Art of Accounting: What a review report should cost
I get more than a few calls from accountants who do considerable business tax work and who are asked occasionally to bid on a review report. They ask me what they should charge. That is similar to someone asking a sneaker salesperson what the average shoe size is. There can be no average fee or even an average fee range. Myriad factors go into determining the price of a review report. Here is a list of some of the factors that affect the fee:
- The purpose of the review report;
- Whether the report will be GAAP or some other basis;
- Who will actually prepare the financial statement and write the notes to financial statements. If the client prepares, what is the competency of the person preparing it and their knowledge of the reporting framework (i.e., GAAP)?
- Number of periods involved. If this is a first review, the opening entries might need to be tested.
- Whether the accounting firm has expertise in the industry;
- Time schedule for delivery of review report;
- Availability of your staff;
- Co-operation of client’s staff;
- Where the work will be done, e.g. at the client’s premises or virtually;
- Who the referral source was.
- The size of the company;
- The industry and also whether special reporting applies to that industry;
- Condition of the books and records and underlying data that might need to be reviewed;
- Adequacy of internal controls;
- Whether there are related entities that will need to be consolidated or combined with the main entity;
- Risk areas;
- Sources of revenue;
- Revenue recognition policies;
- Size of installment, deferred or consignment sales;
- Type of and concentration of customers;
- Potential warranty liabilities;
- Extent of related party transactions;
- Dependence on a single or small group of specialized suppliers;
- Type of accounts receivable and inventory;
- Existence of intangible assets and possible valuation issues;
- Debt covenants and whether the entity has met them;
- Contingent liabilities;
- Extensive commitments;
- International trade (inbound/outbound);
- Capital structure;
- Employee stock option plans;
- Out of line or illogical ratios;
- Whether there is any pending litigation against the company;
- Going concern issues.
This list is not complete but gives a strong enough indication that a fee cannot be quoted without some Inquiry. Every situation is different, and some may require a meeting and a review of the client’s information and situation beforehand to assess the situation. Some situations may not lend themselves to being able to be reasonably estimated, yet many clients do not like open-ended, time-based fees. Even then, they may request a range or a “fixed fee” within that range.
Sometimes a less costly compilation or a more costly but thorough audit would be a better choice for the client. Use this list as a guide and follow through as best you can. Good luck!
This column was prepared with the assistance of my partner, Frank Boutillette, who can be reached at firstname.lastname@example.org if you have additional questions. Do not hesitate to contact me at email@example.com your practice management issues or questions or questions regarding deciding whether to accept a review engagement.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com along with the Pay-Less-Tax Man blog for Bottom Line. Ed is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 743-4582 or firstname.lastname@example.org.