Corporate America continues to win its long-standing battle in the fight to reduce audit fees.
A Compliance Week analysis finds that 63 percent of the Standard & Poor’s 500 won price concessions from their external audit firms amid unprecedented economic strife. The research also shows a median decline of 5.4 percent in fees paid for the audit itself from 2008 to 2009, with 317 of the companies reporting lower audit fees in 2009 from the previous year. The median of total fees paid for audit and other non-audit services, such as certain tax work, also declined by 7.4 percent.
“It was almost like someone sent an e-mail to audit committee members saying this is the year to get a reduction in audit fees,” says Tom Murphy, partner-in-charge of Crowe Horwath’s public company audit group. He estimates that audit fees fell roughly 10 percent across the board in 2009.
JP Morgan, for example, was able to slice a cool 20 percent off its audit fees paid to PricewaterhouseCoopers. Berkshire Hathaway didn’t do too bad either, squeezing 18.9 percent out of Deloitte & Touche. Other examples include Wal-Mart, which was able to get 14.4 percent shaved off its audit bill from Ernst & Young, and Home Depot, which scored a 7.1 percent discount from KPMG.
Other corporate giants logging similar declines in audit fees included Sears, Allstate, McKesson, United Healthcare, McAfee, H&R Block, Charles Schwab, Radio Shack, and scores more.
All but three of the S&P 500 companies hired a Big 4 audit firm to audit their financial statements in 2008 and 2009, but none of those audit firms agreed to discuss their billing trends with Compliance Week.
Murphy says Crowe saw more than the usual number of requests for proposals last year, with many of them coming from companies that were thinking of dumping their larger audit firms. “In many cases, we were bidding against the incumbent, and they were clearly being asked to lower their fees in some way,” he says.
“Outside of financial services, 2009 was a year of sticking to the middle, focusing on reducing costs, improving processes and rightsizing the workforce.”
Jim DeLoach, managing director at consulting firm Protiviti, says the audit process wasn’t immune to the broad cost-cutting measures companies undertook to survive the epic market plunges of the last two years. “Some companies simply looked at all their service providers and asked for reductions in cost. Period,” he says. “It was almost a test of loyalty: ‘If you want to do business with us, we expect some concessions this year.’”
Another factor that likely played a key role in the overall decline in audit fees is that companies continue to get more efficient in their Sarbanes-Oxley compliance processes, rationalizing the number of key internal controls that require reporting and auditing, says DeLoach. He also attributes the decline to a significant drop in “unusual transactions”—like mergers, acquisitions, and other capital-raising measures—that typically command audit scrutiny.
DeLoach says companies in financial services certainly had their share of problems with valuing securities and booking impairments, but that represents a fraction of the companies that demand audit services. “Outside of financial services, 2009 was a year of sticking to the middle, focusing on reducing costs, improving processes, and rightsizing the workforce,” he says.
Quality Vs. Cost
Bill Kinney, an accounting professor at the University of Texas with a focus on auditing, says another factor driving down audit pricing is fewer banks requiring external audits for smaller companies, which drives down overall market demand for audit services. But he cautions audit committees not to get reckless about their success in reducing audit fees, lest they end up with a reduction in audit quality as a result.
“As an audit committee member, your best friend in helping keep tabs on management and acting in shareholders’ best interests is the auditor,” says Kinney. “You want your auditor to do a thorough and competent audit, so trying to lower that cost is penny wise but pound foolish.”
Especially when management is under pressure to meet performance expectations under difficult conditions, audit committees should be cautious about curtailing audit fees or services, Kinney says. “If you skimp on the audit, you don’t know as much, and that may be your one chance to find out what management is doing.”
It’s hard to draw a dotted line between audit quality and audit fees, says Kinney. The S&P 500 already have a low level of reported material weaknesses, and audit experts and regulators have puzzled aloud about whether that means internal controls are largely effective, or weaknesses simply are going undetected or unreported.
SEC Accounting Fellow Doug Besch, in a speech late last year, noted that it was ironic that, just as companies were experiencing one of the most challenging financial reporting environments of recent years, the number of companies reporting material weaknesses continued to decline. While the decline could be due to better controls, the trend “could also be due to material weaknesses not being identified or reported,” he said.
MATERIAL WEAKNESS TRENDS
The following chart from the Securities and Exchange Commission illustrates trends the Commission has noted in material weaknesses:
Source: Securities and Exchange Commission.
As an example, at times, when Crowe has received proposal requests from companies looking for a new audit firm, some “felt their external auditors were being unreasonable when it came to classification of deficiencies, significant deficiencies, and material weaknesses,” says Murphy. “[T]hey were getting a sense of what our tolerance was and whether there was any latitude in evaluating deficiencies reported in the past.”
DeLoach says that, while some are curious about whether a decline in fees paid for the audit will lead to a decline in audit quality, he believes the 2009 phenomenon can be attributed largely to economic conditions. “Companies in general were very aggressive in looking at all their service providers and asking: ‘what can you do for me?’” he says.
Murphy and DeLoach both believe things have leveled off in 2010, with audit fees seeing no significant increases or decreases. “I expect it to stay flat for the next few years,” says Murphy. “Some companies that are struggling may still ask for concessions, but it won’t be across the board.”
Audrey Gramling, an accounting professor at Kennesaw State University, says now is the time for audit committees to pay less attention to fees and more attention to quality. “Audit committees really need to step up and do their job and demand higher-quality audits, not cheaper audits,” she says.