Small Private Companies Whacked By Twelve Percent Increase In Audit Fees
The November issue of accounting today chronicles how audit fees are increasing for all companies, from public to nonprofits.
On average, public companies experienced a 4.5% increase over 2102’s fees. Many of the participants in the Financial Executives Research Foundation survey attributed their increase to PCOAB inspections.
Private companies with over $25,000,000 in annual revenue reported a 3.7% increase, while those under this threshold experienced a whopping 12% increase. In talking with a representative from the Private Company Council, stricter audit standards are likely the cause of the huge increase for smaller private companies. Considering the Private Company Council was just formed on May 30th, of 2012, it’s likely the effects of their efforts were not yet visible in 2013.
Finally, nonprofits paid 1.5% more in audit fees for 2013.
Audit fees averaged $592 per million dollars in revenue in 2004, shortly after the implementation of Sarbanes-Oxley Section 404. They were down to $479 per million dollars of revenue in 2013, reflecting a slight increase of 1.4% over 2012.
Are Increases In Audit Fees a Sign of Trouble?
Michael Cohn, of accounting today, blogs about a study that “found that increases in audit fees are frequently a signal of trouble ahead for a company.”
Cohn goes on to quote the study saying, “a significant portion of the mean increase in audit fees is related to an increase in the auditor’s perception of [a company’s] idiosyncratic risk”. Researchers were able to control for natural increases in audit fees due to growth, etc., while revealing that sharp increases in fees frequently preceded a company stock crash.
One comment on the blog calls the study “white tower thinking”, citing numerous reasons fees could increase, none of which imply loose financial controls.
It’s unfortunate that across-the-board audit fee increases negate the opportunity to pose the argument that a decrease in fees indicates that a company has improved internal controls, organized account reconciliations, and significantly reduced risk, leading ultimately to a bump in the stock price.
