Audit Fees Continue Their Increase
If you’ve been preparing audits for your client, have you been raising your fees year after year? Well, if that's the case, it's reflective of an industry trend.
In the last six years, audit fees increased steadily, climbing to $9.2 billion in 2016 from $7.6 billion in 2010, according to Audit Analytics.
Audit Analytics’ report Audit Fees and Non-Audit Fees: A Fifteen Year Trend initially looked at all 3,846 accelerated filers as of Sept. 1, 2017 to determine which companies disclosed auditor fees each year from 2002 to 2016. That reduced the number of filers for the study to 2,034. (Accelerated filers are those whose public float is at least $75 million but less than $700 million at the end of their second quarter. More than $700 million makes the company a large accelerated filer.)
Audit Analytics’ annual trend report on audit and non-audit fees paid by accelerated and non-accelerated filers from 2002 to 2016 reveals a mixed influence of several factors that kept non-audit fees low while partially increasing audit fees.
Comparing non-audit and audit fees is key because the Securities and Exchange Commission (SEC) considers high non-audit fees a concern on auditor independence. An auditor earning large fees for non-audit assignments may subconsciously undermine his or her professional skepticism, the report states. Because of that, the SEC created four audit-fee categories that companies are required to disclose: audit fees, audit-related fees, tax fees and all other fees.
Based on this report, regulators, though, would have little concern of non-audit fees exceeding audit fees in the industry. In 2016, audit fees accounted for 79 percent of total fees, while non-audit fees made up 21 percent.
Audit fees are those necessary to do the audit or review. This may include services that usually only the independent accountant provides, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the SEC.
Audit-related fees are the due diligence performed by the accountant. That would include employee benefit plan audits, mergers and acquisitions, consultations and audits linked to acquisitions, internal control reviews, attest services not required by statute or regulation, and consultations about accounting and reporting standards.
The study includes findings for audit-related fees with and without non-audit fees.
Here’s a snapshot of the study’s findings for non-audit and audit fees:
In 2002, non-audit fees including audit-related fees were 51.5 percent of total fees paid by accelerated filers. For the next three years, non-audit fees declined dramatically as a percentage of total fees to 21.5 percent in 2005. For the next 11 years, the percentage hovered between 20 percent and 22 percent.
In 2002, non-audit fees without audit-related fees were 38.4 percent of total fees paid to auditors.
Non-audit fees without audit-related fees in 2016 were about 10.8 percent of the total fees paid by accelerated filers.
Removing audit-related fees from non-audit fees cuts the percentages about in half. That indicates that audit-related fees are about the same amount as the total of tax fees and all other fees.
Non-audit fees including audit-related fees in the last 10 years remained in a range between $127 to $148 per million dollars of revenue. In 2002, the value including audit-related fees was $385 per $1 million in revenue. If audit-related fees are not included, the value decreases to $287. Since 2002, these figures declined for four years in a row to an amount of $140 and $75 in 2006.
From 2011 to 2013, revenue increased and non-audit fees over revenue decreased. The next two years showed an increase but calendar year 2016 showed a decrease of 4.7 percent.
After three years of drop-offs, audit fees paid per million dollars in revenue had a partial rebound with four years of increases.
In 2004, average audit fees without audit-related fees paid per $1 million in revenue increased from $395 to $575. When audit-related fees are included, the fees paid jumps from $491 to $660 – due primarily because of Sarbanes-Oxley (SOX) requirements.
Since the SOX requirement spurred the initial increase, audit fees dropped until 2009. The decrease was driven by audit firms that lost the supplemental fees earned from non-audit services.
In 2009, audit fees increased to $615 per $1 million in revenue with audit-related fees included. Audit fees were $548 without audit-related fees. The increase was driven by decreased revenues, not increased fees.
If audit-related fees are not included, audit fees decreased from $7.17 billion in 2008 to $6.92 billion in 2009.
If audit-related fees are included, the decrease went from $8.12 billion in 2008 to $7.76 billion in 2009.
After 2009, fees including audit-related fees per million in revenue decreased for three years and then partially increased for four years to $611 per $1 million of revenue in 2016 — $541 without audit-related fees.
According to Audit Analytics, it’s easier to understand the cost of the audit fees by realizing that $611 per million in revenue is the same as paying about 6.11 cents per $100 of revenue. “From a percentage perspective, this population used 0.0611 percent of its revenue to pay for auditor fees including audit-related,” the report states.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.