In the ninth installment of our small audit profitability series, we'll discuss how small firms can enhance their bottom line by offering non-attest services while performing audits.
Many smaller CPA firms are recognizing that performing audits of financial statements provides major opportunities for additional non-attest services engagements. While auditors of government and publicly held entities are prohibited from performing such services, professionals from non-public firms and non-profit organizations can without impairing their independence.
Unlike compliance work such as accounting and auditing, non-attest services are usually billed at full fees, a practice called value billing. As a by-product of audit engagements, they can greatly increase overall profitability for the individual clients of CPA firms.
Performing Non-Attest Services
The AICPA Code of Professional Conduct defines non-attest services as management responsibilities an auditor performs. Section 1.295.030.02 goes into more detail:
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"Whether an activity is a management responsibility depends on the circumstances and requires the exercise of judgment. Examples of activities that would be considered a management responsibility and would, therefore, impair independence if performed on an attest client include:
a) setting policy or strategic direction for the attest client
b) directing or accepting responsibility for actions of the attest client’s employees except to the extent permitted when using internal auditors to provide assistance for services performed under auditing or attestation standards
c) authorizing, executing, or consummating transactions or otherwise exercising authority on behalf of a attest client or having the authority to do so
d) preparing source documents, in electronic or other form, evidencing the occurrence of a transaction
e) having custody of a attest client assets
f) deciding which recommendations of the member or other third parties to implement or prioritize
g) reporting to those charged with governance on behalf of management
h) serving as an attest client’s stock transfer or escrow agent, registrar, general counsel or its equivalent
i) accepting responsibility for the management of an attest client’s project
j) accepting responsibility for the preparation and fair presentation of the attest client’s financial statements in accordance with the applicable financial reporting framework
k) accepting responsibility for designing, implementing, or maintaining internal control
l) performing ongoing evaluations of the attest client’s internal control as part of its monitoring activities"
Avoiding Impairment of Independence
The Code does not considered independence impaired if a management person from the reporting entity with suitable skills, knowledge and/or experience is assigned to oversee, review and accept responsibility for the work performed by the auditor.
Qualified members of an entity’s board of governance or an outside consultant may also perform these functions on behalf of the management.
Evidence of the performance of these functions by management persons or others should be documented in the auditor’s engagement files. Documentation will normally be included in the audit engagement and management representation letters, and there should be signatures and dates on applicable working papers and schedules of the persons performing and reviewing the functions.
A Plan for Identifying Basic Non-Attest Services for Smaller Entities
Non-attest services provided by auditors have value for reporting entities during good times and bad. Planning is the key to maximizing profitability.
While providing consulting services for a smaller CPA firm several years ago, I witnessed the fruit of planning for increased revenues from non-attest services resulting from audit engagements. Here is an example of a plan developed by a consulting service:
- During the engagement planning phase of each audit, the leader or in-charge accountant was required to initially identify at least three opportunities for providing non-attest services. Additional ones were then discussed with the consulting services partner to identify other possible related services.
- During the engagement performance, staff personnel were instructed to identify other possible needs of the reporting entity and to outline a plan for providing additional services.
- During the completion phase, the engagement leader met with the consulting services partner and developed a sales plan that would be presented when the audit partner delivered the audit report and internal control letter to management and other persons charged with governance.
Smaller firms may not have a consulting services partner, but the same results are often achieved under the leadership of the audit partner or sole practitioner responsible for the work. In fact, evidence obtained during planning and performing a smaller audit, with close engagement leader supervision, is usually the best source for developing suggestions to help management accomplish their operational objectives.
Here are some examples of questions about different topics that may help determine the need for common, basic types of non-attest services:
- Organization: Does the company’s legal form or organization suit the business? Is the company’s fiscal year its natural business year?
- Planning and Controlling Operations: Are formal forecasts and budgets prepared? Are monthly or quarterly budget variances analyzed and corrective action taken when appropriate? Have the results of audit analytical procedures been communicated to management? Does management keep up with changes in technology for both accounting and operations?
- Accounting Systems, Records and Reports: Does the client have a formal, descriptive chart of accounts? Are the categories in the chart of accounts adequate? Does the client have a standard monthly entry for recurring entries? Is the client’s accounting software appropriate for the nature, size and complexity of its business?
- Personnel: Are there formal hiring and firing policies? Is appropriate documentation maintained? Are human resource policies, such as vacations, sick pay, holiday pay and fringe benefits, documented and communicated to employees? Are salaries and wages competitive?
- Administration: Are office reports, records and recordkeeping procedures adequate? Are all records, forms or form copies in use necessary? Is physical control over records adequate? Are hardcopy and electronic filing systems adequate?
- Cash Management: Does management receive daily cash balance reports? Are forecasts, budgets and cash projections prepared? Is the client receiving maximum cash discounts? Is their cash management effective?
- Sales and Accounts Receivable: Are product pricing decisions documented and based on reliable information? Are credit and collection policies appropriate, and does a management person approve all credits? Do customers receive timely statements? Would an invoice billing system be more effective?
- Purchasing and Inventories: Are optimum inventory quantities maintained? Are physical controls of inventory adequate? Is there control over slow-moving or obsolete inventory? Are services and supplies costs evaluated and approved by management regularly?
- Property and Equipment: Are capital expenditures budgeted and purchase alternatives evaluated? Are physical controls over fixed assets adequate? Are fixed assets records adequate? Is a periodic fixed asset inventory taken?
- Accounts Payable and Liabilities: Is trade credit being used as a source of financing if appropriate? Is long-term financing appropriate (is refinancing possible)? Is payroll accounting and recordkeeping software adequate? Is accounts payable software adequate?
- Insurance: Does the company use a good outside insurance manager? Is coverage reviewed at least annually, and is coverage adequate (including fidelity bonding, business interruption, appropriate product or service liability and replacement values for assets)? Are appropriate amounts of key person life insurance carried?
While there are likely many other questions for management that arise as a result of performing smaller audits, these basic queries may present a gold mine of non-attest services opportunities.
With opportunities to bill non-attest services at full fees, auditors can maximize profitability on every engagement, including smaller ones. Prioritizing and planning are major keys to success. Clients’ needs for services are met, engagement profitability is increased and, perhaps best of all, the reputation of the CPA firm is enhanced.