Public Company Accounting Oversight Board Chairman James Doty said in a speech in early May that he is concerned about cuts in audit fees having an impact on the quality of audits as the auditing practice becomes a declining part of the revenue at accounting firms.
"To be sure, audit firms are innovating, but not in the area of the audit," Doty said at Baruch College's 13th Annual Financial Reporting Conference. Doty pointed out that the Sarbanes-Oxley Act puts the audit committee in charge of retaining the company's auditor, and yet the audit committee has limited information on which to judge audit quality. He cited statistics that found that, from 2006 through 2011, 418 companies in the Russell 3000 index changed auditors. The median change in audit fee reported by the companies in their filings with the Securities and Exchange Commission was a decrease of 11.5 percent, he noted.
Among the 418 companies that changed auditors, the decline in audit fees was even more pronounced for large engagements -- such as those with audit fees of $3 million or more, Doty noted, of which 83 percent reported lower audit fees in the auditor's first year, with a median decrease of 15.7 percent. In contrast, the year-over-year change in audit fees among the full Russell 3000 was basically flat, with approximately half reporting increases and half reporting decreases.
SEC chief accountant Paul Beswick is also disturbed by the trend, and mentioned it when he spoke earlier in the day at the conference. "I'm not here to say that audit committees are here to do what the auditors say, but you start to get a little concerned when you see audit fees at a company, when there has been no change in the operations of the business, all of a sudden one year drop by 20 or 30 percent," he said. "You wonder, wow, what's the impact on quality going to be there? What did the audit committee do to get comfortable that the auditor was going to do their job, especially in the context of a change in auditor? That's one of the things that we're constantly highlighting for audit committees when we talk to them. Remember you have a fiduciary responsibility. There are situations I would term 'fee hunting' where companies are out looking for the lowest fee and not spending a lot of time focusing on audit quality."
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