2018 AUDIT FEE SURVEY REPORT - Workiva...2018/12/04 · The 2018 Audit Fee Survey report shows comparatively modest increases in audit fees, with public companies reporting a median

2018 AUDIT FEE SURVEY

REPORT SPONSORED BY

https://www.workiva.com/

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2018 AUDIT FEE SURVEY REPORT

CONTENTS

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Section 1: The Audit Fee Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Section 2: Reasons for Fee Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Section 3: Mitigation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Section 4: Respondent Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Interviewees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

About FERF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

About Workiva . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

About idaciti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

FERF Supporters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

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EXECUTIVE SUMMARYThe 2018 Audit Fee Survey report shows comparatively modest increases in audit fees, with public companies reporting a median increase of 2.5 percent. Similarly, private companies reported a median increase of 3.2 percent, and nonprofit organizations reported flat fees. These results are for the 2017 filing year.

This compares with a median increase of 1.3 percent for public companies in last year’s survey. Reported increases were 3.7 percent for private companies and 1.6 percent for nonprofits.

As in past surveys, the reasons respondents cite for higher fees include new accounting standards, particularly those related to revenue (Accounting Standards Codification, Revenue from Contracts with Customers, Topic 606) and leases (Accounting Standards Update 842, Leases, ASC 842). Respondents also cite high levels of mergers and acquisition activity and more detailed documentation requests from auditors in response to Public Company Accounting Oversight Board (PCAOB) inspection reports and staff alerts.

According to the survey, some factors helping to mitigate increases are:

• a competitive marketplace for audit services;• more interaction between companies and their auditors throughout the year;• collaborative planning and information preparation before the audit begins; • negotiating with auditors about rates, including hours devoted to an audit;• providing assistance to auditors by bringing audit-related tasks in-house.

Automation is also making inroads with some finance teams, especially within larger registrants. Automating tasks such as account reconciliation or the transfer of data between finance systems is expected to increase operating efficiency and enhance the finance team’s contributions to the broader organization.

Respondents say automation may increase audit-related costs in the short term as automation-related controls are validated, but it will help reduce costs in the intermediate term and beyond as auditors become more comfortable and the technology matures.

Beyond automation, respondents say maintaining a collaborative relationship with an audit firm is key to mitigating potential fee increases. This collaboration increasingly involves asking for more detailed audit plans and scoping documents, reviewing proposed corporate transactions with auditors to understand the accounting and reporting implications, and shifting as much work as possible outside the year-end close and audit processes.

By trying to develop a collaborative relationship with their audit firms, preparers say they can balance the goals of receiving a more comprehensive audit while maintaining a cost-effective fee structure.

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SECTION 1: THE AUDIT FEE MARKETPLACE Audit Fee YoY Change/Filings

2017 2016

Median Fee $653,996 $610,097

Median Pct. Fee Change 5.70% -

Average $2,220,251 $2,107,871

Average Pct. Fee Increase 45.80% -

• Data based on publicly available filings from the U.S. SEC and the PCAOB.• Table is based on a sample universe of 6,340 companies that reported in both years.• Percentage increase does not take into account a possible change in filing status that may greatly

impact YoY comparisons.

Public Companies - FERF Survey

2017 2016

Responses 83 161

Fees Median $3,657,000 $7,446,739

Average $9,766,632 $2,803,507

Change Median 2.6% 1.3%

Average 4.1% 6.9%

Audit Fees by Filing Status (Filings)

Filing Status

Number of Filers in 2016

Average Audit Fee in 2016

Median Audit Fee 2016

Number of Filers in 2017

Average Audit Fee in 2017

Median Audit Fee in 2017

Accelerated 1,420 $1,023,100 $679,916 1,393 $1,046,121 $679,147

Large Accelerated 2,028 $5,091,979 $2,495,970 2,184 $5,088,002 $2,477,500

Non-accelerated 664 $1,454,563 $593,000 555 $1,547,172 $535,168

Smaller Reporting Accelerated 12 $313,334 $235,000 13 $744,346 $688,875

Smaller Reporting Company 2,154 $148,005 $78,156 2,134 $155,850 $81,000

• Data based on publicly available filings from the U.S. SEC and the PCAOB.

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Audit Fees by Filing Status - FERF Survey

Large Accelerated Accelerated

Non-Accelerated

Fees Median $6,973,000 $415,000 $128,371

Average $11,010,871 $727,056 $161,101

Change Median 2.2% 2.6% 3.2%

Average 3.5% 3.8% 5.6%

PUBLIC COMPANIES

Median and Average Hourly Rate - FERF Survey

2017 2016

Responses 25 52

Median Hours 17,000 12,246

Median Rate $217 $216

Average Hours 34,003 32,508

Average Rate $248 $225

2017 Spending Beyond Audit FeesFees reported by filing status as a percentage of total spend outside of audit fees.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Accelerated Filer $54,146 $119,052 $144,708

Large Accelerated Filer $871,737 $814,974

Non-Accelerated Filer $462,833 $230,543

Smaller Reporting Accelerated Filer $192,797

Smaller Reporting Company $32,916 $47,501 $29,747

Average of Non-Audit and Tax Fees Average of Audit-Related Fees Average of Tax Fees

• Data based on publicly available filings from the U.S. SEC and the PCAOB.• Table is based on a sample universe of 6,340 companies that reported 2017 fees.

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Audit Fee Averages by Industry/Filings

IndustryNumber of Filers

Avg. of 2016 Audit Fees

Avg. of 2017 Audit Fees

Average Fee Change

Business Services 668 $1,656,863 $1,794,599 8.31%

Chemical & Allied Products 745 $1,591,306 $1,699,859 6.82%

Communications 151 $4,107,904 $3,991,208 -2.84%

Depository Institutions 467 $2,591,661 $2,816,208 8.66%

Health Services 84 $1,560,253 $1,597,242 2.37%

Insurance Carriers 154 $6,739,208 $7,127,019 5.75%

Miscellaneous Manufacturing Industries 33 $1,115,228 $1,175,419 5.39%

Miscellaneous Retail 98 $1,511,107 $1,493,841 -1.14%

Oil & Gas Extraction 282 $1,550,163 $1,634,890 5.47%

Security & Commodity Brokers 161 $3,269,766 $3,339,129 2.12%

• Data based on publicly available filings from the U.S. SEC and the PCAOB.• Table is based on a universe of companies that reported in both years in the same filing category.• Percentage increase does not take into account a possible change in filing status that may

greatly impact YoY comparisons.

Primary Audit Firm

Firm Name 2017 Clients 2016 Clients

Ernst & Young LLP 905 835

KPMG LLP 649 589

PricewaterhouseCoopers LLP 640 607

Deloitte & Touche LLP 600 540

BDO USA, LLP 278 233

Grant Thornton LLP 216 193

RSM US LLP 122 100

Marcum LLP 107 96

MaloneBailey, LLP 103 83

Moss Adams LLP 89 60

Crowe Horwath LLP 74 79

Kost Forer Gabbay & Kasierer 52 52

Baker Tilly Virchow Krause, LLP 51 43

RBSM LLP 50 47

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PRIVATE COMPANIES - FERF SURVEY

Median and Average Fees, Changes

2017 2016

Responses 132 281

Fees Median $71,775 $70,000

Average $138,658 $163,993

Change Median 3.2% 3.7%

Average 5.6% 3.8%

Median and Average Hourly Rate

2017 2016

Responses 26 46

Median Hours 762 510

Median Rate $168 $158

Average Hours 1,395 1,754

Average Rate $191 $180

NONPROFITS - FERF SURVEY

Median and Average Fees, Changes

2017 2016

Responses 22 56

Median Fee $45,000 $52,388

Average Fee $91,619 $181,403

Median Change 0.0% 1.6%

Average Change 3.0% -2.3%

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SECTION 2: REASONS FOR FEE CHANGESPUBLIC COMPANIES - FERF SURVEY

Reasons by Filing Status

Q: Please indicate the primary factors that contributed to an increase or decrease in your audit fees. (Multiple responses allowed)

All Public


Non-Accelerated

Foreign Issuer

Responses 78 62 8 6 2

Negotiation with primary auditor 26% 27% 25% 17% 0%

Changed our independent auditor 1% 2% 0% 0% 0%

Acquisition 33% 39% 13% 0% 50%

Divestiture 12% 13% 0% 0% 50%

Centralized operations 1% 2% 0% 0% 0%

Inflation 19% 21% 13% 0% 0%

New FASB standards 47% 52% 50% 17% 0%

New GASB standards 1% 34% 0% 0% 50%

Focus on revenue recognition 42% 42% 38% 0% 0%

Changes to internal controls 15% 18% 13% 17% 0%

Foreign currency adjustments 1% 2% 0% 0% 0%

Review of manual controls resulting from PCAOB inspections 14% 13% 25% 0% 0%

Review of prior year workpapers resulting from PCAOB inspections 6% 3% 13% 0% 0%

New SEC reporting requirements 9% 8% 0% 33% 0%

New COSO Framework 3% 3% 0% 0% 0%

XBRL review 0% 0% 0% 0% 0%

Turnover of key audit firm team members and/or mandatory partner rotation

6% 3% 13% 33% 0%

Additional review as a result of a SEC comment letter or inquiry 2% 25% 0% 0% 0%

Turnover in staff 3% 3% 0% 0% 0%

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Private Companies - FERF Survey

Responses 131

Negotiation with primary auditor 28%

Inflation 25%

Acquisition 12%

Changed our independent auditor 8%

New FASB standards 7%

Changes to internal controls 6%

Turnover in staff 4%

Centralized operations 3%

Divestiture 2%

Turnover of key audit firm team members and/or mandatory partner rotation 2%

Focus on revenue recognition 2%

Foreign currency adjustments 1%

Review of manual controls resulting from PCAOB inspections 1%

Review of prior year work-papers resulting from PCAOB inspections 1%

XBRL review 1%

OMB A-133 1%

Nonprofits - FERF Survey

Responses 26

Inflation 23%

New FASB standards 15%

Negotiation with primary auditor 12%

OMB A-133 12%

Focus on revenue recognition 8%

Turnover in staff 8%

Changed our independent auditor 4%

Centralized operations 4%

New GASB standards 4%

Changes to internal controls 4%

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New Accounting Standards

Q: How much effort are you putting towards implementation of new accounting standards?

Responses 70

Substantial 69%

Some 26%

Not much activity 6%

Q: Are you engaging your external audit firm for these efforts?

Responses 64

Yes 51%

No 49%

Q: If implementing the new revenue recognition standard, do you anticipate an increase in audit-related fees?

Responses 6

Yes 49%

No 53%

Respondents say the major new standards adopted by the Financial Accounting Standards Board (FASB) in recent years produced a modest increase in their audit fees, primarily for technical advice and documenting their preparation efforts.

For instance, Dino Theodoracopoulos, assistant controller at L3 Technologies, says the January 1, 2018, adoption date for the new revenue recognition standard culminated a three-year effort.

“We decided not to restate our financials for the adoption of ASC 606,” Theodoracopoulos says. “We chose the modified retrospective transition method where we present the company’s financials and disclosures required by the new standard on a go-forward basis after adoption on January 1, 2018. But even with that, the audit work required to review our revised accounting policies and internal controls over financial reporting and our contracts for the impacts of the new revenue recognition standard was the sole reason for our audit fee increase.”

“We were in good communication with our auditors, especially over the last year, on drafting our accounting policies and resolving issues relating to the application of the new standard to our contracts. From an audit perspective, there was no more complexity than we would have anticipated, but because of the additional work performed by our auditors, there was a notable increase to our audit costs.”

For their part, auditors say the marketplace is stable and competitive, despite changes brought on by recent accounting standard revisions.

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“In general, what we’re observing in our opportunities is a highly competitive landscape and a greater focus on efficiency,” says EisnerAmper partner Alan Frank. “There’s a lot of fee pressure out there.”

“All our audit committees and senior executives are having that discussion with their auditors and saying, ‘What can we do to get through this in a more efficient way, whether it’s your technology or leveraging the work of others, or both?’” says EisnerAmper partner Jerry Ravi.

Even for organizations for which the revenue standard did not have a material impact, preparers needed to become familiar with the new guidance, and their external auditor needed to review their conclusions. This review, and the accompanying documentation, added cost and complexity for a large number of registrants.

“On our Rev Rec process, we had to put together, as you would expect, a memo on how we’ve adopted it and addressed the technical considerations,” says a controller. “They now want me to prepare a memo on the memo, and the memo on the memo should discuss how the memo was prepared and what considerations we undertook to prepare the memo. That’s where I’m pushing back.”

Q: If your audit firm was subjected to PCAOB oversight review, were the comments shared with you?

Responses 67

Yes 46%

No 16%

N/A 37%

Q: Has your auditor requested that you make changes to your controls as a result of PCAOB requirements or inspection feedback?

Responses 71

Yes 42%

No 37%

N/A 21%

Q: Has your auditor requested that you make changes to your controls documentation as a result of PCAOB requirements or inspection feedback?

Responses 50

Yes 48%

No 32%

N/A 20%

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Internal Controls Investment

Q: To obtain an auditor’s report on internal controls, has the volume of annual audit work by your external auditors changed?

Public Private Nonprofit

Responses 55 96 16

Yes 33% 8% 13%

No 67% 90% 88%

Q: To what extent are you working to improve your controls environment?


Responses 66 108 21

Substantial effort 14% 14% 24%

Some effort 70% 58% 67%

Not much activity 9% 16% 0%

Not a current focus 7% 12% 10%

Q: Do you expect those efforts to help reduce audit fees?


Responses 66 103 21

We expect reductions 30% 16% 19%

Little or no impact 70% 84% 81%

Q: Who performs your Sarbanes-Oxley Section 404 testing?

All Public


Non-Accelerated

Foreign Issuer

Responses 65 49 9 6 1

Internal Audit 58% 55% 78% 17% 0%

Finance/Controller resources 22% 22% 11% 17% 100%

Outsourced 11% 6% 11% 33% 0%

Management (decentralized) 15% 16% 33% 0%

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Q: Has your company experienced an increase or a decrease in its costs of compliance with Sarbanes-Oxley Section 404 within the past three years?

Responses 70

No Change 37 53%

Increase 25 36%

Decrease 8 11%

Q: If you answered “increase” to the previous question, please check all the reasons why.

Responses 25

Growth of organization/Growth of staff 48%

The company has implemented a new IT system 36%

Regulatory requirements (e.g. COSO 2013) 36%

PCAOB inspection findings/related issues 32%

The company has completed a large acquisition with additional systems 32%

The company experienced a material weakness or significant deficiency 12%

Cybersecurity threats 4%

Multiple responses allowed

PCAOB Considerations

As in previous surveys, several respondents say requirements of the PCAOB contributed to stricter documentation requests from their external auditors that, in turn, led to higher audit fees.

“We’re seeing a large increase in documentation requests, such as documenting the process management goes through in order to come to its conclusions,” says one controller. “That increases the time it takes for them to complete and document their audit.”

While preparers understand major standards and PCAOB staff pronouncements are prompting auditors to pay more attention to specific areas, several say the requests from auditors for additional information and testing can seem excessive and, in some cases, arbitrary.

“It got to the point where from a random testing standpoint, they asked us to support transactions that were less than a dollar,” says Anthony Verkruyse, CFO of Specialty Steel Works, Inc. “Because they picked them, we had to prove that it shouldn’t have been bigger. The scope had gotten so ridiculously small, and I felt sorry for the auditor’s staff because there was no position for them to try and use their own rational thinking, especially for evaluating reasonable scope.”

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“There’s a greater focus and emphasis that you’ve designed your audit so that it’s focused on the key risks and that you’re gathering the appropriate support and documentation to support the conclusion you’re reaching,” says EisnerAmper’s Frank. “That’s why a lot more questions are being asked of the clients. There’s more detailed conversation in terms of their thought process or how they came about their conclusions, and, quite honestly, you need the evidence and documentation to support the conclusion you’re drawing. Without that, you leave yourself exposed [to the possibility] that when someone’s looking at your work, it’s not adequately supported.”

A chief accounting officer in the energy sector says the auditor’s internal controls review often includes what-if factors that require them to document scenarios that, in her opinion, would be completely remote or immaterial.

“I think the simple concept of reasonableness has lost its way where the auditors have to document like crazy to say that they’ve looked at everything. Obviously, their opinion is not saying that they have looked at everything, but as an accountant, you can’t make a human error without having it blown up into something huge and a significant deficiency.”

The CAO says auditor requirements for testing and documentation may not reflect a specific registrant’s practices and risk profile.

“I’ve been at companies that have had disorganized, out-of-control warehouses, so I can see where there’s a risk, but we have a long track record of not writing off obsolete inventory, so their concern is really unfounded. I feel like sometimes it’s just, ‘How do we keep our fees up? Let’s audit everything six different ways.’”

Some preparers compare documentation requests to the idea of defensive medicine, where medical providers order a battery of tests to reduce the risk of being sued for missing something or making an incorrect diagnosis.

“If you look at the word ‘reasonable assurance,’ I think you get people who come in and their question is, ‘Tell me how do you know it’s not going to happen?’” says a financial industry preparer. “My answer is, ‘I don’t know it’s not going to happen, but I don’t believe that is actually the standard we should be applying here.’ I think the PCAOB has audit partners scared, and the path of least resistance is to layer more work on your client until your client says no. That does two things. You drive revenue, which is a metric you get incentivized for, and you reduce your downside risk. So if you’re a partner, why would you not?”

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Internal Audit Investment

Q: Has your company changed its investment in internal audit?


Responses 71 105 20

Increased 18% 9% 10%

Decreased 6% 2% 0%

Remained same 63% 32% 30%

Not applicable 13% 57% 60%

Q: Does your internal audit function provide direct assistance to your external auditors?

Responses 69

Yes 69%

No 31%

Q: If your company has increased investment in internal audit, has that reduced external audit costs?

Responses 70

Yes 9%

No 24%

NA 67%

Internal Audit Reliance

Q: To what extent does your external auditor rely on internal audit’s work?

Responses 68

Substantial reliance 22%

Some reliance 57%

None 21%

Q: Did your external auditors decrease reliance on work performed by internal audit staff because of the PCAOB inspections?

Responses 69

Yes 6%

No 94%

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SECTION 3: MITIGATION STRATEGIESOrganizations Reporting Audit Fee Decreases

Multiple responses allowed

Public Companies Reporting Decrease

Responses 20

Reviewed our audit hours and fees, and negotiated with our auditors 70%

Increased our audit preparedness 25%

Reviewed our current audit focus areas to identify areas for improvement 15%

Improved our internal controls 15%

Centralized our audit footprint 15%

Increased automation 15%

Changed external auditor 5%

Increased staff's audit skill set 0%

Private Companies Reporting Decrease

Responses 15









Nonprofits Reporting Decrease

Responses 4









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Popular Mitigation Strategies

Q: Which of the following has your company used to mitigate audit fees?

All Public

Large Accelerated

Accelerated

Non-Accelerated

Foreign Issuer Private

Non- Profit

Responses 80 63 9 6 2 128 26

Reviewed our current audit focus areas to identify areas for improvement

39% 41% 44% 0% 50% 33% 15%

Improved our internal controls 36% 40% 22% 17% 50% 27% 46%

Centralized our audit footprint 8% 10% 0% 0% 0% 7% 8%

Increased automation 23% 25% 22% 0% 0% 16% 31%

Increased staff's audit skill set 8% 6% 22% 17% 20% 27%

Increased our audit preparedness 40% 38% 56% 33% 50% 64% 54%

Reviewed our audit hours and fees, and negotiated with our auditors

56% 56% 44% 67% 0% 34% 8%

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Increasing Preparedness One of the key ways respondents say they’re mitigating audit fee increases is by devoting more time and effort to planning for an audit in its earliest stages.

This can mean sitting down with the audit team immediately after the prior-year audit closes to conduct an after-action review where the parties discuss what worked and what could have gone better. This includes reviewing scoping documents closely to understand the factors that can drive fees or having more information ready before the auditors show up to begin their field work.

“Before we scheduled their work, I asked for a list of the information they thought they’d need,” says Jared Wasserman, controller of Alert Protective Services. “In the past, they told us when they’d be coming, and they’d start asking for information when they got here.

“I reversed that and said, ‘You’re not showing up until my team can pull the information you’re going to need,’ or at least have enough for them to get started. I don’t believe in wasting my time, and I don’t believe in wasting their time, so my goal is to always make sure that the audit is set up prior to them walking through our door.

“My goal is that at least 90 percent of paperwork that needs to be pulled is sorted and stacked just like you were the auditor. I prep like you’re going to audit your own items and lay it out for them, and you will reduce your fees overall.”

Another preparer says it’s vital to be involved with the auditor’s scoping and planning exercises and to discuss the potential effects of corporate events, such as mergers or accounting changes, on the ensuing audit.

“We’ll review which systems and locations are being pulled into their scope,” says a technology industry controller. “Given the growth of the company, some areas have grown larger than others, so we had a couple of areas that got pulled into scope last year that previously hadn’t been. We review with them how their scope is adjusted based on where the company has gone and will be going. One of our areas of focus, looking ahead to this coming year, is going to be how are they leveraging technology and automation to help reduce their fees?”

“I’m having the audit firm provide a much more detailed engagement letter in terms of hours and fees as opposed to what they did in the past,” says Wasserman. “I’m asking for detail by division and, within the divisions, what’s the scope of work being done.

“If you’re going to come back to me for an overrun, I want to know what division and what substantive testing required the extra hours, which comes back to start with an engagement letter that includes more detail, so I understand any overruns. That also lets them know I’m going to be holding them accountable at a much more finite level.”

An accounting project manager at an accelerated filer says internal audit teams with each of her company’s segments monitor reporting standards and review documents before they’re submitted to the company’s external auditors.

“We have specific standards that need to be followed, so those resources make sure everything’s in line,” the preparer says. “If there’s an issue that comes up, they make sure that we resolve it internally before it gets presented to [the auditor].”

For larger organizations, an important part of the planning process is understanding not only what work is going to be performed but where that work is going to take place.

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“If you’ve got a global firm, make sure they’re using their low-cost locations for the highest and best use,” says a controller in the financial services sector. “Also, make sure that all of the partners are talking to each other. They need to coordinate the lead engagement sign-off partner, the tax partner, the controls partner, the technology partner, and then all of the local partners in the jurisdictions that ultimately have to sign off on the local statutory accounts. You need to make sure they’re not forcing their audit team to retest things that have already been tested in the integrated audit.”

Standardizing processes at international locations can help reduce inconsistencies as well as the volume of testing auditors need to perform.

“Over half of our audit fees come from our international subsidiaries,” says Matt Janzaruk, finance and accounting director at Procter & Gamble. “We use common reporting formats in those locations as we work to make those processes more efficient and streamlined.”

Similarly, Janzaruk says P&G is working to reduce and consolidate the number of legal entities the company has outside the United States.

“We’re present in 80 countries around the world, so where we can centralize and synthesize that legal structure, we have fewer local audit requirements, and that reduces the total audit fee.”

A CFO at a private company says she sets aside time each month to review every general ledger account to make sure all of the company’s documentation is in order.

“That makes it easier to find information when the auditors request it, but also if there is something missing, I can track it down ahead of time,” she says. “We try to have the auditors come in December and do some preliminary questions. The fact that I’ve checked my work for the whole year before they start makes the whole audit go so much faster.”

The CFO says reviewing potential accounting issues throughout the year helps reduce the need to address routine questions during audit season peak periods.

“When there are questions and they’re answering those during audit time, that’s just us getting paid advice from them, and it gets buried in the audit fee. If I need advice on how to handle something mid-year, I go ahead and ask them. Even though I’m still paying the same amount, it’s not really part of the audit fee. It’s just getting accounting advice. That helps eliminate surprises when the audit’s done and it’s higher than you expected because you needed general accounting advice.”

As part of the planning process, preparers suggest trying to get as many of the same audit firm’s staffers back as possible.

“We always ask that they try to bring the same teams back so there’s continuity on the audit,” says Theodoracopoulos. “We try to have as much continuity as possible at our divisional finance teams, and we find that continuity on both the audit and divisional finance teams is one of the best ways to keep audit fees from increasing.”

“When you have staff turnover, you lose the historical knowledge of what the auditors are looking for, along with what’s changed or happened within the company, so that has a tendency to also generate additional work for both sides,” says a food industry CFO.

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Taking on More WorkAnother common strategy to mitigate audit fee increases that several respondents cite is expanding internal staffs or enlisting other resources to take on work they formerly relied on their auditors to perform.

For instance, a financial industry preparer says his organization has taken on 500 to 700 hours of work using a combination of team members and interns to perform audit-related work.

“As we’ve come under cost pressure in the last few years, we’ve taken advantage of labor rate arbitrage,” he says. “The fully loaded cost of the people I use is probably no greater, at most, than $45 an hour. And the incremental rate our auditor charges for an hour of work on the stuff we’re doing is in the $135–$150 range.

“We’ve told them, we’ll take on everything that they’re willing to give us. I’ve told our CFO that if they’re willing to give us more, and I can’t accommodate it, it’s cheaper for us to hire additional people than it is to pay them.”

“If there’s an analysis they’re interested in, such as revenue or AP fluctuations, we now do that for them,” says an energy sector CAO. “We take their templates and give the information the way they want it, so they have to do very little work. They’re basically reviewing data. They’re not preparing any audit work papers. We try to use their same sample methodology and sizes so that we can eliminate their work.”

The food industry CFO says his organization has taken on more information preparation, such as schedules and roll-forward balances, to help reduce the auditor’s billable hours.

“I think that helped us as a client to take on more responsibility,” he says. “We have a better understanding of what the auditors are really getting at and looking for, and for the auditors, it took some of the administrative burden away from them.”

Preparers agree that auditors, in general terms, are more willing to let clients assume work in lower-risk areas.

“In an area like cash, we could basically do everything but test it for them,” says the food industry CFO. “There were other areas they would define as high risk, such as if there weren’t much in the way of internal controls or an error or misstatement was at a high likelihood or there was a materials balance involved.”

In some instances, preparers have to encourage auditors to rely more on the organization’s systems to reduce the volume of testing they perform.

“We’ve never had a bad debt write off. We sell to A-rated customers, and it’s all system-automated,” the energy sector CAO says. “That system talks to our billing system, which bills based on the contracts that are tested and entered in the system correctly at pricing. But the auditors were still confirming basically 100 percent of accounts receivable and 100 percent of revenue, and they were not relying on our internal controls at all. They were sending our customers letters asking to confirm amounts. Well, you can see they’ve paid it.”

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Collaborating With AuditorsAnother key preparers mention is meeting regularly with auditors, usually at least quarterly, to update auditors on planned or recent organizational developments, discuss potential issues, and resolve any questions outside of the year-end rush.

“We have a very healthy relationship with our auditor, and first and foremost, you have to be upfront with them and view them as a business partner,” says the tech industry controller. “It doesn’t do anybody good to delay conversations, so engaging them early when issues come up is key.

“We always have a meeting with our external auditors before close to walk them through what we feel are the significant accounting items they may have to deal with or may want to know about, so they can plan and staff accordingly. By avoiding surprises on both sides, it helps to manage the audit, and that, in turn, helps keep audit fees down.”

One preparer says his company’s local teams meet with their counterparts from the external auditor to review the prior year’s billings, potential efficiencies, and the cost impact of any standards issued in the previous year. These discussions are followed by meetings at the corporate level before senior accounting leaders review the proposed budget with the audit committee.

“We understand they have to provide a quality audit, but we want to review those costs and work together to complete that audit efficiently,” he says.

“When there are new standards or there has been an M&A transaction, we talk about the potential work and fee increases associated with that,” another preparer says. “We also look for productivity improvements we can leverage to reduce fees, so it’s a balanced conversation.”

P&G’s Janzaruk says his company understands that one-off events, such as the passage of U.S. tax reform legislation in late 2017, will affect audit fees, but the company collaborates with its auditors to understand the cost implications of unplanned circumstances.

“I think in the past we were deferential on one-time audit fee proposals,” Janzaruk says. “We’re taking that dialogue to the next level to make sure that we really understand it. Are there things that we can do on the P&G side to reduce the heavy lifting that they’re assuming so that we can really make sure we rightsize that work?”

“We’ve been really trying hard to work with our clients to increase collaboration between the company, internal audit, and external auditors, and that certainly yields benefits,” says Chris Jeffrey, central region risk, internal audit, and cybersecurity consulting leader with Baker Tilly.

“It’s really about making sure that everybody is looking at things in the same way and everybody’s collaborating with their auditors to understand what the company’s doing, and the company understands what the auditors expect,” Jeffrey says. “We want to prevent surprises so we can march forward with the same understanding, versus getting to December and the auditors don’t understand or agree with what the company’s done. That causes confusion, it causes additional costs, and it causes a lot of angst for the company and the auditors.”

“Auditors need to step back and design an appropriate audit so it’s focused on the areas of greatest risk,” says EisnerAmper’s Frank. “I think the days of just doing an audit, using status quo methodology, are gone. There’s too much scrutiny in terms of being efficient and effective during an audit. If it’s a public company audit, having oversight from the PCAOB, there’s a risk of not designing an appropriate audit, so there’s a focus on the key things that may be problematic for the audit firm. Audit firms need to take the appropriate amount of time to prepare and design an effective audit so it’s tailored and focused on the key risks of the financial statements.

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“In designing the audit, you’re going to need to have input from the client because you’re going to have to understand how the client’s business and organization is changing and understand the types of transactions your client is engaged in. An area that might not have been relevant the prior year may become extremely relevant in the current year, based on facts and circumstances. You have to communicate with your client about the areas of focus for the audit.”

The financial industry preparer recommends discussing your expectations and your willingness to collaborate with your external auditor.

“I think one of the things we do well with them is we just tell them we’re not willing to pay more than this amount for the audit, but we’re willing to be a partner with them in how they get to that number,” he says.

“That’s how we got to where my team took on more work and avoided making the relationship adversarial. We’ve been able to keep it as a win-win, to an extent. That doesn’t mean we’re always happy with them, and I’m sure that they’re not always happy with us, but I do think we’ve been able to keep it in a positive realm.”

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Expanding AutomationAutomation is continuing its expansion in the core operations of finance teams interested in increasing their effectiveness and efficiency. While mostly being adopted or piloted by larger organizations, tools such as robotic process automation (RPA) and artificial intelligence (AI) are starting to help finance teams increase efficiency and enhance their internal controls.

Companies are automating basic functions such as balance sheet reconciliation, whereby a robot does some of the matching between ledgers and subledgers, instead of a person doing that manually.

Similarly, the movement of data from a core system into a reporting system — which would typically be done by copying data from an application and pasting it into a spreadsheet — is being automated in a growing number of companies.

“We have a number of programs in production to automate routine closing processes, such as items like fixed asset accounting or company elimination activities in the consolidation process,” says P&G’s” Janzaruk. “We used to have manual touchpoints that are now fully automated.”

Other functions suitable to artificial intelligence include balance sheet reconciliations to identify patterns that would otherwise be invisible to a human or compiling data from several sources as part of the financial close process.

The controller in the financial services industry expects automation to increase his company’s audit fees in the short term as the technology is validated, before leading to longer-term cost reductions.

“In many ways, cost-effectiveness is going to come once the technology reaches a steady state. I’m of the view that in the year you put a lot of robotics in, the firms may actually have more to audit as they get comfortable with an automated accounting environment. It becomes an efficiency play after that.”

An accounting and finance VP said his organization has automated the pricing process for intercompany sales between divisions to improve consistency. The next steps are to document how those intercompany transactions affect the inventory valuation process used by the divisions and to improve communication with the external audit staff, which should reduce the amount of manual price testing auditors have to perform.

“If there is inconsistent data between the divisions, that increases the auditor’s on-site and follow-up time, and that extra work means extra cost,” he says. “In price testing, the auditors extrapolate one error against your entire population of inventory. If they find one $6,000 mistake, they extrapolate and say it’s $1 million. We understand and agree with the concept of sample testing and then using those results to project a potential error rate.

“However, the core issue is a lack of understanding by the audit staff of the business processes in place for intercompany activity and how that activity feeds into the process of inventory valuation. That lack of understanding then leads to time spent refuting the results due to a flaw in the substantive testing process, while simultaneously trying to avoid the auditor’s follow-up request for pulling additional samples, which can take multiple days on behalf of our internal accounting staff and the audit staff.”

Preparers involved with automation say it’s critical to optimize any process you’re interested in automating.

“What we learned the hard way is you have to streamline the process before you put a robot on it,” the financial services controller said. “You never want to put a robot on something that’s already broken. Before a process is a good candidate for automation, it’s got to be streamlined to the extent that’s possible.”

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Similarly, each step in the process needs to be documented carefully, and robust controls need to be installed so the team’s human management — and their auditors — can understand and monitor the robots’ activities.

“They’re looking at the documentation and controls we have in place,” the financial services controller continues. “Where do we have it coded for the robots to email you when they’re done or if they get stuck? How are we generating log files? There are lots of different things you can do to make sure a process is completed properly.

“They want to look at the controls we put in when we put in a robot to do the work. If you think about it, we have robots that are logging into bank accounts and bringing in bank data to our balance sheet reconciliation team. They are provisioned users of our systems, so there’s IT general controls and user access controls you have to be careful about.”

The tech sector controller says they’re working on deploying proof-of-concept bots within finance and accounting, including the appropriate governance structure, templates, and techniques.

“As we understand the best processes that offer automation opportunities, we’ll determine the ROI and then develop bots within those processes. This is a finance-led project, but we have intentionally involved the other support groups. We have HR, IT, legal involved, and we are starting to get interest from some of the operational functions.”

While a growing number of preparers are embracing automation, those pioneers remain a distinct minority. RPA and AI are common topics at accounting conferences, but the majority of registrants are waiting for the technology to mature and gain broader adoption.

“Our experience as a company with automation is that the ease of use of that technology is a little bit oversold,” says the financial industry preparer. “There are people looking to automate certain processes, but we believe that we have greater opportunities in other areas of the company. I am not going to be cutting edge. It’s not because I don’t get it or I wouldn’t want to be cutting edge. I don’t have the resources to be cutting edge.”

Audit firms say the growing use of technology will likely lead to more comprehensive engagements that enhance registrants’ risk management processes.

“We’re using data analytics to look for anomalies in different areas of risk, such as fraud risk or revenue recognition areas,” says EisnerAmper’s Ravi. “That’s coming up now with robotics process automation and assessing risk. It’s key to be able to take the whole data set and look through it to see where you think you should spend time. Maybe we can look at the sample set in a way where we could test 100 percent of the sample and the control in an automated way so there’s less manual effort in trying to pull the data and manipulate it to get to the end state where we can look for risk.

“It’s not broad-based right now, but as clients and auditors deploy tools and can leverage each other’s technology, we’ll develop an integrated automated audit approach. That’s where I think we’re going to end up, because everybody’s talking about it.”

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Monitor the Audit Progress Several preparers also discuss the importance of paying attention to the work your auditors are conducting while they’re visiting your facility. Knowing what they’re working on, while they’re working on it, can help improve the preparer’s ability to provide any information the auditors may need while also reducing the chance of the auditors exploring new avenues.

“You have to stay cognizant of what they’re working on and whether it’s directly related to any issues they find,” one preparer says. “I see scope creep, not because they’ve found something that requires more substantive work but because they’re working on an analysis in an immaterial area. You have to work closely with them to prevent an inefficient use of their time.”

“I always check on them at least three times a day,” says Wasserman of Alert Protective Services. “I think that gives them a set goal of what they have to do. I don’t let them dictate my schedule. By the end of the day, I always let them know, ‘Listen, my day’s about to wrap up,’ and I give them the specific time I need them to be out of there. That tells them they should be using their time on site effectively.”

Preparers say it’s important for company management and the audit team to have conversations about each other’s contributions to the process and their mutual expectations.

“Our audit committee is laser-focused on their fees, and they continually challenge them to make sure they’re doing the audit in the most efficient and effective way,” says the financial services controller.

“The biggest challenge I have is trying to understand where there are overruns from what we took to the audit committee for approval at the beginning of the year,” he continues. “There are a variety of reasons why you could have overruns, and I think every company does, but it’s trying to contain those and understand why it took longer than what they thought when they were putting their audit plan together.”

“We understand that this is a partnership, and we want them to get fair rates,” says the financial industry preparer. “Our frustration is I don’t think their audit is terribly efficient. We deliver 98 percent of our testing on time, and we have very little rework. We feel like we hold up our end of the bargain.”

“With the fee pressures, it’s becoming more and more paramount for the firms to become more efficient in the way they conduct their audits and explore technology or change their approach to be more efficient,” says Frank. “It has to be done, otherwise it’s going to become next to impossible to remain relevant and compete.”

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Finding the Right Firm Several respondents also describe the importance of aligning your company with an external auditor attuned to the company’s size and needs. Accelerated filers, for instance, probably need the resources and reputation of a Big Four audit firm, while a closely held private company may be better suited with a local or regional firm.

“I could appreciate the pressures they were under from the PCAOB, and it felt like they probably had a higher preponderance of public clients than non-public clients that dominated their perception of how to audit everyone,” says one private company CFO who changed from a Big Four to a Top 10 firm. “We thought, ‘We should look at how the non-Big Four firms look at things.’ It felt like we were under a microscope beyond what was normal or called for. Don’t be bashful about trying to find the right fit for you.”

“I am a strong advocate, being an ex-auditor with a Big Four firm, that audits do not add value to a company, and finding the most efficient brand name for what you need is very important,” says the food industry CFO. “I guess that’s a nice way of saying find the cheapest audit for whatever you need, because you’re not going to get much out of it other than the certification that the financials are accurate.”

“There’s a competitive landscape where you have to differentiate yourself,” says Ravi. “The biggest challenge many firms have is explaining what value clients are going to get for the value they’re paying us. Everybody wants a good audit, but they also want to know what kind of insights you’re going to provide as well. It’s going beyond financial reporting and controls to consider operational risk and what we can help the clients do better.”

Several preparers also say it’s a good idea for registrants to explore the market periodically to see if a different firm can meet your needs or if your current firm is willing to show some flexibility about its hours or rates.

“I think it’s good governance to go out every five to seven years and do a bid,” says the energy sector CAO. “You should ask: Is this still the right firm? Are they providing the most value? It’s not like you have to change. You have your incumbent in, but at least it puts them on notice that you’re looking, and it reminds them that you have a choice.”

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SECTION 4: RESPONDENT DEMOGRAPHICS Respondents by Industry


Advertising Services 1 3

Aerospace & Defense 1 1

Agriculture - Mining and Construction 2

Construction 1 6

Contact Centers and Services 1

Consumer Products 1

Distribution 1

Education - Primary or Secondary 1

Energy - Oil, Gas, Solar, Other 3 2

Engineering 1

Entertainment Services 1

Financial Services - All Others Except Insurance 1 9

Financial Services - Asset Management 1 1

Financial Services - Banking 7 9

Financial Services - Investment Banking 1

Food Service 1

Franchising 1

Government 1

Healthcare - Life Sciences 8 1

Healthcare - Medical Devices 1

Healthcare – Pharmaceuticals 3 4

Healthcare - Providers, Services 1 5

Insurance 4 6

IT Service Providers 2

Manufacturing - Discrete 6 12

Manufacturing - Process 13 24

Market Research and Technology 1

Media 1

Membership Organization 1

Merchant Services 2

Nonprofit Organizations 23

Process Flow Instrumentation 1

Professional Services - Other than IT 2 12

Real Estate 1 1

Retail - All Others 4 4

Retail - Hotels, Restaurants 2 1

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Security Services 2

Software - Publishers or Developers 2 16

Telecommunications 1

Transportation 1

Utilities 1 1 1

Wholesale Distribution 7

Wood Products Manufacturing and Distribution 1

Respondents by Revenue


Less than $5M 5 3 2

$5-24.9M 4 17 9

$25-99.9M 3 40 3

$100-499.9M 4 34 6

$500-999.9M 7 9 2

$1-4.9B 16 7

$5-14.9B 13

$15-24.9B 6

$25-49.9B 4

More than $50B 10

Primary Audit Firms Cited by Respondents (Survey Data)

All Public

Large Accelerated

Accelerated

Non-Accelerated

Foreign Issuer Private

Non- Profit

BDO 1 1 11 1

Crowe 3

Deloitte 13 10 1 1 1 4 2

EY 11 10 1 6

Grant Thornton 2 2 1 1

KPMG 17 17 5

MossAdams 5 1

PwC 30 24 5 1 7

RSM 1 1 11

Other firms mentioned: AAFCPAs; Accuity LLP; Aldrich CPAs; Aprio; Armanino; BakerTilly; BKD LLP; Bonadio & Co.; BPM; BSGM; Carr, Riggs & Ingram; CBIZ Kreston; Cherry Bekaert; Cherry Bekaert; Citrin Cooperman; CLA ; Clark Nuber PS; Cohen & Company; CohnReznick; DeJoy, Knauf & Blood; Delap CPA; Dixon Hughes Goodman LLP; EisnerAmper; EKS&H; FGMK; Fisher Herbst & Kemble; Fox, Byrd & Company; Gilbert Associates; Gilmore Jasion Mahler; Gumbiner Savett Inc.; HBK CPAs; Henry+Horne; Hood Strong; Jack W. Olds & Company, LLP ; Johnson Lambert; KBF; Lane Gorman Trubitt LLC; LBMC; Leaf & Cole, LLP; Lutz and Carr; Marks Paneth LLP; Marston Group; Maxwell Locke & Ritter; Mayer Hoffman McCann P.C.; MCG; McGowan Guntermann; Mcm; Mowery & Schoenfeld; Payne & Smith LLC; Plante Moran; Ramachandran & Murali; RBSM LLP; Rylander, Clay and Opitz; Sauvigne & Company LLP; Schenck SC; Sisterson & Co.LLP; Squar Milner; Walthall Rea; Weinstein Spira; Whitley Penn; Wipfli LLP

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INTERVIEWEESAlan Frank Partner, EisnerAmper

Matt Janzaruk Finance and Accounting Director, Procter & Gamble

Chris Jeffrey Central Region Risk, Internal Audit and Cybersecurity Consulting Leader, Baker Tilly

Jerry Ravi Partner, EisnerAmper

Dino Theodoracopoulos Assistant Controller, L3 Technologies

Anthony Verkruyse CFO, Specialty Steel Works, Inc.

Jared Wasserman Controller, Alert Protective Services

(Eight finance and accounting leaders requested anonymity.)

ABOUT FERF

The Financial Education & Research Foundation (FERF) is the nonprofit 501(c)(3) research affiliate of Financial Executives International (FEI). FERF researchers identify key financial issues and develop impartial, timely research reports for FEI members and nonmembers alike, in a variety of publication formats. FERF relies primarily on voluntary tax-deductible contributions from corporations and individuals. FERF publications can be ordered by logging onto ferf.org

ABOUT WORKIVA

Workiva is a leading provider of enterprise cloud solutions for data collaboration, reporting, and compliance. More than 3,000 organizations worldwide, including companies of all sizes, government agencies, and educational institutions, trust our cloud platform to improve productivity, connect data, and gain confidence in their data-driven decisions. For more information about Workiva (NYSE:WK), please visit workiva.com

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ABOUT IDACITI

idaciti was founded by a team passionate about financial analysis and reporting who wanted to provide financial professionals with a modern software solution to solve their biggest challenges. The company founders realized that financial professionals needed a tool to make accessing, analyzing and visualizing financial and non-financial data easier and more intuitive. By using XBRL to parse public records, idaciti is able to provide this data and then makes it possible for users to visualize the data they discover on the platform to build clear and compelling reports.



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FERF SUPPORTERSFinancial Education & Research Foundation (FERF) gratefully acknowledges the following companies for their support and generosity.

PLATINUM MAJOR GIFTS$60,000 Microsoft Corporation

$40,000 Exxon Mobil Corporation

$20,000 Bank of America

GOLD PRESIDENT’S CIRCLE$10,000 – $14,999

Cisco Systems Inc.

Dow Chemical Co.

General Electric Co.

Johnson & Johnson

Wells Fargo

SILVER PRESIDENT’S CIRCLE$5,000 – $9,999

Accenture LLP

Aetna, Inc.

Apple, Inc.

Bausch Health Companies

The Boeing Company

Comcast Corporation

Corning Incorporated

Cummins Inc.

Dell, Inc.

DuPont

Eli Lilly and Company

General Motors

IBM Corporation

Lockheed Martin Corp.

McDonald’s Corporation

Motorola Solutions, Inc.

PepsiCo, Inc.

Pfizer Inc.

Procter & Gamble Co.

Select Medical Corp.

Tenneco

International

Walmart Stores, Inc.

Documents

2018 AUDIT FEE SURVEY REPORT - Workiva...2018/12/04 · The 2018 Audit Fee Survey report shows comparatively modest increases in audit fees, with public companies reporting a median