Mary Kao CA, is a partner in a single office firm of chartered accountants in a medium sized Ontario city. Her firm, Hardy & Co., is the largest firm in the community and has a wide variety of audits including not-for-profit organizations such as the local library. Her firm also does the municipality’s audit. The range of work in Mary’s office includes about twenty-five percent audits, twenty-five percent review engagements, thirty percent tax work and about twenty percent compilation and bookkeeping.
The treasurer of the local YM-YWCA (Y) called her to advise her that the Y planned to tender their audit this year and that the board of the Y had adopted a policy of tendering every three years. The treasurer revealed that several members of the board had been reading in the financial press that organizations,especially not-for-profit organizations,are now asking for tenders for their audits as a matter of course, believing that tendering the audit will result in lower audit fees as well as a fresh approach to the audit.
The treasurer goes on to tell Mary, in response to her question, that the Y is happy with the incumbent auditors and feels they have provided good service at a fair price. The treasurer states that a chartered accountant who is a member of the board, although not in public practice, suggested that the cost to the Y and the new auditor would be high in the first year or two of the audit and wonders if in fact the tendering is necessary. Despite the concerns of the chartered accountant, the board of the Y decides to go ahead with the tendering process.
The treasurer asks Mary if her firm will tender. Mary thanks the treasurer for the information and says that she will get back to him.
After hanging up the phone, Mary ponders the situation. She knows that there are several clients or members of clients’ companies on the board of the Y and she believes that they will expect her firm, since it is the largest firm in town, to tender. She suspects they will be suspicious if no tender is made. Mary also recognises that the cost of taking on a new audit will be fairly high in the first year as her company has never done the audit of the Y and there will be a lot of learning to do about the Y’s systems and operations. Mary suspects that if her firm offers the low tender, Hardy & Co. will not cover the costs of the audit.
At this point, Mary goes and talks to one of her other partners, Arthur Todd. She explains the situation to him and asks for his advice. Mary recognises that the firm’s policy is to discuss any possible tenders or new clients with the entire partnership (there are seven partners in the firm) before making a decision whether or not to tender or accept the new client. As Mary and Art mull over the problem they recall that rumour has it that the Y’s accounting systems are very good and that the employees are generally quite competent. In other words, the audit should be relatively low risk and relatively clean. As they discuss the matter, Art suggests to Mary that perhaps she should call the incumbent auditor and find out what their views on the situation are. He wonders if the incumbent is as happy with the client as the client appears to be with the incumbent. Art suggests that Mary call a meeting of the partners after finding out the incumbent’s view of the audit.
Several days later, the seven partners of the firm meet to discuss submitting a tender for the YM-YWCA audit. The pros and cons of tendering are brought out in the meeting. The point is made, and generally agreed to, that if the firm decides to submit a tender that will be successful the tendered fee would have to be fairly low and that the recovery would probably in the neighbourhood of around sixty percent. One of the partners points out that such a recovery would result in covering most of the variable costs but that there would be fixed costs that would not be covered. Another partner points out that in the second and third year they could ask for a higher fee and increase the recovery up to perhaps eighty or ninety percent of the billable hours. A third partner points out that they do have some time available in the early part of the year and that the Y’s year end is December 31. They certainly would have the staff and the expertise to do the audit. In addition, there would be a certain amount of prestige that would be attached to doing the Y’s audit since the Y is a high profile organization in the municipality.
At this time, Mary reveals that she has talked to the incumbent who has indicated that they are very happy with the audit and get along very well with the client. They plan to tender and hope to keep the job.
After further discussion among the partners, the suggestion is made that the firm should ask the incumbent how much they plan to tender and then tender that amount plus $1000. The expectation behind that suggestion is that the YM-YWCA will continue with the incumbent auditor or perhaps some other auditor who comes in with a lower tender. The rationale of the partners is that they do not want to get into a bidding war with other firms because they feel that a bidding war benefits no one and they also feel that they should tender because of the clients that are on the board of the YM-YWCA.
What should the partners do?