Public company audit fees remained virtually unchanged in 2018, according to the latest annual study by Audit Analytics.
In the newest installment of its annual analysis of audit and non-audit fees, Audit Analytics reports public companies paid an average of $511 in audit fees for every $1 million in revenue. That is the same average amount as in 2017, but it represents a decrease from $537 in 2016 and $515 in 2015.
When audit fees are combined with non-audit fees paid to the principal auditor, the trend year over year is consistent. The study shows companies paid an average of $575 in fees per million in revenue in 2018 compared with $574 per million in 2017.
This stability in fees in relation to revenues is not surprising and reflects that the economy has settled down in 2018 after the downturn in 2015 and some rebound in 2017, says Don Whalen, general counsel and director of research at Audit Analytics. Revenue and audit fees both tend to rise together with corporate growth and inflation.
The study also examines non-audit fees paid over time, as a way to evaluate how firms are complying with auditor independence requirements relating to the provision of non-audit services to their public company clients. In 2018, non-audit fees totaled 19.9 percent of the total fees paid to auditors, which was the second-lowest amount during the 17 years under review and generally consistent with 19.7 percent paid in 2017. From 2005-2018, these percentages have stayed very close to 20 percent, which is a significant drop from the 51.1 percent outcome in the 2002 study.
This report is in its 17th year. It is based on fees paid as disclosed in SEC filings by accelerated and large accelerated filers.
Their analysis shows audit costs were at their highest in 2004, when Sarbanes-Oxley reporting began. Audit fees were increasing during the period from 2012-2016 due in part to increased Public Company Accounting Oversight Board (PCAOB) oversight of public company auditors.
In a separate analysis of audit fees, the Financial Education & Research Foundation’s 10th annual audit fee survey reported growth in average audit fees remains strong. Overall, average audit fees increased 4.25 percent from 2017 to 2018, based on an examination of total fees paid for 2018 auditing and related services. This is up from 2.5 percent in 2017. Adoption of new accounting standards by public companies, particularly revenue recognition, leases, and current expected credit losses (CECL), continues to be reported as the leading cause of audit fee movement, along with high levels of merger and acquisition activity. The study notes audit fees relating to new accounting standards include both time spent assisting clients with transition and increased audit hours to audit new controls and ensure correct implementation.
Over the 10-year period, average hourly audit fees were reported to have increased from $216 per hour in 2009 to $283 in 2019. The report notes there have been significant changes in the audit process over the past decade, and the results reflect the challenges faced by companies and their auditors in containing audit costs.
While larger firms reported an increase in total audit fees, smaller firms reported stable to decreasing fees. This is consistent with the study’s public company respondents reporting more change in the amount of annual audit work carried out by external auditors in providing an audit opinion on the financial statements, while the private company and nonprofit respondents reported less.
According to Dr. Robert Knechel, an expert in audit fee research from the Warrington College of Business who was interviewed for the survey, the biggest driver of audit fee movement is size, with large companies requiring more work to audit than small companies. In addition, he notes complexity at the company being audited makes the audit more complex, and with complexity comes more hours and higher fees. Third, he attributes higher public company audit fees to audit committees expecting more robust and higher quality audits, especially in recent years as a result of Sarbanes-Oxley and PCAOB oversight.
The FERF report is based on responses from financial executives at public companies, private companies, and nonprofit organizations, and audit fees reported by a sample of SEC filers.
It will be interesting to see the results in these annual surveys next year, after a number of years of relatively stable fees and percentages. New accounting standards, like revenue recognition, leases, and credit losses, among others, will have been adopted by more of the companies included in these studies and will likely continue to drive audit and audit-related hours and fees up.
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