The Financial Executives Research Foundation (FERF), the research affiliate of Financial Executives International (FEI), has released the results of its annual survey of audit fees. The 2017 Audit Fee Survey Report, which was sponsored by Workiva, a provider of cloud-based reporting, compliance, and data-management solutions, indicates that public company audit fees overall continue to rise, although at a somewhat lower rate than reported last year. (The 2015 FERF audit fee survey is discussed in Audit Fees and SOX Compliance Cost are Increasing, But Many Companies Think They are Getting Their Money’s Worth, December 2015 Update.)
The FERF/Workiva report is based on responses from 508 financial executives at a mix of public companies, private companies, and nonprofit organizations. The report also examines publicly-reported audit fees for 6,394 SEC filers.
- Public company survey respondents. The 2017 FERF survey, which covers 2016 audit costs, found that, for 161 public company survey respondents, audit fees averaged $7.4 million, with a median fee of $2.8 million. The median audit fee rose 1.3 percent, compared to a 1.6 percent increase in 2015. The survey respondent average audit fee was up 6.9 percent, compared to a 2015 increase of 4.5 percent.
- All SEC filers. The results for all SEC filers, not just FEI survey respondents, are directionally similar, but the magnitude of the changes is larger. (The universe of all SEC filers is weighted more heavily toward small companies than are the FEI public company survey respondents.) For all filers, the 2016 median audit fee was $523,694, and the average fee was $1.8 million. The median audit fee rose 2.6 percent, compared to a 3.5 percent increase in 2015, while the average fee rose 21.5 percent, compared to 35 percent in the prior year.
- Private companies. Private companies in the survey reported a median fee increase of 3.7 percent, compared with 2.9 percent for 2015 audits. Audit fees paid by the 281 private companies responding to the survey averaged $163,993, with a median of $70,000.
- Non-profits. Non-profit survey respondents reported a median fee increase of 1.6 percent, compared with 2.3 percent in 2015. The median non-profit fee was $52,388, while the average fee was $181,403.
When asked to identify the primary factors that contributed to an increase in their audit fee –
- Seventy percent of public company survey respondents indicated that “acquisition” was a reason for an audit fee increase; this was more than double the percentage that cited an acquisition in the 2016 survey.
- Sixty percent selected “new FASB standards” as a fee increase cause, while 38 percent identified “focus on revenue recognition”.
- “Review of manual controls resulting from PCAOB inspections” was chosen by 25 percent of respondents, up from 20 percent last year. (In addition, 52 percent of respondents indicated that the company had made changes to its control documentation as a result of PCAOB requirements or inspection feedback.)
- Other reasons given for audit fee increases included inflation (34 percent), changes to internal controls (30 percent), divestiture (24 percent), and new SEC reporting requirements (18 percent).
Forty-seven (about 9 percent) of the public company survey participants reported that their audit fee declined in 2016. The primary reason given for a decrease in audit fees was “negotiation with primary auditor,” which was cited by 40 percent of these respondents. Twenty-one percent cited changes to internal controls as the reason for the fee decline.
FEI also asked respondents what strategies they were pursuing in order to mitigate audit fees. The top four responses were:
- Reviewed our audit hours and fees and negotiated with our auditors (47 percent).
- Improved our internal controls (45 percent).
- Increased our audit preparedness (45 percent).
- Reviewed our current audit focus areas to identify areas for improvement (43 percent).
Comment: Increasing M&A activity and the focus on revenue (resulting perhaps from the implementation of the FASB’s new revenue recognition standard) seem to have been important drivers of audit fee increases last year. Also, more than 15 years after it came into existence, the PCAOB continues to play a role in fee increases. One would expect the systemwide fee impacts of PCAOB inspections and ICFR auditing to level off, as audit firms and their clients adjust to these requirements and compliance becomes institutionalized. See June 2015 Update. However, survey respondents continue to cite the PCAOB as a cause of fee increases. In the long run, increasing company and audit firm use of artificial intelligence may reduce audit costs, although this does not yet appear to be a major factor.