In the report, we studied the audit and non-audit fees paid by accelerated filers since 2002. This research found that for 2014 the ratio of non-audit fees over revenue was the lowest for the thirteen years under review and is the first time the value was below 10%. In comparison, the ratio of audit fees (including audit-related) to revenue experienced a 1.9% uptick. This year’s analysis also looks at audit fees surrounding a financial restatement.
A review of non-audit fees as compared to audit fees is of interest for many reasons, one of which is that the SEC considers high non-audit fees to be an auditor independence concern.1 To address this concern, the SEC adopted a set of rules that include requiring companies to disclose fees paid to their auditor in four separate categories: (1) Audit Fees, (2) Audit Related Fees, (3) Tax Fees, and (4) All Other Fees.
Highlights from the Report
In 2014 the percentage of Non-Audit fees (without including Audit-Related Fees) dropped to 9.4%, the lowest of any year analyzed. The 2014 data has broken a nine year trend where the percentage of non-audit fees hovered around 11% and dropped to below 10% for the first time. The 2014 percentage of non-audit fees is now a quarter of what it was before the measures concerning independence issues were placed in effect over a decade ago.
As we wrote about recently, the EU has instituted a rule that would cap non-audit fees at 70% of audit fees. As we can see here, and as we found in informal research, the vast majority of US companies pay non-audit fees well below that threshold.
To offer a different perspective on fees, we can also look at changes in audit fees as a percentage of revenue. The graph below shows the average amount of audit fees per 1 million dollars in revenue since 2002. Over this time there have been a few major events affecting both auditor regulations and company revenues that become visible when you look at the data.
The passing of Section 404 of the Sarbanes Oxley Act (SOX 404) greatly increased reporting requirements, including an evaluation of the effectiveness of a company’s internal controls over financial reporting (IFCRs). US accelerated filers were required to comply with SOX 404 on or after November 15, 2004, and as a result we find that in 2004 audit fees as a percentage of revenue reached $676 dollars per million; the highest of any year under review.
Following the audit fees spike in 2004, audit fees as a percentage of revenue decreased in each year and in 2008 were down 13% from the peak. However, due to the decreased revenues as a result of the Great Recession audit fees as a percentage of revenue again spiked in 2009. As businesses recovered, the ratio has leveled off considerably with only slight increases in the last few years. In 2014, audit fees as a percentage of revenue was $550, which represents just a 1.66% increase from the prior year and still well below what it was after the implementation of SOX 404.
In this year’s report, we also investigated changes in audit fees surrounding the disclosure of a financial restatement. As indicated in the following tables, which show audit fees (including audit-related) for 30 accelerated filers that disclosed an Item 4.02 restatement in 2012, there appears to be a spike in fees around the time of the disclosure.
For further details on the topics above and for much more information on Audit Fee and Non-Audit Fee trends over the last thirteen years, see the full report here.
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1. See the Auditor Independence Rules adopted by the SEC in 2001 (SEC Release No. 33-7919, http://www.sec.gov/rules/final/33-7919.htm) and strengthened in 2003 in response to Section 208(a) of the Sarbanes-Oxley Act (SEC Release No. 33-8183, http://www.sec.gov/rules/final/33-8183.htm).↩