Included in the Toolkit’s checklist of questions audit committees should ask: “Was the fee fair and reasonable in relation to what audit committees know about fees charged to other companies, and in line with fee benchmarking data the audit committee might have available to it?”
How Low Should You Go?
Of course, neither CFOs nor audit committees should simply seek the lowest possible cost. While recent trends suggest that now is a good time to benchmark audit fees, that doesn’t mean lowballing your auditor is a good idea. “You have to be careful that you don’t put so much pressure on your auditors that they underaudit,” notes the University of Houston’s Whisenant.
Unusually low or high fees both can signal trouble: weak audits for the former and potential conflicts of interest for the latter. “Companies paying the highest fees [may do so to gain] more flexibility and aggression in accounting,” says Whisenant. He has done studies that suggest that fees that are unexpectedly high or low “can both lead to conditions where the shareholders do not benefit.”
Take, as an extreme case, Fannie Mae, which in 2003 paid a surprisingly low $2.7 million for its audit by KPMG. An accounting scandal the following year subsequently caused the company’s audit bill to soar to $203 million (paid to Deloitte & Touche after KPMG was dismissed).
More recently, in building its case against David Friehling, auditor of Bernie Madoff’s Ponzi scheme, the SEC charged him with raking in “substantial fees.” But, in fact, the opposite is true: that Madoff’s multi-billion-dollar fund paid the tiny audit firm of Friehling & Horowitz a mere $186,000 per year should have been a glaring red flag.
CFOs love to control costs, but when it comes to audits, they also want to make sure they are getting the most they can out of their auditor. Itkin says OSG’s RFP was initially driven by a cost-reduction strategy, but proved “most effective” in securing more services.
Among the services Itkin says he negotiated were international tax planning, director education for both the audit committee and the board as a whole, and access to PwC’s industry specialists. “The relationship has become so much more interactive,” he says, with OSG receiving “on a consistent and frequent basis the insights [the firm] has into changes in accounting policy, major accounting issues impacting our industry or likely to impact our industry, perception as to where the SEC is moving, and a clearer awareness of SEC comment letters [sent to our competitors.]“
And what about the perennial CFO complaint that audits too often consist of recent college graduates camping out in a conference room where they learn to “tick and tie” on their client’s dime? Itkin says OSG has two partners and a senior manager on the account, “each of whom has material industry experience and is [frequently] present here. To us, the commitment and availability of that resource was an important criteria in the selection.”