Engaging Auditors: Field Investigation of a Courtship

Report
Engaging Auditors:
Field Investigation of a
Courtship
Krista Fiolleau, Kris Hoang, Karim
Jamal, and Shyam Sunder
Emory University
December 2, 2011
An Overview
• A publicly traded Canadian company,
and a Canadian government organization
• Field investigation: documents, interviews
on RFPs. Findings:
• Complex courtship, conflicting
incentives
• Significant management control of
auditor selection
• Asymmetry of power and information
flow in favor of management
• Auditor references from senior officers
of current and past clients
• Repeated demonstration of
responsiveness and commitment to
client management
• Extensive price competition
• Implications for audit transparency,
quality, auditor risk management,
expertise differentiation, auditor
rotation, and corporate governance
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Auditors
2
Information and Audit
Reforms
• Regulatory reforms (e.g., mandatory
rotation of auditors) assume common
knowledge
• Hayek (1945): Most such information is
dispersed, little incentive to reveal it to a
central planner
• Individuals, markets and regulators have
to acquire, aggregate and interpret
information
• Information dispersal, and conflicts
between private and collective interest,
“sand in the gearbox” of well-intentioned
reforms
• Pre-engagement courtship to gather
information about each other
• A field examination may help understand
the consequences
• Also, insights into policy issues (e.g.,
increasing the frequency of courtship
through mandatory rotation of auditors)
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Auditors
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Client-Auditor Courtship
• Kinds of information is sought and
gathered during the courtship?
• Justification for regulation of
auditing: audit quality being
opaque, customers’ informational
disadvantage
• Clients’ view of audit quality?
• Client (and board audit committee)
knowledge of quality of audit at the
time of engagement?
• Auditor’s knowledge of prospective
client (for selection, risk
management)?
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Auditors
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A Case for Case Study
• What do managers, the board and
auditors look for, and how?
• Different disciplinary approaches to the
same phenomenon choose different
abstractions to gain useful insights
• Case study: opposite of abstraction—rich
details of complex interactions of auditors
and clients (possible inputs into
traditional analyses of larger datasets)
• Supplement observations with discussion
and conjectures
• Detailed direct observation and analysis
of a single instance of phenomena has a
rich tradition in social sciences (Graham
1971, Cuban missile crisis; Downs 1967)
• Importance of direct observation in an
institutionalized discipline (accounting)
• Methodological portfolio: small and large
sample studies
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Auditors
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What We Did
• Client confidential records: client RFPs,
board and audit committee minutes,
executive notes
• Audit firms (bid documents submitted in
response to RFPs)
• 18 interviews (client executives and bidding
audit partners)
• Both RFP processes arose from mandated
audit partner rotation in Canada
• Case 1: mandatory engagement partner
rotation led the client to invite bids and,
ultimately, to un-mandated change of audit
firm.
• The audit committee chair and the CFO:
availability of senior audit partners with
relevant industry experience due to rotation
in their own firms was a major factor
• Case 2: a government organization
implemented decision to invite bids every
three years
• Both cases study prestigious, profitable,
growing, and successful organizations
targeted by Big-4 audit firms
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Auditors
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Method
• Approval from the research ethics board
• Firm signed a consent form, promised
confidentiality, a copy of the written
research report, and the opportunity to
suggest corrections of any errors or
misunderstandings
• Obtained RFPs (Client 1, >$10 Billion
assets, listed on TSX with NYSE sub,
regulated, financially healthy) sent to the
Big-4 audit firms (Auditors 1-4)
• Bid documents directly from all Big-4
audit firms, releases authorized by local
managing partners, Auditor 1 –
incumbent, Auditor 2 – winning bidder,
Auditor 3, and Auditor 4.
• Interviewed: CFO, chair of the audit
committee (60-90 minutes each, scripted
in advance (Appendix B), recorded and
hand notes, within 6-12 months of RFP
• After clearance MDs of four audit firms
identified the proposed lead engagement
partner; interviewed each proposed
engagement audit partner (sometimes
with the local managing partner); script in
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Appendix C; taped
and
handwritten
notes
Auditors
Method
•
•
•
•
•
Clarify initial observations; obtain additional
records: minutes of board and audit committee
meetings on auditor selection; outline of the
client’s prescribed RFP process; written
correspondence between the audit committee and
management; completed evaluation forms
assessing the auditor bids; and management’s
completed scorecard recording deliberations
about each audit firm
Steps a-d repeated for an audit put up for bid in a
government-funded organization (Client 2: a
large, complex, prestigious organization with a
budget of more than $2 Billion in 2008)
RFP to all Big-4 firms plus one national firm,
received 3 Big-4 bids. Bid documents from all
bidders and conducted interviews with the three
proposed engagement partners (sometimes local
MD participated) as well as three executives from
Client 2. The interview process commenced
within weeks of auditor selection
Supplemented primary and secondary cases:
recent RFPs for audit services of five other
organizations, together with the written bids
submitted by one Big-4 audit firm on all five
potential engagements (Clients 3-7; one publicly,
one private, three public sector)
Summarized in Table 1
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Auditors
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Summary of Findings
• Involvement of the audit committee in the
auditor selection, although management
ran the process
• Management the main producer and
gatherer of information and controls what,
when, and how it is distributed to the
audit committee and auditors
• Auditors struggle to differentiate
themselves through their technical
expertise
• Relationship building by auditors is
critical to success in the courtship
process
• This effort raises concerns about
independence
• Significant differences in bids (audit fees)
• Audit partner rotation can catalyze the
RFP process; rotation influenced client
satisfaction with the incumbent auditor,
freed up expert resources at other audit
firms, and fueled auditor courtship
practices.
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Auditors
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RFP and the Bid Process
• RFP1: describes engagement, selection
committee members, communication
process, deadlines, page limits.
Responses on firm expertise, transition,
rapport, cultural fit
• RFP2: similar, more detailed template,
rigid structure in auditor proposals
• RFP3-7: similar specifications.
• Confidentiality agreement, information
acquisition process; private and public
documents in a “data room” executives
available
• Auditors written proposals; summarized,
compared; evaluated by management
(CFO); proposals and summary to all
selection committee;
• Auditors oral presentations, selection
committees deliberates; recommendation
to the audit committee, approves, sends
to the Board. The selected auditor
notified; losing firms debriefed
• Table 2 details the timeline and records
of the RFP process for Client 1
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Auditors
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Table 1:Documents and Information Gathered
Client 1
YES
Request for
Proposal (RFP)
obtained
YES
YES
YES
NO
Auditor 1 - Incumbent
Auditor 2 – Winner
Auditor 3
Auditor 4
Auditor 1 Winner
Auditor 2 –
did not bid
Auditor 3 –
Incumbent
Auditor 4
None
Auditor 1
RFP includes
information
available in
“data room”
Proposal (bid)
documents
obtained
Public
sector
Large
Complex
Clients 3-7
Includes 1
publicly
held
Moderate
size and
complexity
YES
Type of
organization
Publicly held
Large
Complex
Industry subject to
regulation
Client 2
Meeting minutes
Auditor selection decisionmaking aids (e.g.,
evaluation forms and
scorecard)
Correspondence among
management, board
members and auditors
Sunder: Engaging CFO
Interviews with CFO
Auditors
Accounting
management
Manager
Other
documents
obtained from
management
None
None 11
Guidelines for Analysis
• One author summarized the interviews
transcripts, RFPs, and bid documents,
categorizing it into broad themes.
• Two independent coders, both Canadian
CAs, independently read all materials
and coded them into the same summary
table. Coding differences were discussed
and resolved by the two independent
coders.
• The five sections organize observations
(selection, information acquisition,
expertise, relationships, and fees)
• Expectations of the information produced
and requested from : (1) a sample
request for proposal letter for CPA
services from the AICPA (2004), and (2)
a Canadian Big 4 audit firm guide to RFP
preparation (Audit Firm 2007).
• Interviewed a U.S. Big-4 firm audit
partner
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Auditors
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1. Control of Process
• The regulations (OSC, TSX, NYSE) BAC’s key
function: select and recommend the independent
external auditor to the board
• AICPA: “With the passage of the Sarbanes-Oxley
Act (SOX), audit committees now ‘own’ the
relationship between the independent auditor and
the organization”
• We expected the BAC to run the selection
process
• Management Takes the Wheel
• But management controlled the process, including
all communication and the flow of information to
both the audit committee and the bidding firms
• The RFP was sent out to auditors by the CFO
with the approval of the audit committee
• Examination of Clients 2-7 and interviews with
audit partners suggests this practice of having
CFOs establishing contact and controlling the
interaction with prospective audit firms is currently
the norm in Canada
• The process we observed is inconsistent with the
“best practice” we had expected (audit committee
contacts prospective audit firms, cover letter
jointly signed by the CFO and audit committee
chair, suggested by the AICPA guide)
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Auditors
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…Control of Process
• Client 1: Auditor selection committee of six
managers (CEO, CFO, etc.) listed by name and
position with audit committee chair plus
remaining four as anonymous members
• Client 1’s VP Finance was single point of contact
for auditor inquiries and site visits, no contact
information provided for the audit committee chair
or members; respondents prohibited from any
direct contact with officers or directors of Client 1
under threat of disqualification
• The chair, (no other members) of audit committee
met auditors individually for half hour each
• No meeting between the prospective auditors and
the audit committee without executives present
• The CFO in follow up interviews: such a meeting
would have taken place if the audit committee
was dissatisfied by the selection process or
management’s choice
• The AICPA guide suggests management (e.g.,
CEO, CFO), and the BAC chair meet prospective
auditors
• The audit firm RFP guide suggests all audit
committee members to meet prospective auditors
• The U.S. audit partner: impractical to require all
audit committee members to be available for
meetings with prospective auditors given
geographical challenges. The actual practice of
Client 1 is closer to
thatEngaging
of the AICPA guide.
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Auditors
…Auditor Selection
•
•
•
•
•
•
•
•
•
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Auditors given access to a data room with public and
private client information
Executives available for interview by appointment
The auditors’ written proposals (30 pages max)
evaluated and summarized by the CFO and VP
Finance. Copies of proposals and CFO’s evaluation to
the selection committee
Auditors make oral presentations to selection
committee
The selection committee discusses each presentation
for half hour; each member ranks the four firms on a set
of attributes listed in RFP (e.g., knowledge of business,
people, relationship, organization fit, commitment, audit
methodology, other services, and fees)
Selection committee members provide additional
qualitative comments on each auditor to the CFO, ask
for management’s recommendation
The CFO and VP Finance, compiled the evaluation
forms, as well as a scorecard for each audit firm
The six management members of the selection
committee hold a meeting, select the top two
candidates, and then examine the CFO’s summary of
the pros and cons of the two finalist firms to arrive at a
recommendation
The audit committee accepted the recommendation,
and forwarded it to the board and the shareholders.
The timeline in Table 4: six-day interval for auditors
presentations and the board approval of the change of
auditor; BAC and board meetings held on the same day
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Auditors
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…Auditor Selection
• Client 1 audit committee followed the letter of the
Ontario Securities Commission rule of
recommending the auditor to the board, but hardly
“owned” the process
• All auditors interviewed said that their level of
engagement with the audit committee of Client 1
was normal; CFOs usually drive the process
• A review of RFP documents from Clients 2-7 also
shows the process being coordinated by
management, primarily the CFO
• The AICPA guide and Audit Firm RFP guide also
recommend that management control and
coordinate the flow of information, and the
scheduling of interviews and meetings
• The RFP and interviews of Client 2 indicate that
the audit committee’s involvement was limited to
attending the “all hands meeting”, where all
bidding firms asked questions of management
before developing their proposals. The audit
committee authorized the information that could
be shared in the RFP process but did not weigh in
on the selection of a new auditor.
• For Clients 3-7, one of which is publicly traded,
the audit committee chair (but no other member)
was involved in the selection process.
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Auditors
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Audit committee oversight of
the courtship
• BAC’s participation limited to comfort with the
process, not as decision makers
• A BAC member did not think that the committee
would not have the power to reverse
management’s choice of auditor
• One of the audit partners in our study lamented
that the audit committee had asked management
for a recommendation; felt more appropriate to
ask management for its assessment, with the final
decision by the audit committee
• Our field study suggests that management
controls the courtship process, with the audit
committee in the passenger seat. Management
sets the destination, they read the auditors’ signs
and signals, and the audit committee signs off at
the end of the journey safely executed. The Audit
Committee Chair summarized the process as
follows:
• “Our AC saw its primary role as one to ensure that
a robust selection process was followed by the
company, where the BAC had substantive
oversight, and, had the final decision. We didn't
see this role as requiring, or necessarily being
compatible with, the BAC actually conducting all
work.”
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Auditors
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Information Acquisition
• The RFP document outlines the information
the client wants and uses about the auditor
• These specifications closely reflected the
available guidelines : experience and
expertise relevant to client industry; transition
and continuity plans; audit and quality control
approach; dispute resolution process; fees;
and references.
• Absent (although recommended by
guidelines): relationships and infractions with
regulators; identification of large clients lost,
with reasons; and peer review reports.
• Extensive documents available to
prospective auditors: annual and quarterly
reports, business and strategic plans, Board
and committee minutes, and investment
listings
• We had expected that the auditors would be
highly interested in risk related
documentation made available to them by
the clients.
• The auditor interviews pointed to a different
approach to information acquisition.
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Auditors
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•
•
•
•
•
•
•
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Management Gives a Little,
Gets a Lot
Client acquires information about the auditor
Auditor hesitates to request client for information and
submits proposal in the face of much uncertainty
The client defines the terms of audit quality, and
collects information about auditors from multiple
sources to develop a clear picture of auditor
Managers of Client 1 quite assertive in obtaining the
answers they were interested in
Wanted to know the auditors’ reasoning and process
for arriving at critical accounting estimates and
judgments.
Wanted to be sure that there were no accounting policy
differences between the company and the auditor, no
restatements of their past reports
Client 1’s BAC chair: “We were very concerned about
making sure that they believed they knew enough of
the company’s results, and the company’s transactions,
to ensure that they did not view the risk of restatement
as being even a low probability. We wanted to clear
that outright from the start.”
The U.S. audit partner: prior to engagement, wants to
understand significant transactions and the accounting
for such transactions to reduce the likelihood of a
potential restatement; felt he could identify potential
accounting issues by reviewing the public filings by the
client and discussion to avoid surprises
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Auditors
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Meticulous Client, Hungry
Auditor
•
•
•
•
•
•
•
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Client 1: any lawsuits against the auditor (distraction,
reputation risk)
Management contacted all client references, and
explored informally with industry colleagues
Management did not ask for results of Canadian Public
Accountability Board (CPAB) reports, which are issued
privately to registered audit firms
Auditors bidding on Client 1 paid no attention to internal
control weaknesses of the client reported in the most
recent management letter from the incumbent auditors
Interviews: many clients do not provide such
information. Auditors did not investigate the details of
accounting adjustments and reporting issues raised by
the incumbent auditor, nor whether these items were
booked or carried forward to future periods.
Although management letters issued by the incumbent
Auditor 1 for the last two years were available to them
in the data room, two of the three other auditors stated
that they had not read the management letters.
Auditors showed limited interest in an assessment of
the internal auditing system of Client 1, and assumed
internal audit must be adequate since the company was
subject to review by the industry regulator
Auditors in both Canada and the U.S. felt that they
could not ask Client 1 for certain items, such as the
schedule of unadjusted errors, although they had the
right to do so. Instead they asked indirect questions to
try and gauge the number of items that came up for
negotiation
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Auditors
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Private and Public Clients
• Auditors did not ask to see correspondence with
the federal regulator on accounting related issues,
any internal reports that had been prepared for
the board and audit committee, or breakdowns of
how the incumbent auditor allocated staff time
• One audit partner explained it as follows:
“Company X would be such a big frog in a small
pond for any of the audit firms that I can
understand why they probably all had the attitude
of ‘we don’t care how ugly it is, we want the brand
and we want the business.’”
• Client 2 (public organization) made significantly
more detailed information available to the auditors
(budget breakdown of hours for each account and
location, control weaknesses and management’s
implementation status on improvements, and
issues raising audit concerns)
• One common question-and-answer session was
organized at Client 2’s office; all bidding auditors
were asked to submit written questions ahead of
time, and a single set of responses was provided.
The auditors were reluctant to ask questions in
this common forum out of fear of giving away
strategic information to competitors. Instead, they
relied more on examination of documents
provided by management, and less on the
personal contact we observed to be dominant in
the case of Client 1.
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Auditors
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Bargaining Power Imbalance
• Auditors seemed to’ lack of bargaining power visà-vis management
• Probing a client too deeply on sensitive issues
during courtship may generate enough
antagonism to lose the hoped-for engagement
• Some aspects of auditors’ apparent lack of
interest in critical information might be attributable
to their prior due diligence, overall assessment of
the client as being low risk, and the desirability of
this client. But, they could not have known the
unadjusted errors through their own independent
investigations
• Auditor efforts were centered on personal
meetings and conversations to understand the
clients, to build a relationship, and to sell
themselves
• Less attention on papers, and more on cues from
interpersonal encounters with the management
• Auditors focused on assessing senior
management’s candor, forthrightness,
competence and integrity
• The results from interview with the U.S. audit
partner was very similar to those conducted with
Canadian partners.
• The proposals indicated a good understanding of
how to serve the client prospectively; relying on
their personal judgment from interacting with key
management personnel
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Auditors
Client to Auditor Feedback on
RFP Process
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Interviews with the auditors: extensive knowledge about
their competitors; well-informed about their competitors’
proposals and the client’s assessment of each
competitor
Some auditors even offered their opinions on the
viability of competitor proposals
A similar detailed and informative feedback process at
Client 2
In both Canada and the U.S., the bidding audit partners
sought and received feedback from the client (why’s for
both winners and losers)
Unsure about the reasons for providing such debriefing
by the client, and its consequences; not common in
most areas of the economy
Linked to (1) the client’s desire to gain advantage by
promoting intense competition among auditors; (2)
clients retaining losing firms for other professional
services and gleaned additional feedback from
interaction with the client outside of the formal RFP
debriefing
This level of debriefing also suggests that it is difficult
for an audit firm to develop proprietary strategies or
response formats. Bids from audit firms appear very
similar (making it harder for audit firms to differentiate
themselves) partly because of structure imposed by the
client, but also as a result of common knowledge
amongst firms from receiving client feedback about
what features were effective and ineffective in the bid
process.
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Auditors
23
Expertise
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•
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•
•
•
•
Clients demanded auditor expertise in their RFPs
In all seven cases, auditors responded by
assembling an audit team of relationship partners,
engagement partners, managers, and
senior/junior audit staff
All senior personnel, had industry specific
experience spelled out in detail
Client 1: introduced industry specialists from head
office, tax partners, and the lead IT partner;
dedicated 5-12 pages to staff profiles, lengthy
descriptions of their industry-specific experience,
firm’s industry-specific market share regionally
and globally; industry-specific clients as
references; all bids listed thought leadership
resources in the firm (forums, websites,
roundtables, e-mail alerts and industry specific
publications)
Client 2: similar approach to demonstrating
auditor expertise, although emphasis on local
office resources and IT qualifications, in line with
the client’s needs
These strategies consistent with common
practices suggested by the U.S. audit partner:
importance of demonstrating expertise through
industry leadership and knowledge resources.
RFPs demanded, and audit bids conveyed
expertise
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Auditors
24
All Auditors Look Good
•
•
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•
•
•
•
•
All auditors appear to be suitable prospects for the
client
Differentiation by commitment of senior personnel to
Client 1 (national CEO attend the oral presentation and
designated as the relationship partner; location of
expertise and involvement of experts in the industry)
Auditor 3 proposed to move a partner with industry
experience, and Auditor 2 proposed to move a senior
manager with industry experience for Client 1.
The U.S. audit partner also suggested moving a partner
to the head office city as a way of showing
commitment.
Client 1 valued membership of audit firm personnel on
advisory committees in the relevant industry
associations or regulatory advisory bodies, and all
auditors responded by including team members with
such credentials in their proposals, and included
industry peers of Client 1 as references.
All Big-4 bidders had the technical expertise to perform
a satisfactory audit of this client and closely bunched in
management and audit committee scores for industry
expertise; Client 1’s CFO:
“We all unanimously felt that every firm could do the job
very well with the team they had presented.”
The same sentiment was expressed by the selection
committee of Client 2.
During interviews, an audit partner frustrated that the
standardized accounting environment made
differentiation difficult, reducing it to price competition
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Auditors
25
Management Seeks Softer
Dimensions of Expertise
•
•
•
•
•
•
•
•
Client 1 RFP explicitly asked auditors to provide a
“Summary of relevant training and/or networking
opportunities (with locations) offered to your clients.”
The RFP guides (AICPA; Audit Firm) list involvement
with other clients in the industry, and other participants
in the value chain (e.g., customers, suppliers) as
desirable considerations
Networks keep auditors at the forefront of technical
knowledge, but also provide a platform for management
views and issues to be given due consideration by
regulators;
Auditor’s potential as a connecting link to opportunities
with industry competitors and regulators dominate
concerns about conflict of interest and leakage of
proprietary information
Auditor seen as client’s leads to new customers as well
as competitors with whom Client 1 wanted to
collaborate
Audit engagement viewed as more than an audit—a
relationship that brings opportunities for business
advantage and future connections.
Management wishes not stated in RFP: responsiveness
to management; Client 1 wanted to be treated like a
first tier client; Client 2 wanted its own complexity to be
appreciated, and overcome geographical challenges
Expressed through subtle cues in meetings and
interviews (responsiveness, cultural fit, chemistry,
sharing wavelength)
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Auditors
26
Building Relationships
•
•
•
•
•
•
•
•
•
“There are processes and there are structures, but
people do business with people.”---a Big-4 Managing
Partner
The interviews: the issuance of the RFPs by Clients 1
and 2 was not the beginning of the courtship
Client 1: all invited auditors knew of the coming RFP
All non-incumbent audit firms had active business
development processes through which they had
already targeted Client 1, and visited senior managers
(CFO/CEO) of Client 1 in their offices, or invited them
to dinner and presentations (express their interest,
exchange information, and develop personal rapport)
Client 1 and Client 2: auditors established prior
relationships from providing other services or through
involvement in business and social communities.
Early courting targeted at Client 1’s senior managers
(i.e., the CEO, CFO), and not the audit committee, as
the key decision makers in this process
The U.S. audit partner also indicated that the key
people who would be involved in courting would be the
CFO and Controller, and sometimes the CEO, even
though the appointment formally made by the audit
committee
Prior research: weakly linked relationships (i.e., past
client experience) with auditor satisfaction (Behn et al.
1997).
Our cases: importance of relationships for clients and
auditors; effort in building them; possible impact on
auditor independence.
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Auditors
27
Rapport and Cultural Fit
•
•
•
•
•
•
•
•
•
The neutralization of expertise shifts importance to
rapport and cultural fit
Interviews: Client 1 had been dissatisfied with the
“bedside manner” of the newly rotated engagement
partner
Clients 1 and 2 clearly expressed in their RFP
documents and interviews that demonstrating rapport
was paramount to auditors winning the engagement.
Imitating the style, dress, appearance, and manners of
those one wishes to please is a deliberate strategy in
courting clients
Written proposals mirror the clients: client references
whose positions closely matched those of selection
committee; majority of the references provided were
executives of other clients; over 75% of the references
that auditors provided to Client 1 were from CFOs, and
only one audit committee chair.
Interviews with audit partners confirm that the audit
firms identify the key decision makers, and then choose
referees to match the roles of the key decision makers
The U.S. audit partner indicated that the key variable in
choosing references was to identify the key decision
maker and then choose a peer (the CFO, in this case)
as the key reference.
Auditors considered references from clients as being
very credible and having a significant influence on the
hiring decision.
Auditors adopting client mottos and slogans in
proposals and presentations (fit, culture, thinking,
attitudes, chemistry, resonance of values)
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Auditors
28
Past Guides the Present
• Auditors’ reputation with the clients wins new
ones
• Reputation and past experience with their client
was a major deciding factor with Clients 1 and 2.
• For Client 1, the CFO and the audit committee
chair interpreted auditor reputation as the
engagement partners’ personal reputation with
other CFOs
• Client 1: Do other CFOs classified the auditor as
either rigid (undesirable) or flexible (desirable).
Rigid was sometimes described as issuing edicts
(undesirable) versus discussing rationale
(desirable) for an accounting treatment
• The audit committee chair said: “The most
important issue for us is their reputation; that we
can discern by references on how they operate
with other companies in our industry.”
• No evidence of reputation with investors or any
third party users of financial statements being a
consideration.
• Auditors’ reliance on references from current
clients to get future clients is potentially troubling
for auditor independence; this reliance may bias
auditors to gain favor with clients to serve as
references.
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Auditors
29
Independence of Auditor
• What does it mean to be an independent auditor?
• Absence of a prior relationship?
• Yet, in both Canada and U.S., having a prior
relationship with the prospective client is an
important qualification to be on the audit team
(Client 1 and 2).
• Interviews reveal that including people with preexisting relationships with the client in the audit
team is a critical factor in engagement
• This relationship preference not limited to the
engagement partner but percolates down all the
way to junior auditors
• Audit firms sees auditing as a “relationship”
business, and interested in assigning people to
their teams who already knew management and
had a cordial relationship with the prospective
client
• U.S. partner revealed that auditors seriously
consider the RFP process as a relationshipbuilding opportunity to establish a connection with
client even if the there is no immediate
engagement
• Another channel for the prospective auditor’s past
to influences success in the present courtship
Sunder: Engaging
Auditors
30
Demonstrating The Locus
of Decision Making Power
•
•
•
•
•
•
Clients consider the decision making powers of the
local team vis-à-vis the head office
Client 1: preferred to have senior audit expertise
available locally to handle and resolve all complex
accounting issues by the engagement partner.
Clients impatient with rules imposed by distant
bureaucracies and would rather deal with a person they
know; understand the thought process of the partner
who makes final decisions
After the collapse of Enron and Arthur Andersen, LLP,
this insistence on local partner autonomy is a sensitive
issue for Big-4 audit firms; partners in Canada and the
U.S. thought it was reasonable for the client to express
a preference for engagement partner autonomy.
One reasons given for the collapse of Arthur Andersen
was the transfer of authority for making the final call on
disputed technical issues from its vaunted headquarters
unit of experts in Chicago to the local engagement
partners (Toffler 2003)
Apparently, the headquarters unit serve several
important functions, including: (1) having a high level of
expertise available to all audit engagements; (2)
enforcing a uniform application of judgment across the
firm; and (3) protecting the engagement partners from
undue pressure from client executives by allowing them
a shelter behind the opinion of the headquarters
experts when differences with client executives arise
Sunder: Engaging
Auditors
31
Local vs. HQ Decisions
•
•
•
•
•
•
•
•
•
Interviews: Clients want local partner autonomy
including all complex accounting decisions
Auditors 1 and 4 emphasized the seniority of their
proposed audit partner and provided a description of
their process to identify, discuss, and communicate
such issues without promising local control
Auditors 2 and 3 promised that final and binding
decision on complex accounting matters will be made
by the engagement partner. One firm promised that
they “do not hide behind the head office.”
One of the latter two firms: a communication and not
substantive issue, because of firm’s normal
consultation and quality control processes (the
engagement partner would be a single point of contact
for all accounting discussions with the client, not an
important concession)
The second firm indicated that the audit partner did, in
fact, have autonomy and could decide if and when
(s)he needed to consult head office
The client cannot know whether the local partner or the
head office makes the decision; they can only identify
the person who negotiates with them on a contentious
item and communicates the firm’s position
Prior research: involvement of technical partners in the
negotiation is beneficial to the audit firm (Gibbins et al.
2001).
Auditors appear to be split on the benefits of involving
head office technical experts in communication and
negotiation
Local partners’ share of engagement revenue exceeds
their share of the cost of reputation damage, audit firm
faces a difficult agency problem that clients seek to
Sunder: Engaging
32
exploit
Auditors
Audit Fees
•
•
•
•
•
•
•
Client 1’s RFP invites bids for two years,
constraining auditor ability of auditors to low-ball
the fees
Incumbent fee for the current year as a
benchmark (reflects knowledge of the client,
assessment of risks and the extent of audit work
necessary for the engagement)
Client 1: bids for total engagement fee varied from
materially below to materially above the current
fee
The successful bid materially below the current
fee, although the management had stressed
repeatedly that fees were not a major motivation
for issuing the RFP.
Incumbent was expected by others to bid (publicly
disclosed) current fee, and this common
knowledge was accurate.
Client 1: the RFP preference for greater
involvement of senior auditors, the low (winning)
bidder proposed higher staff hours and lower
partner/manager hours relative to incumbent’s
current time budget
Interviews: Client 1 audit chair and CFO
concerned that a low bid meant the auditor might
not have understood the amount of work involved.
The CFO said: “For Audit Firm 2, we were not
sure on how they would do because the audit fee
was too low…I think they may have
Sunder:
Engaging
underestimated the
work
they needed to do on a 33
Auditors
couple of our subsidiaries.”
Hours and Rates
•
•
•
•
•
•
•
•
•
Auditor 3 bid marginally lower, and Auditor 4 bid
marginally higher than the current fee for substantially
more partner/manager hours and more than double the
staff hours
The AC chairman of Client 1’s did not consider the
Auditor 4 hours credible
RFP solicited hourly rates, but did not factor in the
clients decision
Auditor 4 may have misinterpreted the importance of
this number, and undermined his own credibility
Client 2: auditors believed fees would be a major
determinant; management indicated it wasn’t a key
factor; the incumbent bid 100% of current fee, and the
rest bid just below that
All audit firms developed a table breaking down fees by
rank and financial statement cycle, (e.g., sales,
receivables), and auditors claimed that estimating the
total required hours was important in determining their
fee
RFP indicated that future billings for audit fees had to
identify each person by rank, hours worked, and the
hourly rate quoted in the proposal (bid).
Conjecture: Breakdown of total quoted fee into hourly
rates, hours, and task components may be a client
strategy to reduce auditors’ degrees of freedom,
serving as additional bargaining and monitoring
instrument, facilitating cross-checking the auditor
billings against the accepted bids
Client 2 requested a blended hourly rate, which
facilitated comparison of bids
Sunder: Engaging
Auditors
34
Multiple Bids from a Single
Auditor
• Auditor 4 submitted bids for three different levels
of audit service; middle bid for marginally higher
than the current fee, the other two bids were
priced at materially above and marginally below
the current fee
• The premium priced service: more experienced
partner and staff on the engagement, and many
other ‘non-audit related’ items such as more
frequent meetings , more “free” time to consult on
issues, more customer satisfaction discussions,
and more industry and strategy related
discussions.
• The discounted fee option required extensive
work commitment from Client 1’s internal audit
department, less frequent meetings and fewer
advisory discussions.
• This endogenous appearance of multiple bids for
service of variable quality/quantity in a regulated
domain raises several intriguing questions.
• What should be the regulatory stand on such
variety of service levels? Auditor bundling its
consulting services into the audit fee? Parallels in
other learned professions?
• Unclear how widespread this strategy is in
practice, as we did not observe fee levels in any
other cases studied
• Unexpected appearance of this practice provokes
some rethinking about
Sunder:pricing
Engaging of audit services 35
Auditors
Gradation of Partners
•
•
•
•
•
•
•
What does the gradation of partners imply for the value
of the audit firm and its brand?
Informal identification of audit managers and staff by
seniority and industry experience (e.g., industry expert
senior manager) is common;, this type of differentiation
in pricing among partners by experience is uncommon
In professional service markets where services are sold
to retail customers, it is common to see differential
pricing based on the service provider’s experience
(Lasik eye surgery, the price increases with the number
of operations done by an eye surgeon)
Can audit firms do better by such partner-level
differentiation, as opposed to relying on the firm’s brand
name and a single billing rate for all audit partners
In this case, the multiple billing options created
confusion, and the attempt to very explicitly price the
experience of team members backfired and
undermined the credibility of the audit firm.
When commenting on the multiple prices proposed,
Client 1’s AC chair said: “I think at the end result that
was probably a mistake on their part…I don’t care for
that type of stuff… I didn’t think the idea of having an
audit firm where the service you get depends on how
much you pay is really the impression that they would
want to give.”
In the courtship process, setting fees is a way for
auditors to demonstrate their value and signal their
commitment to the clients. Some of the competing audit
firms were aware of the three price strategy used by
Auditor 4 and disapproved of it.
Sunder: Engaging
Auditors
36
Discussion
•
•
•
•
•
•
•
•
Client 1 developed an elaborate RFP, and engaged its
internal stakeholders in meeting and rating exercises to
determine its preferred auditor
In the courtship, Client 1 wanted, expected, and
received numerous gestures and promises from the
audit firms, who were all seeking to show their
commitment to providing good client service and
responsiveness to management’s needs
Management knew its definition of audit quality—a
partner with a reputation for working well with
management, and visible signs that they would be a
preferred client, and how to get the relevant information
needed to make its assessments and rank the
prospective audit firms
Audit quality was not opaque for management.
Audit committee was involved in the selection process;
they relied on management to collect, evaluate and
summarize information. At the end of the auditor-client
courtship, the audit committee asked for, received, and
endorsed the recommendation of management.
The auditors had also done their homework, and based
their pre-courting behavior on the desirability of
becoming the auditor of Client 1.
Courtship emphasized demonstrations of auditor
commitment to the client, audit reliance on CFOs of
current clients to vouch for them, and the inability of
auditors to access crucial information for assessing risk
(e.g., schedule of unadjusted errors).
Significant power imbalance between the client and
prospective auditors; auditors had surprisingly limited
understanding of the underlying quality of internal
controls, the disagreements
(if any) between the client37
Sunder: Engaging
and incumbent auditor,Auditors
and the unadjusted errors they
might inherit
•
•
•
•
•
•
Discussion
Suggest that new auditors are not only more vulnerable
to fraud (Treadway 1978), but also to errors in early
years (Johnson et al. 2002).
Auditors’ lack of proper risk assessment during
engagement ; Placing high reliance on management
reputation and oral representations is a risky strategy
for audit firms.
Client perception that all four audit firms had the
capacity to do a good job on engagement neutralized
the auditor efforts in assembling teams of experts for
engagement
Auditors differentiate themselves through (1) pre- and
post-RFP courting of the client (bringing the national
CEOs); being responsive to client desires for local
expertise, offering to move an industry specialists;
mirroring the client in presentations of self and selection
of referees; promising engagement partner autonomy;
and lowering their fees
Inability of audit firms to create a clear expertise-based
differentiation and reliance on referrals from CFOs of
current clients may undermine the profitability and
independence of audit firms.
Auditor rotation has often proposed as a way of
preserving the independence of auditors from their
clients. Rotation of auditors (partners or firms) will bring
a fresh set of eyes (Tan 1995), fewer blinders, and
uproot entrenched relationships that may override their
objectivity and independence. There are also wellknown arguments against rotation as time and
repetition can help the auditor develop perspective and
expertise (Arel et al. 2005)
Sunder: Engaging
Auditors
38
Discussion
•
•
•
•
•
•
A counterargument from this field investigation: process
of engagement, combined with competition in the
market for audit services, weaken auditor
independence, promotes perennial courtship by audit
firms, and repeat this weakening of independence more
often. Rotation affords clients the opportunity to shop
for opinion and avoid auditors who they don’t like
without having to fire them (regulatory red flags)
Rotation pressures on auditors to demonstrate
commitment and responsiveness to the management of
prospective as well as current clients (to win new
engagements)
Reforms and regulations often based on the mistaken
assumption that the relevant information for making
decisions is readily available, perhaps even as common
knowledge
Regulatory debates about auditor independence ignore
the selection processes, the level of information
asymmetry between contracting agents and the
difficulty in gathering the relevant information for
making good decisions are underestimated
Lack of alignment of private incentives of contracting
agents and their public duties adds an additional layer
of friction in this process (Jamal and Sunder 2009).
Dispersed information and conflicting incentives can
undermine most well-intentioned regulatory reforms
Auditor rotation requirement will drive small- and
medium-sized audit firms out of the market, and
increase the concentration of the audit market
Questions: Does increasing the frequency of courtship
through mandatory audit rotation serves to increase the
welfare of shareholders? The only benefit to
shareholders from the process documented here was a
Sunder: Engaging
39
lower audit fee, which
is
offset
by
transition
costs
incurred by Client 1 Auditors
What Did We Get?
• New details of engagement, absent
in public record, useful to review
assumptions; new variables for
models
• New questions, and conjectures
about engagement
• Documenting the process (for
auditors, managers, boards, and
regulators)
• Understanding how information is
produced, exchanged and used in
auditing
• Rich materials for nuanced class
discussion of accounting and
governance
Sunder: Engaging
Auditors
40
Thank You.
[email protected]
www.som.yale.edu/facult
y/sunder
RFP: Introduction
•
•
•
•
•
Introduction
X Company …At close to $XX billion in balance sheet
assets and more than Y years of strong growth
including XX percent over the last 12 months, the
necessity to continually review business strategies and
risks is paramount in ensuring sustained success.
Of late, there have been multiple and significant
changes in accounting standards, regulations and the
XYZ industry that have all combined to add a great deal
of complexity to our business with no slowdown in
sight. To name a few, the recent adoption of XYZ
accounting standards, the upcoming implementation of
the XYZ Industry regulations and the transition to IFRS
over the next 5 years represent major changes to our
business organization.
Against this backdrop, X company has determined it is
timely to review the availability of financial services
audit expertise and resources in Canada and is
undertaking a Request for Proposal (RFP) for
independent audit services. This document outlines the
general principles of the RFP. We highlight that our
preference would include the most senior expertise to
be based in Region of Canada, but it is not essential.
All information will be provided to you in strict
confidence. Please complete the RFP Acceptance and
Confidentiality Agreement (Appendix A) and return it to
Mr G as outlined in the Communications Section. The
supplemental information package will not be
distributed prior to the receipt of the RFP Acceptance
and Confidentiality Agreement. Please note this RFP is
being extended to Deloitte, Ernst & Young, KPMG and
PricewaterhouseCoopers.
Sunder: Engaging
42
Auditors
RFP: Scope of Services
•
•
•
•
•
•
•
•
•
•
•
•
•
Your audit should be conducted in accordance with Canadian
Generally Accepted Auditing Standards and will commence
with the period ending year end date. The audit will be for the
consolidated financial statements of X company.
The mandate will include a review of the interim financial
statements for each of the interim periods. For greater clarity,
the first interim review would be for the three months ending
Date.
The mandate also includes:
The statutory audit of Subsidiary 1, 2, and 3;
Communication of weaknesses found in internal controls
during the course of the financial statement audit;
Analysis of accounting questions and issues in the context of
the audit;
Review of Management’s Discussion and Analysis, Annual
Information Form, and Annual Report to the extent required by
professional standards;
Review of quarterly report to shareholders (including financial
statements and notes);
Specified audit procedures for Subsidiary 4 as required by the
New York Stock Exchange;
Specified audit procedures and audit report on specified
financial information for X Company as required by Industry
Association;
Review of audit working papers of Subsidiary 5’s external
auditors (Audit firm);
Audit of financial statements of Special entity (nonconsolidated special purpose entity).
Note: The RFP does not include the audit of Subsidiary 5.
Sunder: Engaging
Auditors
43
RFP: Process
Description
• The RFP process will be conducted in the
following phases:
• Information gathering;
• Submission of a written offer of services;
• Presentations; and
• Selection.
• The Audit Committee has established a Selection
Committee to oversee the RFP process. The
Selection Committee is comprised of:
–
–
–
–
–
–
–
–
A, Chair of the Audit Committee,
Members of the Audit Committee,
B, Chief Executive Officer,
C, Chief Financial Officer,
D, Head Internal Auditor,
E, Senior Vice President,
F, General Counsel, and
G, VP Finance
• The Selection Committee will make
recommendations to the Audit Committee and the
Audit Committee will select the external auditor for
recommendation to the Board and shareholders.
Sunder: Engaging
Auditors
44
RFP: Communications
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
The RFP process will be open and equitable for all firms. We will
endeavor to ensure all firms have access to the same information. No
information in one proposal will be disclosed to another firm in the RFP
process.
Management will be available to answer questions throughout the
process. To aid in the information-gathering phase, a schedule of
availability with management will be established.
To help ensure an efficient and equitable proposal process, Company X
is requesting that each proposing firm comply with the following general
guidelines:
All inquiries relating to this proposal process, including arrangements
for site visits and interviews, are to be directed to G, VP Finance. He
will be your single point of contact. Contacting any other member,
officer or director of X Company could lead to disqualification. G’s
contact information follows:
Contact information
To facilitate the review of the Company’s information, a data room will
be established at X Company’s corporate office located at address. A
list of information that will be available in the data room is attached as
Appendix C.
In addition, the following individuals will be available to meet with and
provide each firm with their perspective of the critical business issues
facing Company X. The individual interviews will be restricted to 30
minutes, unless an alternative time frame has been agreed upon in
advance, and no more than three people from your firm should attend
each interview. The VP Finance will coordinate the interviews.
B, Chief Executive Officer,
A, Chair of the Audit Committee,
C, Chief Financial Officer,
G, VP Finance,
F, General Counsel,
H, Treasurer,
D, Head Internal Auditor,
I, Senior Vice President, Operations,
J, Chief Technology Officer.
Sunder: Engaging
Auditors
45
RFP: Proposal Form and
Content
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Eight (8) copies of the submissions are to be received
by the undersigned no later than date. Your
submissions should be no longer than 30 pages, plus
curriculum vitae for proposed team members. The
submission should contain the following:
1.
Detailed description of audit approach
Approach
Methodology for assessment of risks and establishing
audit approach
Risks identified
Scope and approach of work (including adoption of new
significant accounting policies)
Objectives
Split of work among various locations and corporate
functions
Communication with audit committee, including all
communications required by X Company’s Audit
Committee Terms of Reference
Engagement Letter
Breakdown of audit hours for X Company audit broken
down by major financial section for field staff (i.e. cash,
…, other assets) with partner and manager time noted
in total.
Use of Internal Audit
Quality control
Independence policy
Sunder: Engaging
Auditors
46
RFP: Proposal Form and
Content
•
•
Expertise
Experience and location of the audit team members
– Partners
– Senior Managers / Managers
• Industry expertise by location
• Brief summary of Industry 2 audit and assurance experience
• Availability and location of resources for complex accounting
questions
– Functioning and size of professional practice groups
– Availability of local resources
•
•
•
•
•
•
•
•
•
•
•
Confirmation that the firm is duly registered with the
Canadian Public Accountability Board (CPAB)
3.
Transition plan (if applicable)
Description of transition plan to ensure minimum
disruption to X Company management
Description of team experience in transition of audits,
references if applicable
4.
Independence
Confirmation of your independence from X. Company.
If confirmation not available, then an explanation of the
process to ensure independence.
5.
Fees (including any separate fee for CPAB)
An itemized fee quotation for the year ended Year 1.
An itemized fee estimate for the year ended Year 2
An itemized fee estimate for each entity and
requirement listed.
Sunder: Engaging
Auditors
47
•
•
•
•
•
•
•
•
•
•
•
•
RFP: Proposal Form and
Content
References
The Firm shall provide a list of clients (minimum three (3):
maximum five (5)) that are significant Companies in Industry X
who are currently major accounts of the Firm for services
similar or identical to the Services outlined in this RFP. The
firm will describe how the services provided to these
references are similar to the services proposed to X Company.
The Firm must include the client’s company name, address,
contact name, telephone number and e-mail address, and the
length of the association. The Firm’s references will be
contacted.
7.
Tax
We would like you to address your view on the nature and
extent of work that you could provide for tax compliance or tax
planning activities.
8.
Other services offered by your firm
We would like your proposal to include an overview of the
other services offered by your firm, remaining independent.
Overview could include:
Listing of relevant publications available
Summary of relevant training and/or networking opportunities
(with locations) offered to your clients
9.
Presentation
The objective of the presentation is to allow you to present
your offer for services, respond to the questions from the
Selection Committee and allow us to meet your engagement
team. Presentations to the Selection Committee are expected
to be scheduled for Date with the Board decision to follow on
Date.
We request that your oral presentation not exceed 60 minutes.
After your presentation, thirty minutes will be allotted for
questions and discussion.
Sunder: Engaging
Auditors
48
RFP: Expectations
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Throughout the auditor/client relationship we expect:
An open and professional rapport with direct access to
decision makers for all accounting/auditing matters
An efficient and effective risk-based audit process
Significant and relevant industry experience of the members of
the audit team
As partners or managers assigned to the engagement change
over time, the firm will agree to provide resumes of new
personnel to ensure that each have the requisite technical
knowledge and industry expertise to conduct a thorough and
efficient audit
All billings will be cleared in advance of submission. All billings
should provide a detailed description of the work performed
and a summary of the hours and rates billed by person.
The annual audit plan will be reviewed with X Company and its
Audit Committee in sufficient detail to allow X Company to
understand your audit approach (including the assessment of
significant risks) and efficiently prepare for the audit process.
Timeline
RFP request letters sent to firms.Day 02.
Return of RFP Acceptance and Confidentiality AgreementDay
7
Distribution of Supplemental Information packageDay 7
Data room availabilityDays 7-35
InterviewsDays 35-36
Receipt of submissionsDay 51
Presentation to Selection CommitteeDay 81
Board approves selectionDay 87
Communication of decisionDay 88
Debrief for firmsDays 98-102.
Sunder: Engaging
Auditors
49
RFP: Acceptance and
Confidentiality Agreement
•
•
•
•
•
•
•
•
•
RFP Acceptance and Confidentiality Agreement
To: C, Chief Financial Officer
Fax: X Company
We accept the request to present a proposal to
provide external audit services to the X Company
. We agree to keep in confidence all information
received by us in connection with the proposal
process, including the Supplemental Information,
not to disclose it to third parties, not to use it for
any other purpose than for the proposal, and to
destroy all paper and electronic information in the
event that our firm is not selected to be the
independent auditor as a result of this proposal
process.
Firm Name:
Partner:
Contact Information:
e-mail:
Sunder: Engaging
Auditors
50
RFP: Supplemental Information
(To be provided on receipt of signed RFP Acceptance and
Confidentiality Agreement)
1. Organization structure
2. 200X Annual Report, Annual Information Return and
Management Information Circular.
3. Q3 200X Report to Shareholders
4. Data room details and arrangements
5. List of statutory audits and most recent financial statements
6. Appendix C
7. Information to Be Available in the Data Room
8. Organizational Charts
9. Corporate structure
10. Executives
11. Finance
12. Internal Audit
13. Corporate Office
14. 200X Strategic Plan; 200X Business Plan
15. Consolidation worksheet (and entries) as at Date, 200X
16. Operating Manual
17. Board and Committee Minute Books
18. Accounting Policy Manual
19. Certification Project flowcharts for key controls
20. Quarterly financial reporting disclosure framework
21. Timeline for Interim and Annual Audit
22. Internal Audit Scope and Plan
23. Overview of IT Systems
24. Risk reports
25. Asset listings
26. Year-end working paper files – X Company, Subsidiary 1 and
2
27. Additional information
Sunder: Engaging
Auditors
51
Table 2: Timeline of RFP process for Client 1
Event
Timeline Description of records
(Days)
produced
1. Client sends RFP
request letters to
firms
2. Firms return RFP
acceptance and
confidentiality
agreement
3. Client distributes
supplemental
information
package
0
RFP document
7
Agreements from 4 firms
7
 Organizational
information
Made
available to
researchers
(indicated
by *)
*
 Financial reports and
shareholder
communications
 Data room details and
arrangements
4. Data room
availability
7-35
 Organizational
Information
 Strategic and business
plans
 Policy manuals
 Internal control reports –
IT, Internal Audit,
flowcharts
 Board meeting minutes
5. Prospective firm
and client
interviews
6. Receipt of
submissions
7. Read,
summarize and
evaluate written
35, 36
51
Refer to RFP in Appendix A for
complete list
n/a
Audit firm proposal (bid) *
documents
Table listing Pros and Cons of *
each proposal
Sunder: Engaging
Auditors
52
Interview Script for Clients
•
•
•
•
•
•
•
•
•
•
•
•
•
I. Background
Q1. How long did your previous audit firm audit you before you
put out the request for Proposal (RFP) ? _______Years.
Q2. Why did you decide to put the audit up for bid? Please list
the reasons in the order of importance (highest first):
1.
__________________________________________________
_________
2. _____________________________________________________________
3. _____________________________________________________________
Q3. When you issued the RFP, what chance did you think the
incumbent firm had of retaining the audit engagement? ______ %
Q4. How did you decide which audit firms to invite to bid on
the engagement?
Q5. Did you consider any non Big-4 audit firms? Explain why
or why not.
Q6. On a 9 point scale, how would you rate your 2007 audited
financial statements ____
Where 1= extremely conservative, 5 = average, and 9 =
extremely aggressive
Q7. What other professional services do you procure through
external contracts (e.g. actuarial, valuation, legal), and are
these service providers subject to periodic bidding (every n
years)?
Service ProviderAverage Periodicity of Being Put up for Bid (in
years)Not Put Up For Bid1.2.3.4.5.
Sunder: Engaging
Auditors
53
Interview Script for Clients
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
II. Characteristics of Audit Firm That Can be Observed Externally
Q8. On a 9 point scale, how important is the size of the audit firm?
______
Where 1= not at all important, 5 = average, and 9 = extremely important
Q9. Do you perceive any differences in the size of the bidding firms, or
are they all about equal in size? Explain
Q10. On a 9 point scale, how important is the reputation of the audit
firm? ______
Where 1= not at all important, 5 = average, and 9 = extremely
important.
Q11. Do you perceive any differences in the reputation of the bidding
firms, or do they all have about the same reputation? Explain
Q12. On a 9 point scale, how important is the independence of the
audit firm? ______.
Where 1= not at all important, 5 = average, and 9 = extremely
important.
Q13. Do you perceive any differences in the levels of the
independence of the bidding firms, or are they all about equally
independent? Explain
Q14. On a 9 point scale, how important is the industry expertise of the
audit firm? ____
Where 1= not at all important, 5 = average, and 9 = extremely
important.
Q15. Do you perceive any differences in the industry expertise of the
bidding firms, or do they all have about the same level of Industry
Expertise? Explain
Q16. On a 9 point scale, how important is the audit fee quoted by the
audit firm? ______
Where 1= not at all important, 5 = average, and 9 = extremely
important.
Q17. Do you perceive any differences in the audit fee quoted by the
bidding firms, or are they all approximately equal? Explain
Q18. How important are the following attributes of the audit firm?
Please rank the listed categories from 1 (Very important), 2 (Medium
important) or 3 (not important).
Rank (1, 2 or 3)
The size of the audit firm
The reputation of Sunder:
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The independence of the
audit
firm
Auditors
The industry expertise of the audit firm
Interview Script for Clients
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III. Characteristics of Audit Firms That Can Be Observed
Internally :Accounting Policy Choice Issues
Q19. Are there a set of key accounting issues that you wish to
know the auditors opinion on? Explain. Do bidding firms differ
on these issues?
Q20. What characteristics do you desire in an engagement
partner? How do bidding firms differ on these characteristics?
Q21. What characteristics do you desire in a relationship
partner? Do bidding firms differ on these characteristics?
Q22. Do you have a preference for who makes the final call on
accounting policy issues, and do bidding firms differ on this
issue?
Q23. Do you care about the location of expertise required to
deal with complex accounting issues (local, regional,
national)? Explain.
Q24. Do you perceive any differences in the other services
(e.g., tax) offered by bidding firms, or are they all have about
the same level of other services? Explain
Q25. How important are the following attributes of accounting
policy issues? Please rank the listed categories from 1 (Very
important), 2 (Medium important) or 3 (not important).
Rank (1, 2 or 3)
The audit firms position on critical accounting issues
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The engagement partner
The relationship partner
Who makes the final call on accounting issues
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The location of expertise
The other services offered by the audit firm
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Interview Script for Clients
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IV. Characteristics of Audit Firms That Can Be Observed Internally:
Audit Methodology
Q26. Audit Committees often ask auditors about their “Audit Approach”
and “Risk Approach.” What do you learn from answers to such
questions, and how do the bidding firms differ from each other in this
respect?
Q27. Audit Committees often ask auditors to specify the total number of
audit hours worked, as well as a breakdown of audit hours by staff level
and by functional area. What do you learn from this breakdown of audit
hours, and how do the bidding firms differ on this audit production
process?
Q28. Audit committees often ask auditors about quality control
processes, and availability of expert advice from the professional
practice group, as well as from the local office. What do you learn from
responses to these questions, and how do bidding firms differ in terms
of how expertise is made available to you?
Q29. Since you have an internal audit department, what do you want to
know regarding the relationship between external and internal auditors,
and how do the bidding firms differ in terms of their proposed interaction
with your internal audit department?
Q30. What type of tax and other services would you be interested in
purchasing from the external auditor? How do bidding firms differ in the
quality or type of such services they can offer?
Q31. How important are the following attributes of audit firms? Please
rank the listed categories from 1 (Very important), 2 (Medium important)
or 3 (not important).
Rank (1, 2 or 3)
The Audit Approach
The Audit Production Plan (Total audit hours and breakdown by
staff level)
Availability of Expert advice locally and from other offices
Engagement with Internal Audit department
Provision of tax and other services
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Interview Script for Clients
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V Relationships with the Audit Firm
Q32. How do you assess your interpersonal “fit” with the audit
firm? How do bidding firms vary in terms of their fit?
Q33. How do you assess responsiveness of the audit firm to
your needs? How do you define “responsiveness” and how do
the bidding firms vary in terms of responsiveness?
Q34. How do you assess intention and /or ability of the audit
firm to maintain staff continuity? How do bidding firms vary on
this attribute?
Q35. How do you assess skepticism of audit partner / team?
How do bidding firms vary on this attribute?
Q36. How do you assess ability of the audit firm to deal with
regulators and other external agents in the firm’s
environment? Do you perceive a difference in bidding firm’s
ability to deal effectively with external regulatory bodies?
Q37. How important are the following relationship attributes?
Please rank the listed categories from 1 (Very important), 2
(Medium important) or 3 (not important).
Rank (1, 2 or 3)
The Interpersonal fit
Responsiveness of the audit firm
Staff continuity
Skepticism of Audit partner / team
Deal effectively with regulators and other external
agents
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Interview Script for Clients
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VI. Other Questions
Q38. What additional information / type of questions do
audit firms ask when they meet you? Do bidding firms
vary in the nature or amount of questions asked?
Q39. What do you learn from the presentations that is
incremental to the written responses provided by the
audit firms?
Q40. What (if anything) really stood out about each
bidding firm?
Q41. What was the key factor(s) that led to the choice
of your new auditor?
Q42. Who came second? Explain
Q43. Compared to purchasing other professional
services (e.g., legal, actuarial, valuation) how
comfortable are you with assessing the quality of audit
service you actually receive. Please use the 9 point
scale below. Assessing quality of audit services is
______
Where 1= completely opaque and much more difficult
to assess than other professional services, 5 =
average, and 9 = extremely transparent and much
easier to assess than other professional services.
Q44. Please provide a copy of a RFP for audit,
actuarial, tax or any other service that you were
involved in, and indicate what part(s) of this RFP you
were involved in (or is the RFP mostly a standard
template?).
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Interview Script for
Auditors
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I. Background
Q1. What do you like to see in a Request For Proposal
document? Please list in order of importance (highest
first):
1.
____________________________________________
________________
2. _____________________________________________________________
3. _____________________________________________________________
Q2. When a RFP is issued, on average what chance do
you think the incumbent firm has of retaining the audit
engagement? ______ %
Q3. What additional questions would you ask the
prospective client?
Q4. Are you able to glean any additional insight
(beyond what was written in the RFP) into the
motivation behind the RFP? If so how, and what do you
think the motivation was for this company?
Q5. What part of your proposal response is standard,
and what part is tailored specifically to the company?
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Interview Script for
Auditors
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II. Specific Responses on Your Proposal
Q6. How do you decide which people (and how many)
to “introduce” to the prospective client in your proposal?
Q7. How do you decide which other services (skills) to
mention in your proposal?
Q8. How else do you convey your expertise?
Q9. How do you convey your responsiveness / fit with
the client?
Q10. How do you decide what fee to charge?
Q11. What fee do you think the incumbent auditor will
quote? Explain
Q12. What fees do you expect other bidding firms to
quote?
Q13. Does your presentation convey new information
or just re-emphasize your written proposal? Or is the
presentation meant to convey something else?
Q14 Do you learn anything out of this process that will
be helpful to you on future engagements?
Q15. Please provide a copy of a RFP for audit,
actuarial, tax or any other service that you were
involved in, and indicate how these RFP differ across
services. Are all the RFP’s just using a standard
template or is there some significant adaptation done?
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