Big Four Audit Firms Feel the Effects of Post SOX Inroads As Audit
Fees Skyrocket
The Corporate Library today has released summary findings from its
seminal study of the changes in the audit industry post Sarbanes-
Oxley. In-depth analysis and data underlying these findings can be
found in the full report.
A summation of the post Sarbanes-Oxley macro-changes to the audit
industry are described by Paul Hodgson in this excerpt from "The
Audit Landscape: 2001-2007" conclusion:
"During the period under study, there has been a revolution not only
in the type of tasks performed by outside auditors, but also in the
fees charged for those tasks. The substantial consultancy projects
that companies commonly commissioned are no longer part of the
outside auditor's responsibilities, although many of the firms, of
course, still provide such services, just not to the same clients to
whom they are providing audit services. In addition, the outside
audit itself has changed dramatically, taking into account much more
internal control testing and compliance work than it did pre-2002.
The revolution in fees has mirrored this change in the type of work.
We have witnessed a major shift from 'other costs' to audit and
audit-related fees, as well as substantial increases in pure audit
costs."
In addition to the enormous change in the make-up of audit costs,
the report also tracked dramatic changes in the audit market during
the 2001-2007 survey period. Along with the disappearance of Arthur
Andersen, there has been an invasion of the Big Four's market share
by smaller accountancy firms. Off the 3,140 companies tracked, the
analysis found that the number of non-Big Four audit firms servicing
these companies increased by more than a thousand percent from nine
non-Big Four firms in 2001 to 91 in 2006. In addition, the non-Big
Four firms more than doubled their market share over this period.
The growth in firms may in part be due to the enormous increase in
revenue opportunities for audit services.
"While the aggregate data presented some fairly outstanding figures -
- with an average increase in audit fees of 756 percent between 2001
and 2006 -- digging deeper into the data on individual companies can
produce some even more startling findings," commented Paul Hodgson,
Senior Research Associate at The Corporate Library and author of the
report. For example, research found that General Electric received
the distinction of being the firm with the highest audit costs in
2006, with total fees exceeding $115 million (see table below for
details). The company has been jockeying for position with General
Motors for highest audit costs over the survey period.
Highest Total Auditor Costs 2001-2006 (Source: The Corporate
Library/Company Filings)
Audit fees as
a percentage
Total auditor of total
Year Company costs auditor costs Auditor
----- ----------------- ----------------- -------------- -----------
------
2006 General Electric $ 115,400,000 92.2% KPMG
----- ----------------- ----------------- -------------- -----------
------
2005 General Electric $ 109,200,000 92.3% KPMG
----- ----------------- ----------------- -------------- -----------
------
2004 General Electric $ 102,600,000 91.3% KPMG
----- ----------------- ----------------- -------------- -----------
------
2003 General Motors $ 92,000,000 61.9% Deloitte &
Touche
----- ----------------- ----------------- -------------- -----------
------
2002 General Motors $ 156,000,000 16% Deloitte &
Touche
----- ----------------- ----------------- -------------- -----------
------
2001 General Motors $ 102,000,000 20.6% Deloitte &
Touche
----- ----------------- ----------------- -------------- -----------
------
Additional highlights from "The Audit Landscape: 2001-2007":
-- In 2006 one of the smaller firms -- Crowe Chizek -- audited more
financial services firms than Ernst & Young and the same
proportion as
PricewaterhouseCoopers.
-- Despite incursions into market share, the Big Four continues to
dominate more than 95 percent of the large accelerated filer
market.
-- Auditor churn rate has dropped considerably in recent years.
-- The demise of Arthur Andersen equally benefited the Big Four
firms,
with some of those firms taking industry sector dominance as a
result of
the change.
-- The median increase in audit fees between 2001 and 2006 was
345.68
percent, with the largest increases seen between fiscal 2003 and
2004.
-- Median total auditor costs rose from $1,420,000 in 2001 to
$2,741,087
in 2006.
-- Total fees paid to auditors for the matched sample of companies
were
$6.8 billion in 2006, compared to $5.8 billion in 2001.
About the Audit Landscape Report:
"The Audit Landscape: 2001-2007" is based on over 240,000 pieces of
data, spans more than six years, covers over 3,000 public companies,
and includes more than 100 audit firms.
The special report presents matched sample analyses -- covering the
same group of 1,293 companies in each of the six years -- for each
set of data points, as well as whole sample analyses of 1,500 to
3,139 companies.
The study presents in-depth analysis and extensive detail on topics
such as:
-- the escalating cost of auditing companies since the enactment of
the
Sarbanes-Oxley Act of 2002 (SOX);
-- the change in the makeup of total audit costs since SOX;
-- the decline in the costs associated with other services provided
by
independent audit firms;
-- which years saw increases in audit fees outpacing the increase in
total auditor costs;
-- the influence industry has on auditing costs;
-- the changing market share of the Big Four accounting firms and
the
many smaller firms that have entered the market;
-- how smaller firms are making inroads into the Big Four's market
share;
-- where Arthur Andersen's former clients went;
-- which firms dominate the S&P 500;
-- which firms audit the largest market share of certain industry
groups;
-- median tenure for audit firms;
-- explanations for auditor changes; and
-- the influence of a company's employee headcount on audit costs.
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