Audit Fees Heading Higher After a Decade of Decreases

Squeezed by regulatory demands and salary pressure and emboldened by the economic recovery, audit firms are starting to charge public companies more for audit work after roughly a decade of declining fees.

The latest indicators from Audit Analytics and the Financial Executives Research Foundation suggest the true cost of a public company audit headed upward in 2013 for the first time after years of downward pressure following the 2004 spike with the implementation of processes to comply with the Sarbanes-Oxley Act. “That is consistent with what we are seeing,” says Trent Gazzaway, national managing partner of professional standards at Grant Thornton. “It had to happen eventually.”

Audit Analytics says the cost of a public company audit inched up to $479 per $1 million in revenue in 2013, up 1.4 percent from $472 per million in 2012. FERF says in its latest survey results that public companies reported a 4.5-percent increase in audit costs, although FERF’s survey sample is much smaller than Audit Analytics sample of audit fees reported in public filings. Audit Analytics has tracked audits costs going back to 2002 by focusing on the ratio of costs to revenue because it is a more true measure of the cost to a company for its particular audit work, says Don Whalen, director of research. “It gives you a sense of the real cost based on a company’s ability to create revenue,” he says. “It’s an indicator of a company’s complexity.”

According to the firm’s data, audit fees surged from $403 per million in 2003 to $592 per million in 2004 as companies saw the first effects of Sarbanes-Oxley, bringing enormous pressure on audit firms to reduce fees in subsequent years. Costs remained near those levels although tapering for the first few years after 2004, then dropped more significantly in 2007 and 2008. The data shows an increase in the cost per million in 2009, although Audit Analytics says that increase is an anomaly caused by a precipitous drop in revenue at the onset of the financial crisis and economic recession. True audit costs tapered further through 2012, the firm says, until the turn upward in 2013.

“We’re coming out of a recession. You can only have downward pressure on audit fees for so long before there has to be a recovery of things given away during that time.”
Andrew Burczyk, Shareholder, Mayer Hoffman McCann

Gazzaway attributes the rebound to two primary causes: The Public Company Accounting Oversight Board has brought enormous pressure on audit firms in recent years to increase their scrutiny, their testing, and their documentation to comply with auditing standards. At the same time, audit talent is getting tougher to retain, he says. “Certainly what it takes to comply with auditing standards today takes a greater level of effort than the firms have had to invest in the past,” he says. “We’ve seen an average of 4 to 5 percent compensation increases for staff in a very competitive environment for audit staff,” he says. “That’s a primary cost for the firms to produce our product.”

Auditor Labor Costs Climbing

A TEN-YEAR REVIEW

Below are two charts from Audit Analytics regarding trends in audit fees over the last ten years.


Source: Audit Analytics.

Another factor to consider, says Monika Causholli, an accounting professor at the University of Kentucky whose research has focused on audit costs, is the economic recovery in general. “One thing is for sure,” she says. “We are out of recession, or so we think. Audit fees usually increase with any economic boom.” The unemployment rate for accountants and auditors is only around 2 percent compared with the general unemployment rate hovering near 6 percent the past several months, says Causholli. And graduates are getting snatched up by accounting firms at record rates, according to data from the American Institute of Certified Public Accountants. “It makes sense that salaries are going up, and that could explain the increase in audit fees as well,” she says.

Andrew Burczyk, chief operating officer at Mayer Hoffman McCann, says he believes the results are consistent with what he sees in practice. “We’re coming out of a recession,” he says. “You can only have downward pressure on audit fees for so long before there has to be a recovery of things given away during that time. From a supply and demand standpoint—the staff want raises, and margins are squeezed. Now it’s starting to balance back out.”

He agrees the regulatory pressure on auditors has led to more work, which also is driving costs higher. “I don’t think there’s a firm out there that hasn’t had some comment that the firm should do more work,” he says, especially in areas such as revenue recognition, accounting estimates, and fair value. He also sees concerns around staffing. “We have many offices that are looking for staff and are having capacity issues,” he says. “So that means taking a look at lower-realization, lower-margin clients and talking about increasing our rates or having them look elsewhere.”

Gaylen Hansen, a partner with Colorado regional firm EKS&H, says it seems “a bit human” to blame increasing costs on PCAOB inspections. “That’s a significant part of it, but not all of it,” he says. He says the accounting profession is facing a serious shortage of people, so salary increases to those in the field are inevitable. “Turnover and finding replacements for that turnover is really difficult now at all levels,” he says.

At least one audit leader in the field is not seeing any increase in audit fees on the ground yet. Peter Bible, a partner with East Cost regional firm EisnerAmper, says he was surprised to see evidence that fees might be rising. “The market for audits is still very highly competitive,” he says. “When you go for a significant fee increase, a lot of people will tend to go out to the market and sew what they can get. So this came as a surprise to me.”

Looking ahead, fee data for 2014 is not likely to differ significantly, audit experts say, especially considering this is the year many auditors will audit controls for the first time under a newly adopted internal control framework. COSO’s 2013 Internal Control – Integrated Framework is being implemented across most public companies now as the 1992 framework is set to expire at the end of this year. “Any potential additional work that needs to be done related to the COSO framework would be reflected in next year’s survey,” says Tracy McBride, vice president at FERF. “We know public companies and other companies have been focused on that.”