Tougher clients take tough positions.
by The Corporate Executive Board
The most successful client companies have taken a stronger line with audit fee negotiation in the past year but without jeopardizing good auditor relationships. They succeed by being open and communicating guidelines early on in the relationship, which is a recurring theme in the six ways to strengthen your hand in negotiating with external auditors:
1. Use an integrated Sarbanes-Oxley/Financial Statement audit. This is now significantly less expensive both in absolute fees and hourly rates, as noted above. Some clients have told us that their auditors are unwilling to negotiate an integrated fee but most confirm success with all Big Four auditors.
2. Occasionally issue an RFP to other audit firms. Switching auditors is costly but you should still treat it as a competitive business to keep your auditors honest. Again, open and honest communication help here.
3. Involve Procurement in the negotiation process. Procurement is your internal expert on supplier relationship management, and audit firms are no different from other corporate service providers. Although finance executives may be reluctant to open up management of an important relationship to other parts of the firm, our clients that have done this tell us that it was worth it.
4. Consider a flat audit fee instead of hourly rates to encourage audit efficiency. Although these might seem higher at the beginning of an audit, clients tell us they are often pleasantly surprised to see flat fee rates often come in lower than a comparable hourly rate for a previous audit.
5. Conduct a single global fee negotiation as opposed to multiple local negotiations. This allows you to leverage the full scale of the audit to remove redundancies and cost overruns. Again, some auditors have said they cannot do this, but each of the Big Four has done this with other clients.
6. Require pre-approval before beginning work that will be charged outside of the negotiated audit terms. As fees fall and fewer firms negotiate hourly rates, external auditors will increase out-of-scope work to maintain their engagement income level. To contain this, be open and honest. One client of ours negotiates audit rates before the start of the audit, and then requires any additional project (and so a request for more funds) to be signed off by the audit committee before the any work is started. As part of the agreement, if the auditor does not get sign off, the firm does not have to pay for the work.
