Dive Brief:

• The average audit fee rose 3.7% last year to $2.52 million, an increase that is more than twice the 1.4% gain in the consumer price index during 2020, according to a study by the Financial Education & Research Foundation (FERF).
• Acquisitions was the primary factor expanding the scope of audits, FERF said in a report sponsored by the Center for Audit Quality. The economic uncertainty in 2020 caused by the coronavirus also increased audit scope and effort, including determination of goodwill impairment, going concern and asset valuation.
• “Preparers faced new challenges as traditional methods of preparing financial information were upended as many accounting and finance professionals were forced to work remotely,” FERF said. “External auditors also had to adjust to new ways of performing auditing procedures, including gathering and evaluation evidence in a remote environment.”

Dive Insight:

While expanding the scope of audits, record deal-making has also sharpened a focus on auditor independence.

“An auditor that provides extensive non-audit services to an entity that has an active mergers and acquisitions business model must continually monitor the impacts of all such transactions, and potential transactions, on its audit engagements to ensure that the auditor remains, in fact and appearance, independent of all of its audit clients,” Securities and Exchange Commission (SEC) Acting Chief Accountant Paul Munter said last week in a statement.

Mergers and acquisitions have surged this year, fueled by near-zero interest rates, high equity prices and abundant capital. The value of transactions worldwide during the third quarter rose to $1.1 trillion, eclipsing the previous high during the fourth quarter of last year, according to S&P Global.

“Not all audits are created equal,” Munter said. “It is critically important for all gatekeepers to continue to vigilantly maintain the independence of auditors, in both fact and appearance.”

The introduction of data analytics and other new technology accelerated last year, and 61% of respondents to a FERF survey said the capabilities improved the quality of external audits. Only 8% said they did not see gains from data analytics.

“Preparers and audit practitioners alike have become increasingly more comfortable with the use of these tools and techniques,” FERF said.

Cybersecurity and the increasing attention to environmental, social and governance (ESG) best practices will likely prove pressing future challenges for auditors, FERF said.

“The current market-driven disclosure system for climate and other ESG-related matters could become more prescriptive and driven by regulatory activities,” FERF said, noting that SEC staff are working on proposed rules for mandatory disclosure on carbon emissions.

The SEC is also considering rules aimed at curbing risks to investors from cyber attacks. “Often a cyber breach results in significant effort by management and their external auditor to investigate the breach and determine the potential impact on the financial statements and related ICFR [internal control over financial reporting],” FERF said.

FERF determined audit fees by examining reports from more than 6,200 SEC filers and, for the survey, interviewed 51 financial executives at public companies and 80 audit firm engagement partners.