One of the tasks of a financial modeler is to be involved in the selection process of appointing a financial model auditor.

A model auditor is basically an independent party that will review the financial model and certify that the model is working properly under base case and sensitivity cases. This certification is needed for lenders and is part of the Conditions Precedent to first drawdown.

There are two different aspects of audit required during the due diligence process on the financial model. One is the financial model audit and the other is tax audit. Typically a single company is hired to do both financial model and tax audit. But the scope of work for each of them is different and can not be included together. In this post, i am talking about the financial model audit and not tax audit.

What is an RfP for model audit services?

The RfP for model audit is basically an invitation letter to accounting and audit firms to tender for the appointment of a financial model auditor to undertake a review of a financial model.

Download the Sample RfP for model Audit Services

What should be included in the RfP for a model audit?

Every company or institution will have its own template but generally the following information are included in the RfP:

Section 1: Introduction

You start the RfP with a letter of invitation addressed to bidders, telling them about the project and giving them the general information about what is needed from the bidder. This can include but limited to:

  • About the contractor(s)/Project Sponsors and lenders
  • About the project
  • The assignment
  • Key timeline
  • General rules
  • the outline of the RfP
  • Contractors contact details and signature

Section 2:Preparation of Proposal

  • In this section you should provide the necessary instructions and information regarding the format and content of their proposal.
  • Typically it is common to ask for two separate proposals, a technical and a financial proposal.
  • Language of the proposal
  • on the technical proposal, ask the CVs of all consultants who will be assigned to work with you if they are selected. You can provide a template for the CVs. That will make it easier for your to compare staffing among different proposals.
  • make sure you specify that they can not provide alternative CVs for key consultants. You want to deal with the same people from beginning to end.

Section 3: Scope of Work or Technical Offer

The Financial Model (the Model):

  • I have not seen this in any RfP yet but I think it is necessary to include a section or a paragraph explaining about the financial model:
    • The worksheet structure
    • Mention if it is based on the any of the known financial modeling standards
    • Number of lines of macro coding
    • Number of unique formulas to review
    • Number of sensitivities included
    • Financial model file size

What is expected from the model auditor:

  • Objective of the assignment: a few bullet points explaining what the assignment is all about
  • This is the most important section of the RfP and you should provide enough details to the bidders to ensure they have the capacity to deliver.
  • If you are using a template for the RfP then make sure you get this section checked and confirmed by your financial modeler. Every project is unique and as a consequence every financial model has its own specifications.
  • In this section you can list general terms broken down into couple of main categories like Structural Review of the model, accounting treatment and tax review, maybe the eligibility of development expenses if it is part of the scope and then under each of these categories, you can mention what you need the auditor to check.
  • You can include a more detailed checklist as am appendix to the RfP listing everything that you want to be checked by the model auditor.
  • You need to mention how many iteration you need from the model auditor. In most cases you need a minimum of 3 models runs.
    • First iteration: This is upon of the receipt of the first base case model.
    • Second iteration: this is just before financial close
    • Third iteration: certify the financial close version of the model

Example:

  • the Model has been constructed appropriately, in so far as its logical integrity and arithmetic is concerned.
  • the Model results are reliable, accurate, complete and consistent under the base case assumptions and the designated sensitivities;
  • the method of calculation of tax charges and associated liabilities and payments contained in the Model is materially consistent with the current provisions of [country name(s)] corporation tax legislation, under the base case assumptions and for the Designated Sensitivities;
  • the key accounting assumptions in the Model are materially consistent with our understanding of current of [country name(s)] generally accepted accounting practice, under the base case assumptions and for the designated Sensitivities;
  • the Model is consistent with the relevant financial and contractual provisions in the Project Agreements and Financing Documents;
  • the Model materially achieves its objective of generating profit and loss, cash flow, cash flow waterfall and balance sheet projections and key financial ratios for the project on the basis of the set of operational, financial and economic assumptions set out in the Base Case; and
  • The Model has been constructed appropriately to enable the base case assumptions and input data to be adjusted to reflect certain designated sensitivities and to ensure that the results produced from those sensitivities accurately reflect the consequences of those changes;

Section 4: Fee or Financial Offer

You should encourage the bidders to submit various options.

  • Lump-sum fee applicable taxes
  • Hourly fee
  • combination of Lump-sum fee and hourly fee
  • hourly fee with a ceiling amount

all fees should include applicable taxes

You should also consider that in future, you might need other assignments beyond the scope of work you mentioned in the TOR or you might need additional iterations beyond the agreed number of iterations. For this reason you should ask the bidder to also provide a daily or hourly rates for additional work.

If you have any specific requirement for a currency, you should also mention in this section.

Other than fees for the Model audit services, bidders should also mention how much they will charge the project company for travel expenses (Per Diems, airfares and any reimbursable expenses)

You can ask them to include a table showing their proposed fees to perform the audits including staff hours planned for the audit at the proposed rates and an all other expenses or fees proposed, including travel.

Section 5: The report/Deliverables

In this section you can also provide some directions about the reporting requirement.

Example:

  • All project documents are in [Specify required language]. The report and all of the work and communications are to be undertaken in [Specify required language].
  • Producing draft and final reports which summarise the issues set out above and comments arising from reviews of these reports with various parties.
  • the report should include a record of all errors and queries, cell and sheet reference comments, any recommendations and a priority list for their implementation or impact level on model results (for example: high, medium, low).
  • It is expected that major issues identified are communicated to [contractor] in a timely manner and prior to the issue of the preliminary report and it is intended that meetings and conference calls are organized, as required, with with the model developer [name of model developer] in order to ensure that information is exchanged and assimilated and that potential changes are put through the model in the most efficient of manners.
  • It is expected that The auditor attend (in person or conference call) meetings with the contractor [contractor], and its financial advisors to discuss matters pertaining to your scope of work.

Other points regarding the report:

You can also mention in this section to whom the report should be shared with.

Example:

The report should not be shown to any party except:

  1. Those entitled under the Contact Addresses section of this letter;
  2. Any of the parties that make up the Senior Lender Group; and
  3. The Sponsors.

I have seen cases where a template for the reporting was provided to the model auditor. I don’t agree with this approach. I believe the model auditors know their job better than the sponsors or lenders and they can suggest a better format for their report. However, I suggest that you request from auditors to provide an example of the report that they will submit to you if they are shortlisted.

Section 6: Evaluation Procedure

  • You can include detailed or brief overview of how you will be evaluating the proposals.

Example:

The evaluation will be preformed based on both the technical offer (Technical evaluation) and the financial offer (the financial evaluation). Bidders will be ranked using a combined technical/financial score.

  • You can also mention that if they are selected as the preferred bidder, then they will be contacted for final negotiations and let them know how much time they have to finalize the negotiations and mention that if within that timeline they don’t get into an agreement on pending issues then then the second highest score bidder will be selected.

Section 7: Questions and Answers

Here you can include frequently asked questions.

Q1. Can we submit the electronic copy of the proposal in Adobe PDF format instead of Microsoft Word format?
Answer: An Adobe PDF file will be acceptable.

Q2. Can we send you the electronic version of the proposal through e-mail rather than through a post office?

Answer: Both are accepted. The electronic version of the proposal can be included in the CD and send to us by post or by email.

Q3. Are there any page limitation to the overall proposal?

Answer: There are no [age limitation.

Q4. For assignment of the staff, can we include alternative professional staff in the proposal?

Answer: No alternative to key professional staff may be proposed and only one curriculum vitae (CV) may be submitted for each position.

Additional Notes:

Somewhere in the documents most probably in the section 1: Introduction, mention that costs related to bidding is not supported by the contractor even for the selected bidder.

mention in the scope of work that any question and answer in between the delivery of reports will not be considered as an iteration.

Download the Sample RfP for model Audit Services