Over the past several decades, I have worked with many different accounting firms.
As you might guess, there are significant differences among them regarding their target markets, their pricing, and their overall approach.
Further, there can be a great deal of variation regarding the services provided. These may include auditing financial statements, compilations and reviews, tax service (both strategy and preparation), and more.
With that in mind, begin by considering
these essential factors…
Who is the audience of your financial statements?
Are the owners the same as the operators, or are they individual investors, institutional investors, private equity funds, and so forth? Among any of these “professional” investors, who are
their
underlying investors or limited partners? Ask the same question about your lenders, too.
All of this matters because
the more national in scope your audience, the more national the auditing firm needs to be.
If the readers of your financial statements have never heard of the auditing firm, they will doubt the audit's veracity and the business won’t get the full value of audited financial statements.
Is your company public or private?
Companies with publicly traded securities and their auditors must comply with SEC and other rules that do not apply to private companies. As a result, the audit for public companies is more cumbersome and costly. And yet (despite what they may tell you),
very few auditors have different audit approaches for public vs. private companies — it is simply too costly to run two different methodologies.
So, if you are a private company, you will benefit by finding an audit firm whose clients are predominantly private as well. If you need a larger national firm for reasons mentioned in the prior section, check to see if the auditor truly does have a separate, “private company audit group.” (One of the Big 4 does claim to have that in some of its markets.)
Where is the audit firm located?
If you have significant operations distant from your main location, consider a firm with a matching geographic footprint
so they can use local staff and you can minimize travel costs.
Also, since not all operations are significant to the financial statements, a regional auditing firm may be able to use a sister firm that belongs to a consortium. Keep in mind, however, that in those cases, the firm signing the letter in your financial statements will want to review the other firm’s work, which will cost additional money.
What are your tax needs?
As a practical matter, for private companies, the auditor also does the taxes. C Corporations pay federal income taxes directly. This means the specific tax situation of the owner(s) can be ignored. Not so, however, with so-called “pass through” organizations, such as S Corps, partnerships, and limited liability companies (LLCs).
In a “pass through” entity, the taxes are passed through to the shareholder and the shareholder pays income tax individually.
So the individuals’ circumstances need to be considered and guidance is needed regarding the payment of estimated taxes.
Also, because these are individuals, there are tax planning and estate planning issues that must be considered. All in all, pass throughs involve lots of complexity that requires special skill and expertise that is different from C Corporation work.
Strong people skills are also required among those who do taxes for private companies
— it’s not just about the numbers. One client of mine changed auditors for a variety of reasons, but one of them was the way the owners were treated by the tax people. The “problem” accounting firm was geared to working with tech companies, mostly C Corps. My client was an S Corp and the owners also had real estate investments (these are pass through entities as well). While the accounting firm was perfectly capable in terms of technical tax expertise, my clients “didn’t feel the love.”
What size firm do you need?
If they try, a large firm might be able to give lots of partner attention… but they can’t give “firm” attention. Additionally,
large firms have lots of turnover at the junior levels (the folks that actually do the audit work).
That means your firm will be explaining your accounting to a new set of people every year.
Some smaller firms differentiate by having the same people do the audit year over year. However, there are some downsides to this. I have a client whose auditor has been the same small firm for many years, supported mostly with the same staff. When this company went through a quality of earnings review by a national accounting firm for a prospective buyer, the accounting records raised all sorts of questions, solely because they were not prepared in a manner easily understood by an outsider. Ultimately, the buyer walked away.
How professional is your finance organization?
Some companies have a veteran CFO and staff that know what to do to support the audit process and get the work done on time. Other companies do not. Companies in this latter category will struggle to get their accounting records in shape and on time to meet the auditors’ deadlines.
Whichever category you may fall into,
it’s important that the accounting firm you choose aligns with the level of financial professionalism of your business.
For example, one of my clients began with a highly professional, respected firm. Unfortunately, the client never had the necessary information ready when needed, which wreaked havoc on the accounting firm’s staff planning and utilization. Eventually, my client switched to a more appropriate firm, one that was much more able to adjust its work schedule as needed.
What are the founders’ exit plans?
This may not seem like a critical concern in choosing a firm.
However, many founders these days are not transferring ownership to the younger partners, choosing instead to sell out to national firms
— firms that usually differ in both approach and reputation.
If your intention is to develop a steady, long-term relationship with few hiccups along the way, the future plans of the firm you hire will have an impact.
Choose Wisely
As with most important business decisions, there is no one-size-fits-all answer. Select a firm based on your particular circumstances and objectives and that appears to be the best fit.
The accounting firm you choose matters quite a bit, in terms of cost, efficiency, outside perception, and final result.
Clearly, it’s about much more than just the price tag!
