Best practices to consider when changing your audit firm

Source: RSM US LLP.   

ARTICLE | September 06, 2022

As your business needs evolve, changing your audit firm can result in actionable insights that enable your organization to anticipate next moves, identify opportunities and mitigate risks.

By cultivating trust and a mutual understanding between your organization’s stakeholders and the new audit firm, and by underscoring the importance of timely audit processes and related communications, you can achieve the desired gains. After all, superior service has no size constraints, and a frictionless transition only amplifies the opportunities for your business.

Consider these best practices for changing your auditor:

Align your request for proposals to your needs

An effective request for proposals, or RFP, for audit services can lay the groundwork for a smooth transition by enabling your organization’s decision-makers to get the information they need while positioning a new firm to tackle your business needs.

The objective is to select an auditor that will maintain independence and deliver deep knowledge in executing its professional requirements for providing services while working with management to ensure a quality and timely audit. Understanding your existing population of service providers enables you to adhere to the appropriate independence requirements when determining which audit firms to target when issuing your RFP.

To identify firms which firms to approach as a possible new auditor, tap into your professional networks and trusted centers of influence, and do your own research about how firms’ capabilities align with your business needs.

The RFP then needs to be clear about the information you covet so your decision-makers can clearly see how a new firm would support the areas you seek to improve. This might include such topics as:

• Communication processes
• Industry specialization
• Global capabilities
• Partner involvement in the audit engagement
• Access to the audit firm’s national office
• Geographic footprint
• Digital audit experience

Of course, it’s crucial to ask about firms’ audit approach, including overviews of:

• How risks are identified and assessed
• How materiality is determined
• The approach to substantive testing as opposed to control testing
• Technology to support the engagement, including how client information is obtained and stored

A comprehensive RFP also asks firms to describe their transition processes, timelines and client satisfaction processes.

Having a full understanding of how the auditor approaches the transition and the audit will help you identify the firm best suited to work with you through the transition and meet your ongoing needs.

Time your switch with audit quality in mind

Deftly timing a change of this magnitude can help limit distractions and promote audit quality. For example, an SEC registrant that switches to a new audit firm in its second fiscal quarter instead of the first could minimize the difficulties of transitioning amid the tight deadlines for filing its annual report (Form 10-K) and the subsequent first quarterly report (Form 10-Q). Those deadlines commonly fall within 45 to 70 days of each other, depending on the company’s reporting requirements.

Although the quarterly reports do not include audited financial statements, auditors must understand the company, its financial reporting and control environment to effectively review interim financial information. That involves inquiries and questions, reviewing relevant documentation and communicating with the preceding audit firm.

Similarly, an integrated audit, which, in addition to audited financial statements, includes an opinion on the effectiveness of the company’s internal control over financial reporting, is relatively complex. In that case, switching audit firms in the third or fourth quarters risks a time crunch that stresses resources.

Of course, you can’t always prioritize timing when switching auditors. But to the extent both sides can accommodate the time needed to complete the work effectively, audit quality stands to benefit. At least, being mindful of that can help you prepare with your new firm for time-sensitive challenges.

Educate the new audit firm

Many seasoned auditors adhere to a mantra: You can’t audit what you don’t understand. This has a double meaning, of sorts, when an organization begins working with a new audit firm.

On one hand, the auditor needs to understand core components of your business, such as your company’s unique financial reporting, how transactions flow, your risk profile and your industry. At the same time, it is crucial to have a mutual understanding of the soft skills required for a productive professional relationship and positive chemistry between work teams.

An organization that actively invests time, effort and brainpower in educating the new audit firm will ease the transition. That can begin as early as the RFP process.

A firm proposing to audit an SEC registrant will have reviewed financial statements and Form 10-Ks that were already filed. Generally, when the business is forthcoming with information and documentation in the RFP process, a new audit firm gains a broad understanding of the organization and its risk profile and can formulate a plan for the audit as soon as possible.

A new audit firm will pursue inquiries with the predecessor firm, including a review of work papers. Realistically, however, the business probably will have to provide the new firm with most of what it provided the old firm, such as contracts, agreements, process documentation, minutes, and documentation of the company’s policies and procedures, including those related to its system of internal control. Planning for that can minimize the slowdowns that stem from redundancy.

Cultivate understanding in person

For a business working with a new audit firm, the rules haven’t changed—only the people have. Face-to-face interactions, whether in a conference room or a coffee shop, are crucial to helping new auditors understand the business and develop chemistry in the relationships that underlie a high-quality audit.

A manufacturing company, for example, might host new audit engagement team members on a visit to a plant. Seeing processes in person can help an auditor better understand and inspect systems of internal control.

Meanwhile, interpersonal interactions provide opportunities to continue the educational process. For example, an auditor might ask to whom they should go with a question about a specific topic. The in-person exchange of knowledge often goes beyond superficial information, and natural chemistry can develop.

A business that prioritizes involving its new audit firms’ engagement partner and audit senior manager in these face-to-fact interactions will help set the engagement on course by cultivating connectivity and understanding among leadership.

Manage tasks as you would for a large project

The uniqueness of your organization’s circumstances and characteristics underscores the need for thorough project management and sound communication.

For example, inventory observations for a global company require a high level of coordination by the audit firm. For an integrated audit, the firm might need to test controls at a specific location. Strong communication is crucial.

Overall, frequent communication helps auditors meet deadlines and avoid surprises. Regular check-ins with appropriate stakeholders—such as your management team, your internal audit team or even your audit committee—help to keep the engagement on schedule and address any issues before they balloon into bigger problems.

In addition, consider how an audit firm’s technology solutions can facilitate efficient and secure document sharing, strengthen communication between work teams and provide progress updates to keep tasks on time.

Grow from growing pains

Whatever reasons compel your organization to change its audit firm, remain mindful of those objectives as you transition. The desired gains will result from hard-earned experience and knowledge in the early going.

Regular check-ins by the auditor establish transparency, while a larger-scale in-person debrief after year one will enable your organization and the new audit firm to discuss successes and room for improvement in the audit process. Tapping into the knowledge and experience in the audit firm’s national office can help you understand the most complex issues.

Seek insights about your business that align with your objectives, understanding that the auditor must remain within the confines of independence requirements. In all, an experienced firm that understands the opportunities in this transition will help you achieve what you set out to accomplish.

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