Business-mindedness is key to a successful audit practice
We talk to leaders of firms all around the country who think that if they just get their fee realization right, that’s a sign that they’ve got great business minds. But that’s the wrong approach. Without the right orientation to business-mindedness, you can’t have a successful audit practice.
Business-mindedness is one of the attributes of a framework for audit leadership we’ve developed over the years. The other attributes are relevance, quality, innovation and empowerment. Business-mindedness has two major components and neither one has anything to do with fee realization.
The first component is about making sure the work the firm does makes sense from a business point of view. The second component is thinking about our clients and how we would improve their businesses if we were running them. The right orientation to business-mindedness means looking both inward and outward.
Dabbling puts your firm at risk
The first component of business-mindedness has to do with the clients the firm takes on. For us, the No. 1 element to building a successful audit practice is to avoid taking on work that you don't understand. Too many firms say they can audit any balance sheet, but that’s when they can get into trouble. Many firms get sued because they made a bad business decision. They thought they could take on this unique industry and get it right. But if you dabble in any industry, you’re going to put your firm and yourself at a tremendous risk.
We really believe firms of all sizes and shapes need to have expertise in the industry in which they operate. They need to be good at what they do, and you get good by building industry expertise in your firm. You can’t expect to get it right if you don’t understand an industry.
How can we really focus on what the risks are and where the challenges are if we really don't understand the business, the organization, and the industry in which they operate?
If you want to take on a new industry, then you need to invest in training for you and your staff to learn everything you can about it. Don’t just go to audit training — go to the industry conferences too. That will set you apart from the firms that can’t be bothered to do that.
Keep the right clients
Another aspect of business-mindedness from the firm side is making sure you’re taking on and keeping the right clients. We’ve all taken on clients just to fill up the schedule and to keep staff busy. But if you talk to the staff accountants, they’ll tell you how much they hate working with some clients. These are the clients who aren’t responsive, they don’t care, and always complain about the fee. Yet the firm still keeps these clients on.
Now a lot of firms sort of pay lip service to client quality by ranking them as A, B, C or D. However, since partner compensation is typically based on volume, there’s a reticence on their part to weed out the bad clients. But what these firms don’t know is that they’re weeding out the good auditors because they don’t want to work at the firms that keep all these bad clients.
You may want to look back at your A and D clients. Do you give your A clients the best service they deserve, or are you mired in putting in extra work and the inevitable delays just to get the D client work out the door? It’s going to be very difficult to provide good service to your deserving clients when you’re stressed and using all of your resources on a client that only wants to discuss the fees anyways.
Get out of the conference room
The other side of business-mindedness is thinking about our clients and how we would improve their businesses if we were running them. Business-mindedness is best gained by walking around and asking questions. Your team needs to get out of the conference room, talk to people, and really try to understand how this business works.
Years ago, Al was walking around the manufacturing property for a tractor cab manufacturing client his firm was auditing. He was with the controller and the production manager, and they were getting organized for the annual inventory observation. There was this row of completed tractor cabs on pallets outside of one of the buildings.
Al asked the controller when these cabs were manufactured. The controller hemmed and hawed a bit and then said, “Last month.” The production manager laughed out loud and said, “Good grief, Gary, there are volunteer trees growing up through the pallets into the inside of the cabs. These have been here for at least three years.”
Al had noticed the trees himself, and that is why he asked the question. He knew the cabs had to be old and likely obsolete. The result was that he focused the inventory steps on obsolescence and recommended they get a better inventory management process in place to avoid excess and obsolete inventory.
What would you do?
Audit has evolved into what we call “just chopping down trees.” Auditors spend an awful lot of time ticking and tying and tracing amounts from an invoice to a ledger sheet or to a printout or a spreadsheet, without really understanding what business the entity is in.
What we like to do is assign each staff person to interview someone from the organization who is outside of accounting. They have five questions to ask:
- What is your role in the organization?
- In your view, what is the greatest strength of your area or department?
- In your view, what is your area or department’s greatest opportunity for improvement?
- In your view, what is your company’s greatest strength?
- In your view, what is your company’s best opportunity for improvement?
At the end of the audit they need to report back to the whole team with the answers and what they mean for the business as a whole. Then, starting with the newest member of the team, ask everyone to come up with at least one way they would improve this business if they were running it.
By weaving conversations like this into your firm’s fabric, each team member gains a greater understanding of the client’s business as a whole. They learn to think like a business owner, not just as someone whose job it is to fill out forms and checklists. They gain the necessary skills to become a better auditor. Most importantly, the process serves as a springboard for developing insights, which can then be discussed with the client to add value to the audit.
Look inward and outward
If you lead by demonstrating business-mindedness by looking both inward and outward, then the concerns about fee realization largely vanish. Developing an industry expertise and taking on clients that are a good fit for that expertise gives you the bandwidth to truly add value to every audit. That value-add comes from thinking about every client and providing them with ideas to improve their business.
It’s a simple philosophy: Have good clients and know them. Executing on that philosophy can be tricky, and requires dedication and business-mindedness, but the result will be an audit practice that adds to your client’s bottom line in addition to the bottom line of your firm.