By MIA Professional Practices & Technical Team
In Part 1 of the article on Sustainable Audit Practice, the emphasis is on the impact of the potential increase in audit exemption threshold on practitioners, the importance of charging appropriate fees in sustaining audit practices and the repercussions of failure to do so, such as compromised audit quality and talent retention. Strategies for setting the right fees include understanding the cost structure, conducting comprehensive scoping exercises, considering expertise requirements, evaluating clients’ industry and risk profiles and market competition, and maintaining transparency with clients. The article also discusses various reasons some firms may charge lower fees and underscores the necessity of ensuring fees cover costs and provide a reasonable profit margin. Practitioners who navigate the changes in audit practice strategically will be better positioned to sustain and grow their businesses in the face of evolving regulatory requirements.
The potential increase in audit exemption thresholds discussed in Part 1 has significant implications for audit practices. As more companies become exempt from mandatory audits, firms must adapt to a changing landscape where fewer clients require conventional audit services. This shift necessitates a strategic approach to sustaining audit practices, which is the focus of Part 2.
In Part 2 of the article, let’s take a deep dive into the strategies to manage audit practices effectively without compromising quality. The reduction in mandatory audits means that firms must find innovative ways to deliver value to their clients. These include reviewing clients’ portfolios regularly, identifying tasks that warrant additional billing, modernising operations, embracing technology, managing talent, monitoring key performance indicators and building a strong reputation.
i. Conduct a Review of Clients’ Portfolio
This strategy involves analysing the client base to identify clients that are profitable and aligned with the firm’s expertise and business objectives. This analysis can help audit practices identify clients that are not profitable or do not align with the firm’s expertise, and therefore, may not be worth the investment of time and resources.
To conduct a review of the client portfolio, audit practices can consider the following:
ii. Identify Tasks that Require Extra Billing
This involves analysing the scope of the engagement and identifying tasks or services that go beyond the agreed-upon scope of the audit engagement, which may warrant additional billing.
- Review the audit engagement letter: The audit engagement letter outlines the scope of the audit engagement and the agreed-upon fees. Audit practices can review the engagement letter to ensure that all tasks and services outside the scope of the engagement are clearly defined.
- Assess the complexity of the engagement: Some engagements may be more complex or time-consuming than others. Audit practices can assess the complexity of the engagement and identify any tasks that may require additional resources or time, which may warrant additional billing.
- Consider additional services: Audit practices can also consider additional services that may be requested by the client, such as special reports or consulting services. These services may go beyond the scope of the audit engagement and may justify additional billing.
By identifying tasks that warrant additional billing and communicating these to the client, audit practices can improve their client communication and avoid any misunderstandings or disputes over fees. In order for clients to understand the value of the services provided and be willing to pay a fair price, make sure your fee structure is transparent, easy to understand, and consistent with industry norms.
iii. Modernise Operations
Modernising operations involves rethinking and optimising existing processes to improve efficiency and effectiveness. Audit firms can achieve this by integrating technology into their workflow, redesigning processes to eliminate redundancies, and implementing best practices. Modern operations facilitate better resource management, reduce operational costs, and enhance service delivery. Clients are often willing to pay higher fees for streamlined and efficient audit services that provide more accurate and timely insights.
Transitioning to a paperless system is another effective strategy. Digital documentation and storage not only reduce the costs associated with paper, printing and physical storage but also enhance data security and accessibility. Paperless systems enable auditors to access and share documents quickly and securely, improving collaboration and productivity. The reduced environmental impact and increased efficiency can be attractive selling points to clients, allowing firms to command higher fees.
iv. Embrace technology
Embracing technology can help you improve the efficiency and effectiveness of your audit practice. Tools such as cloud-based accounting software, data analytics, and automation streamline various audit processes, making them faster and more accurate. These technologies reduce the time required for manual tasks, allowing auditors to focus on more complex and value-added activities. The use of advanced data analytics provides greater insights into financial data, enabling auditors to identify trends, anomalies and risks more effectively. These deeper insights not only enhance the quality of audits but also offer clients more comprehensive and actionable recommendations. As a result, firms can justify higher fees due to the improved accuracy, speed, quality and added value of insightful data-driven advice.
v. Manage Talent
Talent management is essential to sustaining an audit practice. Audit practices must invest in professional development, provide competitive compensation packages, and create a supportive work environment to attract and retain top talent.
The auditing profession faces ongoing challenges in attracting and retaining top talent. Implementing modern technologies and paperless systems creates a more attractive work environment for potential hires. Younger professionals, in particular, are drawn to firms that utilise cutting-edge technology and offer a flexible, modern work environment. Additionally, streamlined operations and reduced manual tasks can lead to higher job satisfaction and lower turnover rates. By addressing these hiring challenges, firms can maintain a skilled workforce capable of delivering high-quality services, justifying higher fees.
vi. Monitor Key Performance Indicators
Monitoring key performance indicators (KPIs) is essential to ensuring the sustainability of your audit practice. Regularly track KPIs such as revenue, profit margin, client retention rate, and staff turnover rate. This can help you identify areas for improvement and take corrective action as needed. Additionally, incorporating Audit Quality Indicators (AQIs) into your monitoring process provides a more comprehensive view of performance of your audit practice. By comparing your firm’s AQIs with industry benchmarks, you can gain insights into how your audit quality measures up against peers and identify areas for improvement. For more information about MIA’s AQIs initiative, please refer to this link: https://www.at-mia.my/tag/audit-quality-indicators-aqis/.
vii. Build a Strong Reputation
Ensure that your firm has a good reputation for quality service delivery, professional conduct and ethical behaviour. Consider developing a niche area of expertise that sets your practice apart from competitors. Attend industry events, join professional associations, and leverage social media and other marketing channels to build your brand. This can help you attract new clients/staff, retain existing ones, and build a loyal customer/staff base.
As the regulatory environment evolves, firms that proactively implement the above strategies will be better positioned to thrive and maintain audit quality.
Survey to Understand the Cost Structure of a Small Audit Practice and Strategies Employed in Sustaining an Audit Practice
Sustainable audit practice requires a combination of factors, including charging adequate audit fees, effective practice management and developing good reputation. Audit practices that fail to address these factors may find it challenging to sustain their business over the long-term.
The Institute would like to gain insights into the current cost structure of a small audit practice and to further explore the best practices for sustaining an audit practice. If your firm would like to participate in this exercise, please register your interest with the SMP Department at [email protected].
