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Audit Costs Rise 5% for Public Companies, FERF Says

Tammy Whitehouse | June 27, 2012

Audit costs are creeping back upward, and the number of hours spent on the typical audit is rising, according to the latest research from Financial Executives International.

Public companies reported an average increase in audit fees of 5 percent over the past year, according to the research. The 111 public companies that answered the FEI survey also reported the average number of hours spent on the audit totaled 17,457 -- a big jump from the 12,540 hours reported by last year's survey respondents, said FEI in its report. More than half of the public companies that answered the survey were large accelerated filers.

Audit fees generally spiked in the early years following adoption of the Sarbanes-Oxley Act and its internal control reporting and auditing requirements, but have leveled off the past few years. “Now we are seeing audit fees inching up,” says Bill Sinnett, senior director of research at FEI's research affiliate, the Financial Executives Research Foundation. Even private companies are feeling the pain, reporting their fees rose an average of 7 percent in the past year.

Companies cited a number of reasons for the increase in audit fees, says Sinnett. Both public and private companies said they increased their internal audit staff work and increased the amount of work done by other finance staff, leading presumably to more audit activity, he says. Some companies cited increased requirements by the Public Company Accounting Oversight Board. The most recent cycle of PCAOB inspection reports makes it clear the board has dramatically increased its criticism of audit work, compelling auditors to spend more time and pursue more documentation to complete all audits. PCAOB also recently establish eight new standards around risk.

Some companies said their audit firms are increasing audit staff billing rates, and some said they brought additional business segments into the scope of the audit, perhaps because of an acquisition or consolidation. Companies also reported complex transactions or increased complexity of international operations as cause for increased audit costs. The survey results noted companies with centralized operations -- whether public or private -- paid significantly less in audit costs than companies with decentralized operations.

Sinnett says the survey findings suggest private companies are feeling the effect of increased regulatory scrutiny on auditors, even if they aren't directly subject to public company audit requirements. Nearly all private companies said their auditors are using public company auditing standards in their audits to some degree, nearly half saying to a significant degree. Sinnett didn't offer a reason why auditors would be following public company audit standards in their audits of private companies, but he said the question might merit further study.