Much like a visit to the dentist, an audit is seen by many as an unpleasant yet necessary fact of life. Yet on the face of it, the requirements of the 1890 Partnerships Act and The Law Society's Solicitors' Accounting Rules mean that law firms can escape with a much less probing examination than their commercial counterparts.
However, accountants warn that not getting the right service from an audit can store up even more problems for the future than skipping a dental appointment. This feature examines the factors that determine law firms' choice of auditors and the level of service and relationships they require.
It seems that price is not the major criterion when law firms come to choose an auditor. Alun Morris, director of finance and managing partner at Simmons & Simmons, is adamant that he would not change the relationship his firm has with Ernst & Young on the basis of cost alone. “I wouldn't give the work to someone simply because they telephoned me and low-balled us. We have made savings in the practical areas, such as the quantum of work handled and the way schedules are presented, but I've never had an argument about costs.”
Even so, Morris believes that his firm receives “tremendous value” from its auditors. “Once the work is agreed, we put our accountants under the cosh and screw them on price as much as possible. Being an accountant helps, but I'm also a brilliant negotiator,” he adds wryly. The consensus is that it does make sense to negotiate and extract the full leverage that a competitive audit market offers.
One finance director at a leading City firm illustrates this well. “I would say that the price our auditors charge is about right, but this is due to the favourable deal we have made. Our competitors may well feel charges are too high because of the deals they have made.”
Having previously worked with Price Waterhouse and Ernst & Young, Chris Bull, finance director at Bristol-based Osborne Clark, is well placed to reiterate the strong bargaining position that law firms enjoy. “I get the impression that the level of audit pricing is about right. Accountants tell me they are just about making audits pay – they see it more as a way into law firms, so they can sell more profitable services such as consultancy or mergers and acquisition work. In that respect it is seen as something of a loss-leader. Other law firms may not be taking full advantage of this, so they could end up paying over the odds.”
Price, it seems, is an issue to bargain over once relationships have been established – so what other factors bring law firms and their auditors together in the first instance? The pull of a Big Six firm can affect the choice of auditor in various ways. “We have used KPMG for our audits for many years,” says Bull. “Using one of the Big Six is an increasingly important factor and there are two aspects to this type of thinking. Firstly there is an overall level of assurance that is received from dealing with one of the leading accountancy firms, which are being distilled down to fewer and fewer in number, and secondly there is an element of reciprocity. We are referred a great deal of work through the Big Six. This is a definite consideration, but not to the extent that it sullies our independence.”
“The things we would look at if we were to consider changing from KPMG would be knowledge of the legal sector – and they would probably have to be one of the Big Six or at least in the second tier of firms.”
Bull continues by explaining how the 'easier' regional business community in Bristol facilitates close and useful ties with the leading players. “There is a clubbish atmosphere with a lot of interaction. It is impossible not to bump into other lawyers or accountants. We happen to use KPMG for our tax advice as well as audits but we use all the Big Six for consultancy work and various one-offs. This means we can keep in contact with people who work in the same areas we do.”
A spokesman in the finance department at Nicholson Graham & Jones feels somewhat differently about the Big Six. “We use Elliotts for our audits and have used them for over 20 years.” He believes that “you don't need to use the Big Six. They are far too expensive and cost is a major issue, as is quality, which we get from Elliots.”
Personnel can also play a key part in deciding which auditor to choose, as Simmons & Simmons' Morris explains. “We have an understanding with Ernst & Young which has been built upon over the years, and it would take a major falling-out with them before we even considered using anyone else.”
A good team of auditors can be even more important than the actual accountancy practice they represent, according to a spokesman for one of the top-ranked legal practices. “We've been using Deloitte & Touche auditors for over 20 years in all their various guises,” he says. “It's safe to say that most firms have been using this same team from the Spicer & Pegler days.”
He says that even though the people on the audit team have changed over the years, his firm has been fortunate to have had consistently good partners. “A deterioration in relationship with the lead partner of the team would be a factor before we considered breaking this long-standing relationship.”
Long-standing relationships between lawyers and accountants appear to be the norm, but pressures from various sources ensure that these relationships do not become static.
Osborne Clarke's Bull says: “We do not have fully audited accounts, but we have a hybrid that closely replicates the 'true and fair' audit. This does cost more but it gives our partners a good deal of reassurance and we get a lot of value because our accounts allow us to pick up on areas where we are able to make improvements.”
Morris says that Simmons & Simmons also has a much more business-like attitude towards its audits. “We now have fully-audited 'true and fair' accounts the same as a plc, but presented differently. I think we have learned a lot from Ernst & Young in this respect and they in turn have learned about the legal sector from us.”
Morris also offers his opinion on the recent moves by accountancy firms to establish their own legal practices. “Do you really want to be audited by a competitor? Not really – especially not by a serious competitor. Put it this way: if Ernst & Young took over Linklaters tomorrow, I'd certainly have to look closely at them auditing our accounts.”