In its 19th annual review of audit and non-audit fee trends for public companies published last month, Audit Analytics reported total and average audit fees in 2020 each declined for the first time since 2010.
Total audit fees fell 1 percent, while average audit fees declined 2.1 percent. The report, utilizing data from Audit Analytics’ audit fees database, attributed the decrease to more audit procedures being done remotely during the Covid-19 pandemic and limited travel costs.
In addition, the Securities and Exchange Commission (SEC) amended the definition of accelerated filer in March 2020, resulting in hundreds of companies being reclassified from accelerated to non-accelerated filers and no longer needing to have audits of internal controls. The average fee percentage decline was impacted by more special purpose acquisition company (SPAC) audits, which tend to have lower fees because of their limited operations, Audit Analytics noted.
Audit fees per million dollars of revenue were up 7 percent between 2019 and 2020. Foreign companies experienced the largest increases in this period because audit fees increased but revenue decreased significantly, especially in construction, finance, manufacturing, and mining. For U.S. companies, there was less of an increase in this statistic because although they also experienced declines in revenues for mining and manufacturing, these industries also had decreases in audit fees. The historical trend in fees to revenue statistics was impacted in 2020 by the SEC change in filer status definition, with the ratios for accelerated filers decreasing and non-accelerated filers increasing.
The report noted the decline in total audit fees is not likely to continue. As things stabilize and businesses adjust, more audit work will likely return to client locations, and audit fees will return to their previous upward trends. Also, inflation and competition for certified public accountant talent because of so many employees leaving the workforce might put pressure on firms’ costs and the fees they charge for audits.
Audit Analytics also reported the lowest level of non-audit fees as a percentage of total fees paid in the 19 years of its study (17.7 percent). This metric is a way to evaluate how firms comply with auditor independence requirements in providing non-audit services to their public company clients. Non-audit fees have been decreasing year-over-year: From 2006-16, the figure was between 20 and 23 percent each year, for 2017 and 2018 it was approximately 20 percent, and for 2019 it was 18 percent.
The report attributed much of the 2020 decline in non-audit fees to foreign companies, whose non-audit fee percentage was 14.8 percent. An EU directive that took effect in 2016 prohibited certain, and capped other, non-audit services, which marked the beginning of the declining trend leading to 2020 levels.
Going forward, Audit Analytics expects concerns about independence will continue to drive decreases in non-audit fees, but new non-audit services relating to environmental, social, and governance (ESG) reporting might lead to increases and change the trend.
Related study
In the 12th edition of its annual study of public company audit fees, the Financial Education & Research Foundation (FERF) reported average audit fees increased 3.7 percent, down from increases of 6 percent from 2018-19 and 4.25 percent from 2017-18. The study, published in November, covered the period between June 2019 and May 2020.
According to the report, the primary reason for the 2020 figure was increased audit scope (49 percent), driven by the year’s economic uncertainty because of the pandemic. In addition, more acquisitions and divestitures, implementation of the current expected credit losses (CECL) standard, and changes in internal controls over financial reporting not related to the pandemic contributed to higher audit fees.
The FERF study was based on audit fees reported by approximately 6,200 SEC filers and responses from public company financial executives.
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