Everything you need to know to avoid requesting something unworkable without practical results.

Client acceptance – the first barrier

After years and years away from a Big4, I feel compelled to return to tackle the tedious task of accepting an audit client. Too monotonous, but mandatory and crucial to avoid problems.

The process of accepting or continuing (renewing) an independent (external) audit contract has always been very rigorous, and after the events of Enron and WorldCom, it became a complete nightmare. If I were to cover everything that needs to be done in detail, I would have to write a book.

So, I will try to be as objective as possible and deal with the objective macros inherent in analyzing a new client’s acceptance. After all, this is the case under study: the utopic situation in which a Big4 can audit a Brazilian Football club.

Where does the auditor start? For the reputation of the potential customer.

Here you have to keep in mind that the auditor is not a fan. They don’t believe in clubs’ memory departments nor give a damn about the trophy room. At least, they shouldn’t.

The reputation analysis involves several research types, resulting in highly harmful elements concerning litigation in the football club case. Most clubs have a reputation as debtors who do not honor their debt agreements and confessions and have several taxes, labor, and social security compliance problems. Some of them have already been expelled from the Government’s recovery programs. It is prevalent in delaying the delivery of budgets, and financial statements, among other problems.

Usually, the red flags report about a football club’s reputation in Brazil leaves a Christmas tree full of flashers envious.

The reputation analysis aims to mitigate two risks to the auditor: the risk of association, having your name involved, even if involuntarily, in controversial or illegal acts of not very serious management, and the credit risk, which consists of receiving the audit fees.

Let’s assume that the auditor decided to turn a blind eye to the reputation analysis and gave the green light in this regard. After all, there are crazy people to do everything in this life.

Further research will be carried out on the managers themselves. I will not waste my time detailing this topic. It is highly problematic in Brazil, as it sometimes mixes public and private power, conflicting interests, and even people with extensive criminal records who are involved within the administration somehow.

The potential customer’s business structure is also analyzed based on public information and interviews with key people of the potential audit client. The other auditors’ financial statements and opinions are considered and studied during this acceptance project phase.

The auditors will also review potential conflicts of interest internally to check any conflicting service or business relations (several concerns at this point).

Finally, everything will be documented on internal forms with several annexes and be discussed within Big4. It will involve a peer review and even a C-level assessment or risk management. Football is a hazardous segment, pre-defined as subject to various internal approvals. If all goes well, they accept the new audit client.

You will learn a couple of options a Firm has to serve a “denied” audit client in future posts. Consulting, Diligences, and Investigation are the path to regular Brazilian clubs to be prepared for an external audit by a Big4. But there is an order to achieve the goals. Usually, Brazilian clubs are also ignoring it.