The CPA Journal

Why the Fastest-Growing Companies Hire and Fire Their Auditors

By H. Lon Addams and Anthony Allred

Small companies make up over 90% of businesses in the U.S., and over the past decade, national accounting firms have focused greater attention on acquiring small-but-growing business clients as a logical extension of a marketing niche strategy.

The result of this strategy has been additional pressure on audit proposal teams to secure new clients while maintaining strong relationships with existing clients. Accounting firms must not only develop effective marketing plans to acquire clients but also bring together professionals with various skills and backgrounds to keep pace with clients’ desires.

In a survey, the authors addressed four critical questions that relate to accounting firm recruitment and retention by a client:

Is there one overriding factor that sways the decision to retain an accounting firm?

Are there several criteria that top management in private companies insist on?

What factors contribute to a positive relationship between a private company and its accounting firm?

How is the retention decision process different from the selection process?

Audit Firm Choice

A 2000 study by Stanny, Anderson, and Nowak (“Contributing Factors in the Selection and Retention of Local Accounting Firms,” The National Public Accountant, v. 45, no. 4) surveyed 1,224 clients of one local accounting firm in the San Francisco Bay area. The firm provided a full range of services and the client base consisted of individuals, partnerships, corporations, and service and manufacturing entities. Clients rated 24 selection factors and 18 retention factors.

The survey found that personal integrity of the accountant, technical and industry expertise, returning of telephone calls, size of the firm, partners’ personalities, recommendations by others, and cost of services were the most important factors in the initial selection. Mail solicitations, yellow pages, and web pages were least important.

Hermanson, Plunkett, and Turner (“Study of the Importance of Certain Attributes to Clients’ Initial Selections of Audit Firms: A Longitudinal and Stratified Approach,” Journal of Applied Business Research, Winter, 1994) found that reputation was the most important criterion in the selection of an accounting firm. While accounting firm personnel characteristics were next in importance, the study found that small clients weighted this factor more heavily than large clients did. The fee attribute increased in its relative importance to small clients over time, but remained unimportant to large clients when compared to firm reputation. This study was limited to the auditing clients of large national accounting firms, and the results suggest that accounting firms should be more concerned with their reputation than with fee differentiation. Likewise, Rummel, Davidson and Acton (“Getting New Clients and Keeping Old Clients,” The CPA Journal, April 1999) found that personal integrity and meeting deadlines were essential factors in a client’s decision to select an accountant.

Switching Auditors

Researchers have documented several reasons for switching from one accounting firm to another:

Gregory and Collier found that companies switched auditors to decrease fees (“Audit Fees and Auditor Change: An Investigation of the Persistence of Fee Reduction by Type of Change,” Journal of Business Finance and Accounting, 1996).

Citron and Taffler found that companies change auditors to obtain more favorable audit opinions (“The Audit Report Under Going Concern Uncertainties: An Empirical Analysis,” Accounting and Business Research, 1992).

Beattie and Fearnley found that companies change auditors to resolve auditor-client disagreements and personality clashes (“The Importance of Audit Firm Characteristics and Drivers of Auditor Change in U.K. Listed Companies,” Accounting and Business Research, 1995).

Simunic and Stein summarized their research findings that audit quality increases with CPA firm size and clients switch to achieve the desired quality level (“Production Differentiation in Auditing: A Study of Auditor Choice in the Market for Unseasoned New Issues,” Canadian Certified General Accountants Research Foundation, 1987).

Auditor Retention

Stanny, Anderson, and Nowak concluded that the most important factors in the decision to retain an accounting firm were meeting deadlines, personal integrity of the accountant, overall quality of services, returning phone calls, technical and industry expertise, and personal attention.

The Study

To better understand the auditor selection or retention decision-making process, the authors surveyed the CEOs of the Inc. Magazine 500 (Inc. 500), as representative of the fastest-growing companies in the United States.

The original and follow-up mailings in 2001 yielded a response from 102 CEOs (23% of the 438 potential survey respondents). Of the responding firms, 33% use one of the Big Five, 8% use a non–Big Five national firm, 24% use a regional firm, and 31% use a local firm.

Results. The principal findings of this research indicate that, contrary to many assertions, fees are not the most important factor in companies’ decisions to hire or to switch CPA firms. Exhibit 1 and Exhibit 2 contain a ranking of decision factors. When they select a CPA firm for assurance, tax, or consulting services, the CEOs’ place heavy weight on technical and industry expertise and on personal relationships.

The reasons that Inc. 500 companies’ CEOs give for changing accounting firms include the firm’s shortcomings on proactivity, responsiveness, and new ideas. The need for periodic rotation did not figure highly in their reasoning. In open-ended questions, respondents also reported that they switched because their company outgrew the old accounting firm’s ability to provide acceptable service.

Implications. The results indicate that a company must have considerable confidence in the technical skill set of the partners, managers, and staff professionals in order to choose a firm. The proposing accounting firm should skillfully nurture the communications, interactions, and visits with a potential client during the selection process.

Switching auditors is a frequent occurrence, as evidenced by the weekly tabulation in Public Accounting Report. Because a successful accounting firm must not only gain new clients but also keep current clients, Inc. 500 CEOs were also asked to rate the factors that lead to switching audit firms.

The ratings shown in Exhibit 2 indicate that companies demand professional customer service that is proactive and responsive. Accounting firms should be concerned by these results. The staff working on a client’s audit, tax, or consulting project must foresee a client’s potential concerns and problems and take the initiative to help the company prosper. The accounting firm—as shown by the top three selection factors—is expected to be extremely knowledgeable about the client’s business and industry. If this aspect of customer service is lacking, the client will be looking for a new accounting firm.

The cost of services is important but ranks in the middle of the ten factors surveyed. The fee factor is not the primary reason for a client to look for another accounting firm. A client that is not satisfied by its relationship with its present accounting firm will emphasize the ability of a new service provider to interact and communicate well during the proposal process.

With the competition for new clients, accounting firms must consider the client’s needs very carefully. They must be not only technically qualified but also able to provide premier customer service. The proposing firm must ask the right questions, provide insightful answers to client concerns, uncover real needs, and articulate how their firm can meet client expectations.

During the proposal process, the proposing firm must interact often with client personnel in a sincere effort to understand the client’s needs and expertly present their company’s image, skills, and attitudes in the written proposal and oral presentation to the client’s decision makers.

H. Lon Addams, PhD. is a professor of managerial communication and Anthony Allred, PhD, is an associate professor of marketing, both at Weber State University, Ogden, Utath.

Editor:
Robert H. Colson, PhD, CPA
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The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.