Audit Fee Costs
Written by: Kenny Dennison
It’s budget time. The affordable housing industry is not immune to economic challenges, and therefore like no time before, every dollar counts. In order to position projects to fulfill their mission to the residents and owners, management agents should maximize the profit generated in their affordable housing portfolio by staying knowledgeable on ways to manage audit fee costs.
- Avoid engaging multiple audit firms – Many owners and investors select the audit firms that provide services to their entities. As a result, some management agents are required to work with many audit firms throughout the year. While competition is a good thing, this creates additional time commitments from management agent staff and does not allow the portfolio to benefit from fee savings as a result of efficiencies from economies of scale. Audit firms spend a significant amount of time reviewing internal control procedures and performing other planning and interim procedures. In many instances, these costs can be spread across multiple entities which should reduce fees on each engagement. Recommend a qualified audit firm to owners and investors and communicate the benefits to each entity and management agent operations.
- Look for an audit firm with the right engagement team makeup – Poor estimating and missed deadlines can cause fee overruns, penalties, and a negative impact on the management agent’s reputation. Use resumes to verify the proposed team has the proper industry experience to understand the risks and requirements applicable to each engagement. Ask to see mock schedules and budgets to verify the proposed team has the necessary capacity so engagements receive the required attention. Use references to gain comfort the audit firm and the proposed team has a history meeting commitments and assertions.
- Get ready sooner or challenge reporting deadlines – Many investors and other stakeholders expect to receive engagement deliverables around February 15 or sooner, which creates a concentration of fieldwork in the middle of January and early February for nearly every audit firm. Management agents with the ability to prepare for the audit in early January or the flexibility to push back deadlines after the concentration of fieldwork may have the opportunity to save on fees. In addition, the Single Audit Act gives non-profit entities the option to submit required audited financial statement information to HUD up to nine months after the end of the fiscal year, thus giving those entities even more flexibility. Consider the pros and cons of scheduling fieldwork for the portfolio when most others do not.
- Strive for minimal adjustments – Audit firms typically equate the number of audit adjustments with higher risk, and thus, additional procedures. If a management agent can state that minimal adjustments will be required, it should be used as a tool to negotiate competitive fees. If numerous audit adjustments currently occur on an annual basis, understand the causes and train and develop staff accordingly.
- Look for an audit firm that plans properly – Audit firms that spend significant amounts of time performing planning and interim procedures and preparing management agent staff for the engagement are usually the audit firms that do not deliver surprises. More engagement procedures performed in off peak times should result in fee savings for the portfolio. Request that the audit firm provide management agent staff with a request list with the engagement letter, and ask the audit firm to communicate why procedures are necessary. While some procedures should be unplanned and non-routine, an informed staff will be able to prepare for the audit throughout the year to reduce the time away from everyday responsibilities.
- Find the appropriate balance of auditor assistance – Management agents that utilize staff resources to make it easier on the audit firm should ensure fees are adjusted appropriately. Does management agent staff i) prepare an accurate, complete audit package, ii) work hard to be ready so auditors can start fieldwork earlier than others, iii) assist auditors with checklists and documentation, or iv) scan and organize requests for the audit firm? Consider the benefits of offering more assistance to the audit firm.
- Look for an audit firm with low overhead – Some audit firms have multiple offices and/or service multiple industries. These audit firms may charge higher fees as a result of overhead redundancy and additional training costs, and at times find it difficult to offer consistent and quality client service tailored to the affordable housing industry. On the contrary, audit firms with one office that service the affordable housing industry typically have reduced overhead that can be passed on to the portfolio. Technology and proper planning can significantly minimize the impact of travel costs.
- Gain comfort with the audit firm’s leaders and future – Once a qualified audit firm is identified, gain comfort in the audit firm’s leaders, where they have been, and where they are going, to increase the likelihood future changes are unnecessary and fees remain stable. Will the audit firm make commitments on future fee increases? What is the audit firm’s growth strategy? Will the audit firm be able to grow and evolve as needed? Who are the audit firm’s future leaders? Does the audit firm have minimal turnover at key levels? Can the audit firm offer engagement team continuity?
Before signing the next engagement letter for audit services, consider the points above to ensure you are an informed decision maker.
Kenny has specialized in the real estate and construction industries for nearly 10 years. Kenny manages audit and AUP engagements for owners and managers of affordable housing complexes that receive financing or other subsidies from HUD, RD, or equity as a result of the generation of Low Income Housing Tax Credits pursuant to Section 42 of the Internal Revenue Code.