How reasonable are your audit fees?

• Author: Simon, Daniel T.
• Position: Corporate audit fees

Here is a practical guide for officers and directors in evaluating their company's audit fees.

Like most costs to American businesses, fees paid to independent CPA firms for their annual audits are attracting increasing scrutiny. Executives responsible for negotiating audit fees are concerned with controlling their costs. As are corporate officers, audit committees of boards of directors are expected to assess the reasonableness of audit fees. Even non-director, non-officer shareholders may be concerned about the issue, since major accounting firms have identified audit fees as one of the more commonly discussed shareholder issues at annual meetings.

It is therefore useful for officers, directors, and shareholders, to have information on the determinants of audit fees for a large sample of U.S. corporations in order to compare the fees of their companies with others. This article suggests how this can be done in a relatively quick and efficient manner. The intention is not to determine exactly what your company's audit fee should be but, instead, to assess whether the audit fee seems to be reasonable given the characteristics of your company.

Since 1980, there have been several academic studies that developed statistical models of audit fees. While these have been useful, they have been based on fairly small samples and have a statistical formulation that does not allow for an intuitive interpretation of the results. This article attempts to make these results more readily useful by avoiding statistical complications. It also makes use of a far larger sample (over 4,000 reports of audit fees) than previous studies.

After describing the data source, the way in which the results may be used to assess a company's audit fees will be described at two levels. First, a table of expected audit fees will indicate an expected fee range based on client-company size. Second, based on this study and other research, factors that change fees (up or down) from the expected range will be discussed. While a formal statistical model of fees will not be presented, this is available upon request from the author.

The data used in this study came from questionnaires sent to a large number of U.S. companies asking for the fees paid to their external auditors for audit services only (exclusive of any consulting and tax services, for example). A total of 4,382 responses on audit fees was received from 1,157 industrial, service, and retail companies of varying size...