How Can You Hit the Spot? Finding the right audit firm for your nonprofit

April 3, 2005

By Barbara Green, CPA

High-profile commercial sector scandals in financial management have dominated recent headlines — and the nonprofit sector has not escaped this type of unwanted publicity. Deceptive accounting at United Way, the Nature Conservancy and other charitable groups has also appeared in media accounts.

The abundance of media attention has made nonprofit boards and audit committees aware of the need for greater accountability. As part of this rude awakening, many are beginning to question long-standing auditor relationships and to recommend auditor rotation.

As reports indicate that the public's trust in charitable organizations may be eroding, many boards and audit committees are following public companies by rotating auditors on a regular schedule of three to five years. By taking a hard look at long-standing relationships with auditors, some nonprofits are concluding it is time to put out a request for proposals (RFP) for audit services.

Proposal requests are flooding the CPA community — and some CPAs are astounded to discover that many nonprofit organizations are plunging into this process with no previous experience and no real guidance. In many cases, the results are creating a nightmare for CPA firms responding as well as those in nonprofits faced with unexpected levels of response.

Bidding on an audit can cost practitioners anywhere from a hundred to several thousand dollars in time and overhead costs. Recent trends in proposal writing focus more on individual client needs and less on discussions of the CPA firm's capabilities in general. This trend means that more investigative time is incurred before even making the decision of whether or not to bid — and results in shorter, more focused proposals. Work is often declined because it is inappropriate for a particular firm or cannot be done at a price that will cover a firm's cost.

Audit committees are generally reluctant to consult their present auditors for advice on how to structure a replacement search. Many audit committees are newly formed and are composed of members who have many demands on their time, making them unwilling to read numerous lengthy documents. Some organizations turn to the CFO or controller to do the initial work of selecting a new audit firm, only becoming involved when the search has progressed to a point where just two or three firms are still under consideration.

As a rule, it is best to limit the RFP distribution to a small number of firms that have been specifically recommended by other organizations similar to yours. Ask about positive and negative experiences with their audit firms, the fees they pay and the names of the specific staff with whom they work. Other good sources of referrals are attorneys, insurance agents and pension administrators (who often work with other nonprofit organizations and know who their auditors are), as well as representatives of your funding sources and members of your board. Often, you may find that the same CPA firm names keep coming up as you conduct your search. You may also find firms with interest and experience in auditing nonprofit organizations by using the CPA Referral Online service on the VSCPA Web site.

Check the Web sites of all firms you are considering to make sure they work with other nonprofits and are familiar with the work of those organizations. Mentioning in your RFP how you learned of the firm increases the likelihood that you will receive a more positive response, particularly if the solicitation is addressed to a specific individual. While it is important for the auditor to learn the background of your organization, it is also important to them that you've chosen them over others because of your knowledge and expectation that they can meet your needs.

Typical questions that a prospective client may be asked include:
• Why are you changing auditors?
• What are your needs, and what needs are not being met by your current auditor?
• What are your current fees?
• How much time does your current auditor spend on your audit?
• What other firms are bidding on this job?
• What are comments from prior management letters?

Prospective auditors may also want to review your accounting records, including the most recent audited financial statements and tax returns, and to know your time frame in making a selection. With audit committee members in different areas, electronic proposals are often preferable to easily disseminate to all members.

Some organizations may be soliciting proposals simply to "test the waters" to see if the fees they are paying are excessive and, therefore, may not want to divulge the amount they are currently paying. However, providing this information to potential auditors may prevent receiving bids for a much lower amount than the actual work warrants. Awarding the audit to a low bidder who does not realize the amount of work involved can result in a bill considerably larger than the original estimate or a substantial fee increase in the engagement's second year.

Conducting preliminary interviews with prospective audit firms by telephone can help you get a feel for each firm and thereby limit the number of RFPs you send. If you've done a preliminary investigation of the prospects, you should expect to receive proposals from most of the firms you solicit. A good rule of thumb is that if you anticipate presenting two or three "finalist" firms to the audit committee or other selection group, four to seven RFPs should give you the response you want and provide an adequate choice for your initial selection.

For each bidder, you should request that certain basic elements be included in the proposal, and you may even want to indicate the maximum length of the discussion on each topic. This provides an easy method of setting up a spreadsheet to compare how each firm rates on each element.

Keep in mind that auditors will sometimes negotiate fees. If the fee is the only area keeping your first choice out of range, don't be afraid to ask if the fee is negotiable. Also, consider the advantage of possibly greater staff continuity in a smaller firm versus more turnover in a larger one. Also, an RFP can sometimes test the legitimacy of the audit fees you're paying or the services you receive with current auditors. Sometimes, after completing a proposal solicitation, organizations find they just want to stay put.

Whatever your decision, make sure that you begin the proposal process well in advance of your year-end, and that your new auditor is selected at least three months before the audit fieldwork needs to be performed. This will provide time for him or her to meet with your previous auditors for a smooth transition as well as to review background information and documents about your organization to efficiently plan the audit.