audit-services-redacted (411)

Audit Services
Strategic Sourcing Report
Cost Reduction | Risk Mitigation | Suppler Identification | RFP Creation
Offices of Certified Public Accountants
Gordon Horner LLC - Implement Your Ideas. Faster. ®
1708 Camino de la Costa | Redondo Beach, California 90277
(310) 870-3746 phone
www.gordonhorner.com
heidy.chavez@gordonhorner.com

NAICS Code 541211
December 19th, 2017
Audit Services
Strategic Sourcing Report
Cost Reduction | Risk Mitigation | Suppler Identification | RFP Creation
Not-for-Profit
IRC 501(c)(13)
$100-$500m
Benchmark Price:
Benchmark Price:
2017 2017
Annual Audit Fee
Hourly Rates
$175k $185
Excludes Outliers
Excludes Outliers
Benchmark Hours:
Benchmark Increase:
2017 2017
Annual Audit Hours
Year-End Processing
Annual Increase
1150
$4.50 7.5%
per W2
Excludes Outliers
Excludes Outliers
Range
Price of Annual Audit
$70,000 $380,000

Pricing Environment Explained:
Offices of Certified Public Accountants(CPAs) may provide one or more of the following accounting services
in addition to auditing financial statements. These include (1) designing accounting, procurement and payroll
systems; (2) the preparation of financial statements; (3) assisting in the development of budgets; and (4)
providing advice on matters related to accounting(consulting).
Benchmarks were established in 4 key pricing areas. These include total annual costs, hourly billing rates,
total number of billable hours in an annual audit, and a percentage of annual increases in comparison to
other nonprofit or not-for-profit organizations with a similar annual revenue to the The Metropolitan Museum of
Art.
Aggregate data that includes audit fees paid by other nonprofit or not-for-profit organizations responding to
industry surveys, and price quotes/proposals were used to calculate the benchmark prices, billable hours
and percentages of increase. Historical data from the Bureau of Labor and Statistics(BLS), the Bureau of
Economic Analysis(BEA), and consultants who specialize in the audit services category contributed to this
analysis. We also considered information extracted from previous sourcing events, awards from public
RFP's, and an interview with an internal auditor for Deloitte's consulting engagements - who ultimately verified
many of our findings. Inflation calculators were used to adjust for any previous years data applied to our
research. In these data sets, we made adjustments based on trends for a statistical representation of
increased fee percentages.
The main contributing factors to increases in audit services have been inflation, acquisitions of other
companies, and internal controls. When compared to both public companies and privately held
companies, nonprofit and not-for-profit organizations have been susceptible to higher yearly increases in
audit fees. This could be attributed to the ability of larger companies to mitigate the risk of increase by being
more prepared for audits, improving internal controls, and stronger negotiating with auditors. Inflation has
been identified as the number one contributor to increases in fees for most nonprofit or not-for profit
organizations.
An audit is not a 'one-size fits all' service. Much complexity arises when you consider that every organization
will have have different needs and requirements. Adding to the confusion, audit services companies have
different pricing methods that make the sourcing event even more complex. Outside total annual costs and
hourly rates, audit services companies break down their fee schedules in different ways.
Other pricing methods include:
- Same as last year or same as last year with an 'inflation increase'
- Tiered rates depending on the complexity of services
- Fee schedule for products delivered
- Competitive amount (based on what others might charge for similar services or product output)
- A percentage of savings in certain situations (For example, the savings generated from a tax audit appeal)
- Value based billing, or the right to bill for services or the value to the client.
Not-for-profit Audit Requirements:
Not-for-profit organizations have unique requirements for audit services. An IRC 501(c)(13)
Non-Profit / Museum. 250k + is also subject to New York State audit requirements. The OMB
A-133 audit is also referred to a "Single Audit" which is organization-wide audit or examination
that uses a rigorous standards.
N.Y. EXC Law 7A & 172-b requires a charitable organization with gross annual revenue of
$750,000 to file an audited financial statement prepared by an independent CPA.
Scope of Services (Condensed - See RFP for Complete Details):
Service Provider Deliverables:
1. Audit of Financial Statements with GAAP for year ending 06/30/18
2. Audit of Financial Statements for Retirement Plan - Covered Union Employees (12/31/2018)
- 403 (b) Matching Plan
- 403 (b) Voluntary Contribution
- Retirement Plan for Non-Union Employees
- Retirement Plan for Local 1503
3. Audit of Financial Statements for 401(a) ARC plan (12/31/2018)

Strategy: Increase Efficiencies with a Collaboration
Planning and preparation for your audit will reduce costs. Learning from previously conducted audits will
increase efficiencies and eliminate the need for additional time and complexity. Collaboration with other
key internal stakeholders will be critical in this phase of the project. Time is money in the form of additional
billable hours, and unnecessary consulting fees will increase the overall costs of audit services.
Understand the Audit Process:
(1) Planning - Being prepared for the planning phase is key. Work with other key stakeholders to confirm that
management is prepared to gather the applicable data and information, evaluate your existing controls, and
remain proactive in the steps of the process. The Scope of Work and deliverables in the RFP provide a
roadmap, but effective collaboration of other business units will be critical to the success of this project.
(2) Engagement Letter - Most audit firms will provide an announcement or engagement letter to communicate
the scope and objectives of the project.
(3) Initial Meeting - In the 'kick off' meeting, you will need to be prepared to discuss your financial systems,
statements, and the reporting that are going to be reviewed. Also be familiar with the enterprise structures,
available resources (personnel, facilities, equipment, and funds) and other applicable financial information.
(4) Preliminary Survey - The auditing firm will provide a general assessment and give your organization an
overview of the operations. Meetings with key personnel will be required to review the reports, files, and other
sources of financial information. Working with IT and finance to understand your ERP system will help.
(5) Internal Control Review - Internal control over financial statements and reports is critical to cost reduction and
helps to mitigate risk when working with your supplier partner. So much so, that this has been included in the
Total Cost of Ownership segment of this report. A separate audit to review internal control can become very
costly if your organization is not prepared.
(6) Audit Program - To conclude the preliminary review phase, the audit services supplier will prepare an audit
program that will outline the fieldwork necessary to achieve the objectives as previously stated. Your planning
and preparation will help your organization to avoid unnecessary costs.
(7) Fieldwork - This consists of informal communications and transaction testing. The auditor is seeking to
identify if the internal controls are operating properly and in a manner as described by the client.
(8) Transaction Testing - The auditor will test the major internal controls and the accuracy of financial
transactions. Again, more collaboration with your finance and IT department will be critical to ensure that there
are no potential pitfalls.
(9) Advice and Informal Communications - In this phase of the project, the auditor will discuss any significant
findings with your organization. Collaboration with your audit services supplier partner gives you the chance to
offer insights to work with them to determine the best methods of resolution. This is a good opportunity for your
supplier to suggest consulting engagements for additional projects surrounding the audit and your financial
systems. Being prepared in these conversations reduces the potential Total Cost of Ownership.
(10) Summary - After the fieldwork is completed, a summation of the findings, conclusions, and
recommendations necessary for the audit reports are reviewed.
(11) Working Papers - Your supplier partner will need to support their opinions of the accounting records and
financial systems and statements. These papers serve many functions, but it is also another opportunity to
suggest additional consulting engagements for new projects related to audit services.
(a) Audit report - This is the principle product which is a report that expresses the opinions of the auditor and
discusses recommendations for improvements. Before the final report is presented, a discussion draft with
operating management is reviewed before an exit conference. A formal draft is crafted after these
conversations for review, which will eventually become the final audit report.
(b) Follow-up report - You will be given the opportunity to respond to the final report and provide responses. As
the client the you will respond with recommendations that address the findings provided by the auditor. It will
also list the actions that your organization has taken to address the findings in the original audit report.
To mitigate risk and reduce the overall costs associated with audit services, be
prepared to break down the audit services proposal into specific deliverables,
identify the timeline & the time required for each segment of the process, and
what job roles from the auditing firm will be required to perform each service.

Strategy: Understand the Metrics
An audit is an examination of the financial reports of your organization. These reports include balance
sheets, income statements, changes in equity, cash-flow statements, and notes that summarize the
significant accounting policies.
Metrics and Ratios Used in Audit Services
1. Viability ratio. This indicates a nonprofit's or not-for-profit's ability to pay its debt. It is a basic indicator of
financial strength, and does this by measuring the availability of cash and other liquid assets to cover the
organizations financial obligations. It analyzes the expendable net assets(including unrestricted and
temporarily restricted net assets) to the long-term debt.
2. Current Ratio. This ratio assesses your organization's ability to meet short-term financial obligations by
evaluating your current assets against your current liabilities.
3. Quick Ratio. Financial institutions use the quick ratio comparison to gauge financial stability. It compares
quick assets(assets that can be converted into cash quickly - this could include cash, accounts receivable,
securities, and sometimes (but not usually) inventory.
4. Operating reserve. In the auditors assessment, they will determine if the resources are sufficient and flexible
enough to support your organizations operations without having to borrow. The process compares the
expendable net assets with the total expenses. With a nonprofit or not-for-profit, it describes your ability to fund
programs and other expenses from expendable net assets, should no additional operating revenue be
available. An operating reserve ratio of no less than 25% or at least 3 months of the annual expenses should
be available.
5. Change in net assets. Financial performance is measured by answering the question, "Did our nonprofit
organization live within its means during the previous year?" Positive or negative changes in net assets over
one year does not always present a problem, but consecutive deficits are a concern for auditors.
6. Operating margin. Auditors use this as a forecasting ratio. It illustrates a nonprofits ability to produce a
potential surplus. This surplus should be available if it is needed in future years. Your auditing services supplier
will determine this by subtracting expenditures from revenues and dividing that sum by your revenues.
7. Program efficiency. This compares total program expenses to total expenses. Having this information will
help you demonstrate to potential funders how efficient your organization is in fulfilling its operations.
8. Operating reliance. A metric to show how much your nonprofit is able to pay for total expenses solely from
program revenues. The program revenues are then divided by total expenses.
9. Fundraising efficiency. How much money does your organization generate from fundraising activities? This
ratio indicates the amount of contributions that result from fundraising expenses.
Benchmark: Hourly Rates by Job Roles in Audit Services
Partner/Director Manager Senior Staff
$200 $150 $115 $90

Other Strategies
Inflation Is the Key Reason That Suppliers Justify Increases.
As of June 2017, consumer prices have risen 1.6 percent
year-on-year. Its been the lowest inflation rate since October
2016. Over the last 10 years, the average annual inflation rate
has been 3.22 percent. This is not commensurate to the
benchmark increases in audit service's fees provided in this
report. In your negotiations with the incumbent supplier, or
with other vendors included in your RFP, make sure that rate
increases are negotiated to better align themselves with the
recent and historical inflation rates.
Year-End Processing
19% $4.50
per W2
Reduction
Target
Pro-Bono Hours for Non-Profit Organizations
Use pro-bono hours as a leverage point to reduce costs using
hourly benchmarks. Some companies boast of spending
1,000 hours per year in pro-bono services for not-for-profits
organizations. Although your audit services partner should not
be expected to work at no costs - a breakdown of the hourly
rates and a negotiation of a certain percentage of pro-bono
hours to be applied to your contract may help to mitigate the
risk of an increase in rate from your incumbent supplier, or in
your negotiation with other vendors. Ask if a not-for-profit or
nonprofit discount has been applied to your proposal (what
discounts has the vendor applied to other nonprofits?)
Understand How Outsourcing Plays a Role
7.5%
$4.50
per W2
Benchmark
Increase
The reduction target is
based on the cumulative
rate of inflation over the
last 10 years.
In our interview with an internal auditor with Deloitte in December of 2017, it was explained that the
percentage of outsourcing they used in other countries (India for example) is a huge factor when
determining the price of an audit services consulting engagement. Use this concept as a
leverage opportunity to break down the job roles responsible for each segment of your audit.
Use Local and Regional Vendors as Leverage Opportunities
According to the Bureau of Labor and Statistics, the mean hourly wage of an Account and Auditor
in New York in 2016 is $44.85. Understanding that there are alternatives to the short-list of
vendors included in the RFP may provide a leverage opportunity in your negotiations. It has been
documented in several publications that less than 10% of nonprofit and not-for-profit organizations
utilize one of the "Big 4" Accounting Firms. Many not-for-profit benefit from working with a supplier
partner who is local in the area. Not included in the short list of vendors is CohnRezick.
CohnReznik is a based out of New York City and has been a favorite among other not-for-profir
organizations.
Improve Internal Controls to Decrease Time (Hours) Required for Audit Services
A review of your existing internal controls will help you to better assess your financial statements in
different areas of the business that will be directly impacted during the auditing process. Work with
other internal stakeholders to confirm the the reporting controls are designed effectively and that there
are no gaps in the framework of your financial processes. Some of your internal controls include:
(a) Order-to-Cash, (b) Procure-to-Pay, (c) Payroll Services or In-House Payroll Systems, (d)
Inventory and Property, and (e) Equipment Management
Contract Term
If its been a while since you negotiated or re-negotiated your contract with your existing audit services
provider, there is a good chance that you've been subject to annual increases. The RFP requests
that the term will cover a 3 year period. Use alternative contract terms to either commit to this year's
contract and then to open it up to another sourcing event for the next year's audit services contract
or, extend the contract term to lock-in a rate or fix annual increases year over year.

Substitute Services
Negotiation Power
1. None
An audit is a legal requirement in many
instances. Federal and state law
requires that nonprofit organizations abide
by certain financial reporting
requirements.
High Supplier
High Supplier
High Buyer
2. Financial Review
A financial review by an independent
auditor examines the nonprofit's or nonfor-profit's
financial statements to
determine whether they are consistent with
Generally Accepted Accounting
Principle(GAAP). A review has the same
objectives of an audit, but, it it not
conducted with the same level of
investigation or analysis as an
independent audit.
Supplier Power
Low Supplier
Low Buyer
High Buyer
3. Compilation
Buyer Power
A compilation differs significantly from a
review or an independent audit of
financial statements in that it is literally a
compilation of financial records into a
format required by Generally Accepted
Accounting Principles (ex GAAP). If this
work is performed by an auditor then it is
referred to as a compilation and
accounting standards require the auditor
to assess whether the records contain
obvious errors.
High Buyer Power
High Supplier Power
Competitors rivalry
Switching costs low
Local suppliers an option
Market share concentration
Economies of scale
Brand Recognition
Target Price Savings Example
Year-End
19%
Processing
$4.50
Reduction
per W2
200000 $175,000
$141,750
100000
$33,250
Total annual audit
services savings
0
Benchmark
Target
Savings Goal of 15%
Savings at 19%

Total Cost of Ownership
1. Enterprise or Accounting Software
Maintaining your ERP and/or accounting software is critical to
accurate financial reporting. In planning for your audit services
sourcing event, work with IT to confirm that your organizations
software, hardware, and data migration capabilities will provide the
best outcomes to increase efficiencies during your audit. Additional
user licenses, training, and implementation costs may be
necessary to confirm that your financial data can interface with
external systems relating to the auditing services project.
Cost Savings Opportunities
Benchmark Price:
??? International
$ Installation Fee
$
$
$450kFlights
???
Estimated cost of
implementation of
cloud-based ERP
software
1217
Invest in training programs designed to promote more effective
financial reporting with your existing ERP applications in your
organization.
Range
Implementation
Costs
$150k $750k
2. Audit of Internal Control
Cost Savings Opportunities
In addition to an assessment of financial
reporting, an audit requires an evaluation of
management's effectiveness of internal control
over financial statements and reporting An
audit of internal control over financial reporting
is integrated with an audit of your financial
statements.
To avoid common pitfalls that may lead to an
increased investment in audit services, make
sure that finance, IT, and other business units
involved in reporting are prepared.
A collaborative effort between internal
stakeholders will help to mitigate $ risk during
your audit. Effective communication with
finance will help to better prepare the
procurement organization in the negotiation
of the audit services contract.
Using the previous audit report provided by
the incumbent supplier will also help to gain
a better understanding of the category in
general. Last years audit report has been
included as an addendum to this report.
3. Consulting Fees
Not being prepared for your audit may result in
additional consulting fees for projects
suggested by your supplier partner. Although
some of these engagements may be
warranted, others could be avoided by being
prepared to make your own recommendations
to your audit report.
Cost Savings Opportunities
Develop your own internal process improvement models based
on the previous year's audit report. Collaboration with other
internal stakeholders in finance will prepare you for your audit
and suggest corrective measures when working with your
auditor.
$
??? International
1217
$ Installation Fee
$
$
$185Flights
???
Benchmarked hourly
rates for audit services
consulting services.

Supplier Data
PwC
KPMG
Overview:
As your incumbent supplier,
PricewaterhouseCoopers or PwC is a
multinational professional services company
headquartered in the UK.
In 2017, the company's global revenues
were $37.7 billion.
It is one of the 'Big 4' accounting firms and is
the second largest professional services firm
in the world. According to Vault Accounting
50, it has been ranked as the most
prestigious accounting firm in the world for
the last seven years.
Overview:
KPMG is a competing supplier for your
audit services contract and has been
short-listed in review of the audit services
contract.
As one of the "Big 4" accounting firms,
KPMG has annual global revenues of
$25b as of 2017.
It employs roughly 189,000 people and
has three primary lines of service which
include financial audit, tax and advisory.
It is actually of network of firms that operates
in 157 countries, 743 locations with around
224k employees.
PwC provides services to 422 of 500 of the
Fortune 500 companies.
In Billions
37.7
25.5
Grant Thorton
Overview:
As the 7th largest professional services
network, Grant Thornton provides
independent accounting and consulting.
Its member firms provide tax and advisory
services to privately held businesses and
organizations in the public sector.
Based out ot London, the company's
combined global revenues from member
firms in 2015 were $4.6 billion. There are over
2,500 member firm partners and total
member firm personnel of over 42,000.
4.8
PwC KPMG Grant Thorton
Other Key Suppliers
Deloitte
EY
McGladrey
Moss Adams
BDO
BKD
Cohn Reznick
Low Risk Medium Risk High Risk

Other RFP/RFI Elements
Vendor Qualification
Did you ask for?
1. Proposed fee structure for each of the three
years's proposal period including whatever
guarantees can be given regarding increases in the
future years, and the maximum fee that would be
charged.
2. Proposed fee structure should be itemized to
reflect services by staff member and by hours,
including professional fees and any other out-ofpocket
expenses. Hourly rates by level of
professional should also be requested as well.
(Included in your Schedule A Staffing and Fee
Outline Addendum of the RFP)
3. Describe the billing rates and procedures for
technical questions that may come up during the
year, or whether these occasional services are
covered in the proposed fee structure outlined in the
proposal.
4. Detail the description of whether and how you bill
for overruns. Ask for details on how your
organization can avoid or reduce any overruns and
how you can be assured of no 'surprise' billings.
Are expenses included in the fee structure.
- A proposed timeline for the fieldwork and final
reporting.
- Evidence of the auditing firm's qualifications
and ability to provide the services and
deliverables.
- Background and experience in auditing other
nonprofit or not-for-profit organizations.
- The size and organizational structure of the
auditor's firm.
- Statement of the firm's understanding of the
work to be performed.
- A copy of the firms most recent peer review
report, and the related letter of comments, and
the firm's response to firm's response to the letter
of comments.
- References and contact information from at
least 3 comparable nonprofit or not-for-profit
audit clients.
5. Describe the firm's audit approach, including
review of internal controls.
6. Describe how the firm will obtain a basic
understanding of The Metropolitan Museum of Art's
operations, and activities for planning the audit.
7. Describe the procedures utilized to monitor the
progress of the work for periodic evaluation and
communication to management of The Metropolitan
Museum of Art's so that problems can be resolved.
8. Names of the partner, audit manager, and other
applicable field staff members who will be assigned
to the audit, and have them provide bio's on each
team member.
Financial Strength (20%) Overal Costs & Price Guarantee (40%)
Ability to Meet Require.. (20%) Demonstrated Competence (10%)
Quality Certs and Exp. (5%) Coverage Zone (2.50%)
Organizational Background (2.50%)
Disclosure: This report was not produced by a CPA
and does not intend to offer any professional or
legal advice surrounding audit services.
The evaluation criteria was derived from the RFP
presented by The Metropolitan Museum of Art.
Suggested weighted scores were included.
Source:
Gordon Horner LLC - Implement Your Ideas. Faster. ®
1708 Camino de la Costa | Redondo Beach, California 90277
Need help? Please contact our office.
(310) 870-3746 phone
www.gordonhorner.com
heidy.chavez@gordonhorner.com