PORTLAND, Maine — Corporations paid auditors fees totaling $10.5 billion in 2006, up 64% from $6.4 billion in 2001, according to a study of 3,139 companies The Corporate Library released Aug. 22.
Sarbanes-Oxley compliance was blamed for a large part of the escalation in auditing costs, although that has leveled off in recent years.
The Corporate Library is a corporate governance and executive compensation research firm based in Portland. Findings in the study include:
• the median audit fee rose 345.68% between 2001 and 2006;
• the median total auditor cost rose to $2.741 million in 2006 from $1.42 million in 2001; and
• the number of audit firms in the market rose to 22 in 2006 from nine in 2001.
“During the period under study, there has been a revolution not only in the type of tasks performed by outside auditors, but also in the fees charged for those tasks,” wrote Paul Hodgson, senior research associate and author of the study.
Now, in fact, audit fees dominate total audit costs. The proportion of audit fees as a percentage of total auditor costs, including non-audit consulting work, rose to almost 95% in 2006 from 40% in 2001, the study found.
“We have witnessed a major shift from ‘other costs’ to audit and audit-related fees, as well as substantial increases in pure audit costs,” Mr. Hodgson wrote. The consulting projects that companies commissioned auditing firms to do “no longer are part of the outside auditor’s responsibilities, although many of the (audit) firms, of course, still provide such services, just not to the same clients to whom they are providing audit services.”
General Motors Corp. paid the highest fees to an auditor in 2006, $156 million to Deloitte & Touche LLP and its affiliate Deloitte Consulting.
Size affects cost
The size of a company, whether measured by market capitalization or revenue, greatly influences audit costs, Mr. Hodgson wrote in the study. At the same time, “industry group does not have a consistent effect on auditing costs, with the highest costs being paid by different industry groups in different years,” Mr. Hodgson wrote.
After Arthur Andersen LLP, formerly one of the Big Five audit firms, surrendered its auditing license in 2002, “former clients were divided equally among the current Big Four firms” — Ernst & Young LLP, PricewaterhouseCoopers LLP, KPMG LLP and Deloitte & Touche. Since that major reshuffling, “the auditor churn rate has dropped considerably,” the study noted — in fact, the median tenure of an audit firm increased to five years from four in the past year.
Smaller firms have made inroads in capturing market share for auditing work from the Big Four firms, the study found. The market share of non-Big Four audit firms rose to 5.5% in 2006 from 1.97% in 2001. “Much of the headway … has been in the small- to midsize company market,” it said.
Of the auditing firms used by the companies studied, Ernst & Young had the most clients, while PricewaterhouseCoopers has the largest share of Standard & Poor’s 500 companies.
Auditing cost rose substantially in 2004, in large part due to Sarbanes-Oxley, the study found. But “almost as many companies saw their audit costs fall as saw them increase in 2005, and fiscal 2006 confirmed this general slowdown,” it said. “Few companies made specific disclosures of costs related to Sarbanes-Oxley compliance, but those that did show that these costs have in general fallen since 2004.”
The complete study is available from the firm.
