Audit and assurance services are increasingly under price pressure as audit firms compete for business. It can be a challenge not only to get clients across the line with audit services, but also to provide those services within the agreed cost budget. Technology is a key enabler of workflow efficiencies. However, progressive audit firms should also focus on developing formal processes for establishing and managing scope and price of service.
A modern approach to price management within professional firms focuses on 4 key areas:
- Setting the price (the art and science behind defining the right price)
- Getting the price (how to communicate and negotiate the value of service)
- Managing the price (delivering services efficiently and appropriately)
- Reviewing the price (providing the basis for continual improvement)
How effective is your firm at setting, getting and managing price? Are decisions about pricing made on a formal or ad hoc basis? Does your firm have a centralised pricing policy?
National Audits Group has put significant effort into developing a formal pricing policy that helps to ensure that both clients and the firm are satisfied with outcomes. In this article, we share our top 7 steps to manage scope and price effectively.
Develop a formal service agreement
An engagement document that’s more than just a contract is essential to really communicate to clients the servicing requirements of the audit. The service agreement should outline in detail:
- The scope and value of audit work to be completed
- How and when work will be completed
- The nature of communication between client and firm
- Expectations of both the client and firm in completing work
- Process for managing out of scope work
It’s particularly important that mutual expectations are clearly outlined. This is one of the key issues that can lead to scope creep. We take great care to ensure that we have required information before work is commenced and out of scope work is identified early.
Provide a detailed scope of work
A detailed scope of work is essential to minimise the possibility of scope creep. This means that we specifically outline the steps we will take to complete the audit assignment and the role that both the firm and clients will play in achieving required outcomes.
A key benefit of a detailed scope of work is that any work outside scope is easily identified and subject to a separate agreement. Whilst most accounting and audit firms will outline to clients their policy for dealing with matters outside scope, in reality it’s often difficult to identify scope creep until it’s too late to proactively inform the client.
Provide a fixed fee for service
We try to be as transparent with pricing as possible. Our website outlines in detail indicative fee estimates in relation to the size and nature of audit reports. This serves to better inform the client up front, whilst still providing flexibility in developing fee quotes based on specific scope of work.
Whilst our engagements are all based on a fixed fee for service, we still insist that the value of work in progress is monitored through the use of timesheets. This is really the only way we can identify issues in relation to client communication, staff capability and available resources. It’s not important to our clients, but it helps to provide strong internal oversight of workflow efficiency and outputs.
Review the service agreement on an annual basis
In addition to the initial engagement letter, we review the engagement on an annual basis with every client. This gives us the opportunity to review the scope of work as well as address any specific issues that have arisen during the year.
It’s important that re-engagement letters go out well in advance of financial year end. By the start of February, we will have sent out all re-engagement letter for 2019 financial year work. This gives us time to prepare the client and ensure that workflow in the following financial year runs smoothly.
Implement a 2 part audit process
The proactive management of work in progress and flagging of issues is critical to achieving a good outcome for clients and the firm. Audit assignments are divided into (a) interim jobs (preparation for financial year end) and (b) final jobs (completion of audit reports based on financial year end results). By preparing the client before year end, we can be proactive in ensuring the financial reporting and management systems are in place in advance of the reporting season.
Manage workflow in 4 distinct phases
Our audit workflow is segmented into the following phases:
- Phase A – Audit planning, risk assessment and materiality considerations
- Phase B – Risk response, review of financial data and substantive testing
- Phase C – Reporting process, financial statements, governance issues
- Phase D – Any work which is outside scope
Specific staff are given responsibility for each phase and clear turnaround guidelines are in place to ensure that phases are completed in a timely manner. Capacity planning is essential to ensure that we’ve got the staff at the right level, in the right timeframe, to complete the work in a timely manner.
Delegate as much responsibility for implementation to administration as possible
Wherever possible, responsibility for implementation these steps will rest with the administrative team, with the manager overseeing the client relationship. The time required by adminstrative staff in servicing service agreements is incorporated in internal time cost budgets and reflected in the fee charged to clients for our audit services.
Strong outcomes with our pricing policy
With these processes in place, issues with pricing and scope of work are generally minimised. There’s no doubt that it takes a lot of time and effort to establish formal processes in relation to scope of work and pricing, but the benefits in terms of turnaround time, job profit and client satisfaction more than make up for the time and cost in establishing and managing these processes.
Steven Watson, National Audits Group
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