Looking for lower audit fees? Be careful....

Posted by Bill Bockwoldt on November 4, 2010

During a recent conversation with a Managing Partner at a local CPA firm I learned that the PCAOB is starting to use forensic statistics to determine which external audit firms to review; it isn't random.  The PCAOB has apparently come to the (logical) conclusion that if an audit fee is usually low relative to their comparative companies audit fees, then the quality of the audit is also probably low.  What this means is that if a company decides to price shop for their audit, chances are they will not only get what they pay for but they may also be subjected to the scrutiny and potential requirement for an additional audit by the PCAOB.  This could cause restatements, lawsuits, and just a laundry list of bad things.

Here is the short of it; CPA firms are required to meet some pre-defined and some subjective standards to perform audits of public companies.  The subjective nature of their work can lead to price differences amongst firms but in the end, their objective is to provide shareholders with an opinion about your company that can be relied upon with making investing decisions.  The opinion external auditors publish comes with liability and that translates into value which costs money.  

A recent article from CFO.com claimed that “Lynn Turner, a former chief accountant at the Securities and Exchange Commission… who sits on the board of a $40 billion retirement investment fund in Colorado, says investor groups get nervous when a company in their portfolio, particularly one that's in hard times, wins a steeply lower [audit] fee.  Turner described a lasting distrust among investors of the accuracy of financial statements following the audit failures that contributed to the scandals at Enron and WorldCom in the early 2000s. That lack of confidence has been a significant factor in the overall poor performance of investment markets during the past decade and caused capital to flow away from the United States, he suggested.”  Read more on that article here: http://www.cfo.com/article.cfm/14535614

In the end, cheaper when it comes to audit fees, isn’t necessarily better and may ultimately end up costing you more money and headache.  Let me say there are times when you can gain a significant discount and still get the same quality (for instance, audit firms out of Utah are terrific and typically significantly cheaper than those out of California) but do your research.  Verify the audit firm’s credentials and check their references and their public review records with the PCAOB before getting too excited about the price tag.  There is no such thing as ‘buying’ a clean audit opinion and if a firm is suggesting that is a possibility – run.  If you don't, you will regret it.

Tags: audit costs, external auditing