Study Says Non-Audit Fees on the Decline

Corporate America’s long war to reduce audit fees—which it has been winning in recent years—seems to have reaped benefits for non-audit fees as well, according to a comprehensive new study.

Non-audit fees paid to a company’s external auditor went from 51 percent of a company’s total auditing bill in 2002 to only 20 percent in 2008, according to a study by research firm Audit Analytics. Non-audit fees also declined as a portion of a company’s revenue, from $399 per $1 million in revenue in 2002 to only $142 per $1 million in 2008—a drop of 64.5 percent.

Whalen

To some extent, the decrease stems from new auditor independence rules imposed by SOX, says Don Whalen, director of research at Audit Analytics. Prior to the law’s arrival, companies routinely relied on their external auditors for help in many areas: internal audit work, employee benefit audits, due diligence for mergers and acquisitions, taxes, research into accounting and reporting requirements, and more. SOX prohibited most of that work as a conflict of interest.

All that financial reporting legwork does still get done; companies have simply shifted it to internal staffers or other auditing and consulting firms that don’t handle that company’s external audit, says Gary Sturisky, global practice leader for risk advisory services at Jefferson Wells. But since that spending is not subject to any disclosure requirements, it’s impossible to pin down precisely how much money companies are spending on the work.

Still, accounting experts say fees for those non-audit services have been cut down by the same market forces that have reduced fees for audit work in recent years. Foremost among those market forces have been the poor economy and the increasing maturity of companies’ own internal control efforts.

“Fee pressure is probably across the board,” Sturisky says. “Companies are squeezing their external audit fees, but they’re also being cost conscious as it relates to their advisory fees. We are seeing that trend.”

Hansen

Gaylen Hansen, an audit partner for Colorado regional firm Ehrhardt Keefe Steiner & Hottman, admits that his firm feels pressure on non-audit fees. “I would say there’s been some cutback, and I don’t know that it’s totally unlike what we’re seeing in audit fees themselves,” he says.

“In non-audit services, clients are reprioritizing their agendas. They’re not going above and beyond the minimum.”

—Gary Sturisky,

Global Practice Leader,

Jefferson Wells

Rick Ueltschy, an executive with accounting firm Crowe Horwath, says the same. “Risk management, internal audit outsourcing, consulting on internal control implementation—the kind of things that would normally be thought of as related to auditing but not auditing services themselves—they have suffered the same fee pressure as audit fees,” he says.

Ueltschy

One important exception to that rule, Ueltschy says, is tax work. Auditing firms are still permitted to provide tax consulting to their audit clients, and the federal tax code isn’t getting any simpler. The result? “Tax services industry-wide continue to be in pretty high demand, so I don’t think we’ve seen softening in tax rates that we’ve seen in audit rates,” he says. “That’s an observation we’ve had in our firm, but I’m also confident you’d find that to be a fairly widely held view across our industry.”

Whalen says tax work probably represents a significant portion of the non-audit fees companies are still paying to their audit firms. (Some companies do disclose tax-related fees as its own line item, but that isn’t required and the practice is not widespread.) Hansen says many companies prefer to err on the side of caution and draw a sharp line between audit work done by one firm, and everything else done by another.

Hirth

Bob Hirth, managing director at consulting firm Protiviti, says he sees no meaningful pressure on non-audit advisory fees. “There is some pressure because of economic conditions, but I don’t think it’s significant,” he contends. “If companies are … experiencing problems, that’s the issue that drives those fees.”

NON-AUDIT FEE TRENDS

Below are two charts from Audit Analytics’ audit fee report regarding non-audit fee trends from 2002 to 2008.

In 2002, non-audit fees were 51 percent of the total fees paid by accelerated filers, but after three years of steady decline non-audit fees appear to have leveled off at about 20 percent of total fees.

During calendar year 2002, non-audit fees represented 51.09 percent of the total fees paid to independent auditors by the 2,924 accelerated filers that comprise the research population of this analysis. Non-audit fees continued to decline as a percentage of total fees through the year 2006, reaching a low of 20.01 percent. This decline seems to have

leveled off the following two years. In 2008, the audit fees equaled about 20.32 percent of total fees.

Source: Audit Analytics.

Ueltschy says he sees companies curtailing some of their discretionary spending on non-audit advisory fees. “If it’s not statutorily required, the likelihood of a company making a decision to spend is much lower right now,” he explains. “Projects have been deferred; acquisitions haven’t happened. These are things you do without if there’s not an immediate negative impact to the company’s business.”

Sturisky echoes those comments. “In non-audit services, clients are reprioritizing their agendas,” he says. “They’re not going above and beyond the minimum.”

He does worry, however, that companies may be taking on some risk as a result. “There are certain things organizations need to continue to do regardless of economic pressures,” he says. “In some cases, I do feel some companies are not keeping their foot on the pedal as it relates to good risk-management practices.”

Ueltschy says companies may risk undermining some of their competitive advantage by curbing some strategic non-audit advisory spending, but he does not see companies reducing their focus on key controls.

Bedard

Jean Bedard, an accounting professor at Bentley University and an expert in audit issues, is more concerned about any decline in audit spending. “Unfortunately, in times of economic decline, the pressure on company personnel to maintain or improve performance increases despite the difficulty of securing sales,” she says. “Companies interested in maintaining their quality of financial reporting should not skimp on audit work during troubled times.”