Magazine article The CPA Journal

The Nature and Disclosure of Fees Paid to Auditors

Magazine article The CPA Journal

The Nature and Disclosure of Fees Paid to Auditors

Article excerpt

An Analysis Before and After the Sarbanes-Oxley Act

The issues surrounding auditor independence and investor confidence in the financial statements of public companies have been widely debated. Much of the discussion has been fueled by the dramatic changes in the accounting profession since the 1990s. Many accounting firms (including some of the largest in the world) merged and transformed themselves into multispecialty organizations.

In the wake of accounting firms' transformation, regulators became increasingly concerned about the interplay between auditor independence and the provision of nonaudit services (NAS) to audit clients. In his highly publicized testimony before the U.S. Senate on September 28, 2000, then-sec chairman Arthur Levitt expressed his concern that "as auditing becomes an ever-smaller portion of a firm's business with an audit client, it becomes harder to assume that the auditor will challenge management when he or she should, if to do so might jeopardize a lucrative consulting contract for the auditor's firm." This view, coupled with Enron's failure, WorldCom's malfeasance, and the collapse of Arthur Andersen, led to the eventual passage of the Sarbanes-Oxley Act of 2002 (SOA).

The analysis that follows focuses on the market for audit and nonaudit services by examining fees paid to auditors during the period 2000 to 2003. This timeframe is of particular interest because this period saw sweeping changes in auditors' business, regulatory, and professional environment.

Regulatory Background

In recent years, the sec and Congress have promulgated a variety of rules that are grounded in the notion that auditor independence is vital to the production of high-quality audits and that fees paid to auditors for both audit and nonaudit services may impair such independence. In November 2000, the sec issued a directive requiring public companies to disclose audit and auditrelated fees paid to their outside auditors. These disclosure rules became effective for proxy statements filed after February 5, 2001 (sec Final Rule S713-00). Following SOA, the sec expanded (and in some instances redefined) these disclosure requirements, and now requires that fees paid to auditors be broken down into the following categories: 1) audit fees; 2) audit-related fees; 3) tax fees; and 4) all other fees. One of the more significant changes under the expanded guidelines is a change in how audit fees are defined. The initial rule adopted by the sec (for proxies filed in 2000) required that companies disclose fees paid for audits and quarterly reviews in the "audit fees" category. The expanded rule requires companies to include any fees for services performed to fulfill the accountant's responsibility under GAAS. Additionally, audit firms are now prohibited from providing such services as financial information system implementation and design, internal auditing, and a number of other services.

Data and Results

The study comprised a sample consisting of 2,507 public companies that have disclosed audit fee information from 2000 to 2003, as reported in the Standard & Poor's Audit Fee Database. Starting in 2003, companies were required to report fees paid to their auditors under the new disclosure rule. The new rule also mandated that companies present their fiscal 2002 fees under the new rule for comparison purposes. Consequently, the sample consists of fees reported under the old rules for 2000 and 2001, and fees reported under the new rule for 2002 and 2003. The descriptive statistics for the additional fee categories are limited to 2002 and 2003.


Exhibit 1 presents the full sample descriptive statistics for fees paid for audit and nonaudit services during the period under study. For ease of exposition, and to mitigate the impact of extreme observations, the discussion focuses on median fees (illustrated in Figure 1).

As noted in Exhibit 1, total fees increased from $602,369 in 2000 to $683,618 in 2003, an increase of roughly 13%. …

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