FERF finds more evidence of audit cost creep in 2016
First Published in Compliance Week on January 17, 2018.
Another new study confirms public company audit costs inched upward in 2016, albeit by a smaller amount than in 2015.
The latest analysis by Financial Executives Research Foundation says public filings show public companies paid a median 2.6 percent more in audit fees in 2016 than they did in 2015, when fees rose by 3.5 percent. Large accelerated filers showed increases of 3.4 percent in 2016 compared with 2.5 percent for accelerated filers, and 2.4 percent for both non-accelerated filers and smaller reporting companies.
A FERF survey says the median increase in 2016 landed at 1.3 percent compared with a 1.6 percent-increase in 2015. Taken together, the data suggest fees continue to rise, but at a slower rate, says FERF. That’s similar to another recent study on audit fees, conducted by Audit Analytics, which showed audit costs as a percentage of revenue inched upward in 2016 for public companies.
The survey aspect of the FERF study suggests companies attribute audit cost increases in large part to acquisitions. They also cite preparations to implement major new accounting standards, a rise in hourly rates for audit services, and increased audit requirements for documentation and testing of internal controls.
The examination of public filings with the Securities and Exchange Commission also showed that companies with internal control problems paid more for their audit services. Companies that reported effective internal control over financial reporting reflected a median audit fee increase of 2.3 percent. Of the 19 percent of registrants who reported some measure of ineffectiveness in internal controls, however, the median audit fee increase was 7.5 percent.
Joe Howell, executive vice president at study sponsor Workiva (NYSE:WK), says companies reported some consistent themes in how they controlled rising audit costs. “They are trying to make sure they are prepared for the audit,” he says. “They say they are working to do a better job of collaborating with auditors to make sure auditors had to invest less time to get the work done to come to their conclusion.”
In addition to the increased audit work that goes into acquisitions, public companies report they saw some increased audit activity associated with the implementation of new accounting standards. Companies have been preparing for the adoption of major new rules on revenue recognition taking effect this year as well as a new standard on lease accounting that takes effect in 2019.