Audited Financial Statements - Cost As a Function Of X

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Audited Financial Statements - Cost As a Function Of X

Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

For the tax wizards on the forum...

For the moment suspend any sense of rationality and assume that there is a gov-mint mandate on startups that require them to do audited financial statements.  They really don't have much to audit so the standard mid-size firm requirements that drive costs to $25k+ aren't really accurate any more.  

Next assume that the startup is a real estate company that either buys and sells property, notes, or other things that people on BP generally do. The firm would be structured as a series LLC and each series would do an activity like this; buy/sell/issue notes, do a fix/flip, etc.

Assuming all of this what would you base your pricing on if you had to assume you'd have many competitors for your services and the client would be able to send you a steady stream of work (hundreds of projects potentially and many new clients) for years to come?  Would it be on things like this:

  • Journal entries
  • Individual series within the LLC (e.g. 1 series, 5 series, X series)
  • Projects done

or on something else?  

I know the answers here are probably going to vary, but the goal would be to establish fair pricing for value delivered and to pay based on the project rather than on the hour.  Bounding rates based on X journal entries with Y entities would seem rational because it would be a good way to specify the amount of effort required.

Any thoughts?  How would you base your billing for a situation like this?

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Brandon Hall
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
11y

Hey @Bryan Hancock

I'd suggest reading a few articles from the AICPA. A great many CPAs (myself included) are implementing "value pricing" strategies. The idea is to get away from variable pricing such as billing per hour or billing per "journal entry" and move more toward a client centric, value add focused pricing model.

With value pricing, the emphasis is first placed on the customer and the value each project will add (if it can be quantified). The pricing is agreed upon at the beginning of the project so that there are no surprises later down the road. Ultimately this increases customer happiness, loyalty, and communication.

So if you approached me with a need, I'd look at billing an agreed upon fixed price per project. The price would change for each project as each project adds a different value to your company. If you have many projects, such as CFO outsourcing, I'd look at pricing the bundle or set a fixed price per month for repetitive projects. The value each project adds to your company would be clearly communicated and understood by you (the buyer) which is what makes this a highly effective model.

Other pricing methods are not of the same caliber. For instance, the journal entry method you mentioned - sure you could do a lot of financial analysis and determine an average cost, but even still, not all journal entries are created equal, and ultimately, you will likely not know the price until the end of the quarter/year. The same can be said for those who bill by the hour - not all hours add the same value, so not all hours should be billed the same. You may have an hour where the added value is $900 and another where the added value is only $50. So what should be the hourly bill rate? Again, you'll find out how much you owe after the hours have been billed.

You should look for someone who is going to agreed to a price upfront and focus that pricing on the value added to your company. That's the "trusted advisor" you should be looking for and you'll sleep better at night knowing no surprises will come up down the road and that the CPA isn't just churning hours to bill you more. 

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  • Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    11y

    Hey @Bryan Hancock

    I'd suggest reading a few articles from the AICPA. A great many CPAs (myself included) are implementing "value pricing" strategies. The idea is to get away from variable pricing such as billing per hour or billing per "journal entry" and move more toward a client centric, value add focused pricing model.

    With value pricing, the emphasis is first placed on the customer and the value each project will add (if it can be quantified). The pricing is agreed upon at the beginning of the project so that there are no surprises later down the road. Ultimately this increases customer happiness, loyalty, and communication.

    So if you approached me with a need, I'd look at billing an agreed upon fixed price per project. The price would change for each project as each project adds a different value to your company. If you have many projects, such as CFO outsourcing, I'd look at pricing the bundle or set a fixed price per month for repetitive projects. The value each project adds to your company would be clearly communicated and understood by you (the buyer) which is what makes this a highly effective model.

    Other pricing methods are not of the same caliber. For instance, the journal entry method you mentioned - sure you could do a lot of financial analysis and determine an average cost, but even still, not all journal entries are created equal, and ultimately, you will likely not know the price until the end of the quarter/year. The same can be said for those who bill by the hour - not all hours add the same value, so not all hours should be billed the same. You may have an hour where the added value is $900 and another where the added value is only $50. So what should be the hourly bill rate? Again, you'll find out how much you owe after the hours have been billed.

    You should look for someone who is going to agreed to a price upfront and focus that pricing on the value added to your company. That's the "trusted advisor" you should be looking for and you'll sleep better at night knowing no surprises will come up down the road and that the CPA isn't just churning hours to bill you more. 

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  • Paul Sundin
    Accountant · Chandler, AZ · Member since 2014 · 72 posts · 36 votes
    11y

    @Bryan Hancock

    This is a tough one to answer.  The main reason is because most small to mid-size CPA firms are essentially tax firms and do not do audits.  My firm, for example, does not do audits because the risk is just too high plus there is much higher compliance on my end so it is just not worth it.  But in many situations, companies do not need audits they can get a "review" or "compilation" which are much cheaper and much less risky for CPA firms.

    To answer your question, if someone were to propose this to me I would probably try to do some sort of flat rate pricing with some small variably depending on the documentation, journal entries, etc.  But I would still assume that you'd be looking at a fee of a few grand each minimum.  

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  • Bryan Hancock
    OP
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    11y

    Any suggestions about where to find small firms that do audits?  I am assuming some single-man shops may have tax folks that still have the license to do audits from working at a big firm earlier in their career.  Yes?

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  • Mark Canton
    CPA · Seattle, WA · Member since 2016 · 22 posts · 2 votes
    9y

    Hi Bryan,

    I have run into this a few times, particularly in the year of acquisition or sale, and have some ideas.  I know you posted this a while back, but feel free to PM me if you have any questions.

    All the best,

    Mark

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