Since Sarbox, Non-audit Fees Dove from 51% to 21%

The auditor-independence law has proved remarkably efficient in keeping accountants focused on audits.
David KatzMay 7, 2009

Remember the Sarbanes-Oxley Act? In the furor over the current financial meltdown and its attendant cries for stiffer regulations, good old Sarbox has largely faded from the news. But according to a new study, one of its most prominent provisions — the one that seeks to insure auditors’ independence by forcing them to focus less on raking in fees for services unrelated to audits — seems to have succeeded smashingly well.

Indeed, in 2002, the year Sarbox became law, non-audit fees amounted to 51% of the total fees paid by public companies with a market cap of $75 million or more, according to a study just released by Audit Analytics, a research firm. After three years of steady decline, however, non-audit fees seem to have leveled off at about 21% of total fees.

Further, in each of the five years from 2003 through 2007, such companies experienced a drop in the cost of non-audit fees as a percentage of revenue, according to the study. Audit Analytics looked at fees paid and disclosed by 3,390 corporate filers of financial statements identified as of March 16, 2009 that disclosed audit fees from 2002 through 2007.

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In 2003, 2004, and 2005, the companies reported cuts of over 20% in the portions of fees paid to audit firms for non-audit services. Such slashing “could not be maintained for very long,” according to study, although 2006 revealed a hefty decrease of 11.98%. The decline recorded in 2007, however, was 1.67%. (As of March 16 of this year, most of the companies studied hadn’t yet filed the Securities and Exchange Commission forms containing information about calendar year 2008 fees. Thus, the study stops at 2007.)

Despite the big decrease in the proportion of fees paid to auditors for such things as tax advice, help on employee benefit plans, and software systems, critics may feel — in an era that promises increased regulatory scrutiny — that the slashing should go even further.  Non-audit fees are the “link to the concept of auditor independence,” Donald Whalen, Audit Analytics’ director of research, said in an e-mail. “In short, if a principal auditor receives too much money from a registrant for non-audit/consulting work, it is believed that the auditor could inadvertently become biased when performing its independent audit of the same registrant.”

Sarbox barred public accounting firms from performing “any non-audit service” for clients while they were working on the audits of those clients. Among the prohibited tasks are: bookkeeping; the design and implementation of financial information systems; actuarial services; outsourced internal auditing; management and human resources functions; brokers-dealer, investment-advice, and investment banking services; and legal services.  

From 1978 to 1982, the SEC required corporate filers to disclose audit and non-audit fees in proxy statements. The commission dropped that requirement because it found that the 1,200 companies filing proxies at the time paid only a small percentage of their total fees for non-audit services.

That changed quite a bit over the next two decades, as accounting firms began to garner heaps of money from their consulting practices. In 2000, out of 16,700 public companies, 4,100 were paying fees for non-audit services. The commission again proposed requiring the disclosure of audit and non-audit fees beginning with proxies filed in February of 2001, and the measure was later confirmed.