• Hate To Say I Told You So…

    By • May 1st, 2008 • Category: SEC


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    We’ve talked about the Big 4 audit firm Catch-22Pay me here or pay me there, but you’re going to pay, since I hold the trump card.


    As was reported here and here, intolerance for risk and management of legal liability exposure are motivating the Big 4 to force the extra work and fees down client’s throats, whether it comes as part of Sarbanes-Oxley testing and documentation or as rework and lack of dependence on other’s work when completing the external audit.
    Spend all you want internally and on cheaper resources to do Sarbanes-Oxley, (and you are, as the layoffs in the Big 4 attest to), sayeth the Big 4,  but we can play that game.  We’ll charge you to redo and rework that work because we don’t deem your team competent, objective or neither competent nor objective.  Or perhaps you haven’t proven that we should have any faith in what you do…
    The SEC will have a hard row to hoe in making a case that it’s not Sarbanes-Oxley’s fault that companies are paying more to their auditors.  It is.  But the reasons are more complex than just blaming a law for not providing any “value”.
    Companies, for the most part , were woefully unprepared to prove they had sufficient internal controls over financial reporting.  The scandals, frauds, and restatements prove that point.
    The audit firms were handed a double edged sword – make more money by moving companies towards this higher standard, a reasonable one in my mind.  But also be judged on the quality of your efforts in this regard by a new regulatory body that should  now be making sure companies never get a pass again form their auditors on poor controls over financial reporting.
    It’s not going to be easy for the SEC to balance the interest of their two customers:
    the public companies’ executive management teams and the audit firms.
    Or maybe they should rejigger their headsets and reconsider who their customer should be – the shareholder.
    Their job is then super crystal clear.


    Section 404 costs way down, but total audit fees on the rise
    Price tag for compliance now under $2 million; external auditors are charging more for their services, however

    The cost to meet the requirements of Section 404 of Sarbanes-Oxley is tapering off for companies in their third year of compliance, according to a survey released today by Financial Executives International. The fees these businesses are paying to their external auditors…well, that’s a different story.

    The survey of 185 companies—most of which had a market capitalization of at least $75 million—found the average cost for Section 404 compliance last year was $1.7 million. That’s down 41% from 2006.

    Fees to outside auditors for Section 404 attestation—one of the more controversial parts of the law—dropped to an average of $846,000, down 5.4% from 2006.

    The sucker punch? Total audit expenses for these companies—including internal and external costs—averaged $3.6 million in fiscal year 2007. That’s a 1.8% increase over the prior year, an increase driven by fees related to the audit of the financial statement.

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    4 Responses »

    1. $$$…lining the pockets of partners. It really is a shame that the power to dictate and to charge lies where it does…

    2. While we’re thinking about single-payer health insurance, how about single-payer auditing? In other words, the public takes bids and hires the auditors it chooses. The auditors then really are closer to being independent of the auditees and answer to the people.

    3. “The sucker punch? Total audit expenses for these companies—including internal and external costs—averaged $3.6 million in fiscal year 2007. That’s a 1.8% increase over the prior year, an increase driven by fees related to the audit of the financial statement.”

      The article does not distinguish between whether the higher costs are due to more external costs, more internal costs, or from both. You can’t assume that the audit firms are making the lost SOX fees back in audit services when the article clearly states that it is due to both internal AND external costs.

      If a company hires more qualified people to better prepare for the SOX attestation, for SOX remediation, etc, therefore reducing the fees charged by auditors, how is that the audit firm’s fault?

      What am I missing?

    4. Well, companies don’t like the extra costs in any form. Whether they have to beef up internal audit, beef up accounting and GAAP expertise internally or via consultants, or whether they have to still pay outside resources to do the documentation, testing and maintenance for SOx attestation, they see it as additional, unnecessary cost. Their auditors were not holding them to this higher standard pre-SOx. God forbid a company spends this money to try to get more work done inside and reduce the external audit fees and the external firm disregards and ignores it anyway. Double whammy. Then there’s the fact that Big 4 firms are often all over the largest public companies. Except for the cheapo ones and the already good ones, many companies have at least three if not four firms in there providing services. There is one and sometimes two as external auditors, another as internal audit co-sourcers and/or SOx co-sourcers and another for tax and or accounting policy and standards consulting, or maybe M&A , investigation or restatement related activities. They’re paying Big 4 fees all the way around. How do the Big 4 firms get blamed for this? As external auditors, they will often not accept or allow work by any other than Big 4 to be depended on for the external audit/SOx attestation. That’s where the duplicate effort and rework come s in and therefore higher fees form external auditors. Since the external auditor passes final judgement on any other service provider doing work in support of financial statement assertions, clients have little choice, if they are not super savvy, but to accept the extra fees.