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Are Accounting Rule Changes Hurting your Bottom Line?

Adapting to new accounting rules and regulatory changes have caused annual audit fees to continue to rise for U.S. companies. According to a survey by the Financial Education & Research Foundation, the average hourly fees public companies pay for external auditing services has climbed 31 percent over the past decade. Businesses tend to retain external auditors for assurance that their financial statements contain no misstatements. 

Respondents of the survey cited new accounting standards as the primary change in audit fees. Further, complying with new revenue recognition rules that sought to unify the ways in which companies accounted for revenue from sales and services led to the dramatic increase in fees.

Public and private companies, especially financial institutions, are adapting to the new Financial Accounting Standards Board rule that requires them to record expected future losses as soon as loans are issued. And, the “Critical Audit Matters” rule requires independent auditors to disclose the most challenging elements in reviewing companies’ financial statements.

As finance executives go head to head with new accounting complexities, audit fees are expected to continue to rise. In 2018, public companies paid an average of $2.3 million in annual audit fees, and in 2019, an estimated $2.54 million. Audit fees in 2020 are also expected to continue to rise; average audit fees have increased yearly since at least 2011.

Public companies have seen the brunt of these audit fee and audit work increases; private companies and nonprofits typically operate with fixed-fee arrangements. Seventy-three percent of public company respondents noted that the volume of annual audit work performed by external auditors changed in 2018, while only 27 percent of private company respondents and 22 percent of nonprofit respondents reported a change. The communications industry and depository-institution industry reported the biggest increases from the previous year in 2018, and insurance industry paid the most on average in audit fees in 2018, at $6.7 million, though this was 5.4 percent less than the previous year.

Some companies are reducing fees by switching to audit firms or negotiating with their existing firms. According to The Wall Street Journal, a Santa Clara, California-based software company cut its audit fees by more than half by switching to a smaller, local accounting firm (having previously been working with a Big Four firm).

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