Tracking trends in audit fees

Wondering about the direction of audit fees? 

Look no further than the Financial Executives Research Foundation. FERF  recently released findings from on its latest annual survey of audit fees for public companies. While the data is from 2022, the trends should interest CFOs, controllers and other finance executives. 

I downloaded the full report from FEI National's website as a pdf. You can, too --  downloading the report as an FEI member almost pays for your annual membership!

The first section of the report discusses the value of an external audit. (And of course that’s from an FEI perspective, not AICPA.). The next section analyzes data on audit fees. The report then provides insights on the “key drivers of the changes in audit fees and related effort.” 

Additionally, it discusses the current environment of financial reporting and auditing, covers the impact of ESG reporting (environmental, social, and governance) and ends with observations about the audit marketplace in the future.

Importantly, the report was prepared in partnership with the Center for Audit Quality, including anonymous surveys and interviews with FEI members and CPA audit engagement partners. Half of the respondents were from the “Big Four” accounting firms, meaning that input was also gathered from firms like FORVIS, giving a more complete view of the environment.

Although the focus is on public companies, the report likely has relevance to private companies, too. (Reporting on public companies is easier as information is readily available from SEC reports.)

Here are some select findings: 

VALUE OF THE AUDIT

• 81% of FEI members surveyed believe the external audit enhances the quality of their financial reporting.

• Audit quality is improving using data analytics and other existing and emerging tools. Of management respondents, 64% reported that auditor use of those technologies resulted in improved audit quality, versus 49% in the last survey. Audit partners surveyed reported that data analytics were used on 97% of audits.

• Artificial intelligence (AI) is seen as having a significant effect in the future.

AUDIT FEE MARKETPLACE

• Across different sized public companies, average audit fees increased less than 5%.

• The report notes that SEC requirements that increase audit work were less onerous during this reporting period as compared to the previous FERF report.

• CPA firms are facing higher costs due to shortages of entry-level college graduates. Offsetting this to some extent is the increased use of technology.

AUDIT FEES IN THE FUTURE

• That phrase, “in the future,” actually includes “now.” As noted earlier, the data in the report is lagged by a year. The future is here.

• Of FEI members responding, 47% indicated that their audit support activities had increased, while 51% reported no change.

• A significant factor affecting management’s support for the external audit was M&A activity. I’m sure we’ve all seen reports that suggest M&A activity is increasing and may continue to increase.

• While major changes in financial reporting declined as compared to the prior FERF report. That prior report was affected by changes in lease accounting, revenue recognition, credit loss reporting (CECL), and reporting by auditors of critical audit matters. All added complexity to the external audit function and management activities to support the external audit.

• Audit partners responding to the survey reported an increase in audit team effort, with ICFR (internal control over financial reporting) a main driver of the change, along with increasing acquisition and divestiture activity.

• Sixty-eight percent of audit partners reported increased effort from IT-related (and increases in audit scope).

OTHER CONCERNS 

• Cyber security. No surprise there.

• Increased regulatory and compliance activity. The report notes that the SEC and PCAOB have both been very active with new rules and standards, and proposals. And of course, there’s the FASB which also has an active agenda.

• The impact of AI on financial reporting and on auditing. (“Hey Siri, write a note to the financial statements on our leases.”)

• And of course, there is still economic uncertainty lurking.

I encourage you to download the report and read it. There is no substitute for reading the actual document.

Board member Bill Stout can be reached at william.stout@louisville.edu.