Audit Analytics (AA) has released Nineteen Year Review of Audit Fee and Non-Audit Fee Trends, the 2022 edition of its annual analysis of fees paid to external auditors. Somewhat surprisingly, AA finds that, in 2020, both average and aggregate audit fees paid by public companies declined for the first time since 2010. Non-audit fees, as a share of total fees, also fell to a record low. In a blog post summarizing the study, AA observes: “Audit fee trends were impacted by several external events during fiscal year 2020. The COVID-19 pandemic necessitated modified audit procedures, subsequently lowering audit costs. Additionally, regulatory changes altered the composition of companies filing as accelerated filers. This resulted in the audit fee to revenue ratio falling for accelerated filers during the year.” AA does not expect fees to continue to decline.
The Nineteen Year Review provides analysis and comparison of trends in audit and non-audit fees disclosed by public companies between 2002-2020. The executive summary highlights four findings:
In 2020, aggregate audit fees paid by public companies fell by about one percent, compared to 2019. AA notes that aggregate audit fees fell despite an increase in the number of public companies in 2020. (The rise in the public company population was rather slight – from 6,916 in 2019 to 6,972 in 2020. The long-term trend is downward – the number of companies peaked at 10,894 in 2006 and then declined each year until 2020.) AA suggests that several factors may account for the 2020 reduction in aggregate fees, “including pricing pressure due to uncertainty related to the pandemic, increased use of technology, and a lack of physical travel expenses.”
Average audit fees also fell (by 2.1 percent) in 2020 for the first time in a decade. “Average fees were impacted by a wave of special purpose acquisition companies disclosing fees for the first time. SPACs pay relatively low fees due to their absence of operations.”
Continuing a five-year trend, non-audit fees declined to a record low percentage (17.7 percent) of total fees paid to external audit firms. AA suggests that much of the decline is attributable to foreign companies, for which non-audit fees were 14.8 percent of total fees in 2020.
Audit fees per million dollars of client revenue declined 23.8 percent from 2019 to 2020 for companies classified as accelerated filers. In 2020, the SEC changed the definition of accelerated filer, causing many low revenue companies to be reclassified from accelerated filers to non-accelerated filers. See SEC Exempts More Small Companies from ICFR Audits, February-March 2020 Update. As AA notes, “This caused a significant decrease in audit fees per million dollars of revenue due to the removal of lower revenue companies.”
While not highlighted in the executive summary, AA also found that, for reporting companies of all types, audit fees per million dollars of revenue increased seven percent between 2019 and 2020. This increase was apparently driven by revenue declines, rather than fee increases, AA states that the increase “was largely due to 26% and 12% declines in revenue for mining (including oil and gas) and manufacturing companies, respectively.”
In AA’s view, the 2020 dip in audit fees is not the start of a trend. On the contrary, AA expects fees to resume their upward march in the future:
“A decline in total audit fees is unlikely to continue. Some amount of audit work will return to in-person engagement. Physical counts of inventory and the existence of property, plant, and equipment are two examples of work that will likely return to in-person engagement. But other areas - such as observing the operation of internal controls - also have benefits to in-person engagement.
“Macro factors like inflation and talent competition will also impact fees going forward. The ‘great resignation’ has impacted most employers. But before this recent talent crunch, the audit profession was already seeing a talent deficit. A 2019 study by the AICPA found the number of CPA candidates that passed their fourth section of the CPA Exam has declined over the past decade. The talent competition is likely to increase the cost of an audit.” (footnote omitted)
The view that audit fees are likely to rise in the future is consistent with the findings of a recent Gartner, Inc. survey. See Survey Finds that Audit Fees are Expected to Rise in 2021, May-June 2021 Update.
Comment: In addition to the headline findings summarized above, the Nineteen Year Review provides information concerning trends in audit and non-audit fee over the nineteen-year period based on location, company size, and industry. Audit committees may find it useful to compare changes in their company’s fees against this information.
Audit committees might want to specifically focus on how their non-audit fees compare to broader measures. As noted, AA found that in 2020 non-audit fees reached their lowest level as a percentage of total fees paid in the 19 years of its study. AA observes that, from 2006-16, this metric was “between 20 and 23 percent each year, for 2017 and 2018 it was approximately 20 percent, and for 2019 it was 18 percent.” AA describes non-audit fees as a percentage of total fees as “a way to evaluate how firms comply with auditor independence requirements in providing non-audit services to their public company clients.” Regardless of whether one agrees with this statement insofar as it relates to legal compliance, it is certainly possible that investors may raise questions about auditor objectivity at companies where non-audit fees as a percentage of total fees are significantly above average.