Audit: A little choice may be a dangerous thing

By Fiona Czerniawska.

One of the biggest complaints clients make is about a lack of choice, either because most suppliers look the same or because an outside authority, usually a government or regulator, is forcing them to do something. And these two things feed off each other. When an external stakeholder is laying down the law, sometimes literally, it limits the opportunity for differentiation–the more prescribed the process, the more similar firms inevitably become.

This is, of course, painfully obvious where the financial audit process is concerned. Successive regulatory changes have limited audit firms’ room to manoeuvre, and have led directly to a situation in which clients feel so little compunction to change (why change if nothing changes?) that they’re prepared to keep the same auditor for decades. Ironically, regulation has had to step in and force the issue, effectively trying to recreate the differentiation it’s been responsible for eroding. But mandatory audit rotation may have unintended consequences, our new report on the audit business, The Client of the Future, suggests.

Today’s audit clients are generally happy. Asked if they’re satisfied with their current audit, more than 80% say they are. However, the proportion that think the audit adds value over and above the fees it charges is considerably lower: 48% in fact. And, if we delve a little deeper, we find that both rates of satisfaction and perceived value are at their lowest at around two years after their audit has been put out to tender.

What our data suggests is that there’s a honeymoon period immediately after the tendering process, presumably the result of all the effort that goes into winning or keeping an audit. Fresh faces are introduced; world-class experts are wheeled in; new technology is unveiled; promises are made. Two years later, some of the shine has come off, and everyone is bogged down in the nitty-gritty of making the process and relationship work. Perhaps the technology isn’t quite as revolutionary as it was made to sound; perhaps those fresh faces just look a little grimmer. But two years beyond that, things settle down, satisfaction and value rise, as both sides accept the strengths and weaknesses of the other.

It’s a bit like buying a new house: with your furniture still in the truck, you walk through those empty rooms, savouring the smell of fresh paint. A few months in, what looked spacious is still full of boxes and you’re struggling to work out why the plumbing makes such a noise. But two years later you’ve learned to live with the faults, so much so that you cease to notice the cracked window in the bathroom and, 20 years on, you still haven’t got round to fixing it.

In the world of an audit relationship that remained unchanged over decades, the period of dissatisfaction, which we’ve called the mid-term blues, doesn’t matter too much - any more than it matters when you live in the same house for a long time.  It’s a bump in a very long road.  But mandatory rotation means that clients have effectively got to move house much more often, so the ‘mid-term blues’ period as a proportion of total ‘occupancy’ time rises rapidly.  If audits are changing hands every four years, for example, a quarter of the duration of a single audit contract falls within this period.

The aim of audit rotation isn’t to create choice: it’s to prevent an organisation’s relationship with its audit firm becoming too comfortable. But the consequence of rotation is that firms have to compete more, which means more promises and increasingly desperate attempts to prise a sliver of difference out of a homogenous product. At a time when clients feel more unsettled (moving house every few years… ), it offers - but doesn’t deliver - real choice.