Fees for external audits rose only slightly last year, by 2.5%. Indeed, the real increase in costs was probably the effort required to complete external audits, both for the issuer and the audit firm.
Average fees for existing large accelerated and accelerated filers rose modestly by 1.8% and 2.3%, respectively, in 2021, according to the Financial Education & Research Foundation’s Public Company Audit Fee Study. (Generally, accelerated filers have a worldwide public float of $75 million or more, and large accelerated filers $700 million or more.)
Average fees for non-accelerated filers increased the most — by 10.8%. The FERF study said the increase for non-accelerated filers was driven mostly by higher fees for the audits of special-purpose acquisition company (SPAC) entities.
About half of the financial executives surveyed said 2021 audits required greater effort to support than those in 2020. A majority said that was due to the expanded scope of their audits, but changes in organizational structure, divestitures, and economic uncertainty were also cited.
Many auditors responding to the FERF study noted an increase in effort by their teams (68%). The auditors said changes to internal controls over financial reporting (ICFR) — not related to the transition to a hybrid working environment — were the main driver. Also cited were acquisitions and changes to issuer structure or business model.
An increase in costs related to ICFR and Sarbanes-Oxley compliance continued as the norm for issuers in 2021. For 2021, the main reasons cited by finance executives were the implementation of new IT systems, large acquisitions with additional IT systems, and organizational growth.
Technology’s integration into external audits, however, was mostly seen as a positive advancement by finance teams. Nearly half (49%) of public company executives in the FERF survey said the use of data analytics and emerging technologies improved the quality of their audits.
“Many audit teams have begun leveraging innovative data analytics and tools to support risk assessment procedures; to increase audit procedure precision; and to introduce more unpredictability into testing,” according to the FERF survey report. The report also noted the use of cloud-based tools for data collection and population testing “in lieu of conventional audit sampling methods.”
As more technology is used in external audits, auditing standards will have to adapt, pointed out Christina Ho, a member of the Public Company Accounting Oversight Board (PCAOB) and former CFO of the University of Maryland College Park, on Tuesday.
Speaking on a panel at the FEI Corporate Financial Reporting Insights Conference, Ho said current standards assume a paper-based audit. The PCAOB and the industry need to start understanding what “a complete digital audit looks like,” said Ho, and the accompanying requirements for standards and documentation. She sees 100% digital audits becoming more of the norm in 5 to 10 years.
The FERF study collected data on audit fees companies paid to external auditors between June 2021 and May 2022. The audit fee data is based on issuers that did not transition between filer categories in 2021. The report is based on responses from more than 55 finance executives at public companies and an additional survey of 99 audit engagement partners.