Audit fees declined for 25 large companies in 2005, the second-year of Sarbanes Oxley Act compliance for accelerated filers. That’s in sharp contrast to first-year experiences for these big companies, which were pummeled by skyrocketing audit fees. In some cases, audit fees rose by 70 percent between 2003 and 2004.
Four companies — Aflac, BellSouth, Johnson & Johnson, and Motorola — cited a drop in fees related to Sarbox Section 404 compliance as the reason for the overall decrease in their 2005 fees. Section 404 is the provision of Sarbox that requires companies to test and maintain adequate controls over their financial reporting systems and procedures. It also requires that auditors attest that their client’s financial controls are adequate.
The new data, released by Compliance Week on Tuesday, examines the proxy statements of 47 companies with more than $1 billion in annual revenues and a December 31 fiscal-year end. In aggregate, the companies registered a 0.6 percent dip in audit and audit-related fees, and a 7.4 percent drop in total fees, which include payouts for tax work and other bookkeeping services.
It’s too soon to tell what the final count will reveal, says Compliance Week editor Scott Cohen, since the first survey includes few of the more than 1,000 public companies that meet the study’s inclusion criteria. However, the early results indicate that the chronic complaints about the cost of Sarbox may be overstated (see chart). In addition, the results suggest that year-one compliance efforts created second-year efficiencies for some companies, which is what the Big Four auditors predicted.
For instance, insurance company Aflac had the largest drop in audit and audit-related fees, reducing their KPMG bill from $5.3 million in 2004 to $4 million in 2005. Meanwhile, oil giant Sunoco saw its payment to Ernst & Young drop from $8.1 million to $6.4 million, and Merck and Co. reduced PricewaterhouseCooper’s fee to $14.2 million in 2005, after paying the audit firm $17.5 million the prior year.
Still, plenty of companies have reason to continue grumbling about rising fees. The remaining 22 companies in the study recorded increases in audit fees. Most notably, Agilent Technologies jumped 72 percent in year-over-year payments, forking over $7.5 million in fees to PwC in 2005. Clear Channel Communications and The Bank of New York also saw audit fee rise by 40.5 percent and 21 percent respectively. Clear Channel paid E&Y $11.8 million in 2005, while The Bank of New York shelled out about $10 million to the same auditor.
The decline in fees is larger when total fees are considered. Thirty-one of the surveyed companies noted a decline in total fees. American Electric Power Co. led the way, dropping total fees by 42 percent in 2005, and paying $14.6 million. Chemical maker Rohm & Haas, as well as Aflac, also recorded significant decreases, falling 26 and 23 percent respectively. Rohm and Haas paid out a total of $6.7 million, and Aflac shelled out about $4.1 million.
|Biggest Decreases in Audit Fees, 2005|
|Company||2005 Audit Fees, $||Year-to-Year Change, %||2005 Fees as % of Revenue|
|American Electric Power||13,481,610||-18.9||0.12|
|Rohm & Haas||6,218,000||-18.4||0.08|
|Source: Compliance Week|