Charging The Audit Fee at the Right Time

When it comes to setting the price for services, time based charging is one of the important factor  to consider. Although, there is caution and optimism among some professionals to accept the use of time based remuneration for services like auditing, there is always a variance in this opinion.

 In auditing profession,  80% of clients turn up at the last minute with their books for tax audit and tax filing – typically the last one month before the tax filing deadline.This is not an area specific or country specific issue but a global phenomenon. 

Some types of assignments are time specific – for example statutory audits of banks, tax audits etc. Time specific assignments bring in a touch of seasonality to the profession with peak requirements during tax audit submissions typically July to September every year. Audit firms therefore have very specific and detailed training requirement for staff to avoid being swamped/overloaded during the peak season - training that involves a fair amount of time and money. Every CA firm undertakes said training and development to ensure smooth sailing during the tax audit.

When a client comes in at the 11th hour with a set of sub standard books the question of course is how to provide quality service when the level of input is sub standard as well as being last minute. This would require the use of qualified resources at a higher cost and therefore justify a higher fee from the client than that charged to a similar sized business which brings in the books on time.

Let us look at a similar situation in the Airline industry. Once upon a time, airline companies charged you the same amount whether you booked the ticket one month in advance or just a day ahead of your scheduled travel. The advent of low cost airlines changed the whole game. They brought differentiation into the pricing structure and used that as a major business strategy.

Typically,  flight ticket from Kolkata to Mumbai would cost around Rs.3000, but if you book at the last minute, it would cost around Rs.15,000 to Rs.20,000.

This is the precise model US CPAs follow to charge clients when they come in at the last minute. They typically charge 20% more if the client comes in during the last month and fees go further up, if the same happens during the last week of the due date in April.

An auditor cannot work a miracle when the client takes forever to put together the documentation, and presents it hardly 3 days before the audited financials are due to be filed. Ideal clients would understand their own accounting and make the time to get the auditor what he / she needs on time.

Charging the same fee for prompt & not-so-prompt clients would tempt clients to drag on till the last possible minute as there is no monetary penalty involved per se – just a slight reprimand from a disgruntled auditor. However, a graded fee structure would serve as a disincentive to attempt last minute audit requests. This practice will eventually reduce the average cost per client served. Once the practice becomes habit, the overall fee charged is only going to go down as the auditor will have a more organized workload on hand and can plan ahead.

As Chartered Accountants, all of us are aware of the time value of money. While no client should be overcharged for any of the services provided, it would also not be justified to allow last minute clients to get quality service at a price that does not meet the basic costs involved and the related risks.  Therefore, it is worth considering a graded fee structure based on time and effort during the tax audit season.