The double-digit jumps in audit fees that hammered large public companies during their first two years of life under Section 404 of Sarbanes-Oxley appear to be a thing of the past—but the drop in fees that companies had hoped to see in 2006 remains, apparently, a thing of the future.
Overall, audit fees among large companies rose incrementally in 2006, according to a Compliance Week analysis of the fees paid to auditors by 445 Standard & Poor’s 500 companies. The median total fees paid to auditors last year was $6.7 million, up 5.6 percent from 2005. Median audit fees rose 7.2 percent to $5.4 million, and audit-related fees jumped 11.5 percent to $422,565.
The good news: Median tax fees fell 1 percent to $493,430, and median “other fees” plummeted by 25.5 percent to $31,000. Audit fees, however, comprised the vast majority of companies’ costs: median audit fees were 83.2 percent of median total fees paid last year.
Compliance Week’s analysis looked at fees disclosed by S&P 500 companies that had 2006 revenue of more than $1 billion; median revenue of companies included in the analysis was $8.7 billion.
While fees associated with the internal controls audit work required by Section 404 were blamed for sky-high audit fees during the first two years of compliance for accelerated filers, experts say 404-related costs did drop last year. The decreases, however, were offset by an increase in the hourly rates paid to external auditors.
Graziano
Recent studies by Financial Executives International have shown decreases in the control component of audit fees for accelerated filers, “due to less or streamlined control work,” says Cheryl Graziano, head of research and operations at the Financial Executives Research Foundation. But, she adds, “Anecdotally, we’re hearing that some of the decrease is being offset by an increase in hourly rates.”
Indeed, a survey of 200 companies released by FEI in May found that after three reporting cycles, while corporations reduced their costs internally, external audit costs have held steady. The hours spent on audit work both internally and externally declined, but the average hourly rate companies in that study reported paying for the external audit rose by 6.1 percent in 2006, offsetting any reductions.
Paul Hodgson, senior research associate at The Corporate Library, says the Compliance Week findings are in accord with those of TCL’s own recent analysis, which looked at fees from 2001 to 2007. Hodgson notes that audit fees as a percentage of total fees paid to auditors increased “dramatically” during the six-year period TCL studied. But the increase in fees and total audit costs overall “were pretty minor,” he says.
Hodgson
Hodgson says some companies appear to be optimistic that the picture will improve in 2007, with a new standard for auditors in place and long-awaited guidance for management finally in hand. Both measures, the result of two years of effort by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, emphasize a top-down, risk-based approach for auditing internal controls over financial reporting. That should help companies and their auditors be more efficient in their assessments and bring down costs.
“We’re hearing comments from parties that indicate they’re happy with [Auditing Standard No. 5] and they feel it’s going to lighten the burden,” Hodgson says.
A SOX Success Story
At least one company is already seeing efficiencies as a result of the new audit standard, approved by the SEC in July.
Young
“We have seen [SOX 404-related] costs go down, and they’re going to go down for us a good bit in 2007,” says Steven Young, controller at Charlotte, N.C.-based Duke Energy Corp. “The adoption of AS5 has really been beneficial.”
Young also repeats a common complaint from Corporate America: that under the previous (and now defunct) Auditing Standard No. 2, “companies fell into the habit of testing virtually everything with equal effort.”
“Costs were high in great part because everybody was testing every little control out there,” he says. “So that’s [AS5] been a big driver [in lowering costs] in 2007.”
Young says even before the final AS5 was adopted, Duke worked with its auditors, Deloitte & Touche, to revamp its testing plan for 2007. He describes the process as “very collaborative.”
“We looked at the financial statement line item by line item and identified the line items where the transactions were riskier,” Young explains. “Then we started honing on the controls around those and developed our test plan.” The result, he says, has been less to test.
FEE FINDINGS
Below are median numbers for fees paid by S&P 500 companies in 2005 and 2006, plus the change in each category.
Audit Fees
Tax Fees
Total Fees
2005
$5.03 million
$498,177
$6.31 million
2006
$5.4 million
$493,430
$6.66 million
Change
+ 7.2%
- 1%
+ 5.6%
Compliance Week (Sept. 5, 2007)
In 2006, Duke Energy’s audit fees dropped 17.5 percent to $16 million, while its total fees paid to its auditors plunged 32 percent to $22.3 million. Young says the main reason for the decrease in 2006 was the disposal of a majority of Duke’s energy trading business. “It’s a high-risk business with a lot of complex accounting and a lot of transactions to audit,” he says.
Young also credits an effort to centralize many of Duke’s corporate processes, including human resources, finance, and IT, which meant fewer processes and controls to audit and test.
Young says the company’s audit costs related to Section 404 did fall last year mostly for the same reasons, although he didn’t specify precisely how much they fell. He estimates that SOX-related costs comprise roughly $2 million to $3 million of Duke’s audit fees.
So far, the response to Duke’s new testing processes, which it started in May, has been good, Young adds. “In general, we’re getting more comfortable with the process. A lot of our testing is done [internally] by the business process owners. They’re coming up the learning curve and doing testing more quickly and effectively.”
A downloadable spreadsheet of the Compliance Week analysis of audit fees can be found in the box above, right.
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