Fees Paid to Audit Firms Exceed Estimates
Levinsohn, Alan, Strategic Finance
* HOW MUCH DO companies actually use --and pay--their auditing firms for consulting services? For years, estimates by regulators, journalists, professors, and other watchdogs had 25% of public companies buying additional nonaudit services, such as management and technology consulting, from their auditing firm and paying fees equal to about 27% of the audit, on average.
Well, it turns out to be a lot more.
Ninety-six percent of public companies bought nonaudit services from their auditing firm last year and paid an average of $2.2 million, or 1.97 times the audit cost for nonaudit services. That's according to a new study by four accounting professors: Lawrence Abbott of the University of Memphis, Susan Parker of Santa Clara University, Gary Peters of the University of Georgia, and Dasaratha V. Rama of Texas A&M International University.
At the high end, consider these examples: Delphi Automotive Systems Corp. paid Deloitte & Touche $6.6 million last year for audit services but $50.8 million for additional nonaudit services including $41.3 million for information technology services. FleetBoston Financial Corp. paid PricewaterhouseCoopers $8.6 million for auditing work and $33 million for other services. And Wells Fargo & Co. paid KPMG $4.2 million in audit fees but $37.5 million for additional work.
Previously considered proprietary, information about how much money companies pay their accounting firms is now pouring out. That's because of new disclosures the Securities & Exchange Commission (SEC) requires for proxy statements, which passed last year as part of the SEC's effort to tighten the rules governing auditor independence, which much of the accounting industry fought vigorously (see Strategic Finance, Trends in Financial Management, August and December 2000).
The main issue the SEC sought to resolve was auditor objectivity. How objective can an accounting firm be in an audit when it is also making millions of dollars providing the same client with other services? "I'm a firm believer that economics does have a firm impact on people's behavior," SEC Chief Accountant Lynn Turner reportedly said recently. Turner was surprised by the magnitude of the nonaudit fees, saying that it raises difficult issues for auditors faced with tough calls on their clients' accounting practices.
The SEC tried to underscore this point in June 2001 when it settled civil fraud charges against Andersen and three partners for more than $7 million. …