Audit fees paid by publicly held U.S. companies rose by 4.6% in 2022 over 2021, according to the Financial Education & Research Foundation (FERF). The average audit fee paid by more than 6,200 organizations was $2.4 million. Large accelerated filers paid more than double that — $5.6 million on average, while non-accelerated filers and smaller reporting companies paid less — $532,321.
FERF’s 14th Annual Public Company Audit Fee Study said the increases for large accelerated and accelerated filers were bigger than in recent years. However, it noted that the increases still trailed the overall U.S. inflation rate and cost inflation in other goods and services.
However, there were plenty of other drivers of rising external audit costs.
For example, nearly half (47%) of the 54 companies (preparers) responding to the audit fee survey said the scope of their 2022 audit had increased and, as a result, the effort to support the external audit had to rise commensurately. According to FERF, 70% of the 116 engagement partners responding to the survey indicated their audit team’s effort to conduct the most recently completed integrated audit engagements had increased.
Auditors are bringing their technology “A-game” to audits — 64% of preparers said their auditor’s use of emerging technology, particularly data analytics, had resulted in improved audit quality. But even as technology improves the amount of work an audit requires expands.
“As public companies are dynamic and their ICFR frameworks continue to evolve with changes to systems, operations, and M&A activity, so too does the scope of internal controls evaluated by auditors.”
FERF 14th Annual Public Company Audit Fee Study
Companies attributed the increase in their efforts to M&A deals, changes to internal controls over financial reporting (ICFR), and divestitures. Auditors listed changes to ICFR first, followed by acquisitions and the impact of 2022 economic uncertainty.
“Mergers and acquisitions result in complex accounting and auditing work, translating to increases in audit effort and higher fees,” according to FERF’s survey report. “As public companies are dynamic and their ICFR frameworks continue to evolve with changes to systems, operations, and M&A activity, so too does the scope of internal controls evaluated by auditors.”
Tech Adds to Effort
Ironically, IT transformations at preparers are increasing not reducing the workload. New and updated internal controls are needed to “ensure that new technologies and systems are operating effectively,” according to FERF. And the heavier reliance on new technologies results in types of reporting or automation “for which auditors must obtain evidence to support their audit opinions.”
The Public Company Accounting Oversight Board’s more aggressive oversight of auditors has caused firms to “invest time accordingly to ensure they deliver high-quality audits,” said FERF. And the burden on auditors and preparers is likely to increase, said FERF.
“The next few years portend to be particularly transformative for financial reporting with the recent enactment of the SEC’s cybersecurity rule and the expected passing of its climate [disclosure] rule,” according to FERF.
In the coming years, though, auditors may encounter a shortage of professionals who can perform these expanded, more exacting audits.
A tight accounting and professional services labor market has already increased the cost of hiring and retaining qualified auditors and made “turnover of key team members” a top-five reason why auditor effort increased last year.
Additionally, this year more audit partners and finance executives expect auditors and audit support staff to spend more time in the office. About 55% of audit partner respondents to the FERF survey (compared with 25% last year) indicated they expect their audit team will spend more than 50% of their time together on-site at the client or at the firm office during peak times.
Those hoping that applications of artificial intelligence will help to reduce the human effort required in external audits may have to wait: of the FEI members surveyed, 36% indicated they plan to incorporate the use of AI in their financial reporting process within the next five years, while 55% indicated they were unsure.
Half of the auditor respondents to the FERF survey, conducted over the Summer, were Big Four accounting firms.
