The 10-month-old Sarbanes-Oxley Act, designed to restore investor confidence in corporate governance, has taken business away from auditing firms that now can't perform certain non-audit services for their clients.
But offsetting that is an apparent increase in the fees they charge for auditing financial statements for firms' annual and quarterly reports filed with the U.S. Securities and Exchange Commission.
Several national studies show a pattern of fee increases. Proxy statements filed by 10 large Toledo-area companies disclosed that fees for auditing and audit-related services - including audits of employee-benefit programs - rose more than 13 percent last year.
Experts say that's just the beginning of a general boost in auditing costs, as companies will be forced to hire other accounting firms and consultants to do some work now banned for their outside, independent auditors.
Up until now, investors have been able to get a pretty good handle on what companies pay the main auditors for a wide variety of services. In the future, they likely will get even greater detail on fees paid to the main auditor, but they may get little or no information on how the money is spent for other consulting work.
Sarbanes-Oxley, crafted in the heat of such high-profile scandals as Enron, WorldCom, Global Crossing, and Arthur Andersen, prohibited outside auditors from performing nine types of consulting work for their audit clients. Those included bookkeeping, internal audits, actuarial services, appraisals or valuations, legal services, and financial-information systems design and implementation.
The act also requires boards' audit committees to pre-approve most accounting work beyond basic audits.
The dollars at stake are huge. The 10 large Toledo-area companies, for example, spent a total of $38.5 million last year for services provided by their main auditing firms, or about the same the prior year. However, the amount spent for accounting and auditing services is probably millions of dollars higher, as companies don't have to tell shareholders details of all consulting work.
Nationwide, the Big Four accounting firms - PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, and KPMG - audit public companies that collectively account for 95 percent of the nation's total stock-market valuation, according to Leslie Murphy, a managing partner for the accounting firm of Plante & Moran in Southfield, Mich.
Ms. Murphy recently told a Toledo forum of business executives that corporate audit committees are closely scrutinizing the role of independent auditors to avoid running afoul of federal regulators. “To bring in another [accounting] company to do some of the work will increase costs,” she said.
Complying with the new governance rules - including auditor independence requirements, increased disclosure, and new standards for “financial experts” on audit committees - could add at least $500,000 to a public company's annual costs and perhaps millions for larger companies, according to Gordon Kaiser, Jr., a partner in the Cleveland law firm of Squire, Sanders & Dempsey.
Exactly how much costs will increase is uncertain. But one study found that accounting costs doubled last year for a group of firms with less than $3 billion in annual sales. But another study, of large public companies in Massachussets, found costs there up 14 percent in the last year.
The Ohio Society of Certified Public Accountants reported two weeks ago that a study found a 27 percent increase in audit fees, on average, for the companies in the Standard & Poor's 500-stock average, including some whose fees doubled or even quadrupled.
Locally, audit and audit-related fees (such as audits of employee-benefit plans) for the 10 large companies rose more than 13 percent last year, to $22 million, up from $19 million the year before. The figures were reported in the firms' proxy statements and do not include auditing costs from Owens Corning, which has not held a shareholder meeting since it filed a Chapter 11 bankruptcy in October, 2000, and Cedar Fair LP, a limited partnership that's not required to have shareholder meetings and does not file proxy statements.
A number of the area firms had to move business away from their main auditors to meet the new requirements.
Among them is Dana Corp., the largest area company, with annual sales of $10 billion. Last year, Dana spent nearly $22 million on auditing, accounting, and consulting services provided by PricewaterhouseCoopers, but only $5.1 million of that went for the actual audit. Another $6.6 million went for audit-related fees covering SEC filings and registrations, employee-benefit plan audits, due diligence for acquisitions, and work involving divestitures and joint ventures. Its auditing firm can continue to do that sort of work, as well as tax compliance, which cost Dana $6.6 million last year.
But PricewaterhouseCoopers will no longer be able to do actuarial compliance work ($3.1 million last year) or financial-information systems design ($1.8 million in the last two years).
“We hired several different companies [to do that work],” said Gary Corrigan, a Dana spokesman.
Companies bigand small are approaching the Sarbanes-Oxley problem in different ways.
Ms. Murphy, of Plante & Moran, said some companies, like General Motors Corp., took a hard line, limiting their main auditing firm to nothing but audit work. But others decided to limit the non-audit work to a certain percentage, or perhaps a multiple, of actual audit costs, she said, and some others simply decided to hire a second accounting firm that could be called to play when needed.