Determining Audit Fees - Are You Leaving Money On The Table?

LAS VEGAS - June 11, 2014 - PRLog -- So what is the appropriate way to determine audit fees?  And due to the ‘price cutting’ competition, are CPA firms leaving money on the table?

Attributes that are typically used by audit firms, in the determination of audit fees, are commonly used as ‘best practices’.  Such attributes would include organization size, total expenses, total revenues and overall risk.  However, two most common attributes employed are time and hourly rates.  Interestingly enough, both of these attributes are clearly estimates and are considered moving variables.  In addition, due to the perfectly competitive industry and complexity of their clients, audit firms are struggling to capture hourly rates, as they are subject to client price negotiations.

Several studies have sought to establish the link between the characteristics of a corporation and the audit fees charged by their auditors.  The impact of risk on audit fees has also been examined, but has proved to be an elusive topic.  A study by Swanson (2008) uses regression analysis to examine the effect of size and financial position on audit fees.  The study hypothesizes whether measures of size and financial position affect the pricing of audits for the 37 largest financial services institutions audited by the four largest public accounting firms in the United States (i.e. the Big 4).  The study concluded that the measure of size does have an effect on the price of audit services in the U.S. financial services industry.  Swanson (2008) found that total assets and sales revenues are statistically correlated with audit fees (p-values were less than 0.05); whereas net income and number of employees had no statistically correlated relationship to audit fees.

Swanson (2008) developed a mathematical model that illustrates a direct relationship between measures of both assets and revenues and the audit fees that firms are charged for financial service institutions in the United States.  This model can explain approximately 71% of the audit fees charged to the 37 largest financial services institutions in the U.S.  By a simple calculation, one can determine what audit fees should be.

Although this study narrows the scope towards the U.S. financial service industry, it would be reasonable to reflect on this study, along with other comparable studies, in the determination of the standardization for audit fees.  It would also provide a more robust estimation on what to charge based upon proven attributes – size and health.

Reference

Swanson, Kevin. "The Determinants of Audit Prices for Financial Services Institutions in the United States." Major Themes in Economics (2008).

Biography

With over a decade of experience as a public accountant, consultant and researcher, Brian Provenzano has gained a deep understanding of business challenges and how those challenges can be overcome through experience and the knowledge of academic rigor.

Brian Provenzano holds a Bachelors of Finance degree from Oakland University Business School, an Executive Masters in Business Administration from The Ohio State University Fisher College of Business (program ranked 9^th globally) and is a licensed Certified Public Accountant (CPA) from the State of Nevada.  He is also a doctoral researcher, pursuing a doctorate degree in Business Administration from the University of Liverpool (academic institution ranked in the top 1% globally) where he specialize in strategic management and process improvements.

To RSVP for speaking engagements and consulting services, contact Mr. Provenzano at (702) 217-8433 or at brian@theventureboard.com.