Audits: Can they be more profitable?

By William C. Balhoff
Partner, Postlethwaite & Netterville A.P.A.C.

The answer to the question posed in our title is a resounding "yes." It's possible to increase efficiency and improve your realization rate, yielding more profit on audit assignments large and small. But how do you make it happen?

The most profitable firms plan ahead. So should you. And the time is now, before the busy season revs up. A little advance planning now can pay tremendous dividends next spring.

PCPS recently surveyed some top member firms to determine best practices in audit efficiency. The following culls some tips and techniques from that survey to help local and regional firms audit smarter. See if they don't yield results in terms of time saved, realization increased and valued added to the client.

Top four best practices

The key to greater profitability is efficiency, not in the sense of cutting corners but in that of maximum results from minimum expenditure of resources — as they say, "bang for the buck." Efficiency means better use of time and a higher realization rate. The firms PCPS surveyed employ some fairly simple, common-sensical practices to increase efficiency.

Manage your client.
The CPA's job is to perform procedures on data, not collect them. That's the client's job, and you shouldn't be afraid to ask the client to do it. The better trained a client is to provide prepared-by-client (PBC) data, the more efficiently the CPA can audit. To that end, client training can take forms like the following:

Make a list. There's no time like the present to review last year's audit and draw up a list of PBC matter. A review will spotlight aspects in which the client needs to be educated, and suggests ways of making the list easy for the client to handle: examples, checklists, due dates and the like. The PBC work can then be identified in the engagement letter.
Educate your client. It's crucial that the client understand the purpose and value of an audit engagement. If it doesn't, the place to begin the education process is at the top, with the directors, who should communicate the message to staff. (Again, let the client do the client's work.)
Use carrots and sticks. Clients respond to financial incentives, so it is worth considering a statement in the engagement letter that PBC work will be charged if not done timely and discounted if it's done incorrectly.
Use technology wisely. Of course, technology can enhance efficiency dramatically by cutting down on hard copy and increasing a firm's analytical capacity. But it is all too easy to let it increase a firm's workload by taking on tasks that should be delegated to the client, just because the firm has the technology to do it. Keep a firm hand on the PBC list despite this temptation.
Be realistic. Don't expect the client to get it right the first time. Client education is an ongoing process.
Show them the money. Nothing concentrates a clients mind like showing it how it wasted money. A discussion at the exit conference of how PBC work could have shortened an engagement will reverberate throughout the year.

Retain high quality clients and staff.
Any businessperson knows that a roster of long-term clients reduces the time needed for client development. Familiarity breeds efficiency. A stable and dedicated staff means continuity and familiarity with clients. To develop longevity on both sides, you need to be proactive.

Cull your client list. Actively fashion the most lucrative and worthwhile client base by dropping high-risk, low-profitability clients and acquiring stable clients with good reputations.
Provide a reasonable lifestyle. A dedicated, loyal and experienced staff is key to efficiency. It's only common sense to ensure that your staff is adequately compensated (including competitive benefits), provided with interesting work and empowered in firm decision-making. Extra steps might include casual dress and flexible hours policies, and a growth plan that clearly sets forth opportunities for advancement.

Plan properly.
How much planning is enough? It depends on the assignment and your firm culture. An extensive planning process to make sure the whole team is on the same page may be right in one situation but not in another. Obviously some planning is necessary to prevent inefficiency and overauditing, such as a site visit; learning about the client's operations, business and industry; and considering client risks. But an experienced firm auditing a familiar client might have that information already and will need to do little more than look over last year's audit and think about what should be done differently.
Use risk assessment in the planning process.
Risk assessment is a major contributor to audit efficiency, enabling a firm to correlate its efforts to levels of risk and materiality. Analytical procedures are more efficient than transaction testing and in low- to moderate-risk situations can even be used exclusively. Appropriate replacement of substantive with analytical procedures can cut as much as 20 percent off the time required for an audit. Risk assessment also contributes to efficiency, logically enough, by allowing the auditor to concentrate on the areas of greatest risk.

Conclusion

There's no magic to profitable audits, just the diligent application of sensible practices and methodologies. Firms that streamline the audit process, adopt an approach based on risk and materiality, manage the client and carefully shape their client base, commit themselves to enlightened policies of staff retention, and use all of these practices to leverage their experience and judgment are positioning themselves to achieve higher realization and greater success.

William C. Balhoff is chair of the PCPS Executive Committee. PCPS, an alliance of the AICPA, represents more than 6,000 local and regional CPA firms.

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