Therein lies the paradox of hiring an auditor for a publicly traded or pre-IPO company. An auditing firm, despite its eagerness to sell its services, is not working for you, the controller. It is working for the shareholders (or future shareholders) of your company, assuring them that the financial statements you release are accurate.

The Deciding Factors

However, though shareholders can ultimately veto the choice of an auditing firm, such an action is extremely rare. A controller/CFO recommends the auditing firm to be used - a decision based on many factors. Some are objective, like cost and previous engagement experience. Some are very subjective, like what sort of rapport is established between top executives and members of the audit team.

Whatever the reason for his/her decision, the CFO's recommendation is almost always accepted by the executives and shareholders. When you choose an audit firm, a poor decision can result in disaster for you, your bosses, and your shareholders.

So what factors should enter into the decision to hire an auditor? Randy Green, who serves on the Accounting & Auditing subcommittee of the Georgia State Society of CPAs, cites technical expertise, industry expertise, and, of course, cost, as the most important.

Let us examine those three main factors:

• Technical Expertise - Does the firm have the ability and know-how to conduct a competent audit? This can be determined by examining the history of the firm, and the experience of the members of the audit team.
  
  
• Industry Expertise - An auditor with specific experience of your company's industry will be extremely valuable during the auditing process. Firms will mention in their oral and written presentation any companies in your industry that they have audited.
  
  
• Cost - An audit firm will produce a list of fees for services performed. Big Five firms generally charge higher fees than local firms. Nevertheless, many companies choose them because they believe that a Big Five audit will garner greater respect from investors and lenders.

Professor Bruce McManis of Nicholls State University adds that the relative size of the auditing firm is an important consideration.

"You don't want to be their biggest or smallest client. If you are their smallest client, they will probably give you the most inexperienced audit team and not really care if they lose your business as a client." However, he warned, "If you are substantially bigger than any of their other clients, they may lack the staff and expertise to do an effective audit in a timely manner."

Big Five... or Not?

A major question is whether or not to hire a Big Five firm. Higher prices from the Big Five can be offset by the many consulting services that are now cross-sold to companies. These services, in areas like management consulting and information systems, are very valuable, and can be more easily accomplished by a firm with the inside knowledge that an auditing firm would have. Smaller firms do not yet offer the same range of services as the Big Five, though they are catching up fast.

However, the selling of these consulting services has raised questions about the main reason for hiring a Big Five firm: an audit recognized as independent by investors around the world. The prestige of Big Five firms has taken a hit recently, leaving many wondering whether Big Five audits reassure investors or not.

Regulatory agencies, especially the SEC, worry that the cross-selling of services compromises the independence of auditors. Even worse, confusion resulting from mergers and constantly changing client rosters led recently to the discovery that hundreds of PricewaterhouseCoopers partners held stock in companies that their firm was auditing - an elemental breach of auditor independence rules.

Some controllers must hire one of the Big Five. "For the Fortune 500 size firms the Big Five are the only ones with a large enough staff to do an effective job," said Professor McManis. "For the firms on the NYSE and the top end of NASDAQ, an audit from a Big Five firm is probably of value since their shareholders, lenders, and customers are from all parts of the country and may not be familiar with the relevant regional firms."

What about the rest?

"For less actively traded firms and those with a regional shareholder and market base a smaller audit firm is not a problem," Prof. McManis added. "I do not think [a Big Five Firm audit] adds much but it does raise the cost and may result in an inferior product, in that the least experienced audit team from a Big Five firm probably will have less experience than the senior team from a regional firm."

However, there may be other factors that require a controller to hire one of the Big Five.

"Consider the structure of your operation," said Rick Bralich, a partner at Pittsburgh accounting firm Sisterson & Co. LLP, and part-time CFO. "If you have a global operation, you might want to go with a Big Five firm."

As business becomes global, many businesses look across borders for new opportunities. In fact, many investors demand it. This also spells opportunity for the larger firms, who have much more established overseas operations.

How can you choose from among the Big Five? Erni Mann, CFO of Steven Jacobs & Co, and a board member of the Indiana Society of CPAs, sees little difference between Big Five firms in experience, knowledge and access to technology.

"Once I am constrained to choosing a Big Five firm, it all comes down to people," said Mann. "When someone comes in and goes through your files, you want to like that person."

Regarding cost, Mann added that she always demands to see prices up front. If a firm is unwilling to do so, she will not hire them.

"I have to be able to fit their fees into my budget," she said.

Over time, an auditor can become, in addition to a reviewer of financial statements, a trusted business partner, and a source for consulting services. As the audit firm learns your particular business, they will be able to perform more valuable audits, and assist in providing consulting services more effectively. Choosing the right audit firm will reap great benefits in the long term.