I buried this story in Footnotes last Friday but thought it deserved its own post because A) it’s interesting and B) Bramwell is on vacation this week, leaving me to run the show and find enough crap to write about. So here we are. Sky News reported last week that they obtained a letter from […]
The Purple Rose of Chicago just got itself a new engagement. Via Reuters: Wearable device maker Fitbit Inc has dismissed auditor PricewaterhouseCoopers LLP after a review of its fees and appointed Grant Thornton LLP, the company said in a regulatory filing on Thursday. The filing states that Fitbit chose not to renew its engagement with PwC […]
We'd say you heard it here first, kids but actually you heard it from CFO Journal: U.S. securities regulators are wary that pressure to reduce auditor fees could lead to worse audits. Regulators grow “worried” when auditor fees appear to fluctuate with economic cycles, Paul Beswick, chief accountant at the Securities and Exchange Commission, said […]
Audit Analytics puts together some great data points from time to time, and this latest on audit fees by industry is no exception. Let's take a peek: In this entry, we investigated the relative audit fees of Russell 3000 companies on a broader industry basis (using the NAICS classification system), looking at audit fees compared to […]
Courtesy of our friends at Audit Analytics, who have just issued a new study evaluating the trends of audit fees and non-audit fees earned from accelerated filers over the past 11 years. As you can see, it appears that audit firms have found a comfort zone in its split between audit/non-audit fees. And in this […]
Part of the reason this KPMG resignation is such a conundrum for both Herbalife and Skechers is that the firm withdrew its audits back to 2010. The clean-up crew for each company will have its work cut out, and according to Georgetown professor James Angel, Herbalife's new auditor, especially, will "be walking into a war […]
[R]esearch finds auditing fees charged to companies to be significantly related to the their financial performance for as long as five years into the future: the higher the fees this year, the lower firms’ performance next year and beyond. In the words of the journal report by Jonathan D. Stanley of Auburn University, “Primary results indicate a significant inverse relation between audit fees and the one-year ahead change in clients’ operating performance… Further analysis reveals that the primary results extend to changes in operating performance observed up to five years after the fee is disclosed; are more pronounced for future negative versus positive chances; and [are] applicable to future changes in earnings unaccounted for by analysts’ forecasts.” Asked if these findings are likely to be of value to average investors, Prof. Stanley answers in one word: “Definitely.” [AAA]
BDO International CEO Jeremy Newman is a little concerned about the trend of lowball audit fees out there. Now, those aren’t his exact words, in fact he calls it ‘‘extreme downward pressure on fees’ which still seems far more than honest than “my US colleagues call ‘fee compression.’”
He’s worried because he thinks that all this slumming around for any little opining job will lead to shoddy audits:
There is increasing evidence that fees are being forced down to such an extent that one worries this will encourage audit firms to ‘cut corners’ to reduce their own costs and thereby reduce audit quality – particularly given that the buyers of audit services (ie clients) do not monitor or determine audit quality which is a role taken on by regulators who are not involved in the pricing discussion between the client and the audit firm.
Yes, the man has evidence, courtesy of:
Canadian Public Accountability Board – “CPAB has learned that certain audit committees are pressuring firms to significantly reduce audit fees. This stance may be incompatible with the audit committees’ important role … in helping to ensure the integrity of financial reporting.”
Australian Securities and Investments Commission – “We will also focus on audit quality for new or existing audits where audit fees appear low or appear to have been reduced for reasons other than changes in the underlying business of the entity being audited.”
And he rounds it out with a quote from a speech given by Stephen Hadrill, the Chief Executive of the UK’s Financial Reporting Council, “There is a role for the market in setting higher expectations of auditors. So far the market has not played that role. Quite the opposite. It is more likely to applaud lower audit fees than higher quality.”
So if you’re desperate to retain some business or provide “client service” through the Wal Mart method, you’ll be on your own. As long as Newman is running the ship at BDO, they will be choosing quality over quantity, “despite the pressure on us to reduce costs,” no matter what other firms (read: Igbay Ourfay) are doing.
A Bizarre Market [CEO Insights]
It looks like audit fees are stabilizing.
The 150 publicly-held companies responding to a recent survey paid an average of $4.8 million in audit fees in 2009, down 2.4 percent from the total shelled out by these respondents the prior fiscal year.
The 197 privately-held companies responding to the survey paid an average of $291,200, roughly even with the prior year.
Drilling further down, the survey found that total audit fees for 83 large accelerated filers-those with market capitalizations over $700 million–averaged $7.8 million, 3.6 percent less than what they paid the prior year. What’s more, this average of $7.8 million was possibly skewed to the high side this year due to the total audit fees reported by the 19 respondents from companies with more than $25 billion in annual revenues.
On the other hand, the average audit fees paid by the 22 non-accelerated filers were $579,900, 3.3 percent more than what they paid in the prior year.
These are some of the highlights of a newly-released annual report from Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International. It stresses that the averages reported in this year’s Audit Fee Survey are not comparable to those reported in the 2009 survey because this year’s respondents are not necessarily the same as last year’s respondents. In fact, FEI stresses that this year’s average was skewed slightly higher due to representation from more companies with revenues of $25 billion or more.
The survey also found that the total number of audit hours averaged 21,458 for all public companies, and-not surprisingly–was directly proportional to both the size of the company and to the number of legal entities comprising the company. Of the 19 respondents from companies with more than $25 billion in annual revenues, the total hours averaged 108,571.
The average hourly audit rate was $218 for all public companies–$186 for nonaccelerated filers and $220 for the large accelerated filers. Surprisingly, the survey found that the lowest hourly rate ($110) and the highest hourly rate ($400) were both reported by large accelerated filers. It said the $110 rate was reported by a large multi-national consumer goods distributor and the $400 rate was reported by a large multi-national financial services firm.
Other interesting findings:
• 88 percent of public company respondents used Big 4 audit firms compared to 36 percent of private companies.
• 21 of the 197 private companies plan to switch auditors, compared to only 7 of the 150 public company respondents. Service issues and fees were key reasons for both groups.
• Just 16 of the 150 public companies indicated that their auditors broke out the cost of the Section 404 attestation.
There’s a bit of a tiff going on over at my former place of employment as a result of the cover story in the latest issue of CFO Magazine on the recent fall in auditor’s fees.
Some critics seem to fear that the phenomenon will be encouraged by a new benchmarking tool the website unveiled on April 1.
For a fee of $1,200, the tool allows companies to compare the fees that their peers pay for auditors. The process should be both quicker and more comprehensive than the requests for proposals now put out by many companies trying to figure out what they should be paying.
Accounting mavens David Albrecht and Lynn Turner, however, seem to worry that such an exercise will lead to the further commoditization of audits, and so to lower quality financial reporting, even though there’s no evidence the increased fees we saw in the wake of the Sarbanes Oxley Act did anything to improve its quality. Lehman Brothers, anyone?
Yet after the article appeared, Turner sent around comments on his list serve saying it contained several “factual inaccuracies” and that “a firm cannot do the same amount of work with these lower fees without seeing a huge reduction in profits.”
One problem here, it seems to me, is that we’re talking about an oligopoly, which invariably skews the normal effects of supply and demand. Albrecht concedes that the industry is an oligopoly but doesn’t make a cogent point about the significance of that. And he misses the other complication, which is that SarBox not only required auditors to review a company’s internal financial controls as well as its financial results, but also prevented auditors from offering audits as loss leaders for their more profitable consulting services. Now auditors can’t offer both services to the same clients. So audits have to stand on their own two feet.
Turner gets this point, though he confuses the chronology of the regulatory events involved. And he seems to suggest the article is flawed in the conclusion it draws about it, without saying how.
Here’s the point. If, in fact, the extra work SarBox required inflated auditors’ profits, why shouldn’t CFOs be able to make sure they’re getting what they pay for?
And the apparent assumption that benchmarking will inevitably lead companies to push for lower fees seems a bit shaky to me. As CFO.com’s editorial director Tim Reason points out, the process may instead merely keep auditors on their toes. Are Albrecht and Turner arguing that opacity is necessary for the public good, so auditors can pad their fees with impunity? Sorry, but that just doesn’t compute.
In an email to me this morning, Tim wrote: “We think finance executives and audit committees will benefit from having an independent, trusted editorial source provide them with a quick way to benchmark their fees-and make sure they are neither too high nor too low.”
Too low? Sure. You get what you pay for.
Tim also points out that there are no advertisers or sponsors for the tool. “It is a pure editorial offering being made directly to our readers, giving them information they’ve been asking us for years.”
Now there’s a radical idea.