With the rising cost of audit fees, companies need to find ways to cut costs. We recently had the opportunity to interview Leena Roselli, Senior Manager of Research at Financial Executives Research Foundation (FERF). And these are some of the findings she shared with us from their most recent comprehensive study.
The Sarbanes Oxley Act of 2002 called for major regulations that shifted the way companies did business and how auditors audited. This was a key driver in raising the cost of audit fees. In fact, FERF began analyzing these compliance costs, and found that they were embedded into a company’s overall audit fees.
Looking at past periods such as 2011 to 2013, audit fees average increase ranged from 4 to 6% for public companies and 3 to 7% for private companies. Then fast forward to the 2015 Audit Fee Study, participants had a 30% audit fee increase from prior year. Not to mention 20% of public companies had ineffective controls! 67% of the participants of this study also mentioned they had to increase the documentation of their internal controls, especially for those surrounding judgment areas like allowance for doubtful accounts or accrued liabilities. So what gives?
Taking a deeper dive and looking at public information and SEC reporting, using a key tool, called MYLOGIQ, Leena shared that they noticed these SIX KEY DRIVERS that increase audit fees:
Drivers of Audit Fee Increases
- PCAOB Inspections, especially Audit Alert #11
- Updated Accounting Standards, such as Revenue Recognition and Leasing
- Implementing 2013 COSO Framework
- New SEC Requirements
Leena suggests, “The more that accounting standards have judgment, the more there is potential for NOT having appropriate internal controls over those
judgments.” She recommends making sure you have support for any numbers you have and are documenting your procedures.
Ways to Mitigate Audit Fees
You may not be able to decrease audit fees, but you may be able to mitigate increasing audit fees with the following suggestions from the report’s findings.
- Improve Internal Controls. You may have a control in place, but it’s not formally documented.
- Create Templates. Create templates that auditors can use to insert into their work papers, so they don’t have to reinvent the wheel.
- Plan and Be Prepared for the Audit. If the client is not prepared, you might end up with new auditors, who is not familiar with your company. Consider having weekly or biweekly discussions with the audit partner to ensure that everything is on track. The #1 client complaint is that the auditors don’t understand their business. So being prepared for the audit will ensure that you have a seasoned auditor assigned.
- Automation. Systems today are more advanced and allow companies in their audit firms to share information on a real-time basis in some cases. In addition, if you have a dashboard, you can see where the bottlenecks are.
- Review Audit Hours with Auditors. Don’t be afraid to push back. Contrary to popular perception, auditors want companies to be more efficient and also help keep fees down.
- Be Part of Peer Network. Check with your peers and FEI and about how long each activity took.
Need help finding ways to reduce audit costs? We invite you then to learn more with our Compliance Resource Analysis or by emailing us at: Info@avivaspectrum.com to start the conversation on Aligning Compliance Values.
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More about Leena Roselli
Listen to Entire Interview
Leena is the Senior Manager of Research at Financial Executives Research Foundation. Prior to joining Financial Executives Research Foundation, Leena held technical accounting research positions in the pharmaceutical, insurance and retail industries. She has authored over 30 reports which have been mentioned in various publications such as Wall Street Journal, Accounting Today, Compliance week, and various other business publications. Leena holds a Master’s of Business Administration degree from the Saint Peter’s University.