How to Select the Right Independent Auditor

It’s equally important to engage with the local business community to gauge the reputation of the local offices of the audit firms under consideration. The local office’s reputation, including the specialized expertise that might be unique to them, can be as critical as the overall brand of the national or international audit firm. This local insight can provide invaluable perspectives on the quality of service, responsiveness, and specific industry expertise that the firm’s local office might offer, ensuring a more tailored and effective audit experience.

Choosing an Auditor: The RFP Process

When a company is ready to select an auditor, a well-prepared RFP is crucial in order to vet qualified respondents. The audit RFP should clearly communicate the nature and scope of the engagement, outline your company’s objectives, and specify your requirements. Ensure that the RFP contains sufficient information about your entity to allow audit firms to make a comprehensive proposal.

Once the auditor’s proposals are received, conduct a thorough and uniform evaluation. This involves reviewing the audit firm’s qualifications, experience, and adherence to the technical requirements specified in your RFP. Price is a factor, but it should not be the sole criterion. Opt for a balance between the audit team’s technical ability and cost-effectiveness.

After narrowing down to a few audit firm finalists, invite each to present and discuss their proposal. This interaction allows for a deeper understanding of their approach and their team’s compatibility with your organization. Assess their insights into your industry and the audit team’s ability to collaborate effectively with your accounting and finance team and other relevant stakeholders (whether these include in-house resources or third-party advisors). During the auditor selection process, ask questions, such as the following, and consider their responses, proposed approach, experience, and the quality of their interactions:

• Team Experience and Roles: Start by inquiring about the experience of the audit partners who will be directly involved with your company. Ask for specifics about their industry expertise, years of experience, and notable past engagements. It’s also important to understand the roles and responsibilities of other key team members who will be part of the audit. How do their individual expertise and experiences complement the overall audit strategy?
• Specialist Involvement: If your company operates in a specialized industry or has unique aspects (like complex international operations), ask about the roles and responsibilities of specialists who will participate in the audit. What specific expertise do these specialists bring, and how will they integrate with the main audit team?
• Audit Approach Customization: Discuss the key features of the firm’s audit approach and how it will be specifically tailored to your company. How does the firm plan to adapt its methodologies to suit your company’s size, complexity, and industry?
• Risk Assessment and Management: Understanding the audit firm’s perspective on high-risk areas is crucial. Ask how the firm identifies and evaluates risk areas specific to your industry and your company.
• National Office Resources and Technical Consultation: Inquire about the use of the audit firm’s national compliance office resources and the process for technical accounting consultation and issue resolution. For instance, your company might be required to implement new accounting standards that could impact the forthcoming audit cycles. How does the prospective audit firm leverage its broader network to support your audit, especially in complex or unprecedented scenarios? Conversely, what level of autonomy does the audit team have to make key decisions, and how does the firm determine which areas require national office consultation versus those likely to require additional time, effort, and fees?
• Internal Controls Compliance: Whether or not a company is currently subject to Sarbanes-Oxley, it’s important to understand the auditor’s approach to the company’s internal controls. It’s important to get an upfront perspective from the auditor on how they evaluate design effectiveness and segregation of duties, and specifically how they consider internal controls in environments where the company, its processes, and underlying technology may be maturing or changing.
• Collaboration with Internal Teams: Ask about the expected involvement of your company’s internal audit department, if applicable, and IT professionals in the audit process. How does the auditing team plan to collaborate with these internal teams, and what role will each party play in the overall audit process?
• Existing-to-New Audit Firm Transition Plan: If a company is switching from another auditor, ask: What detailed steps will the firm take to ensure a smooth transition that aligns with your company’s needs and objectives? This question is key to understanding how the firm handles the practical aspects of taking over from a previous auditor and positions the team for a successful engagement.

Beyond the Firm: The Significance of the Audit Team Members

While the qualifications and reputation of an audit firm are important, the real work is carried out by individual auditors – the audit partner and their core team. The significance of these individuals cannot be overstated. It’s crucial to remember that at the end of the day, businesses work with people supported by a firm.

During the RFP process, it’s essential to meet and evaluate the actual team members who will conduct the day-to-day audit work. The potential audit team members should have relevant industry experience, not just the audit firm itself. This ensures that the team is well-versed in the unique challenges and regulatory requirements of the industry. Moreover, the team’s ability to communicate effectively, both internally and with the client, is crucial for a thorough and transparent audit process. Explore how the team plans to roll out a “no surprises” audit. The team’s ability to interact effectively with the company’s personnel is as critical as the firm’s overall credentials. This human factor often determines the effectiveness, efficiency, and smooth running of the audit process.

The Paramount Importance of Auditor Independence

Auditor independence is a foundational pillar of financial reporting and assurance. It is the bedrock that guarantees unbiased and objective assessment of a company’s financial statements. Recent trends and communications from the US Securities and Exchange Commission highlight a growing concern: the blurring lines between auditing and non-audit services offered by audit firms.

The SEC’s continued emphasis on independence violations is a clear signal to companies to be diligent in their auditor selection process. It’s imperative to ensure that the audit firm’s other services do not conflict with its auditing responsibilities. Transparency, clear communication, and a thorough vetting process are essential in ascertaining this independence.

Because auditor independence can have impacts beyond the current audit cycle, companies should think ahead regarding this matter. Although a potential auditor may appear qualified to meet independence requirements at the start of an engagement, CFOs should consider the impact of any potential acquisitions. For example, inquire of the audit firm as to their process for evaluating and maintaining independence in the face of an acquisition where they have historically provided the target company with non-audit services.

Role of the Audit Committee

The role of the audit committee in selecting an independent auditor is pivotal and multifaceted, especially in the context of public companies where the Sarbanes-Oxley Act of 2002 plays a significant role. According to Section 301 of this legislation, the audit committee is directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by the issuer.

For public companies, this legislative mandate elevates the audit committee’s role to a key governance function. It requires a careful selection process as well as ongoing involvement in negotiations of audit fees, scope of audit work, and addressing any issues arising from the audit findings. This active oversight is crucial in maintaining the auditor’s independence and objectivity.

In the case of private companies, the role of the audit committee in selecting an independent auditor is also significant. The level of involvement of the audit committee in private companies may vary depending on the maturity of the company’s governance structure. In emerging or smaller private companies, the audit committee might be less formalized, but its involvement in selecting an auditor is still critical. For more mature private companies with a well-established governance framework, the audit committee’s role can be as comprehensive as that in a public company, overseeing the auditor’s selection, work, and independence with a high degree of rigor and professionalism.

How to Think about Audit Fees

While fees are an important consideration in the selection of an audit firm, they should be evaluated in the broader context of the audit’s scope, complexity, and the specific needs of the company. Through the RFP process, companies should expect a transparent and detailed explanation of the fee structure by the audit firm. Don’t hesitate to press for more information about the underlying effort and core drivers of audit fees. Some questions to consider asking in this process are as follows:

• Understanding the Impact of Company Size and Complexity: How do you, as an auditor, factor in the size and complexity of our company in your fee calculation? What specific challenges or considerations have you identified in our case, and how do they translate into your estimated efforts and costs?
• Operations Structure: How do centralized versus decentralized operations impact your audit approach and fees? If our company has international operations, how does this global presence affect the auditing process in terms of logistics, regulatory compliance, and cost?
• Reporting Requirements: Can you detail how various reporting requirements, like statutory reports, comfort letters, and specific audits (e.g., employee benefit plan audits), are considered in your fee structure? How do these additional requirements influence the overall audit effort and timeline?
• Regulatory and Accounting Changes: With ongoing regulatory and accounting changes, how does your firm stay updated, and what is the anticipated impact on the audit process and fees? Can you provide examples from past experiences where such changes significantly affected the audit approach?
• Company’s Risk Profile and Business Activities: How do you evaluate changes in our company’s risk profile, such as those arising from acquisitions or divestitures, and reflect these in your audit approach and fees? What is the estimated effort for auditing these activities?
• Technology and Systems: How does our investment in technology and the sophistication of our systems affect your audit methodology and fees? Do more advanced systems lower the audit cost, and if so, how?
• Leveraging Company Resources: In what ways do you plan to leverage our internal resources, like the internal audit function, in your audit process? How does this influence the efficiency and cost of the audit?
• Scope of the Audit and Potential Inefficiencies: Can you outline how potential changes in the audit scope or inefficiencies either from the auditor’s side or management might affect the audit timeline and fees? How would these changes be communicated and managed?

The process of selecting the right independent auditor is a nuanced and significant undertaking that involves more than fulfilling a regulatory requirement; it’s about choosing a partner who will understand and thoroughly evaluate your company’s financial intricacies, bringing clarity and confidence to your financial disclosures. A well-prepared RFP process is crucial to ensure that the selected audit firm is not only technically capable but also a right fit for your organization in terms of approach, communication, and industry expertise. Ultimately, the goal is to form a partnership that fosters a transparent, effective, and tailored audit process, contributing to the long-term success and financial stability of your company.

Need help selecting the right auditor?

Riveron’s team of experts assists in developing an RFP for audit services that specifically addresses your organization’s need for auditor independence and the importance of the qualifications of the audit team members. We help by framing questions that bring out the prospective auditor’s approach to maintaining independence, especially as many audit firms also offer non-audit services.

With deep expertise advising the Office of the CFO throughout each audit cycle, we meticulously evaluate proposals to help your organization select the right audit partner. Our comprehensive approach ensures that the selected auditor brings a blend of independent perspective, industry-specific knowledge, and a team capable of delivering high-quality audit services. Your choice of an audit partner will impact your organization for years to come, as a tailored and right-sized audit approach will also address the company’s risk profile, which can change over time as the organization evolves. Reach out to an advisory expert to learn more.