That has now changed markedly. “We have seen price competition return in 2007 and 2008,” observes Whisenant. Not only have fees been falling, but they have fallen for companies of all sizes, including those not directly affected by 404. Companies with revenues between $100 million and $250 million saw an average 8% drop in fees from 2007 to 2008, while those with revenues of $250 million to $500 million saw them drop 5%, according to a CFO analysis of data provided by Audit Analytics (see “Fees Fall Everywhere,” below).
Chalk up much of that change to a long-delayed reaction to the fee transparency ushered in by the SEC’s 2000 decree. When fee disclosure was first proposed, some experts theorized that it would actually result in higher fees, in that audit firms would no longer offer a discount in the early years of an engagement to win new clients. On the contrary, says Whisenant, “fee disclosure probably gave auditors more information to underbid existing audits.”
But, he adds, it now appears that the larger impact of price transparency is its potential to help clients control their costs once an engagement is under way. “After the second or third year, when the fee starts to revert to a normal level, then the clients have the advantage, because they can start benchmarking.”
In other words, clients are wising up to initial discounting and are leveraging the new transparency not only to help select a new auditor, but to rebuff fee increases in subsequent years.
While Sarbox may have been a windfall for auditors in its early days, it is actually driving fees down now for several reasons. Fee disclosure was intended to shed light on potential conflicts when auditors acted as consultants, but Sarbox went further and outlawed many types of auditor consulting altogether. It also emphasized a relatively straightforward “check-the-box” review of controls. Both aspects of the law make it harder for audit firms to differentiate their services.
“Let’s face it,” says Eric Davis, CFO of SunOpta, “auditing, especially within the Big Four, is a bit of a commodity right now, as long as you’ve got a firm that has the scale and scope to handle your needs.”
SunOpta, a client of PricewaterhouseCoopers (and Coopers & Lybrand) since 1975, switched to Deloitte & Touche at the end of 2008. Davis says the natural and organic food company suspected the fees it was paying PwC were “really at the high end.” The company initially asked PwC to provide a fee benchmark and then, based on the results, decided to take a harder, independent look at its fees. “That’s when we realized that, hey, we are overpaying these guys for what we’re getting and we should put it out to tender,” Davis says.
Publicly traded companies alone spent $16 billion on audit and audit-related fees in 2008, with nearly 7,000 companies paying more than $100,000 each year, and 2,585 paying more than $1 million, according to CFO’s analysis of data from Audit Analytics. Little surprise, then, that half of all CFOs now say they regularly (at least every two years) benchmark what their company pays its external auditor against what their peers pay, according to the latest Duke University/CFO Magazine Global Business Outlook Survey.