SOURCE: The Corporate Library

September 17, 2007 12:41 ET

Big Four Audit Firms Feel the Effects of Post SOX Inroads as Audit Fees Skyrocket

PORTLAND, ME--(Marketwire - September 17, 2007) - The Corporate Library today has released summary findings from its seminal study of the changes in the audit industry post Sarbanes-Oxley. In-depth analysis and data underlying these findings can be found in the full report.

A summation of the post Sarbanes-Oxley macro-changes to the audit industry are described by Paul Hodgson in this excerpt from "The Audit Landscape: 2001-2007" conclusion:

"During the period under study, there has been a revolution not only in the type of tasks performed by outside auditors, but also in the fees charged for those tasks. The substantial consultancy projects that companies commonly commissioned are no longer part of the outside auditor's responsibilities, although many of the firms, of course, still provide such services, just not to the same clients to whom they are providing audit services. In addition, the outside audit itself has changed dramatically, taking into account much more internal control testing and compliance work than it did pre-2002. The revolution in fees has mirrored this change in the type of work. We have witnessed a major shift from 'other costs' to audit and audit-related fees, as well as substantial increases in pure audit costs."

In addition to the enormous change in the make-up of audit costs, the report also tracked dramatic changes in the audit market during the 2001-2007 survey period. Along with the disappearance of Arthur Andersen, there has been an invasion of the Big Four's market share by smaller accountancy firms. Off the 3,140 companies tracked, the analysis found that the number of non-Big Four audit firms servicing these companies increased by more than a thousand percent from nine non-Big Four firms in 2001 to 91 in 2006. In addition, the non-Big Four firms more than doubled their market share over this period. The growth in firms may in part be due to the enormous increase in revenue opportunities for audit services.

"While the aggregate data presented some fairly outstanding figures -- with an average increase in audit fees of 756 percent between 2001 and 2006 -- digging deeper into the data on individual companies can produce some even more startling findings," commented Paul Hodgson, Senior Research Associate at The Corporate Library and author of the report. For example, research found that General Electric received the distinction of being the firm with the highest audit costs in 2006, with total fees exceeding $115 million (see table below for details). The company has been jockeying for position with General Motors for highest audit costs over the survey period.

Highest Total Auditor Costs 2001-2006 (Source: The Corporate
Library/Company Filings)

                                          Audit fees as
                                           a percentage
                          Total auditor      of total
Year      Company             costs       auditor costs       Auditor
----- ----------------- ----------------- --------------  -----------------
2006   General Electric $     115,400,000           92.2% KPMG
----- ----------------- ----------------- --------------  -----------------
2005   General Electric $     109,200,000           92.3% KPMG
----- ----------------- ----------------- --------------  -----------------
2004   General Electric $     102,600,000           91.3% KPMG
----- ----------------- ----------------- --------------  -----------------
2003     General Motors $      92,000,000           61.9% Deloitte & Touche
----- ----------------- ----------------- --------------  -----------------
2002     General Motors $     156,000,000             16% Deloitte & Touche
----- ----------------- ----------------- --------------  -----------------
2001     General Motors $     102,000,000           20.6% Deloitte & Touche
----- ----------------- ----------------- --------------  -----------------

Additional highlights from "The Audit Landscape: 2001-2007":

--  In 2006 one of the smaller firms -- Crowe Chizek -- audited more
    financial services firms than Ernst & Young and the same proportion as
    PricewaterhouseCoopers.
--  Despite incursions into market share, the Big Four continues to
    dominate more than 95 percent of the large accelerated filer market.
--  Auditor churn rate has dropped considerably in recent years.
--  The demise of Arthur Andersen equally benefited the Big Four firms,
    with some of those firms taking industry sector dominance as a result of
    the change.
--  The median increase in audit fees between 2001 and 2006 was 345.68
    percent, with the largest increases seen between fiscal 2003 and 2004.
--  Median total auditor costs rose from $1,420,000 in 2001 to $2,741,087
    in 2006.
--  Total fees paid to auditors for the matched sample of companies were
    $6.8 billion in 2006, compared to $5.8 billion in 2001.
    

About the Audit Landscape Report:

"The Audit Landscape: 2001-2007" is based on over 240,000 pieces of data, spans more than six years, covers over 3,000 public companies, and includes more than 100 audit firms.

The special report presents matched sample analyses -- covering the same group of 1,293 companies in each of the six years -- for each set of data points, as well as whole sample analyses of 1,500 to 3,139 companies.

The study presents in-depth analysis and extensive detail on topics such as:

--  the escalating cost of auditing companies since the enactment of the
    Sarbanes-Oxley Act of 2002 (SOX);
--  the change in the makeup of total audit costs since SOX;
--  the decline in the costs associated with other services provided by
    independent audit firms;
--  which years saw increases in audit fees outpacing the increase in
    total auditor costs;
--  the influence industry has on auditing costs;
--  the changing market share of the Big Four accounting firms and the
    many smaller firms that have entered the market;
--  how smaller firms are making inroads into the Big Four's market share;
--  where Arthur Andersen's former clients went;
--  which firms dominate the S&P 500;
--  which firms audit the largest market share of certain industry groups;
--  median tenure for audit firms;
--  explanations for auditor changes; and
--  the influence of a company's employee headcount on audit costs.
    

The special study is available from The Corporate Library www.thecorporatelibrary.com in both hard copy for single report purchases and electronic format for firm-wide distribution. The underlying data used in the study is also available for purchase.

About The Corporate Library

The Corporate Library is an independent research firm that provides corporate governance information products, research services and data to a broad variety of clients including institutional investors, corporations, D&O liability insurers, law firms, accounting firms, executive search firms, academic institutions and the media. The Corporate Library produces the definitive ratings of U.S. corporate boards of directors, allowing businesses that subscribe to the service to evaluate governance as an element of investment and other risk. The Corporate Library is also a leading publisher of corporate governance reports and studies, including reports on CEO employment contracts, governance practices, mutual fund proxy voting, and executive and director compensation, which its analysts compile using its extensive database of over 3,000 public companies and over 30,000 executives and directors. Additional information on The Corporate Library and its suite of online corporate governance data and analysis products can be found on its website at www.thecorporatelibrary.com.

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