Regulatory Pressure Leads to Increasing Audit Fees

By Cydney Posner

The WSJ is reporting  that heightened regulatory pressure on auditors is causing audits fees to rise as auditors sharply increase requests for documentation, details of internal control processes and details around asset valuations. These are all areas in which the PCAOB has found an uptick in audit deficiencies over the past couple of years. Reportedly, auditors are more frequently asking companies to justify management decisions with much more documentation and increasing inspections related to internal controls, such as requesting permission to attend meetings where managers review an internal control to observe how the process works. Commentators at an accounting conference sponsored by Financial Executives International noted that the "increasing details auditors are asking for often seem arbitrary or immaterial to managers and are increasing the amount of time [the] finance team has to spend with outside auditors, rather than running the business…." Auditors are apparently wary of the PCAOB ad the consequences of an unfavorable report card, but, the article reports, the PCAOB "says it is just pushing auditors to follow procedures they should have been doing all along. In its findings on audit deficiencies, the PCAOB has often seen that auditors just don't understand how a control works or what assumptions management is using to justify a certain valuation. [According to a PCAOB member,] ‘Just seeing that somebody signed a document isn't helpful at all.' [A]uditors sometimes either need to see internal controls processes written down, or follow an executive around to understand how they actually work. While some auditors have responded by doing a complete audit of every minuscule feature of a control process to improve their understanding,… in most cases the increased pressure is just from firms realizing they have not been following their own audit guidelines in these areas. ‘But you also have to wonder, if the auditors don't really understand what the control is and they start probing, and there's not a lot of documentation on it, how do you know the control really works? ‘"

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