Audit Fees Steadily Increase

Audit Fees Steadily Increase

Audit fees have risen approximately 40 percent in the past year, according to a Wall Street Journal analysis of 23 of the 30 companies used to calculate the Dow Jones Industrial Average.

While there’s no clear reason for the increase, some are pointing out that the fee analysis might not necessarily be indicative of an across-the-board trend. Michele Amato, of Raich Ende Malter & Co. LLP, said that while audit fees might stay flat for this year and increase again next year, it’s important to keep in mind the companies that the analysis are sampling.

“You are looking at the largest public companies, which are audited by the largest public accounting firms,” Amato said. “They are able to charge more, because certain public companies are so large that only certain accounting firms are able to audit them.”

Some CPAs, however, say that audit rates are going up for companies regardless of size. George Victor, from Holtz Rubenstein Reminick LLP, chair of the NYSSCPA’s SEC Practice Committee, said that the higher fees are “going to apply to companies large and small.”

“They’re definitely going up across the board, especially public companies,” Victor said. “There’s no way anyone could say it’s not across the board. Every company has to devote more resources to the job, which results in more billing.”

The new way that fees are being classified is also a factor in the increase of audit fees. Fees that are connected with internal controls must be included by companies as part of the audit bill. Previously, the fees were not included in the audit fee category, and were instead classified as “audit related.” The Wall Street Journal article also points out that audit fees are now encompassing the bulk of auditing firms’ total fees.

Victor noted that the increase in fees is partially due to “overall work for the auditor.

“The auditor has to do more work on the audit side to comply with Section 404 as well as the auditing standards,” Victor said, referring to the Sarbanes-Oxley Act. “The corporation also has to utilize more resources to comply with Section 404.”

It remains to be seen whether audit fees will increase next year as well.

In the past, Victor said, it’s likely that accounting firms did not fully realize the worth of their services, which might partially account for the rising price of audits.

“I don’t think (rates) are going to go flat, I think you’re going to see that the accounting firms are going to realize the value of their services and they’re going to bill accordingly,” Victor said. “This is what started the problem originally. Firms didn’t realize the true value of their services because they were outbidding each other, and they kept bringing down the price of the audit to where it was just a commodity.”

Victor also added that the reach of Sarbanes-Oxley is likely to implement internal controls fees for all sizes of companies.

“You’ll eventually see this in nonpublic companies as Sarbanes-Oxley spills over into the private sector,” Victor said. “Companies will be under more pressure to develop internal controls similar to public companies’, and that pressure will come from lenders or investors wanting to raise the bar on the financial controls of the company.”

Peggy Wood, from Grant Thornton LLP, vice chair of the Society’s Financial Accounting Standards Committee, said that the fee hike affects firms small and large.

“The smaller firms are also picking up businesses the bigger ones dropped, but they’re not willing to discount to the extent that they were before,” Wood said. “A lot of it is the requirement of the additional work, and I think that’s the main factor that’s happening. The other part is that audit firms are not willing to give away this work.”

Wood added that she does not see audit rates going down “by any major percentages” in the near future, which she said is due partially to the lack of people entering the profession.

“I do not see the rates going down because of our resource constraint,” Wood said. “As long as they’re a resource constraint, you won’t have the fees going down.”