Audit fee recovery percentages in training firms

Straw poll of average expected recovery rates

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I've been moving heaven and earth to try to improve chargeable time recovery percentages on a particular client case with a long history of very large over-runs, approached from the non-audit side. Firstly, I reinstated a strict split between accounts preparation / tax work and audit work. This was not least to significantly improve impartiality of the audit approach and encourage better focus on the audit procedures being applied. But also to avoid waters being 'muddied' between compliance and audit time costs so I could see clearly what was contributing to write-offs. The accounts prep has been done at senior level with a grand left in the kitty for pressing a few buttons and issuing accounts for signature. That side of things has gone extremely well.

 

As an auditor in a 'former life' I have some idea of the likely nature and reasonable / proportionate scope of work involved to perform a good quality audit of a firm of the relevant size and type. In my own experience, with 90% of the relevant information laid out, ready-filed in sections and a full set of working papers and lead schedules to hand, a thorough audit could have been done by an experienced audit senior in about 4-5 days tops. 

 

To keep Chinese Walls as thick as possible, I don't have any say in how audits are run, only the opportunity to 'hand over on a plate' everything I think could feasibly be relevant including having transitioned the client to 'Cloud' accounting where most things such as copy invoices can be downloaded at the click of a button. 

 

At completion, with the file still to "pull together" on the audit side, RTM and LOR outstanding but no identified adjustments the entire (pretty decent) budget has already been exceeded by around 20%. I am somewhat at a loss to understand it (even being very generous) and can only presume that having put four different members of staff over 2 weeks on a £3m turnover company job there is some huge inefficiency in the system I haven't identified the source of yet. It just doesn't "add up" to me. "In my day" I would have been on the carpet to explain every hour spent leading to a write-off. I don't think that happens anymore !

 

Whilst some time is not charged if a staff member has been clearly under training on the job I think for anyone above a junior it likely is, so I am hazarding as a guess more senior staff may also be challenged by some aspects of the job and may be spending a lot of time looking things up or raising a lot of review points with inexperienced team members they are supervising leading to to-ing and fro-ing. 

 

The bottom line is, I would really like to see some efficiency unlocked to bring audit performance within the reasonable fees clients can access in the market and some benchmarking would be very helpful as I rarely engage with this area. 

 

I realize policies about booking time etc may differ as may the mix of staff used on particular jobs, but are any members in training firms able/willing to share their 'expected' average chargeable time recovery percentages from audit work these days ? At least that way I have some sort of benchmark for whether I am being too hard in my expectations of that team, and everyone is suffering routine write-offs in audit, or whether it's time for a proper 'pow wow' debrief on what is going wrong... 

 

Much obliged to any contributors willing to share a bit of context ! 

Replies (23)

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By taxdigital
28th Mar 2024 06:57

I don't have answer to your questions but have some comments.

kim.shaw-and-co.com wrote:

Firstly, I reinstated a strict split between accounts preparation / tax work and audit

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Unless there is something more to it, if your firm is the auditor not sure how you can prepare the accounts as 'auditor independence' will obviously be in question.

kim.shaw-and-co.com wrote:

£3m turnover company job 

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Unless it's part of a UK or overseas group, audit for them will be an 'overhead' best avoided. Audit thresholds will continue to rise and , soon OMBs may go the US way with audit requirement out of the way. So, there is nothing much left in small audits and that too with the PBs all over the auditors like a rash. Many one-man band audit shops have been giving up their licenses.
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Replying to taxdigital:
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By Sandnickel
28th Mar 2024 08:49

There's nothing to stop accounts and audit being prepared at the same firm (at the moment anyway). As long as you have the audit threats sufficiently covered then it's fine.

To answer the question my experience is that it's often in the planning stages where the job falls down. The plan is quickly put together and then not followed or revised as the job progresses. The senior or manager then ends up completing or even performing junior work in order to get the file finished.

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Replying to Sandnickel:
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By Bobbo
28th Mar 2024 09:22

Sandnickel wrote:

The senior or manager then ends up completing or even performing junior work in order to get the file finished.

This is too real for me

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Replying to Sandnickel:
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By taxdigital
28th Mar 2024 10:00

Sandnickel wrote:

There's nothing to stop accounts and audit being prepared at the same firm (at the moment anyway). As long as you have the audit threats sufficiently covered then it's fine.

How does that work in a one-man band firm (of course with staff) with an audit licence?

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Replying to taxdigital:
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By Sandnickel
28th Mar 2024 12:08

RI (so OMB) would sign off the audit. No involvement with the accounts at all - a suitable senior manager would take responsibility for that.

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Replying to Sandnickel:
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By kim.shaw-and-co.com
28th Mar 2024 14:21

Sandnickel wrote:

The plan is ... then not followed or revised as the job progresses. The senior or manager then ends up completing or even performing junior work in order to get the file finished.

There was plenty of planning done - 1/3 of the total budget actually, and I even gave them an hour of 1 to 1 briefing on what (way beyond the 'norm') had been ingathered and made available for review.

I am inclined to think what you have described is exactly what the issue is, and that weakness is in the execution !

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Replying to kim.shaw-and-co.com:
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By Sandnickel
28th Mar 2024 16:07

I find that planning is a box ticking exercise instead of it actually being helpful.

In a previous life I saw audit recoveries vary between 35% (!) and 120% and it was usually either too low a fee or inadequate planning (workload / wrong areas picked / unexpected complications which should have been obvious etc).

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Replying to Sandnickel:
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By kim.shaw-and-co.com
28th Mar 2024 17:13

Sandnickel wrote:

I find that planning is a box ticking exercise instead of it actually being helpful.

In a previous life I saw audit recoveries vary between 35% (!) and 120% and it was usually either too low a fee or inadequate planning (workload / wrong areas picked / unexpected complications which should have been obvious etc).

Time cost recovery last year was just over 30% hence my interventions ! There was a lot of blaming on accounts prep work etc. which I just didn't accept and therefore separated that part of the job.

Getting to finalization stage and through final audit meeting at a running 80% of fixed audit fee used and 80% or so recovery overall on time charged to date out of it is likely a minor miracle against that history and a great first step - the proof will be in the final pudding when all the i-dotting and t-crossing has been charged to the time clock, given all relevant evidence has been confirmed to have been received now, I am guessing overall recovery % may drop to about 65%.

I would, however, like to see it at 100% next year - and genuinely believe that should be achievable if the job is approached in a different way with different staffing.

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By Roland195
28th Mar 2024 09:23

I can't claim any specific expertise in this area any longer, but I'd be surprised if many smaller audit firms can turn a profit on strictly auditing.

Could the thick "Chinese walls" (are we allowed to say that anymore?) may be contributing to inefficiencies - Who supplies tax calculations for instance?

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Replying to Roland195:
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By kim.shaw-and-co.com
28th Mar 2024 14:17

Roland195 wrote:

I can't claim any specific expertise in this area any longer, but I'd be surprised if many smaller audit firms can turn a profit on strictly auditing.

Could the thick "Chinese walls" (are we allowed to say that anymore?) may be contributing to inefficiencies - Who supplies tax calculations for instance?

They have the tax comps with add-back recs and DT all done and reviewed by Corporate Tax Partner as a 'starting point'. All they have to do is perform audit procedures. The (separate) audit fee is 130% of the fee for preparation of accounts and corporation tax combined.

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Replying to Roland195:
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By kim.shaw-and-co.com
28th Mar 2024 14:17

.

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By Duggimon
28th Mar 2024 09:40

You can only recover all your audit time by having staff on extremely low charge out rates performing the bulk of the work. For this to be feasible without impacting the quality of work you need a large audit department with a formalised training path and a constant stream of audit work, which is why there are so few smaller firms still doing audits.

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Replying to Duggimon:
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By kim.shaw-and-co.com
28th Mar 2024 14:14

Duggimon wrote:

You can only recover all your audit time by having staff on extremely low charge out rates performing the bulk of the work. For this to be feasible without impacting the quality of work you need a large audit department with a formalised training path and a constant stream of audit work, which is why there are so few smaller firms still doing audits.

The thing is, I'm not convinced for smaller company audits that is optimal. I could personally bring the job in 'on budget' at full 'Partner' charge-out rates from the starting point we gave the audit team. Because you would know from experience what to focus on and could see the 'bigger picture' from the planning stage.

Drop to an experienced Senior and give them two more days to do the same job with minimal consequential review time and I'll bet it could be done at 100% recovery.

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John Toon
By John Toon
28th Mar 2024 10:03

Our bottom line is 80% recovery. Anything below that and we investigate the reasons. I don't recall what our overall current recoveries are running at, but a few years ago they were down at 82% overall. That is distorted somewhat by a large NFP portfolio. Of course, that doesn't catch all the time not charged by staff(!) or if our charge rates are comparable to other firms

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Replying to johnt27:
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By kim.shaw-and-co.com
28th Mar 2024 14:10

johnt27 wrote:

Our bottom line is 80% recovery. Anything below that and we investigate the reasons. I don't recall what our overall current recoveries are running at, but a few years ago they were down at 82% overall. That is distorted somewhat by a large NFP portfolio. Of course, that doesn't catch all the time not charged by staff(!) or if our charge rates are comparable to other firms

Finally a "figure" - many thanks !!! They're at 80% with final accounts agreed but still to finish their file and do LOR. I'm guessing another £1.5-£2k.

Fee-wise, the Group main auditors could (and would likely) undercut on tender/negotiation. Given sectoral pressure the audit fee is going to have to be frozen next year.

As far as I'm concerned it's up to the audit team to self-examine and question their approach. Slashing a diverse team to a single senior member of staff is likely, I reckon, what would bring this back into tolerable recovery margins.

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By frankfx
28th Mar 2024 10:43

may be worthwhile engaging an external audit reviewer.

*Mercia
*2020

Immediately come to mind.

They can assess strengths and weaknesses in your approach.

Also benchmark your audit service at the same time.

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Replying to frankfx:
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By kim.shaw-and-co.com
28th Mar 2024 14:05

Thanks @frankfx that's a great suggestion - I will make it to the relevant audit partner !

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By SkyBlue22
28th Mar 2024 11:27

How do your audit fees compare to other clients? If you can't improve efficiency it suggests that perhaps the fee is just too low. But my experience is that often staff spend too much time 'fixing' or 'investigating' things that really the client should have prepared.

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Replying to SkyBlue22:
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By kim.shaw-and-co.com
28th Mar 2024 14:03

SkyBlue22 wrote:

How do your audit fees compare to other clients? If you can't improve efficiency it suggests that perhaps the fee is just too low. But my experience is that often staff spend too much time 'fixing' or 'investigating' things that really the client should have prepared.

I would say, given statutory accounts in this case had already been prepared competently with fully cross-referenced working papers to source of prime records it is quite possibly too much time 'fixing' or 'investigating' things that are not broken or have already been investigated and documented ... but nobody actually looked !

Let's just say on fees a Big4 firm could undercut our fee by about £2k on a loss-lead because they audit the rest of the Group.

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By taxdigital
28th Mar 2024 13:27

Sandnickel wrote:

RI (so OMB) would sign off the audit. No involvement with the accounts at all - a suitable senior manager would take responsibility for that.


That sounds like a piece of nonsense. It's the directors' job to prepare accounts (s.394 et seq) which subject to the terms set out in the engagement document is outsourced to a firm of accountants. And that very firm, according to you, will then sign another audit engagement letter with the same client for the audit to be performed??? May be I'm very old school out of touch with the 'modern' world!
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Replying to taxdigital:
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By kim.shaw-and-co.com
28th Mar 2024 14:00

taxdigital wrote:

Sandnickel wrote:

RI (so OMB) would sign off the audit. No involvement with the accounts at all - a suitable senior manager would take responsibility for that.

That sounds like a piece of nonsense. It's the directors' job to prepare accounts (s.394 et seq) which subject to the terms set out in the engagement document is outsourced to a firm of accountants. And that very firm, according to you, will then sign another audit engagement letter with the same client for the audit to be performed??? May be I'm very old school out of touch with the 'modern' world!

It's usually another company in the Group, but it can be the same firm for smaller practices. Preferably with a different RI. Nothing unusual about it !

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Replying to kim.shaw-and-co.com:
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By taxdigital
28th Mar 2024 14:43

kim.shaw-and-co.com wrote:

It's usually another company in the Group, but it can be the same firm for smaller practices. Preferably with a different RI. Nothing unusual about it !

I was talking about a one-man band (single director firm) doing both accounts and audit.

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By Sandnickel
28th Mar 2024 16:04

Nothing nonsensical about it. Threats to independence and self review should all be planned out at the beginning of the assignment and mitigated. If the threat can't be managed or mitigated the audit wouldn't go ahead.

The auditor signs off the accounts, so it's perfectly possible to separate the accounts prep in house.

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