The good news: audit fees are flat. The bad news? Given the economy, flat may not be enough in light of increasingly complex audits that portend an increase in fees.

To be sure, recent moves by the Public Company Accounting Oversight Board to impose term limits on audit firms and prod auditors to provide more details in their published opinions have CFOs worrying that complexity will drive audit fees higher. Further, a 2009 Securities and Exchange Commission requirement related to the release of financial statements in XBRL, a standardized business-reporting language designed to improve the reliability of data across a global platform, has already put pressure on finance operating budgets. “In this tight economic environment, you can’t just stand still and accept higher audit fees,” says Stephen Kuchen, CFO of PacificHealth Laboratories, a small publicly traded provider of nutritional supplements. “I have already gone through two quarters of XBRL, and we managed the process just fine. But small publicly traded companies like us have to worry about what’s next.”

Easy Does It
Becoming easier to audit is one way for small and midsize companies to climb out of the cost quagmire. A good way to do that is to reduce audit complexity by improving accuracy, transparency, accountability, and auditability in the close-to-report process, particularly in the “last mile of finance,” a term that describes steps that take place between the trial balance and statutory reporting.

In all, finance executives looking to transform the last mile need to tackle the three major causes of poor performance:

  1. Lack of common data definitions and standardized documentation across the enterprise;
  2. Poor reporting discipline — for example, business units omit data needed to complete the process, and the reporting team must chase them down; and
  3. Lack of standardized systems, which creates a need for manual rekeying and reliance on spreadsheets to prepare presentation documents to senior management.

Business-software vendors in the “disclosure management automation” space are not missing a beat in the quest for less complexity. James Fisher, who oversees SAP’s portfolio of solutions that address the office of the CFO, says: “Regulatory requirements have been the forcing mechanism for organizations to finally sit up and say, ‘We’ve got to do something about the last mile of finance,’ which is only going to get more complex and costly in coming years.” When it comes to preparing XBRL filings, he adds, “CFOs tell us that they will not be able to afford to outsource the work to third parties as the burden grows.”

Fisher’s crystal ball shows more-varied consumers of corporate financial information demanding to receive their “feeds” electronically as XBRL becomes the global standard for digital data exchange. That means the return on investment of XBRL outsourcing (for the sole purpose of satisfying SEC rules) will diminish while the need for better controls on information quality rises.

Automation is not the only salve, of course. Michael Simons, CFO of Blauer Manufacturing Co., a private company that provides safety equipment for first responders, takes great pride in the cleanliness of his financial statements. He advises his counterparts to remember that “stable processes are the friends of every auditor. If you can’t explain why sometimes you do A versus B, you have financial process instability. Maybe your solution is or isn’t automation, but the point is to eliminate steps and ensure stability.”

A Perpetual Problem — and Solution
Global giants such as Intel, which has been committed to continuous financial-management process improvement for years, are reviewing the global shared-services model in the search for perpetual productivity increases. Intel is experimenting with innovative ways to apply principles such as Lean Six Sigma to financial-management process design, says Jim Campbell, vice president and controller at the company. His goal is “to remain on the constant-improvement curve because there will be persistent cost pressure on finance.” One regulatory move in particular has sparked his attention: the PCAOB’s recent proposal regarding term limits on audit firms (see Making Audits More Audible”). “The switching costs would be onerous on global companies of our size, and the value to readers of our financial statements would be questionable,” argues Campbell. Changing audit firms on a dictated schedule would increase complexity, effort, and cost.

Just Ask
“Between XBRL and other things, we are being asked to do more,” says Kuchen. “But the good news is that it’s a two-way street. Your auditor will partner with you to find ways to keep fees in line if you do certain things, such as provide better process documentation or ensure more reliable segmentation of duties,” he adds. “If you don’t, you are tougher to audit.” As a result, audit complexity will lead to audit fees that gain weight every year.

Although CFOs may have good reasons for delaying investing in other areas of finance, it is becoming harder to ignore the last mile. Repairing the road will not only save money for the CFO, it will also help persuade the watchdogs to heel.

Mary Driscoll is senior research fellow for APQC, a nonprofit business research firm in Houston.

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