Non-Audit Fees Declining at Auditing Firms

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Last year, the percentage of non-audit fees dropped below 10 percent of the total fees paid to audit firms for the first time since Sarbanes-Oxley, according to a new report.

The report, from the research firm Audit Analytics, studied the audit and non-audit fees paid by accelerated filers since 2002. The report pointed out that the Securities and Exchange Commission considers high non-audit fees to be an auditor independence concern and adopted Auditor Independence Rules in 2001 that precluded the principal independent accountant from performing certain non-audit services in response to accounting scandals such as Enron and WorldCom.

Audit Analytics’ research found that last year the ratio of non-audit fees over revenue was the lowest for the 13 years under review and is the first time the value was below 10 percent. In comparison, the audit fees over revenue (including audit related) experienced a 1.9 percent uptick.

When analyzing non-audit fees in isolation (without including audit related), the analysis found that non-audit fees represented 38.2 percent of the total fees, but after four years of steady declines, non-audit fees leveled off to a value of about 11 percent of total fees for the following seven years. During 2014, however, the non-audit fees dropped to 9.4 percent of total fees. This value is the first time that the percentage of non-audit fees represented less than 10 percent of the total fees paid to the auditor.

During 2002, the cost of non-audit fees paid by the research population of accelerated filers for every million dollars in revenue was $290. After four years of substantial declines, the research population paid only $77 of non-audit fees for every million dollars in revenue during 2006, according to the report. The amount leveled off in the 70s for the next six years. During 2013, the population paid $69 per million in revenue followed by a notable decline in 2014 that brought the figure to the lowest value calculated for the 13 years under review: $57 for every million dollars in revenue.

The ratio of audit fees over revenue (including audit related) peaked in 2004 when the average amount of audit fees paid per $1 million of revenue was $676. After four consecutive years of decline the figure increased slightly in 2009, but this uptick was due to a decrease in revenues instead of an increase in fees.  After another three years of decline, 2012 reflected a cost of $531 per $1 million of revenue, the lowest value since 2004 (since the implementation of SOX 404). A slight increase of 0.91 percent in 2013 followed by an increase of 3.55 percent in 2014 brought the figure to $550 per $1 million of revenue.

Audit Analytics pointed out, by way of perspective, that $550 per million dollars in revenue would be the same as paying approximately 5.5 cents for every $100 dollars of revenue (or less than one tenth of a penny for every dollar of revenue). From a percentage perspective, this population used 0.055 percent of its revenue to pay for auditor fees (including audit related).

Restatement Effects
The companies that disclosed a restatement in 2012 experienced a conspicuous multi-year bump in non-audit fees that peaked the year before the disclosure. These companies paid 78 percent more (129 versus 72) in non-audit fees during 2011, according to the report. Likewise, these companies experienced a conspicuous multi-year bump in audit fees, but the peak occurred during the year of the disclosure. During 2012, these companies paid of 90 percent more in audit fees (when including audit related fees, the cost was 1,043 versus 531). These companies also paid 70 percent more during the year before and year after the restatement disclosure.

In terms of reissuance restatements, defined as any restatement revealed in Item 4.02 of an 8-K and thus involving a misstatement that undermined reliance on past financials, the report noted that companies that disclosed a reissuance restatement in 2012 experienced a conspicuous multi-year bump in non-audit fees, with the fees for 2012 about 2 times higher (133 versus  70). The audit fees (including audit related) were almost three times higher (1,516 versus 551) during the year of disclosure.

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