Audit Firm Business Models – What Audit Committees May Want to Know

As the audit profession continues to evolve to satisfy changing business needs while prioritizing high quality audits for the investment community, firms are taking different approaches toward a sustainable future. These may range from maintaining traditional partner-owned entities that oversee cross-disciplinary functions in pursuit of value creation or exploring business relationships through taking on sovereign debt, selling a portion of the business to an external party while retaining an equity or other interest, divesting a portion or all of the firm’s consulting practices to a third-party, growing through acquisition of other audit firms, or even the changing traditional ownership structure within the organization. Each of these options will impact how the audit firm operates and how it is governed.

From the perspective of an audit committee, that is responsible for the appointment, compensation, and oversight of external audit firms, these changes in an audit firm’s business model may be of particular consideration. Directors may wish to understand the following (not all inclusive) when engaging with external auditors:

General

• • • What prompted the change in business model?
    • What determined the decision to select this business model over another?
    • How does the change in business model align with the firm’s stated core values, goals and strategy?
    • What were the specific benefits to the firm, its leadership, and its investors (if applicable)? What were the disadvantages?
    • Is this business model change designed to be sustainable in the long term for all stakeholders?

Governance and Leadership

• • • How has the governance structure changed under the new business model?
    • How is the primary objective of executing high quality audits being preserved?
    • Has the change in business model impacted the culture of the organization and how is this impact being monitored?
    • Are all those involved in the governance proficient in applicable regulatory, accounting, and auditing professional standards required of traditional accounting firms?

Ethics and Independence

• • • Does the business model safeguard adherence to ethical and independence responsibilities?
    • Is there a need for further development of controls with respect to associated entities?
    • How might the new business model impact current and future clients of the firm and their business relationships?

Operations and Change Management

• • • Under the change in business model, who has control over decisions that impact operations?
    • Has a change management function been integrated and how is this being monitored?
    • Will there be any disruptions or delays in the provisions of audit services?
    • Will there be any changes in or stoppage of services provided to existing client types, sizes or industries served, etc.?
    • Does the change in business model impact the attraction and retention of talent?
    • Does the nature and integration of the transaction ensure that systems of quality management are operating and effective?
    • How are investments in technology, tools, and processes needed to conduct high quality audits determined?
    • Who is responsible for the oversight of engagement management – e.g., engagement partner and staffing, budgeting, fees, etc.

Monitoring and Communications

• • • Is a robust monitoring system being maintained for compliance with professional standards and firm policies and procedures?
    • Are the gatekeeping responsibilities in the interest of investor protection being communicated and prioritized under the new business model?
    • Will current voluntary reporting to the Audit Committee and other stakeholders be continued or expanded under the new business model?

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References:  SEC Chief Accountant Statement: Audit Independence and Ethical Responsibilities: Critical Points to Consider when Contemplating and Audit Firm Restructuring