Audit cost increase for public companies are outpacing the Producer Price Index, but the largest public companies appear to be keeping the lid on cost increases by increasing their focus on internal controls and making themselves more ready for an audit.
The latest data on audit costs from Financial Executives Research Foundation, which focuses on median figures to eliminate the effect of outliers, says audit fee increases across all public companies landed at 3.2 percent for 2015 audits. That compares to the 2015 U.S. average PPI of 1 percent. The gap was a little smaller in 2014, where the audit fee median increase fell at 3.4 percent and the average PPI at 1.8 percent. “We’ve found for several years now is that rate of increase in audit fees always seems to be a couple percentage points more than the Producer Price Index,” said Bill Sinnett, chief operating officer for research at FERF.
The audit cost increases described in the FERF study differ somewhat from those characterized in a recent Audit Analytics study, which showed an increase in 2015 closer to 9 percent when expressed as a factor of revenue. That study showed, however, that a decline in revenue in 2015 had perhaps a greater effect on that ratio of audit costs to revenue than the change in audit costs.
The FERF study shows changes in audit costs are not even across size and type of company. Among public companies, non-accelerated filers reported audit fee increases of 4.8 percent compared with 3.8 percent for large accelerated filers. Accelerated filers reported fee increases of 3 percent, while smaller reporting companies, which are not subject to the audit of internal control over financial reporting under Sarbanes-Oxley, reported increases of only 2.3 percent.
The study also says companies with effective controls see lower increases in audit costs than those that have ineffective control findings. Among the 19.5 percent of public companies who reported ineffective internal control in 2015, audit fees increased a median 5.1 percent. For the rest of public companies not reporting problems with controls, the audit fee cost increase was a median 3.1 percent.
In addition to the data analysis, the FERF study also includes a survey component to gain a pulse on the drivers behind audit cost changes. The survey showed the primary causes for changes in audit costs include acquisitions, the continued focus across public companies in particular on internal controls, and inflation.
With merger and acquisition activity experiencing a resurgence in 2015, Sinnett is not surprised to see it cited as a factor for audit cost increases. In recent year, companies have also pointed to an intense focus on internal controls as a result of audit inspections by the Public Company Accounting Oversight Board. “Each year acquisition has been the most frequent reason given for increases in audit fees, but the PCAOB effect is always a close second,” he said.
One-third of the public companies who responded to the survey said compliance with Section 404 of Sarbanes-Oxley has improved their internal controls and has been worth the added expense, the study says. Public companies, especially large accelerated filers, said they have taken steps in recent years to mitigate audit fee increases, including improving internal controls, negotiating with auditors, and taking steps to make themselves more audit-ready. Some also said they increased their use of automation.