The Financial Education and Research Foundation (FERF) recently published the findings of the 2018 Audit Fee Survey. idaciti was proud to be involved with producing this report by providing the non-survey data for analyses. The data was collected by idaciti from the SEC filings and the data provided by the PCAOB for all public companies in 2017.
Beyond some of the highlights of the report showing modest audit fee increases from 2016 to 2017 for public companies by 2.5% and private companies 3.2%, the report provides some interesting insights.
Large Accelerated and Accelerated Filers Spend Evenly between Audit-Related Fees and Tax Fees
For example, if we look beyond the 2017 audit fees and analyze the audit-related, tax and non-audit fees and non-tax fees, we see that the Large Accelerated and Accelerated filers, on average, appear to spend evenly between audit-related fees and tax fees. For instance, Large Accelerated filers in 2017 spent on average $ 871 M on audit-related fees and $ 815 M on tax fees. This pattern is similar with Accelerated filers who spent on average $ 119 K on audit-related fees and $ 145 K on tax fees.
Contrast this with Non-Accelerated filers and Smaller Reporting companies who spent nearly double on audit-related services compared to tax services. Interestingly, we see the amount spent on tax fees subsuming more importance over all other fees for Smaller Reporting Accelerated filers. Their average tax fees comprise of slightly over 80% of all professional accounting fees (outside of the audit fees). Whilst it is arguable that different tiers of companies may have different levels of tax complexity, it is not necessarily clear that this is a linear relationship whereby larger (smaller) companies have more (less) complex tax implications and therefore spend relatively more (less) on tax consultation.
So, what are these ‘audit-related’ fees that feature so prominently for Non-Accelerated filers and Smaller Reporting Companies? The following is an excerpt from the FAQs of the SEC’s Office of the Chief Accountant:
“...More specifically, these services would include, among others: employee benefit plan audits, due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services related to financial reporting that are not required by statute or regulation and consultation concerning financial accounting and reporting standards. Fees for the above services would be disclosed under "Audit-Related Fees."
Implementing Automation-Related Internal Controls May Reduce Audit-Related Fees
Some respondents in the survey suggested that companies implementing automation-related internal controls may be able to reduce audit-related fees. In addition, being proactive in collaborating with the external auditors on reviewing proposed corporate transactions (like, for example, mergers and acquisitions) and the accounting and reporting implications may also reduce audit-related fees. Whilst the larger companies may have the resources to implement these audit-related cost reduction strategies, the verdict is still out on whether the smaller companies are able to achieve this. In addition, as audit fees continue to rise year over year, albeit incrementally, can companies leverage advancements in technology to facilitate the audit review process and increase collaboration with?
Streamlining Filing Review and Analyses Could Further Reduce Audit Fees
At idaciti, we pride ourselves on continuously innovating ways to streamline data consumption and analyses. In particular, as it relates to the audit process, the idaciti Inline XBRL (iXBRL) portal allows companies to upload their 10-K or 10-Q to the portal so that the auditor can more efficiently review the filings. The portal provides a disclosure checklist to allow the company’s auditors to quickly determine whether a company has disclosed or tagged data that covers a US-GAAP or IFRS disclosure requirement. In addition, the iXBRL portal also allows auditors to easily benchmark their client’s financial data against that of its peers, as well as allow auditors and clients to annotate directly in the iXBRL filing so that there is an audit trail of the communication between the auditor and client linked directly to the reported number or disclosure.