The Nature and Disclosure of Fees Paid to Auditors

By Markelevich, Ariel; Barragato, Charles A. et al. | The CPA Journal, November 2005 | Go to article overview

The Nature and Disclosure of Fees Paid to Auditors


Markelevich, Ariel, Barragato, Charles A., Hoitash, Rani, The CPA Journal


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.

Analysis

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%. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Nature and Disclosure of Fees Paid to Auditors
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.