The 25% Approach: Audit Fees

December 10, 2014

This is the final article in a series about reducing costs by shopping around for new service providers. So far we've looked at cutting costs from legal, banking and insurance. In all these areas, the target has been to reduce costs by over 25%, and to sustain that reduction for several years. I have also noted the importance of CEO support for these cost-saving initiatives. This is crucial because service providers tend to have champions within the company.
 
When it comes to saving money on auditing, you'll also need the Board of Directors' endorsement, since they appoint auditors. Present the total audit fee and expenses for the prior year, and the 25% targeted reduction from the negotiation effort. Board members can then see the annual stream of cash savings, profit impact and company valuation improvement. If you have already successfully reduced fees from one or all the other areas we've discussed, it will bolster your case.
 
Audit fees have escalated over the last 10 to 15 years, as the Sarbanes-Oxley Act has driven demand. Audit firms have tried to insulate themselves from losses from lawsuits. It is particularly important to match your firm with the appropriate tier of CPA firm. Fee level differentials between the tiers are of the order of 25% to 50%.

 

TIER 1: The Big Four (Deloitte, PwC, Ernst and Young and KPMG)

 
The big four audit firms bring in more than the next 100 audit firms. They are set up with national research groups to address domestic and international complexity. They also have very strong international connections. The top 100 sized companies in the US gravitate to them as a natural consequence of that international capability.
 

TIER 2: The next three national firms (McGladrey, Grant Thornton, and BDO)

 
The next three national firms also have research groups, but they are not quite as strong as tier 1's. While they may have international affiliations, they are not considered to be quite as effective. If you are a company incorporated in several countries, this may be of concern to you.

 

TIER 3: Regional firms

 
This is a large grouping that will have limited international connections. They tend to name partners and support personnel for specialist research on a part-time basis. These are well organized concerns. Unless your company needs research on exceptional technical subjects, or you have many international concerns, regional firms will be adequate.
 

TIER 4: Local firms

 
Local firms will generally have one location and a limited number of CPAs on staff. They will be proficient for routine domestic companies.
 
If you are moving down a tier, you are pretty well guaranteed to save 25% to 50% of the current audit fee and expense level. In this situation, though, you may want to have 3 firms in the new tier present bids to you. Let them know before they come in what the audit fees and expenses were for the prior year, and share your expectation of a 25% to 50% drop in audit costs. You need to set this expectation early to avoid the wasted time of getting a non-competitive bid.
 
Lastly, gather up your service group annual savings on legal, banking, insurance and audit. Express the savings not only as a percentage of annual profits, but also express it as a percentage of profit growth. If your company profits are growing by 10% to 15% a year, and your cost reduction efforts have contributed, you should take a bow.

Topics: Accounting & Finance

Peter Duff

PDC Consulting

Peter is a seasoned financial and operational executive who is passionate about enabling  businesses to reach the next profit and cash generation level. He brings to consulting a broad experience of over 30 years as EVP, COO, and CFO roles in diverse consumer, industrial and technology businesses. Peter has been responsible for significant improvements in revenue, margins, expense as well as cash levels in manufacturing and service oriented businesses. He has a solid background in domestic and international settings with top 500 companies, middle market, start-ups and service operations. Peter is a trusted adviser to private equity and other fund managers.
Read more articles from Peter Duff

Guide to Business Borrowing

Learn what banks are looking for when they prepare to make loans. Our guide covers what business owners need to know when they prepare to borrow.

BBoT-COVER-GeneralBorrowing

Download eBook