Auditing Your Auditor

After nearly a decade of turmoil, companies have gained the advantage in negotiating with their auditors.

The practice seems only likely to grow in the current economy. “It wouldn’t surprise me that audit firms are somehow ending up with lower realization rates in order to keep their clients,” says IDT’s Pereira. “There has been a lot of pressure over the last 18 months or so for companies to cut their costs, whether for audit firms or other service providers.”

Like IDT, shipping company OSG decided to examine audit costs as part of a review of all of its professional-services contracts. The company switched to PwC in 2009 after 40 years as an Ernst & Young client, and saw its $2 million audit cost drop by a third. “We were looking at every line item of expense,” explains CFO Myles Itkin, though when it comes to OSG’s lengthy audit engagement, he adds drily, “after 40 years, everything should be put out to rebid.” Itkin says the move was one of many cost-saving measures that helped drop OSG’s SG&A from $144 million in 2008 to $120 million last year.

Itkin is quick to point out that savings were only part of the benefit for OSG, noting that “certain inefficiencies get built into the process” on both sides during such a long relationship. He estimates that roughly 10% of OSG’s savings came from improvements in the way OSG uses its own internal-audit team to prepare for the audit. The degree to which auditors from PwC would rely on that work then became part of the overall negotiation.

2008 audit fees fell in nearly every industry.

IDT’s Pereira, likewise, says the second fee reduction IDT negotiated with Grant Thornton depended in large part on IDT’s own efforts to streamline and simplify its operations, which in turn allowed the company to argue that its audit had also become simpler.

SunOpta’s Davis says fee negotiations — which now take place annually, if not continuously — focus less on the hourly rate charged than on how much Deloitte & Touche will rely on work done by the internal-audit department. “We try to make sure the controls and binder reviews are done preaudit,” Davis explains, “so that when they do come in they are going through more of our work rather than trying to reinvent something.”

That’s a common refrain among CFOs, who still witness surprising variations in the way each firm audits specific finance processes. “There’s no question auditors have gotten more comfortable with 404 and how to do it, which has allowed them to reduce the fee,” says journeyman CFO Ken Goldman of Fortinet, who sits on several boards and is also former finance chief of such companies as Siebel Systems, Sybase, and Cypress Semiconductor. “Having said that, I’ve seen the different tendencies of different auditing firms, and how they price and charge, and I still think there’s room for better cost efficiency in running audits overall.”

Thanks again in part to Sarbox, audit committees are also paying attention to fees, both because many audit committee financial experts have day jobs as CFOs and because the audit relationship is the ultimate control check. “The audit committee has the responsibility to hire, fire, and evaluate the independent auditor,” notes the most recent copy of the American Institute of Certified Public Accountants’s Audit Committee Toolkit.

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