Fractured Fraternity

Oh for the days when auditors were counselors and not pricey overseers.

Morrow believes second-year fees for 404 work will probably come in at about 70 percent of first-year fees. But all major firms continue to raise their hourly rates. Field-level or engagement partners now routinely bill $250 per hour for their work, with national partners getting as much as $1,000 per hour.

Auditors don’t apologize for the pricing, insisting that hourly rates reflect higher costs. PwC’s Breen notes that the threat of litigation has forced the top firms to spend more on settlements, insurance, and lawyers. Labor costs have also increased, fueled by a yawning shortage of trained accountants. The AICPA’s Kueppers says clients and regulators — even the PCAOB — are draining the talent pool. “The capacity issue won’t be resolved within the next couple of years,” predicts McGladrey & Pullen’s Travis. “With the shortage, companies should not expect to see declines or even stable [overall] pricing in the near future.”

Because They Can

This prognosis won’t likely thrill finance managers. Davey Tree’s Adante says the company’s audit fees doubled last year. While 404 fees were a big part of that, Adante also points out that the company’s outside auditor increased its hourly rate by 10 percent. “Our audit firm came in and said that its targeted hourly billing rate was $50 more per hour than what we had been paying,” he recalls. “We were pretty much dictated to.”

His comment underscores another reason top-tier firms keep boosting fees: because they can. The value of thorough audits has never been higher. And while perceptions about second-tier firms are changing, many still believe investors are more comfortable with a Big Four imprimatur on a financial statement.

Hence, CFOs at many publicly traded companies seem resigned to sticking with their current auditor — and getting socked with supersized bills. Says Michael McGee, CFO at International Rectifier, in El Segundo, California: “Audit staff and audit partners are subject to the laws of supply and demand.” And right now, McGee adds, “they’re in demand.”

That demand may ease during the second year of 404 compliance, as auditors and their clients get used to the regulatory drill. And some CFOs insist the PCAOB’s May 16 guidance will ease the pressures felt by audit firms. But as BDO Seidman’s Kolins points out, it’s still unclear what constitutes acceptable judgment. “Accountants do not have a free ride on the use of judgment,” he says. “Regulators will determine [what's appropriate].” He pauses. “It’s still not business as usual as far as advice given to clients.”

Indeed, the AICPA’s Morrow thinks CFOs may just have to get used to a much more formal relationship with their auditors. “It’s a matter of getting used to the new normal,” he says.

Many prefer the old normal. “Before, we had a valued adviser, a valued friend,” laments Wall. “And then all of a sudden, they’re not there. We miss the old guys.”

John Goff is technology editor of CFO.


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