Differentiating Audit Bids
A general rule of thumb when an accounting firm estimates the fee for an association audit, the main factor they consider is the time they must commit to complete the service requested by the association. The audit fee is then dictated by their hourly rate and the amount of time they will have to dedicate to the audit. When evaluating bids, the lowest bid should not always be the deciding factor your community association should base it’s decision on. Lower fees generally mean less experienced individuals will be performing the audit or the firm will be allocating less time to the engagement. Really large discrepancies should always raise a red flag or produce concerns when comparing bids.
There are a certain set of standards and procedures that must be followed accordingly when a public accounting firms performs an audit. Typically all public accounting firms are held to the same set of rules and standards in which they must abide by when performing an audit. They must have a healthy grasp of the association in which they are performing the audit, comprised of the internal control system, in order to evaluate the risk of material misstatement. The risk of material misstatement being the chance that the financial statements will contain a significant misstatement either by error or by fraud. In turn, the accounting firm will use their determined risk, amid other factors, to dictate how it will perform a successful audit.
Determining which public accounting firm is ultimately in the hands of the Board of Director’s (the elected officials that represent the community or association). They must utilize their inquisitive traits and outside observations to deduce how inclusive an audit is being performed. In turn there should be a list of questions you will need to consider as a Board Member:
- Did the auditor request any supporting documentation or reports?
- Were any invoices analyzed or reviewed?
- How were the internal controls tested?
- Was the Board of Directors interviewed?
If you answered no to one, or even a few, of the questions then the amount of time committed to the audit will vary and thus lead to lower audit fees.
Choosing the Correct Audit
From the outside looking in, saving money on an audit fee may seem like a grand idea, but there could potentially be consequences. As an elected official, all Board Members have a fiduciary duty to preserve and secure the assets of the community association and it’s members. Consequently, when making the decision in to which public accounting firm to use for an audit, elected Board Members must assess all aspects of the prospective firm, instead of taking the lowest bid and potentially having an undesirable outcome.
There are many potential financial pressures and motives that could influence many employees, homeowners, or unit owners. Increased financial pressure creates a underlying motive for prospective fraud. Encountering economic pitfalls may lead to an individual rationalizing to themselves the act of stealing money to provide for their family. There is a term called the fraud triangle which includes: “I’ll pay the money back,” “they don’t pay me enough,” or “they’ll never miss the funds.” Board members may not be able to control the pressures or vindication that they may feel from the triangle and thus increases the likelihood of performing fraud. But, the Board can inherently create procedures and implement them to prevent future opportunities for misconduct or fraud within the association. A thorough audit of the association’s books is one immense way to reduce the Association’s fraud risk.
To conclude, the Board of Directors should be aware and informed that they have the ability to minimize the potential fraud risk by carefully and diligently choosing the Association’s auditor. Meeting with prospective auditors will be key in your search of the correct firm, and the firm best fit to perform an audit for your community. It is essential to gather as much information as you can about the potential auditor such as: reputation, expertise, employee experience, typical procedures, etc. Taking the lowest bid doesn’t always produce the best benefit for your association and like most other services, you get what you pay for.