At the top of the list of future audit-cost drivers are fair-value issues, say CFOs: 37 percent of survey respondents said fair-value accounting standards like FAS 157 and FAS 159 would be most likely to raise the price of their company’s audit in the next year. A short supply of audit staff and a possible new format for financial statements also ranked as areas that will increase costs.
The Effect of AS5
One measure that many hoped would reduce costs significantly was Auditing Standard No. 5, issued in July 2007 by the Public Company Accounting Oversight Board (PCAOB). AS5 instructs accounting firms to take a more selective, risk-based approach to audits. But although the standard has helped matters (along with a similar Securities and Exchange Commission interpretation), it has hardly been revolutionary.
“AS5 hasn’t resulted in the change a lot of us expected,” says PG&E’s Johns. In fact, a majority of finance chiefs surveyed by CFO — 64 percent — say they have seen no audit changes at all as a result of the new standard.
Still, a third of CFOs report that auditors have narrowed their scope at least somewhat thanks to AS5. That’s confirmed by Robert Kueppers, deputy CEO at Deloitte, who says AS5 has reduced Deloitte’s time on engagements and enabled the firm “to hold the line on audit costs.”
At Johnson Controls, McDonald has been one of the lucky few to see a significant impact: “The adoption of AS5 and the risk-based approach resulted in probably about a 20 percent reduction for us in the cost of compliance with Section 404 [which mandates documentation and testing of internal controls]. The auditors have been able to step back and look at something like our petty-cash controls and say, ‘That’s not going to lead to a significant financial-reporting problem.’”
Ackerman of Charles River says he was skeptical about whether auditors would really take AS5 to heart and scale back the scope of their audits. “It seemed like they might have a hard time moving away from entrenched practices,” he says. But Charles River has benefited from the new standard: its audit fees came down more than 15 percent in 2007 from 2006. “Once AS5 was written down, it gave audit firms something to lean on,” says Ackerman. Auditors used to include 90 percent of the company’s global locations for either complete or limited testing, but last year fewer locations were scrutinized. “The approach was more risk-based, taking into consideration the work we do at each of the different locations,” says Ackerman.
Jonathan Mason, CFO of specialty chemical maker Cabot Corp., views AS5 as “a step in the right direction.” He says the company’s auditors are making a greater effort to identify significant controls and examine those areas thoroughly. External auditors are also relying more on the internal auditors’ efforts, he adds. “The auditors are not going to write an opinion based on internal audit’s work, but they can get comfort on some of the less critical areas,” says Mason. This marks a significant shift from the early Sarbox days, when external auditors couldn’t consider internal audit’s work, because of a mandate that external auditors conduct testing on all material items. Ackerman also notes that there is now a greater reliance on testing done by the internal-audit staff than in the past, and says this has been a major factor in reducing Charles River’s audit costs.