Overall, fees increased 6 percent from 2018-19, up from 4.25 percent from 2017-18 and 2.5 percent from 2016-17.
Increased audit scope was the key driver of the rise in audit fees, according to the report. Adoption of new accounting standards—namely, ASC 842 (Leases)—continues to be reported as a leading cause of audit fee movement, along with high levels of merger and acquisition activity.
Other reported areas of increased audit effort compared to the prior year were changes to internal controls over financial reporting and the new Public Company Accounting Oversight Board (PCAOB) requirements for implementation of critical audit matters (CAMs) in 2019.
The change in average audit fees varied by size and category of company, with large accelerated filers having a 5 percent increase, accelerated filers having a 12 percent increase, and non-accelerated filers having a 9 percent decrease year over year.
The study was conducted in partnership with the Center for Audit Quality and was based on fees paid to external auditors for auditing and related services between June 2019 and May 2020 reported by over 6,000 SEC filers. It included responses from more than 50 financial executives at public companies and a survey of 88 audit engagement partners.
FERF also evaluated the impact of COVID-19 on financial reporting. Nearly 70 percent of respondents indicated their audits and quarterly reviews were affected. Almost half noted the challenges of working remotely for the first time required internal controls to be executed and documented virtually. In addition, auditors noted virtual challenges of managing and training their teams (72 percent) and client inquiries and meetings (60 percent), along with impacts of the pandemic on the accounting for goodwill and asset impairments (45 percent).
Survey respondents indicated they expect the virtual environment to continue and less audit time to be spent at client locations.
In its 18th annual review of audit and non-audit fee trends for public companies, Audit Analytics in November reported accelerated and large accelerated filers paid an average of $495 in audit fees for every $1 million in revenue in 2019, declining from $504 in 2018 and values above $500 from 2015-17. While revenue and audit fees both tend to rise together with corporate growth and inflation, audit fees increased 2.65 percent and revenues increased 4.41 percent, resulting in a decrease of about 1.7 percent when applying the ratio of average audit fees per $1 million in revenue year over year, says Don Whalen, general counsel and director of research at Audit Analytics. In addition, Whalen attributed some of the increase in audit fees in recent years to the PCAOB’s emphasis on the auditor’s evaluation of management’s attestation of the effectiveness of internal controls over financial reporting under SOX 404.
Audit Analytics also reported the lowest level of non-audit fees as a percentage of total fees paid in the 18 years of its studies (18.4 percent). From 2006-16, the figure was between 20 and 23 percent each year (2017 and 2018 could be rounded up to 20 percent). This metric is a way to evaluate how firms comply with auditor independence requirements in their provision of non-audit services to public company clients.