Finance

How to Choose the Right Auditor for Your Company

Executives use a company’s financial statements to determine strategy. If those statements are inaccurate, the resulting strategies could be deeply flawed. A skilled auditor can confirm the validity of these and other accounting products, enabling the rest of the company to feel confident in the finance department’s reports.

Any competent auditor can do a good job of analyzing your company’s financial statements, but not all auditors will approach the task in a way that will fit your needs. That’s why it’s crucial to choose an auditor with the skills and experience to do an excellent job as well as a process and an attitude that will enable them to work seamlessly with finance staff and company management.

What does an auditor do?

When someone in finance talks about an audit, they’re usually referring to a financial statements audit. An outside auditor will gather information about a company and use it to check the validity of that company’s financial statements, including the balance sheet, income statement, cash flow statement, and statement of retained earnings.

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Some organizations are subject to more specialized types of audits. For example, a SaaS company may be required to undergo a SOC 2 compliance audit. If your company requires more than the basic financial statements audit, you’ll need to find an auditor who specializes in the required type of audit.

What doesn’t an auditor do?

Auditors typically don’t provide tax advice and similar services; in fact, SEC and GAO standards strictly limit which nonattest services auditors may provide. They also are not permitted to take on any managerial role during the audit (for example, preparing or revising source documents). Outside auditors must maintain their independence from the companies they audit, and any actions that would jeopardize that independence are forbidden.

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Basic auditor requirements

Qualified auditors will share the following characteristics:

  • An active CPA license. Confirm their active status by contacting your state’s Board of Accountancy or by looking them up with the CPAverify tool.
  • No black marks on their record, such as suspensions and other disciplinary action. The CPAverify tool and state Board of Accountancy can both provide such information.
  • If the auditor works for an auditing firm, that firm should also have a good reputation and no black marks.
  • An active external auditor certification from the AICPA. Specialized auditors may have additional certifications, such as the CFE (certified fraud examiner).
  • A thorough QA process. You can ask the auditing firm to spell out their process in their proposal.
  • Good peer review results. Ask candidate firms to send you a copy of their most recent review.

Going beyond the basics

Let’s say you’ve looked at a handful of auditors and audit firms and found several that meet the above basic requirements. Any one of them will likely do a decent job of analyzing your financial statements. However, if you choose an auditor based on the basics alone, you’re likely to end up with the wrong auditor for your specific situation.

Do you want an auditor who will provide guidance on how to prepare financial statements, or are you confident in the statements issued by your finance department? Do you want someone who will advise your finance staff about disclosure requirements and accounting treatment of specialized transactions? Who will review your employee benefit plans? Who will assist with risk management? Is there additional information that you want the auditor to provide in their report?

A nontraditional audit report. [source]

Auditors may or may not provide these additional services, and the only way to find out if a particular firm will give you the support you need is to ask. Other potentially important factors include the following:

  • Experience with firms in your industry
  • What technology they use and are familiar with (i.e., choose an auditor who is comfortable with your internal accounting software)
  • The type and format of audit reports they issue
  • References and/or testimonials from companies similar to your own

Writing the RFP

The typical auditor hiring process includes requesting proposals from several different firms that will spell out the nature, limits, and other details of the firm’s auditing service. That means you’ll need to write a request for proposal (RFP) before your search for an auditor can make significant progress. Here’s what you’ll want to put in your RFP.

Background

Audit firms need to know a little bit about your company in order to put together a realistic proposal. Include basic background information such as your company’s business entity (e.g., corporation), the industry you’re in, the nature of the products or services you sell, your fiscal year-end date, your business locations, and the locations of various employees who will be involved in the audit process. You’ll also want to provide any specific requirements, such as the audit report deadline.

Scope of the engagement

Explain the exact nature of the services you want the audit firm to provide. For example, how many years’ worth of financial statements you want audited, if the audit report will be included in an SEC filing, and whether you want any additional services to be provided by the auditor. You’ll also want to describe any unusual circumstances that the auditor will encounter, such as uncommon types of transactions or assets that require specialized valuation approaches.

Proposal requirements

Include the information that you expect each of the auditing firms to provide in their proposals. This will likely include details like the firm’s history, whether or not they have experience with your industry, copies of the firm’s most recent peer review report, which auditor will be performing the audit (and some information on this individual’s background), and any other information that’s particularly important to you.

Evaluation

Finally, explain how you’ll select the winning audit firm. Firms will want to know how you’ll evaluate the proposals (i.e., if there are specific elements, such as the nature of the firm’s certification, that will be significant factors), the steps involved in the evaluation process, an approximate timeline, and any other information you consider pertinent.

Auditor letters of engagement

Once you’ve sorted through the proposals you received and have selected a firm, the chosen firm will send you a letter of engagement or another form of contract. You’ll need to review this document closely to confirm that everything the audit firm promised in their proposal is included. A reasonable letter of engagement will include the following details:

  • The scope of engagement: This is a comprehensive list of everything the auditor will do during the course of the audit, and how and when they’ll prepare the report.
  • The term of the engagement: Confirm that this schedule is acceptable.
  • Independent contractor clause: This clause states that the auditor is an independent contractor and is not an employee of your company.
  • Confidentiality: The auditor will not reveal sensitive company information acquired during the course of the audit.
  • Fees: These should match the agreed-upon amounts; confirm that there are no unusual penalties or extra charges.
  • Termination: Either party should be allowed to terminate the contract with reasonable notice at any time during the engagement.

Firing an audit firm can give your company a bad reputation by giving the impression that you have something to hide. That makes it imperative that you choose the right auditor the first time, and the only way to accomplish this is through careful due diligence before you make your choice.