Differentiating Your Audit Services and Achieving Premium Pricing

Robert SawhneyManaging Director, SRC Associates Ltd

CCH Singapore20th April 2011

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Objectives for Today

• Understand the key factors that drive the differentiation of audit services

• Understand the key elements of client value

• Learn about SERVQUAL and how it can be applied to audit services

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From some of you!

• ‘Our audit approach, at the leading edge of best practices, is tailored to suit the size and nature of your organisation and draws upon our extensive industry knowledge. Our deep understanding of regulation and legislation means we assist with complex reporting issues. ‘

• ‘Our services reflect our overall vision in serving as professional advisers -we seek a personal relationship with you, so that we can provide the services you need, in the manner most effective for your situation.’

• ‘To help our clients be the best that they can be by bringing out the best that we can give.’

• ‘Our audit approach, which is at the leading edge of best practice and draws upon our extensive industry knowledge, is tailored to suit the size and nature of your organisation. Our deep understanding of regulations and legislation means we can also help you with your complex reporting.’

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Try this

• What goes here?

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Performance

What research shows

Clients’ Perspectives Toward Audit Service Quality of the Big 4 in Thailand, University essay from Karlstads, Pitchaya Sonsa-ardjit; Ramon Vejaratpimol; [2010]

• Assurance, reliability, and responsiveness were significantly below client expectations

• 8 key factors (order of importance):• Factor 1: Trust & Confidence, Factor 2: Responsiveness &

Accuracy, Factor 3: Knowledge and skills in clients’ industry, Caring and Independence, Factor 4: Understanding of Clients, Factor 5: Timing/Scheduling & Right Service, Factor 6: Physical Facilities, Factor 7: Professional appearance & Professional Procedures, and Factor 8: Information & Communication Channels and Materials.

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Cont’d

• Ishak Ismail, Hasnah Haron, Daing Nasir Ibrahim, Salmi MohdIsa, (2006) "Service quality, client satisfaction and loyalty towards audit firms: Perceptions of Malaysian public listed companies", Managerial Auditing Journal, Vol. 21 Iss: 7, pp.738 – 756

• Dissatisfaction with reliability, responsiveness, empathy, and assurance

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Auditor switching

• Prior research has investigated the relationship between audit fees and client-initiated auditor switching in two areas. Several studies indicate that relatively high levels of audit fees prompt clients to switch auditors [Ettredge et al., 2007; Kallunki et al., 2007; Woo and Kob, 2001; Garsombke and Armitage, 1993; Haskins and Williams, 1990; Johnson and Lys, 1990]. Thus, the client's incentive to control costs appears to motivate some instances of auditor switching.

• The literature suggests that factors such as client dissatisfaction with the auditor's responsiveness to client needs, technical competence, industry expertise, the extent of partner involvement, and the interpersonal relationship between audit and client personnel all lead to auditor switching [Garsombke and Armitage, 1993; Eichenseher and Shields, 1983

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The Importance of Industry Knowledge

• Much research in the professional services sector points to the importance of industry knowledge for clients and accounting firm

• For example, Moroney and Simnett (Behavioral Research in Accounting, 2009) found that auditors working in a complex industry (pension funds) have a greater comparative ability to identify business risks, information sources, and evidence-gathering processes in their industry than auditors working in a generic industry (manufacturing)

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So, can you differentiate audit services? Contemporary Accounting Research, Client satisfaction and big 6 audit fees

Bruce K Behn, Joseph V Carcello, Dana R Hermanson, Roger H Hermanson. Contemporary Accounting Research. Toronto: Winter 1999. Vol. 16, Iss. 4; pg. 587,

• Both the CPA firm and the audit team as a group (at the senior level and above) had the necessary industry expertise to effectively audit your company

• The CPA firm was responsive to your company's needs

• The audit team members as a group always exercised due care throughout the engagement

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Cont’d

• The CPA firm has a strong commitment to quality.

• The executives (partner/manager) from the CPA firm were actively involved in the engagement

• The audit team members interacted effectively with the audit committee before, during, and after the audit engagement

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Cont’d

• Recent research from Oxford Brookes University shows that for every one point on a scale a firm can increase its empathy score, it delivers a ROCE of over 16 percent.

• Responsiveness and empathy can become key differentiators then since most clients complain about lack of responsiveness from their PSFs and cite industry/business knowledge as one of the key factors in choosing a provider.

• Since many PSFs structure around practice groups and train their people in technical skills almost to the exclusion of client skills (such as EQ, communication, business acumen), there is a massive gap here for firms to become more client focused and hence create meaningful differentiation

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Using SERVQUAL for the 3 customer groups

• Valerie Zeithaml and Mary Jo Bitner have come up with the most widely used and accepted model of service quality for services. According to these authors, service quality has 5 dimensions:

• Reliability – ability to provide the promised service dependably and accurately

• Responsiveness – willingness to help customers and provide prompt service

• Assurance – employees knowledge and courtesy, and their ability to inspire trust and confidence

• Empathy – caring individualized attention given to clients• Tangibles – appearance of physical facilities, personnel, and

written materials

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The Framework

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Thank You• If you want copies of the any of the reports or research cited here, please

don’t hesitate to contact me:

• bob@srchk.com, www.srchk.com

• Blog: www.marketingasia.typepad.com

• Twitter: http://twitter.com/robertsawhney

• My books: Available from Lexis Nexis in Hong Kong and other Asian offices, Ark Group, or www.amazon.com

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