Independence and Profitability

By Alex Vuchnich, CPA, CFE - I have had the opportunity to work with a large number of accounting firms of varying sizes, from sole practitioners up to the top ten largest firms in the nation. One thing I have observed across the board is that those firms that implement standardized processes for monitoring independence with respect to their clients tend to be able to charge a higher premium when it comes to their fees. This correlation is also observed in the fact that larger firms tend to have more standardized processes and typically charge the highest rates. Part of the increased independence that these firms maintain is a result of the relative insignificance any one SMB client has to the firm as a whole. Larger firms are more easily able to walk away from a 'problem' client since the revenue impact may be slight.

It is quite common in the SMB environment for smaller firm audits to require significant adjustments to the financial statements in order to properly present them in accordance with GAAP. Although recording adjustments approved by the client's management is a permissible non-attest service under 101-3, there is no question that it results in diminished independence and in diminished profitability for the firm. All firms would benefit greatly if they began to not only recognize this trend but to also start taking steps to move toward a more independent stance from their clients.

One solution is to systematically begin to identify those attest clients where a significant portion of the time budget on a job is spent providing non-attest services allowed under 101-3. The firm can begin to transition services to these clients from attest engagements to solely non-attest work. This provides the firm a way to continue a relationship with the client and to continue generating a revenue stream. The attest work will need to be referred to another firm. It is likely that overall fees for both your firms services and the new firm will be higher than the original fees under the single firm model so it is necessary to properly manage the transition and present the overall benefit to the client. The primary benefit will be that you will be able to provide a higher level of advisory service to the client (and you must provide concrete examples) and at the same time reduce the overall disruption and discomfort associated with the annual audit. Just like with larger firms that may have the luxury of walking away from SMB clients, all firms that can maintain a higher degree of independence will likely be able to maintain higher profit margins on their engagements (attest and non-attest alike).

This blog

by Alex Vuchnich, CPA, CFE - Alex Vuchnich is the developer of Controlzkit an internal controls anaylsis tool and shares his perspective on how audit and accounting theory, technology and professional ethics interrelate to create forward thinking profitable firms.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.

48711

Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.

82011

Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.

53884

Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

97428
Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.
24575

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".

61278

William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.

87118

Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.

28506

Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.

70044

Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

38224
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
110183
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.
29998

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

58258
Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
32004
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.
36634

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.

109055

The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.

37893

FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.

120227

Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.

67435

Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

43691
Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.
71427

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.

98404

AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.

58968