Setting and managing fees for service is one of the most challenging tasks for audit professionals. When the client believes that the service is easily ‘commoditised’ and acquired, price competition becomes an issue. Hence, it is no surprise that scope creep arises when the service provider does not take due care in establishing and managing the scope of work.
When expectations are not aligned, and scope creep impacts on the profitability of audits , firms should consider:
1. Maintaining the scope of work and fee for service
2. Maintaining the scope of work and increasing the fee for service
3. Reducing the scope of work and maintaining the fee for service
4. Referring the client to another firm for their audit work
Each of these actions has specific challenges. Ideally, an annual re-engagement process provides the opportunity to talk with the client about the scope and fee and negotiate a new agreement that better reflects the cost of providing the service. However, the best approach is to establish a process upfront that prevents scope creep and fee issues from arising.
A formal pricing policy focuses on 4 key areas:
1. Setting the price (the art and science behind defining the right price)
2. Securing the price (how to communicate and negotiate the value of service)
3. Managing the price (delivering services efficiently and appropriately)
4. Reviewing the price (providing the basis for continual improvement)
Step 1 – Develop a formal cost and pricing policy
A formal cost analysis based on hours and charge out rates at different levels of expertise is essential to ensure that the engagement is not under-quoted. Expect that, for a new client, there will be minor matters arising that are either out of scope or under-costed in the engagement. Often the best way to address this is to establish a cost-price ‘multiplier’ to enable some leeway as the engagement progresses.
Step 2 – Give the client options if possible
The best way to ‘frame’ the engagement is to explain to the prospective client what is and isn’t included within the engagement. This helps the client to ‘compare you with you’ rather than make comparisons with another quote that’s not really comparable. It also allows the client to better understand what you can provide beyond audit and assurance.
This can be challenging for a service which is considered by the client to be compliance driven. However, even a commoditised service can be structured on the basis of the quality and timeliness of work received by the client.
Step 3 – Develop a formal service agreement
An engagement document that’s more than just a contract is essential to really communicate to clients the servicing requirements of the audit. The service agreement should outline in detail:
1. Detailed scope and value of audit work to be completed
2. The basis on which fees are computed and billing arrangements
3. How the work will be completed (stage by stage)
4. Key timeframes for the completion of work
5. The nature of communication between client and firm
6. Expectations of both the client and firm in completing work
7. Process for managing work which is ‘out of scope’
In scoping the work, it is critical to identify all steps involved, including the expected outcomes. Often, the real value (and cost) of audit services is not well understood, or is overlooked by the client, simply because it’s presented and/or considered as a commoditised service.
Step 4 – Manage workflow in 4 distinct phases
At National Audits Group, our audit workflow is segmented into the following phases:
§ Phase A – Audit planning, risk assessment and materiality considerations
§ Phase B – Risk response, review of financial data and testing
§ Phase C – Reporting process, financial statements and governance issues
§ Phase D – Any work which is outside of and/or additional to the scope of the audit
Specific staff are given responsibility for each phase and clear turnaround guidelines are implemented to ensure that phases are completed in a timely manner.
Capacity planning is essential in ensuring the audit team has access to sufficient staff at the required times to facilitate the completion of work in a timely manner.
Step 5 – Delegate as much responsibility to administration as possible
Wherever possible, responsibility for managing workflow should rest with the administrative team, with the manager overseeing the client relationship. The time required by administrative staff in servicing service agreements should be incorporated in internal time cost budgets and reflected in the fee charged to clients for audit services.
Step 6 – Identify out of scope work quickly
A key benefit of a well considered detailed scope of work is that any work outside scope is more easily identified and subject to a separate agreement. Whilst most accounting and audit firms will outline to clients their policy for dealing with matters outside scope, it is often difficult to identify scope creep until it’s too late to proactively inform the client.
All staff involved in managing the client should be trained to identify key issues leading to scope creep and its consequential pressure on the agreed fees. Special matters are usually easy to identify, with the challenge being notifying the client in a timely manner. When information received is not at the standard required to do the work efficiently, or when workflow is prolonged due to adhoc provision of information, special care should be taken to advise the client of the additional processing time.
Step 7 – Review the agreement on an annual basis
All client agreements should be reviewed on an annual basis. This provides the firm the opportunity to review the scope of work, and to address any specific issues that have arisen during the year.
It’s important that re-engagement letters go out well in advance of the financial year end. This means that 3 months before year end, all re-engagement letters are sent out for the next year’s work. This provides sufficient time to review the scope and fee, discuss with the client and obtain approval to proceed.
There is no doubt that these 7 steps work effectively in managing client expectations in relation to both scope of work and fee for service. These steps should be implemented for both new and existing clients.
It can be quite challenging for firms that don’t specialise in audit to establish and maintain these procedures. When it just isn’t feasible to manage client expectations, the best approach is usually to outsource the audit to a specialist service provider, such as the National Audits Group.