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By Phil Cowperthwaite
Illustration: Blair Kelly
The audit engagement can and should be a value-added service for your micro-entity clients. And here’s how it can be done
Many small, not-for-profit organizations need an audit by a professional accountant as a condition of funding. The most obvious product of the audit that these micro-entity clients receive is the audit report, though how many users actually read it is dubious. The report opinion is either unmodified or modified, not unlike the result on a test that you either pass or fail. The report itself does not say much about the financial health and general state of the client or the quality of the audit. As such, the audit report itself is not a selling point. So what is it that thousands of micro-entities in Canada value in their annual audit? There are a number of benefits they receive and value, including:
Expertise in financial reporting that every skilled auditor brings to the engagement: most micro-entities do not have reporting expertise in house, and for that reason they rely on their auditors for assistance in the preparation of their annual financial statements.
Review of internal control systems related to financial re-porting that comes with every audit: these controls are usually not very complicated in a micro-entity, but management often lacks the knowledge to evaluate the effectiveness and adequacy of them. The annual review of the design and implementation of the controls and the requirement for the auditor to report any significant deficiencies give management and the board of directors, if applicable, a good idea of whether their controls are adequate.
Professional review: the annual audit gives micro-entities the opportunity to review their results for the year with a professional accountant.
Another benefit to the client is the industry knowledge the auditor can provide management. Auditors across the country have significant industry-specific knowledge they can provide any time in the year if asked by their clients or can pass on at audit time. This is not an audit requirement, but is often the byproduct of the audit. For example, in the case of work for childcare centres in Ontario, that knowledge consists of an understanding of the funding system, available grants, pay-equity legislation in Ontario and taxation rules for not-for-profit entities — be they registered charities or otherwise. This is knowledge that takes professional accountants time to acquire.
Auditors can provide their micro-entity clients with financial-reporting expertise that is specific to a client’s industry, warn the clients of deficiencies in internal control, provide them with an opportunity to re-view annual performance and deliver valuable industry expertise throughout the year. Those are services worth paying for. Having public accountants audit micro-entities annually is a value-added service, with this type of involvement in financial reporting significantly improving the quality of the re-ported information.
What is an affordable price for an audit of a micro-entity?
As noted, industry knowledge and audit expertise take considerable effort for an auditor to acquire and maintain. As a result, determining an affordable price can depend on whether your micro-entity client sees the audit as a value-added service or purely as a cost of doing business — that is, a commodity.
A commodity is an undifferentiated product that can be provided by many suppliers and something for which the lowest price is usually considered the best price. Where the audit is seen as a commodity, the market will usually set the price as the lowest amount any auditor will accept. Often when an audit is mandatory, it is viewed as a commodity and considered a cost of capital. In this case, the auditor will often be pressured to lower the audit fees. With reduced fees, the client will sometimes be receiving less than optimal service. Remember, purchasers usually only get what they pay for.
Without in-house accounting expertise, micro-entity management often welcomes the help of an auditor with financial reporting and the opportunity to talk to an expert in financial reporting who has an intimate knowledge of both the business and the company. If that is the case, the audit becomes a service unique to a specific micro-entity client. It will not likely be seen as a commodity and need not be priced as one. Micro-entity audit clients are often more than happy to pay for a service they consider to be value-added. To unlock the value of the audit, an auditor needs to ensure that his or her client views it as a service adding value to their operations.
Tips to ensure your audits add value for your client
It’s important to note that these tips are interlinked. For example, communication is fostered by senior staff performing the audit work and doing it on site, thereby turning the annual audit into a service that is appreciated for the value it adds, instead of a necessary annual inconvenience.
An audit can add value to a micro-entity and good clients are always willing to pay to add value to their operations. Once your client sees the audit this way, there are a number of strategies you can employ to unlock that value and increase your recoveries.
Phil Cowperthwaite, FCA, is a partner of Toronto CA firm Cowperthwaite Mehta and a member of the IFAC’s Small and Medium Practices Committee
Technical editor: Ron Salole, vice-president, Standards, CICA