Even the venerable Christian Frederiksen, in "Interview with an Expert" (CPA/PM January 1998) said: "I think the low-value services, like auditing, bookkeeping, write-up, payroll, and the low end of the tax return activity will become more competitive and, ultimately, irrelevant."

Audit revenue, as a percentage of the U.S. Gross Domestic Product (GDP) - that is, production of goods and services within the U.S. borders - has decreased between 1989-1995. In that same time period, the GDP overall has increased 28 percent.

If you were to analyze the Service (or Product) Lifecycle (that is, the four stages that each service goes through) - Introduction, Growth, Maturity, and Decline - there is little doubt that audits would be somewhere between Maturity and Decline. This is one of the main reasons for the consolidations taking place at the top of the accounting food chain, from the Big Eight to the Big Six - and now the Big Five.

Companies in the Introduction and Growth stages do not consolidate, though some do acquire. The consolidations are not taking place to reduce competition - as I hear so many CPAs inform me - but rather to eliminate redundancies.

What you are witnessing is dinosaurs mating, and it is likely to continue (at this writing, Andersen Consulting wants a divorce from the traditional Andersen accounting firm). As Tom Peters humorously pointed out with respect to a bank merger: "Why anybody thinks that they will produce a gazelle by mating two dinosaurs is beyond me."

Audits As a Revenue Source
If you analyze the statistics of percentage of revenue derived from accounting and auditing for the Big Six, the highest percentage is Coopers & Lybrand, with a little over 40 percent of its revenue from A & A (see the Journal of Accountancy, August 1997).

If you were to analyze these same percentages, say, 25 years ago, they would be radically different. They would most likely resemble the percentages reported by BDO Seidman: 53 percent from A & A, 27 percent from tax, and 20 percent from management consulting services.

I am by no means arguing that audits are a growth area. The empirical evidence is overwhelming that they are not.

Since audits are in the Decline phase, does that, ipso facto, make them a commodity? Is Christian Frederiksen right - will the audit someday become irrelevant? Is it on the low-end of the beloved value curve, relegated to sharing a feeble existence along with all of the other commodity services - which comprise 60 percent of any given market's work - such as 1040s, payroll and sales tax returns, bookkeeping, and write-up work?

Is the audit destined for the ash heap of history?

Give Audits a Healthy Prognosis
To paraphrase Mark Twain, the reports on the death of audits are greatly exaggerated. In truth, I believe they are hokum. There are two ways of looking at a service that is in the Maturity and/or Decline phase, similar to the two shoe salesmen who arrive in a country where the natives do not wear any shoes.

The first salesman calls his home office and reports that the trip is a waste: The population does not even wear shoes, so he is coming home. The second salesman calls his home office, requests they send as many shoes as possible, as the natives do not wear any at all.

In other words, whether or not an audit is a commodity is dependent upon your attitude.

It is helpful if we keep in mind why audits are performed at all. Long before the SEC came into existence, audits were routinely performed (albeit in different form) by British Chartered Accountants dating back to the 1860's, as well as CPAs in this country up until the Stock Market Crash of 1929. Why were these audits performed without any governmental agency requiring them?

One method of keeping track of the agents - and keeping them honest - is the financial statement audit. Thus, the audit is really an insurance policy for the principals, and this explains why the professional liability is so high for performing audits.

Insurance companies are in the business of managing risk. Risk is where all profits come from. Therefore, CPAs who perform audits are really in the risk-management business. But how many of them think that way? How many audits are priced that way?

Risks vs. Rewards
I recently sat next to a partner of a national accounting firm who proceeded to tell me a story that should send a chill down the spine of all CPAs who perform audits. He does seminars on initial public offerings (IPOs), explaining to controllers and CFOs the CPA's role in an IPO.

He says there is an inverse relationship between the amount of risk assumed and the prices obtained from the various parties providing services in an IPO. For instance, the investment bankers make the most, yet assume the least amount of risk. Second in line in terms of price - according to this partner - are the printers, who also have very little risk. Third, the attorneys (minimal risk there too). The lowest paid are the CPAs, yet they assume the largest risk. This is baffling.

In a free market economy, there is supposed to be a direct relationship between risk and reward, not an inverse relationship. How can this situation possibly exist? After all, the attest function is a government-sanctioned monopoly! Only CPAs can provide it. Whether or not it should be - and I do not believe it should - is not the point.

If a profession seeks the government's assistance in limiting competition, you would think it would command monopoly or, or at least, semi-monopoly profits as a result. This is what the airlines, trucking, cable telecommunications, banking, and any other regulated industry achieved before deregulation.

One explanation for this imbalance between audit prices and risk assumed is our profession's emotional attachment to the almighty hour. We do not price the audit based upon its value, but the time it takes us to perform. CPAs have never been very adept at conveying value for any of their services and nowhere is this more apparent than with audits.

We have let the customer beat us into submission, convincing us that the audit is nothing more than a commodity. We have confused the customer's incessant haggling as a sign of their price consciousness.

The customers are not price conscious. They are value conscious. If they were price conscious, the VW Beetle would be the best selling corporate car.

We also have not engaged in the practice of discrimination. Instead, we treat all audits the same, and even codify them further into the almighty hourly rate, with no regard to the external value provided to the customer. Even if audits are on the low end of the value curve, you can still engage in price discrimination. Southwest Airlines is the low-fare leader, and is engaged in price discrimination by charging a higher price to businesspeople, for example.

The most recent survey by The Controller's Report (as reported by Partner's Report, January 1998, published by the Institute of Management & Administration) indicated that professional services are where 42.2 percent of the controllers surveyed had the most success in containing costs over the past year. Only capital expenditures and purchasing/materials were more popular cost-saving areas in 1997.

Most achieved the reduction by negotiating a fixed dollar-per-hour rate and doing more of the work themselves. Many of the survey respondents shared their strategies for holding down CPA prices, but none discussed efforts to reduce legal fees. Why is this? Attorneys have moved away from hourly billing in droves and are becoming better at discussing the value they provide rather than the hours they spend.

The number of firms providing audits is shrinking. It is a government-sanctioned monopoly that no one other than CPAs can provide. It is a relatively risky business and the most respected and trusted business advisor - the CPA, provides it. The CPA/customer relationship is not a commodity. To believe otherwise is to believe that your relationship with your doctor is a commodity.

It is only a commodity if CPAs allow it to become one. In fact, the CPA has the ultimate monopoly - the relationship itself. To say that audits are a commodity is, in effect, saying that you and your firm are commodities. I do not buy it.

In fact, there is no such thing as a commodity. Anything can be differentiated, as this story from The Tom Peters Seminar illustrates:

"Transformation. Breaking the mold. Anything - ANYTHING - can be made special. Author Harvey Mackay tells about a cab ride from Manhattan out to La Guardia Airport: 'First, this driver gave me a paper that said, "Hi, my name is Walter. I'm your driver. I'm going to get you there safely, on time, in a courteous fashion." A mission statement from a cab driver! Then he holds up a New York Times and a USA Today and asks would I like them? So I took them. We haven't even moved yet. He then offers a nice little fruit basket with snack foods. Next he asks, "Would you prefer hard rock or classical music?" He has four channels.'"

This cab driver earns between $12,000 - 14,000 a year in tips. A cab ride is probably the biggest single commodity service out there, except in this driver's mind. If he can build a rapport with a passenger in the short period of time from downtown New York to the airport, what can a professional do with a long-term customer over their lifetime? Tom Peters further expands on this in his book, "The Pursuit of Wow!"

The idea of professional-service delivery becoming "commoditized" is ludicrous. That is as true for the two-person firm as it is for the Big Five accountancy. Professional services are inherently personal. They are commodities only if you are a commodity, if you do not have anything special to offer, if you are just another accountant, engineer, trainer, or professional whatever.

I always try to personalize: Can I imagine saying, "Opened a management book today. Could not be sure whether it was mine or Peter Drucker's"?

Are You Worth the Money?
Another explanation for the inverse relationship between the risk and the price of audits is a lack of self-esteem among CPAs. Notice how the controllers cannot beat up attorneys over price but have no problem with their CPAs. In my experience, along with other consultants to our profession, this is due to CPAs not believing they are worth it.

You will never get paid more than you think you are worth. And if you do not believe you are worth a premium, neither will your customers.

If CPAs do not have the ingenuity and creativity to differentiate their audits from their competitors, perhaps they deserve the commodity prices they receive. Stereotypes aside, I do not believe CPAs lack creativity. We need to realize that we are not commodities and neither is the audit that only we can provide. It is troubling to me that audit prices are set by our dumbest competitors - that is, those who charge based upon the hours spent rather than the risk assumed and the value provided.

Businesspeople live the ultimate contradiction: They spend their nights praying for monopoly prices and spend their days driving down those same prices by supplying the market with more services. This contradiction cannot be solved, but it can be ameliorated. The audit is a good example of a service that should command a higher price than it is receiving in the market. It is emphatically not a commodity, and you should not allow it to become one...Unless, of course, you yourself are a commodity.