Study Shows Non-Audit Fees Drop Below Half Of Auditor Payments

A new analysis of corporate payments to auditors suggests companies are more wary of using their auditors for non-audit services.

Only 42 percent of total fees that companies paid their auditors during their most recent fiscal year went toward non-audit services, with 58 percent going to the audit fees themselves, according to data on 1,652 companies reviewed by the Investor Responsibility Research Center (IRRC).

The Wall Street Journal reported that the figure is down from 55 percent a year earlier and an even bigger drop from the 72 percent paid for non-audit fees in 2001, the first year figures were reported. Concerns about auditor independence prompted the requirement that companies disclose fees paid to the auditors. The list of non-audit services that auditors are barred from performing was expanded the next year through the Sarbanes-Oxley Act.

Some of the drop can be attributed to a regulatory change last year that revised the way in which companies report the fees paid to their auditors. The change allowed certain expenses to be classified as audit fees that were not allowed previously, resulting in a lower non-audit fee percentage.

The IRRC, a Washington, D.C., proxy-research firm, said the change "may slightly affect" its comparisons.

"There is no question that some companies have taken advantage of the change in the rule to put everything including the kitchen sink into audit fees," said Lynn Turner, managing director of research at Glass Lewis & Co., a research firm serving institutional investors.

However, the numbers do appear to show that companies are reluctant to use their auditors for work that could raise questions about a potential conflict of interest.

"It clearly says the audit committees are looking at this closely and are moving toward using their auditors for less and less," Turner said. However, auditors are still being used for a significant amount of non-audit work in many cases. "We still have outliers who haven't gotten the message," Turner said.

Nearly a quarter of non-audit fees went to tax work. Since the Securities and Exchange Commission still allows auditors to advise clients on tax shelters, some say auditor independence rules don’t go far enough.

John O'Connor, PricewaterhouseCoopers' vice chairman, said PwC got out of tax-shelter work a few years ago, but he still believes auditors can properly do some kinds of tax work. "If we have the best resources or the best skills to provide the service, should we not be used because we hit some arbitrary ratio of non-audit services to audit services?" he said. "We think good governance would suggest you evaluate who the best providers are."


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