M&A, Control Issues Push Audit Fees

by FEI Daily Staff

As you may have guessed, audit fees increased in 2014 - with primary reasons cited being acquisitions and, for the second year in a row, review of manual controls resulting from PCAOB inspections.

This year’s Audit Fee Report is expanded to include audit fee information for over 7,000 SEC Filers (provided by MyLogIQ) for the past four years, in addition to over 220 survey responses from senior-level financial executives from public, private and nonprofit organizations.

In the report, the information is segregated by over 7,000 SEC filers and survey respondents.  Key findings include:

SEC Filers:

  • The median increase in audit fees from 2013 to 2014 was 3.4 percent. The average increase was 30.9 percent, due to the impact of over 450 companies that experienced increases of over 100 percent.
  • A distribution of percentage changes in audit fees reveals that many companies experienced a decrease in audit fees.
  • A total of 20.6 percent of filers (or 1,460) reported ineffective internal controls over financial reporting (ICFR).
  • The median change for audit fees of companies that disclosed ineffective ICFR was 6.4 percent, which was three percentage points more than the overall median change in audit fees of 3.4 percent, and 4.6 percentage points more than the U.S. Average Producer Price Index for Services of 1.8 percent.
Survey Respondents:
  • The median increase in audit fees was 3.1 percent, with an average increase of 10.7 percent.
  • Most respondents indicated that to obtain an auditor’s report on the financial statements, as well as an auditor’s report on internal controls, the volume of annual audit work increased in 2014 compared to 2013.
  • Audit firms were mostly transparent in providing comments to their clients regarding the PCAOB inspections, which mostly resulted in a change of controls or control documentation. However, no respondent indicated that the PCAOB findings resulted in a restatement.
  • Private companies experienced an average audit fee increase of 2.7 percent, with a median of 2.0 percent, citing inflation as the key driver for the increase.
  • Non-profit organizations experienced an average audit fee increase of 1.3 percentalso citing inflation as the key driver for the increase; while the median was flat.
FERF staff interviewed executives at several organizations to better understand why their audit fees either increased, decreased, or remained the same. Those executives who experienced an increase reported that their organizations had completed mergers or acquisitions.  Others reported a special audit of an affiliate.  However, a financial institution executive shared how he was able to reduce his audit fees. He provided this process, which focused on six initiatives:
  • Discuss integrating Sarbanes Oxley (SOX) and financial audit activities with external auditors. He explained, “Instead of asking specific things for SOX and financial reporting audit, the questions were combined, which saved a significant amount of time.”
  • Re-write SOX controls to address the effectiveness of the controls
  • Automate internal controls which made testing for auditors much easier and therefore, reduced their time.
  • Expand the use of internal auditors for increased reliance by external auditors.
  • Ask audit firm to limit their travel expense. For example, if an auditor came from out of town, this company suggested that this should be a part of the flat fee, rather than getting “add-ons” at the end.
  • Constant dialog between client and audit firms to resolve any forthcoming issues at the earliest possible time. For example, their audit firm had opened up dialog with the company about what is coming up with the PCAOB in terms of examinations. He explained “Since we knew it was coming, we tried to be proactive, versus reactive to these findings.”
This report also provides a valuable basis for future research. Some of the most provocative questions inspired by this report are:
  • Although the median change in SEC filers' audit fees from 2013 to 2014 was a 3.4 percent increase, over 45 percent of public companies reported lower audit fees from the prior year. What were the factors that contributed to this decrease?Are such practices sustainable?
  • In each of the last three years, approximately 12 percent of public companies reported increases in audit fees of 50 percent or more. What were the principal drivers of such significant increases? Are they preventable?
  • What is the nature of the material weaknesses in internal controls over financial reporting disclosed by 20.6 percent of public companies?
FERF intends to prepare a follow-up report to this year’s Audit Fee Report. This follow-up report will provide leading practices for reducing audit fees, explain increases, and explore the effects of ineffective internal controls over financial reporting.

To download the report, please click here

Key findings from this year’s Audit Fee Report will be presented at FEI’s 2015 Current Financial Reporting Issues (CFRI) conference in a breakfast session What’s Up With Audit Fees? Results of 2015 FERF Audit Fee Survey. Panelists include the former Chief Auditor of the PCAOB, the former Deputy Chief Accountant of the SEC, and a Chief Audit Executive who successfully reduced fees. For more information on CFRI, please follow this link.