Changing your auditor

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Have you ever considered changing auditors, but then were not sure how you can go about it? This is not an uncommon question that we are asked, and it tends arise when a prospective client has been with their existing auditor for a number of years.

Are you sure about changing auditors? If so, jump to the how to change auditor section.

Do you need to change auditor?

Before getting onto the how, it is important to answer the question of why you may want to consider changing auditor. Some of the most common reasons for wanting a change we hear include:

  • Changes in personnel at their existing audit firm, notably arising from a key member of staff changing firms or retiring. If the change is not felt to have been managed well, then this can be a reason some clients choose to change auditors,
  • Cost can be a consideration; there can be worry that they are overpaying for their audit,
  • A breakdown in the relationship, perhaps arising from a disagreement or disappointment in the service being received; and
  • To ensure independence of the auditor; some organisations prefer to rotate audit firms to ensure that a familiarity risk between the auditors and management does not develop.

It is important to establish the reasons for changing, and to discuss your concerns with your existing auditor in the first instance. It may be possible to resolve your concerns quickly and avoid the need for a change.

However, some problems are likely to be difficult to resolve and a change in auditor may be the best way forward.

Benefits of changing

Keep audit fees competitive

It is not unheard of for the costs of an audit to creep upwards overtime. One of the key measures to reduce the risk of overpaying is to hold regular tenders for the audit, typically every 5 years.

This gives you a chance to compare a range of firms across the market and help to keep your audit competitively priced.

However, when considering fees, it is worth noting that audits are typically performed on an audit risk basis. This means that the size of your audit fee will likely be tied to the perceived audit risk of your organisation, as opposed to simply its size. Consequently, it is possible to be quoted more for your audit than a seemingly comparable organisation (in terms of income).

Ensuring independence

A well-known risk to the integrity of the audit is familiarity risk. This arises when there is considered to be a relationship between the auditor and management which is too close. i.e. they are too ‘friendly’ which gives rise to the risk that the auditor may find it difficult to be objective when undertaking the audit.

If there could be a perception that the auditor was unable to be objective, this will naturally damage the credibility of their audit opinion. Without trust in the competency and independence of the auditor, the value of the audit report could be impacted.

To avoid this risk you may wish to change auditors after a period of time (the Auditing Practices Board consider this risk may arise after a period of 10 consecutive years).

Alternatively, there are potentially simpler solutions you may wish to consider to safeguard against the risk including:

  • Asking the audit firm to change the audit partner, instead of changing the entire audit firm
  • Having the completed audit file reviewed by an independent third party (i.e. someone not involved as part of the audit team)

Offer a fresh perspective

Nothing stands still. The world, you and your organisation are constantly changing, and it is important that your auditor can change in line with your needs.

A new auditor may offer alternative ways of working, such as being able to utilise latest digital technology which better fits how your organisation operates.

Alternatively, another auditor may have different ideas to share with your organisation which may help to improve the audit process, the efficiency of your finance function or recommendations to tighten up on controls which reduce your risk of fraud and error.

Just like making changes within the management team, it can be beneficial to change auditors to provide a different point of view, which may help your organisation evolve.

Some issues to be aware of

Whilst changing auditor can be beneficial, it is important to be aware of some of the potential drawbacks.

Loss of knowledge

The delivery of an effective audit relies upon knowledge and familiarity with how an organisation operates. Put simply, it is very difficult to audit an entity which you do not understand. Only through understanding an entity, can you properly identify where the audit risks lie.

This should not be a deal breaker though, as the new auditor can learn about your organisation. The issue is more that it takes time. If you do make the change, you will need to be prepared to answer more questions to allow the incoming auditors to get to know you and your organisation.

It is worth noting that most professional bodies require their members to provide support to incoming auditors, by sharing their knowledge. Thus, this should go some way to helping with the transition.

Potential for disruption to business

There are two potential reasons that this may arise. The first relates to the process of appointing an auditor, and the second potentially arises during the transition year.

If a comprehensive auditor tendering process is decided upon (see below), this can be a time-consuming task for management to undertake. This may potentially detract their attention from their other operational responsibilities.

Secondly, there can be some potential disruption in the first year following the appointment of the new auditor. This can arise from the incoming auditors implementing audit approaches that are different from the incumbent. For example, the incoming auditor may ask for additional information which may not have been requested by the previous auditors.

How to change auditor

Agree on the need for a change

The first step is to ensure those who ‘own’ the organisation (be they trustees for charities, or shareholders for private companies) agree with the need for change. Whilst the auditor will primarily speak with the management, they are ultimately responsible to either the Board of Trustees or the Shareholders.

Thus, it is the board of directors/trustees who will need to instigate the process for change. However, the responsibility for managing the process of appointing the auditors will often be delegated to management.

Define the recruitment process

Once there is agreement to seek to appoint a new auditor, the next step is to agree on the method to appoint a new auditor. There is generally not a prescribed way to go about this, unless it is written within your organisation’s constitution or articles of association.

If the board know the auditor they would like to appoint, then it is possible to simple approach them directly. This is a quick way to do it, however this is potentially risky, as you may find it tough to fully evaluate the proposal as you do not have anything to compare it with. Hence, the most common method for appointing a new audit is to hold a tendering process.

A tendering process collects several proposals and provides a framework to learn about how each provider would approach the audit of your organisation. This creates a competitive process (something missing from the direct approach), by allowing for easy comparison between a range of different providers.

The downside of a tender is that it can be time consuming for management to run.

Prepare invitation to tender

Assuming you opt for the tender process, the next step is to prepare a short document known as an “Invitation to Tender”. This is to be given to potential audit firms and provides them with a short introduction to your organisation.

The purpose of the document is to attract firms to tender for the audit, and therefore it only needs to be one or two pages; it should outline:

  • Who the organisation is, including a short history and an outline of the products or services provided by the organisation.
  • The structure of the organisation’s finance team, and details of any audit/finance committees that the organisation has.
  • Desired characteristics that incoming auditor should possess/demonstrate

In addition to the invitation to tender, it is always recommended to attach a copy of the full accounts from the last financial year. This is especially important if your full accounts are not publicly available.

Request proposals

Naturally, once you have prepared the invitation to tender document, you will need to find suitable audit firms to invite to the process.

Suitable firms can be identified in a variety of ways including from personal recommendations, through social media platforms such as LinkedIn or through Google searches.

Could Balance Rec be your next auditors? Find out more about our values and principles.

You should expect that the prospective audit firms will want to arrange a meeting/call to find out more about your organisation before submitting their proposal.

Failure on the part of a prospect to arrange a meeting with you may indicate a lack of enthusiasm to work with your organisation and should be considered a red flag.

Evaluation of the proposals

In addition to the submitted proposals, as part of the evaluation process you may wish to arrange an opportunity to meet the firms. This could be in the form of an interview or presentation and gives you the opportunity to question the prospects in more detail.

Note, the process is yours to design and you may feel you have enough information from the proposals to make a decision. Holding an interview or presentation is recommended though.

When making the final decision, it is worth considering a range of factors including the following:

  • Check the audit firm is registered to act as your auditors – public registers of licenced auditors are available. In the UK, this information is available from the Register of Statutory Auditors.
  • Experience of working with similar organisations – knowledge of working within your sector will mean they are familiar with your challenges and will be well placed to keep you updated on regulatory changes, whilst providing insightful recommendations.
  • Audit approach – it will be helpful to learn about how they would undertake the work, and what software they might use. Ensuring compatibility with your systems, and how you work is important to ensuring a smooth audit process.
  • Relationships – are they people who you could work with happily? A good working relationship is required if the engagement is to be successful
  • Cost – which proposal offers the best value for money? A word of caution; be wary of going for the cheapest option. Unless you can understand why the quote is significantly cheaper, it may be an indication that the audit firm have not fully understand the level of work involved.

Making the appointment

Once you have settled upon a new auditor, you will need to notify those involved in the process of the decision, including the outgoing auditors.

You can expect the incoming auditors will prepare an engagement letter to be signed on behalf of the organisation, once all the anti-money laundering checks have been passed.

As mentioned previously, professional bodies expect that outgoing auditors will cooperate with the incoming auditors, to ensure a smooth transition. You can expect the new auditors will deal with this process directly, after gaining your permission.

There is one additional step for Companies, (either private limited companies or charitable companies registered at Companies House). The outgoing auditor will need to write to the company informing them of their resignation as auditors. This letter will also include a statement of if there are any relevant factors to bring to the attention of shareholders or creditors and will need to be filed at Companies House with 14 days.

No such conditions apply for charities who are not registered with Companies House.

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