Auditing

Audit Fees Surged in 2004

With companies reportedly willing to pay up for top-notch auditing work, accounting firms are making hay.
Stephen TaubMarch 28, 2005

Thank you, Sarbanes-Oxley.

While it’s unlikely that auditors would express such gratitude in public, that’s what a good many of them might be thinking these days when they bill their clients.

In an early look at 2004 audit fees, The Wall Street Journal reported that 23 of the 30 companies used to compute the Dow Jones Industrial Average saw their auditing bills rise about 40 percent, to a total of $533 million. That increase over 2003 is nearly twice as much as the percentage change in audit fees paid by the same companies in 2003 as compared with 2002, the paper added.

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The Journal offered this interpretation: Companies are willing to pay up for top-notch auditing work, and the accounting firms have milked the changing auditing environment by charging much higher fees.

Indeed, audit fees are making up a hugely expanding piece of the firms’ income. Audit fees account for 65 percent of the total fees paid last year to auditing firms by the 23 DJIA companies that disclosed fees in their 2004 proxies. That compares with just 30 percent four years ago. The reason for the shifting proportions, according to the paper, is that Sarbox has barred audit firms from performing consulting and other kinds of non-audit work for their audit clients.

Part of the big increase in audit fees stems from a change in the way fees are categorized. For example, companies now must include fees associated with performing work for internal controls as part of the audit bill, the paper explains. They formerly called the fees “audit related” but didn’t include them in the audit-fee category. Under Sarbox 404, of course, audit firms must attest to their clients’ internal controls over financial reporting.

Among the companies the paper looked at, General Electric Co. shelled out the most in total fees last year, paying auditor KPMG $102.6 million. GE spent $78.2 million alone on audit work. This is the fourth straight year that the conglomerate spent the most on these kinds of fees, the Journal added.

While most companies paid their accounting firms more for audits than for other services in 2004, two that didn’t were International Business Machines Corp. and Johnson & Johnson. IBM paid PricewaterhouseCoopers $55.1 million in other fees, which worked out to more than twice what it paid in audit fees. IBM spokesman John Bukovinsky told the newspapers that the company’s aggressive acquisition activity contributed heavily to its non-audit fees because M&A demands a lot of number-crunching. “I don’t see it changing,” he reportedly added, referring to this ratio of audit fees to total fees.

For its part, J&J paid PwC $20.1 million in audit fees and $21.7 million in fees for dispute analysis, benefit-plan assistance, risk management reviews and other services.

United Technologies Corp. reported the largest hike in audit fees. The reason was that it made big acquisitions in 2004, according to the report. The company’s audit fees more than doubled to $31.9 million, mostly as a result of changed internal control categorization, according to the paper.

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