If you are in the market for a financial model auditor, here are some of the things you should know.
Choosing a reputable model auditor
You need to be sure that you are choosing a credible provider.
Your board and investors will want confidence that you are working with someone who will do a thorough job.
The default choice for a safe pair of hands is often to choose one of the Big-4. However, in the world of model audit, although the Big 4 operate to a degree, they don’t generally see it as their core business.
The leading players in audit are a handful of specialist firms for whom model audit is their bread and butter.
To get comfort you‘re dealing with a serious player, check out the model audit league tables on Inframation.
You should also ask any potential auditor to give you evidence of their track record before you appoint them.
Understanding liability
Investors in infrastructure projects typically expect the model auditor to have some ‘skin in the game’. So, lenders for major projects commonly expect that the financial model auditor will offer up liability capped at up to 5m GBP.
Audit providers will typically take out expensive insurance to cover them for this risk. So, before you appoint an auditor, you should get comfort that they can stand behind their promises.
Note that some firms will not offer a meaningful level of liability. This may be appropriate for some deals where a second pair of eyes rather than formal due diligence is needed. But be aware, this will not fly with lenders on big infrastructure deals.
Comparing model audit approaches
Not all audits are the same.
Model auditors generally fall into two main camps:
- Those who adopt a cell-by-cell approach. (I.e. checking every formula one by one) or;
- Those who follow a shadow build approach. (I.e. recreating the model, or sections of it, to check that the results are accurate.)
The leading specialist audit firms tend to follow a shadow build approach on the basis that it provides a higher level of comfort in the material accuracy of the output. With the cell-by-cell approach you run the risk that a single missed cell will have a material impact which is not readily identifiable.
There are arguments for either approach, so you should know what you are paying for.
Time is money
Sometimes there is no time pressure. For a review of an operational model where there is no looming bid deadline, time is not the critical factor.
Other times speed REALLY matters! Where getting in a bid for a Billion USD deal is reliant on getting the audit turned around on time, you want to be sure your auditor is doing all they can to turn things around quickly.
So, you should ask your auditor how quickly they can turn around an audit, and specifically, what they can do to accelerate that process.
At Gridlines, we always look to start work as early in the process as we can, even at the risk of rework later in the day, to give us a head start.
We have also developed ways of working so that we work in parallel with our clients. Our unique shared issues list means you can be solving issues in parallel with us continuing our work.
Therefore, while the usual turnaround time for model audits is 4-6 weeks, we often complete audits in just 2-3 weeks.
Cost and hidden extras
The drivers of cost will typically be a combination of model quality/complexity, the level of liability cover required and whether there is a requirement for a document review and/or tax and accounting review.
To an extent these are all within your control, and so it is helpful to be clear on what you really need when procuring an audit.
Pricing from auditors will typically vary based on their cost base, profit expectations and the efficiency of their delivery model. A full due-diligence model audit typically costs in the range 25k – 50k USD.
Whilst not an inconsiderable amount, it is typically small in comparison with overall transaction costs.
In addition to the base cost, most auditors will charge an extra fee based on the number of iterations of review they undertake. A typical structure would be that the auditor will assume 3-4 iterations in their base fee. Beyond that point, for each additional iteration of review, there would be an additional charge of circa 5k USD.
Gridlines do not charge by the iteration or have any hidden extras in our fee quotes so with us you’ll always have complete control of your budget.
You should clarify this point before appointing an auditor, as these fees can have the potential to mount up, and cause delay, at a critical point in your deal.
If you’d like to learn more about how Gridlines can offer you the best possible model audit solution
