Though many organizations look at an auditor’s fees as the most important aspect of their proposal, we saved this topic for last. We’ve already discussed five other factors that contribute to how an auditor works with organizations, and in many ways, those aspects are more important than fees.
Even so, being aware of the three most common ways auditing firms charge for their services can make you a more well-informed decision-maker both now and in the future.
Common Auditing Fee Structures
Depending on your organization’s needs and prior experience, you may prefer one fee structure over another. However, no matter what structure you seek during the engagement process, you should make sure you understand what’s included and excluded from the proposed cost of service. Being prepared and thorough at the beginning may save your organization both money and frustration.
Perhaps the most self-explanatory structure, firms that work by the hour will quote their hourly rate and the estimated time it will take to complete your audit. However, there are a few drawbacks to choosing this flat rate.
First, it’s hard to know exactly who you’re paying the hourly rate for: an experienced CPA or an intern? In any audit, people with a range of experiences help prepare your financial statements, but you probably don’t want to pay an expert’s rate for a novice’s work. Ask the auditing firm what percentage of the work will be completed by which team members.
Second, under this structure, auditors can charge their hourly rate for consultations and phone calls. This is a common way for hourly auditors to inflate their fee throughout the year. Ask about this as soon as possible. If meetings and discussions with your auditors aren’t included in the quoted fee, make sure you understand the charge rates for speaking with your auditor.
Auditing firms know how important the bottom line is to potential engagements, so many try to quote minimum service costs up front while keeping other expenses (like shipping, travel, meetings, etc.) unmentioned in the proposal.
Others will quote a low fee up front but later inform the client they need to prepare other schedules or reports, which drives the service cost up. We’ve even seen an auditing firm charge clients for “education on professional standards.”
Add-on fee structures are common in the auditing world, so before you sign an engagement, make absolutely sure you have a grasp of the full cost of service: The quoted price plus all additional and necessary charges.
Another common fee structure predicts the total cost of service for clients based on the type of engagement. An all-inclusive fee quotes a single price for services, logistics, and all other anticipated fees. This makes budgeting for yearly audits simple and ensures you won’t be caught off guard by any fine print.
This type of fee places the burden on the auditing firm rather than the client. The firm is bound by the engagement, so if the audit becomes complicated, in a majority of cases, the auditors cannot come back to ask for more money.
If you consider an auditor who quotes an all-inclusive fee, clarify that communication with your auditor, mailing expenses, and travel costs are part of the quoted price. Also make sure the auditor cannot raise their fee for the current audit after engagement.
Annual Fee Increases
Finally, keep in mind that most auditors increase their fee by a certain percentage each year — usually between 5% and 10%. If you don’t see a three-year fee quote in an auditing firm’s proposal, clarify what the annual increase will be.
The Value of Transparency
Being thorough, direct, and targeted in your questions throughout the proposal process will help you identify which auditing firms are the most transparent with their fees. Eliminating firms whose fee structures aren’t right for you will speed up your decision, save your organization money, and spare you the hassle of having to choose another auditor the following year.
If you have any questions about the fee structures mentioned here, please contact us! We are here to serve you.
Want to learn more? Check out our blog series on how to choose an auditor.