Accounting firms say audit fees are headed upward due to a wide range of factors. Research by the Wall Street Journal indicates audit fees have increased approximately 5% per year in recent years, but the fee could increase as much as 25% this year at some companies.
The reasons cited by accounting firms include the following:
- Post-Enron cost increases. After the Andersen meltdown, firms say they face higher costs of insurance and recruiting. Some also anticipate higher costs in connection with the establishment of the new accounting oversight board, even though the board's ongoing activities are supposed to funded independently of the profession.
- Higher workloads due to new laws and regulations. Auditors say they are logging in more billable hours and using higher-priced professionals to help clients implement new accounting and reporting rules.
- Separation of consulting services. Some firms say audits have long been loss leaders through which they lure clients who then purchase more lucrative consulting work. They will need to raise rates now to make up for foregone consulting subsidies.
- More meetings with audit committees. Audit committees and management are requesting more meetings with auditors. Grant Thornton CEO Edward Nusbaum notes that audit committees that once met with the lead partner of their accounting firm two to four times a year are now requesting six to 12 meetings per year.
To a certain extent, the higher fees also reflect that elusive factor known simply as what the market will bear. Large publicly held U.S. companies are willing to pay more this year after witnessing the effects of the recent waves of "infectious greed" and distrust of management. "A year ago," says Mr. Nusbaum, "they wanted to save the next nickel. Now most CEOs are saying they don't want to be the next problem."
Ironically, although the waves of scandals and resulting reforms affected mainly larger companies, the Journal notes that smaller companies will feel the audit fee increases most. This is because auditors typically charge more for companies with higher risks, including smaller companies where fraud is more likely to be induced by survival concerns than a desire to raise share prices. A U.K. manager blames the banks, "They (the banks) demand very nasty personal guarantees at no risk to themselves and at the slightest sign of trouble they pull the plug. A lot of fraud is a reaction to the nervousness of the banks." Whether tougher audits and higher fees will ease the uncertainties facing these smaller companies remains to be seen.