Wall Street Journal Reports: New Accounting Rules Drove Up U.S. Audit Fees in 2017
First published on Dec. 11, 2018 5:30 a.m. ET on The Wall Street Journal by Tatyana Shumsky.
U.S. public companies paid a median of 2.5% more in 2017 to auditors for assuring that their financial statements are free from material misstatements, according to an annual survey by the Financial Education & Research Foundation.
The increase was nearly double the 1.3% median rise in audit fees recorded in 2016 and came as companies prepared to implement sweeping new revenue accounting rules, which became effective for most public companies in 2018. U.S. public companies were also preparing to adopt new lease accounting rules, which come into effect for fiscal years starting after Dec. 15, 2018.
FERF examined audit fees reported in securities filings by 6,340 U.S. public companies, and surveyed more than 250 financial executives at public and private companies as well as nonprofit organizations.
New accounting standards were the most frequently cited factor behind changes to public company audit fees, with 47% saying it contributed to an increase, the survey found. Meanwhile, 42% of financial executives specified the focus on the new revenue recognition rules as the primary driver, while 33% pointed to acquisitions.
A change in accounting rules always entails a great deal of work on the part of both companies and auditors, said Chris Westfall, vice president of content strategy at professional organization Financial Executives International. FERF is the research affiliate of FEI.
Even companies that don’t have to make significant changes to their books and processes to comply with the new rules must still show regulators they’ve done the work to understand the new standard and explain why it doesn’t apply, Mr. Westfall said.
“It’s not just a yes or no. It is getting together with the auditor and documenting that, so there’s a reasonable amount of work involved,” Mr. Westfall said.
Sixty-nine percent of finance executives said they put substantial effort into implementing new accounting standards, while 51% said they engaged their external auditor for these efforts.
Defense contractor L3 Technologies Inc. began work on the new revenue accounting rules three years before the 2018 implementation date, Assistant Controller Dino Theodoracopoulos told the FERF survey. The company worked with its auditor on developing new accounting policies and solving any challenges linked to applying the new rules to the contracts L3 Technologies has with its customers, he said.
“From an audit perspective, there was no more complexity than we would have anticipated, but because of the additional work performed by our auditors, there was a notable increase to our audit costs,” Mr. Theodoracopoulos told FERF.
And audit fees could keep climbing in the near term as larger companies ramp up the use of automation, survey respondents said.
Finance departments increasingly are deploying robots to perform basic tasks such as matching transactions in ledgers and subledgers or moving data from a core system into a reporting system. Some companies also are relying on artificial intelligence to identify patterns or compile data from several different sources, the survey found.
These automation efforts aim to improve efficiency and enhance oversight, but in the short term, they’re likely to raise audit-related costs as auditors must validate the technology and ensure it complies with rules, the survey said.
“We automate wherever possible,” Jill Klindt, chief accounting officer at software maker Workiva Inc., told CFO Journal. Manual processes are more time consuming and more prone to errors, while automation also removes the need to add staff, she said.
But each time the company implements a new system, its auditors must test and review it to make sure the system and relevant oversight measures are functioning correctly, Ms. Klindt added.
“In the first year when you implement a new system, there’s additional [audit] fees to do that implementation,” Ms. Klindt said. In subsequent years, the workload declines as auditors rely on change-management reporting within those systems to track any changes, she said.
Workiva (NYSE:WK) is a sponsor of the FERF survey.
Audit firms themselves also are deploying these new technologies to make audits more thorough and efficient, the survey found.
“We’re using data analytics to look for anomalies in different areas of risk, such as fraud risk or revenue-recognition areas,” said Jerry Ravi, partner at accounting and audit firm EisnerAmper LLP, in the survey. Robotics could enable auditors to examine the entire data set, rather than just a sample, and reduce the manual efforts required to compile and prepare the data for analysis, he said.
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