Let's take a look at it from the client's perspective. Many of clients, depending on their size and the type of audits they are having performed, have dealt with firms that offer hourly rate based fees and fixed fees. An article by Boomer Consulting Inc. help put in perspective how a client may feel during an audit engagement conducted under hourly rate fees, "Imagine arriving tired and weary, late at night in a strange city. You hail a taxi for what you hope is a quick ride to your hotel. But with no knowledge of the area, you have no idea how long the ride will take or what the final fare will be. Isn't it unsettling to watch the meter tick up and up, while you just hope you have enough cash when you finally reach your destination?" .
They compare hourly rate fees by CPA firms to a meter in a taxicab. Now it is unfair to compare an audit engagement to a cab ride, as there are clear discrepancies between the two, but the metaphor does have merit to it. I think a client would have much more confidence in an engagement knowing the price going into it, or in other words establishing a price for the taxi ride before the ride instead of watching the meter keep tick up because after all, either way you are going to the same place.
Another knock on fixed fee audit engagements is that firms may charge an inadequate fee or "low ball" competition just to attain business." In other words firms may charge a price under what the particular type of audit should cost and what their competitors are charging. It is speculated firms may do this because business has been slow for them as of late or they fail to follow proper procedure and specifications while performing an audit. The other side of the argument is firstly, a client will/should never choose a firm purely on price, especially if they feel the lower price comes with sacrificing performance on the audit. Secondly and maybe most importantly, an auditor should always be in-line with the established code of ethics that come with the position.
