Comment: Choosing the right auditor

By Karen Allan, director of Haysmacintyre

When it comes to selecting an auditor, sentiment is moving away from the Big 4, with many private equity houses moving to mid-tier auditors.

Oftentimes, the cultural fit with a smaller audit firm is better. The audit manager and partner are more accessible, encouraging an open dialogue with regards any accounting/business issues as they arise, rather than retrospectively during the audit process. As a COO or CFO at a private equity firm, it is crucial to develop a good ongoing relationship with your audit manager and partner, this fosters open and honest channels of communication which make the audit process much smoother.

Many firms do not realise the auditor of a PE firm and the auditor of the fund(s) do not need to be one and the same, and that the division of these services between two audit firms can often deliver a better level of service and cost savings. This is particularly true where the audits are split between large and, say, mid-tier firms who between them can provide the appropriate level of service and comfort for investors on each entity in the group, whilst achieving cost efficiencies. Whilst bigger firms often specialise in fund audits, the size of the management company audit may not result in the same level of attention or quality of service from a large firm as it would a smaller firm.

What are the key considerations when thinking about audit firms?

Access to senior members of the team, the partner and the manager.

Access to ancillary financial services which may be suitably provided by a smaller firm including:

• Corporation/partnership tax advisory and compliance;
• Personal tax compliance;
• Outsourced finance function;
• Payroll; and
• Company secretarial.

This allows the private equity firm to focus on key commercial areas with comfort that financial compliance is outsourced to a specialist.

COOs and CFOs should be confident that their future “partner” is the right fit from a cultural perspective, quite rightly you want a strong ongoing relationship with all of your service providers and want to get the most out of them.

Consideration should be made to an auditor’s sector specialism, given the specific requirements of the regulatory framework in which most firms operate.

Recommendations are helpful and references are a prerequisite.

What do you consider to be the most important factor?

Relationships are key: a strong working relationship with the manager and partner at your audit firm is integral to future success. If you are able to touch base regularly with your audit partner and manager, it helps to ensure that the audit process is smooth and efficient and avoids any “surprises” at the year-end audit if any complexities or queries can be dealt with as they arise during the year.

Is it easy to move auditor?

The simple answer is yes. Once the decision has been made and approved by management and the audit firms have been informed, the transition onus is on the audit firm. This takes the burden away from the PE firm. The incoming audit firm will liaise directly with the incumbents to obtain professional clearance and to ensure that appropriate handovers of information are performed ahead of the forthcoming audit.

There will be a requirement for the new audit team to familiarise themselves with the business and the systems and controls in place in the first year they work with you, but this should provide an additional risk mitigation process insofar that a fresh perspective can help identify any control weaknesses which may have been overlooked by the exiting audit firm and provide added value in this respect.