by the
markets. If weaknesses in controls lead to the reporting of incorrect results or
less than expected profits, the consequences can be dramatic.

In today’s blame culture, personal as well as corporate reputations are on
the line.

High quality audits form part of the safety net available to companies and
the increasing trend of boards to focus on quality is to be welcomed.

Glyn Barker is head of assurance at PricewaterhouseCoopers

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