Never mind the cost, feel the quality
Use of sealed bids marks a complete change in focus from the recent past
The emergence of sealed bids being used in the audit market marks a complete
change in focus from the recent past.
Some large listed companies are now aiming to take price out of the
decision-making process altogether, making the choice of which firm to appoint
purely on the quality of audit that can be provided. While there are concerns
over a lack of transparency and other potential implications for the tender
process, almost all see it as a welcome move.
This shift of onus onto quality was sparked by the corporate scandals of
Enron and WorldCom in 2002 and the subsequent reaction of governments and
regulators around the world.
A high-quality audit is seen as key to helping prevent these disasters
happening again. Before those watershed events, audit firms often undercut each
other, sometimes taking a loss on the audit as a way into companies to sell
other services.
Not that the firms, or even their clients, would admit that price was the
most important factor in the first place, of course.
Deloitte partner Ken Wild argues that there was more emphasis on quality now
than there had been in the past, although companies still want value for money.
This change of emphasis has pleased investor groups, many of which are
actively pressing for improvements in audit quality through the Audit Quality
Forum and other avenues.
But there are still fears that the situation could be exploited and audit
fees could rise significantly if it starts becoming more prevalent among
corporates.
Some have even questioned whether it is something the Professional Oversight
Board for Accountancy should look into.
Others simply argue that should this happen, or appear to be happening, then
companies would just abandon sealed bids and return to more standard methods of
tender.
Besides, economics do not completely disappear with this method, despite how
it may seem, as Brian Kilpatrick of the National Association of Pension Funds
points out.
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‘I can’t imagine that if a bid is chosen on audit quality and the price seems
a bit high, then the company would not be able to negotiate on the fee,’ he
said.
