[IMGCAP(1)]To value bill or not to value bill?

That’s the question posed by the article “What Price is Right” in the April 2012 issue of Accounting Today. Lawyers value bill, ad agencies, consulting firms and actuaries do it…why don’t CPAs do it?

How do you value an engagement? It depends. What kind of engagement are you bidding on? The many types of activities that CPAs are called upon to perform make it extremely difficult to set a value on. Most of the work boils down to how much time it will take and who is going to work on the project. Certain engagements can have a premium added to the normal rate. Does that make it value billing?

For example, let’s say you are retained to handle an IRS, sales tax or state tax examination. After a review of the matter, you find that the potential exposure is $50,000. You believe that it is possible to settle the matter in three days for $20,000. Your normal billing rate would total $9,600 for the time. Considering that your talent and knowledge saved the client $30,000, would you not be justified in adding a premium to the bill? The fee arrangement and the potential value to the client must be discussed with the client at the outset and incorporated into the engagement letter.

An audit of the financial statements is an entirely different matter. Many items have to be factored in, besides the time estimated to do the normal work of the audit. How good is the client’s bookkeeping staff? Are the records in apple pie order, or will the CPA and staff have to dig to get answers? How good are the internal controls? Is there a possibility of fraud? If problems are encountered, who will do the necessary corrective work—the client or the CPA? And the list goes on and on.

Auditing has become a commodity and as such is subject to competitive pricing, commonly called “low-balling.”

Someone will come in and offer to do a job at a ridiculously low fee. Can you match it? Michelle Golden gave an example of a bid for an engagement budgeted at $24,000 that came in for $19,000. Can you match it and do a proper job?

She suggests “better pricing.” According to Golden, “pricing better means the ability to offer more choices.” So you tell the client that you can do a full-service option for $24,000, a “stripped down” version for $22,000 and the really stripped down version for $19,000. Of course, the article states, “these different levels should never compromise ethics or audit standards”.

Who’s kidding who? First, the client will laugh his head off at such a suggestion. Then, if you come in with a low-budget fee, you’re going to do your damndest to cut your losses, so you bring in lower-cost staff, cut investigative search to a minimum, reduce partners’ supervision and review time, and anything else you are willing to gamble on.

So, how does one do value billing on an audit? You figure the real time that you expect to spend on the engagement at the normal billing rates and discuss it with the client. You value your time, expertise, knowledge and talent, and let the client know that you are the best there is and that you will not risk doing a second rate job at a second rate fee. That’s value billing by a CPA.

Edwin J. Kliegman, CPA, is the founding partner of Marcum & Kliegman, CPAs (now Marcum LLP), founder of the Nassau/Suffolk Chapter of the National Conference of CPA Practitioners (NCCPAP) and past president of NCCPAP. He has been an active member of the New York State Society of CPAs and has chaired numerous committees. He is a consultant for small CPA practice units that seek guidance.