Audit Fees Actually Dropped Post-Sarbox

A new study shows that post Sarbanes-Oxley accelerated filers have seen audit fees fall, while non-audit fees are edging up.
Kathy HoffelderAugust 21, 2013

Despite the extra work that compliance with Sarbanes-Oxley has brought for auditors since it was first signed into law in 2002 and an increase in the percentage of companies required to adhere to the rule, audit fees for certain filers have actually decreased over the last few years, says a new report from Audit Analytics.

Audit fees for 2,408 accelerated filers (U.S. companies whose public float exceeds $75 million but is less than $700 million) averaged $472 per $1 million in revenue for 2012, which is down from its peak of $592 per $1 million in revenue in 2004 and 2005, the report says. The average audit fee for these firms was $476 in 2011. 

Non-audit fees for the accelerated filers in the study, however, rose slightly on average in 2012 to $134 per $ 1 million in revenue from $132 in 2011, though they are still down from $222 in 2004.  

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Don Whalen, director of research for Audit Analytics and one of the report’s authors, notes that the drop in audit fees in his study came at a time when audit firms also lost the supplemental fees earned from non-audit services. The Securities and Exchange Commission developed auditor independence rules in 2003 precluded auditors from performing non-audit services that previously represented a substantial segment of fees.

In recent years, though, the rise in non-auditing services at both the big four accounting firms and the next level of mid-size firms has grown dramatically. Deloitte Touche Tohmatsu Limited, for example, announced last September that its financial advisory group’s fiscal year 2012 revenue grew 15 percent and its consulting revenue grew 13.5 percent, while its audit and enterprise risk services, by comparison, grew only 6 percent.  Deloitte had global revenue of $31.1 billion for the fiscal year ending May 31, 2012.

The rise in audit fees leading up to the peak years of 2004 and 2005 were understandable given the Sarbox requirements, notes the report. U.S. accelerated filers had to provide Sarbox certifications in annual reports for fiscal years ending on or after November 15, 2004. According to the report, a particular section of Sarbox, dubbed Section 404, mandated that each annual report contain an “internal control report.” The report must acknowledge management’s responsibility to maintain adequate internal controls, identify the framework used to evaluate the effectiveness of the internal controls over financial reporting and provide an assessment of the effectiveness of these internal controls as of the end of the fiscal year.

In addition to management certification, Whalen noted, Sarbox 404 required the registered public accountant to attest to and report on the management’s assessment. “This new requirement and expansion of scope caused an increase in fees,” he wrote.