The Audit Relationship – More Important Than Ever

The changing and ever more complex financial environment is putting an even higher premium on developing and maintaining strong audit relationships. We have discussed the challenges of managing in this environment in a previous CEO Topic – October 2004 and talked about the importance of a company’s relationship with its auditor. In this CEO Topic, we explore the audit relationship further by describing some of the fundamental changes affecting the audit industry and the consequences of this for clients.

The demand for audit services especially among the Big 4 (PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte & Touche) has never been higher. The demand is driven by public companies, US companies preparing to be public and an increase in foreign registrants wanting access to the US capital markets. In addition to aggregate global demand, clients are demanding more services from their auditors driven by Sarbanes Oxley and regulatory requirements resulting in additional capacity constraints. It is difficult to get the attention of a Big 4 audit firm and the engagement is likely to be both expensive and time consuming.

So we are left with a few important questions. What do the Big 4 provide that others do not? Are there any alternatives to the Big 4? How do I initiate a relationship with the appropriate firm if I am currently using a regional firm? Finally, what is the best way to make the most of my audit relationship?

The Big 4 provides both the breadth and scope of services essential for public companies, those considering an IPO, those operating on a global basis and those with complex accounting requirements. The Big 4 offer SEC capabilities, a deep understanding of registration requirements in the U.S and the unique understanding of the complexities of operating in the public environment. Their capital markets group and national SEC professionals are very well-positioned to advise on regulatory requirements and compliance issues. Due to their global orientation, these firms provide the requisite knowledge to audit international subsidiaries and the consolidated results. They also have an understanding of the intricacies of revenue recognition and a deeper understanding of issues related to intellectual property than smaller regional firms.

While the Big 4 are the recognized experts in auditing, two additional firms provide a scope of services that is as broad: Grant Thornton and BDO-Seidman. We usually encourage our portfolio companies to engage a Big 4 firm particularly if an IPO is imminent. However, for smaller firms whose IPO horizon is farther off, we have recommended considering Grant Thornton and BDO. Both firms have nationwide offices and have deep expertise in all key audit service offerings.

Making a change from a regional audit firm to the Big 4 Plus 2 is a significant step for most firms. It does imply a greater level of sophistication both in terms of internal systems and also in managing the relationship. GA has strong network of contacts within most of these audit firms and can be helpful in initiating a relationship and advising on the process of engaging and working with a new audit firm. We have helped many of our companies make the transition to new auditors and/or develop the right partner-level contact within nearly all of the ‘Big 4 Plus 2’.

Whether with your current firm or a new one, managing the audit relationship continues to be essential to receiving the appropriate attention and the proper scope of services at the appropriate cost. With ever expanding regulatory requirements, it is critical to understand the impact on your organization and its internal capability to fulfill these mandates. The interaction with the audit firm: what is needed, time required, who is involved and cost must be carefully managed and controlled. It is always beneficial to plan for contingencies and cost and time overruns to avoid surprises. The more you can facilitate the work of the audit team by having systems and processes that are efficient, transparent and well-run, the more you can ensure that your company obtains the highest level of service from audit firm with the outcome of financial statements that are accurate and meet all the appropriate standards.

For additional thoughts on working with your audit firm, please contact your GA team