To shed light on this, we at JL Verar, CPA pllc did an analysis of audit fees in recent years. We looked at companies with audit fees ranging from $10,000 to $100,000, and compared those fees with financial data. Our research shows that there's actually no correlation between audit fees and total assets, revenues, or market cap. Compared to larger companies, small reporting companies show disproportionately high audit fees as a percentage of revenue; Smaller Reporting Companies pay over $5,000 in audit fees (on average) for every $1 million in revenue, whereas Large Accelerated and Accelerated filers pay only $479 in audit fees for every $1 million in revenue.
Small filers may be hurt by a lack of good information about audit firms. There are hundreds of firms in the US providing audit services to thousands of companies, with an extremely wide range of audit fees. As an example, we have identified a few companies with no revenue and with average total assets of $50,000 assets who paid an average of $35,000 in audit fees, while one fully operational entity with about $2.5 million in assets paid only $15,000 in audit fees for 2015. Without the right information, companies often pay too much in audit fees.
So why do some companies spend so much? As the saying goes, time is money. Most auditors only accept a job if they are able to bill actual chargeable hours in relation to audit work. They do this because they are venturing into the unknown; most companies in this category barely have any formal accounting information systems or controls in place, which is the key to producing financial reporting data. The main conclusion from our study of audits done for small reporting companies with higher fees than the average was that auditors usually spent enormous amounts of time helping the client prepare their report, following up with information needed and locating documents for verification.
Therefore, the key to reduced audit fees is to make sure the auditors spend time only on auditing significant items only. Clients should understand the auditors' responsibilities as far as their financial statements are concerned and know exactly what is required of management. Specifically, there are a few main ways to keep fees down and make your auditor happy.
- First, make sure to address the responsibilities of management. It is a requirement that management should have a suitable accounting information system and internal controls in place to ensure that the financial reporting will be accurate. It is understandable that hiring a full-time accountant may be impractical if there aren’t a whole lot of transactions. In the beginning, you may be able to get away with doing your own accounts because your business is small and you’re working with a smaller amount of money. However, as your business grows, the need for accounting is no longer confined to taking care of the cash or bank accounts. A lot more accounting-related functions are needed to comply with the documentation requirements for an audit. If hiring a full-time accountant is beyond your budget, we highly recommend outsourcing a professional accounting and financial reporting firm to do your in-house accounting.
- The second step is to document your financial reporting and control procedures, including policies on fraud prevention and cybersecurity. Auditors will always review your internal controls. Even if you don't have a well-established internal control system, you still have to make sure that the procedures you set up will ensure that the financial reporting would more or less be accurate, if not perfectly stated in all respects.
- Third, implement an efficient document management system. Document management systems can provide invaluable document searching, versioning, comparison, and collaboration features. And while free tools like Google Desktop or Windows Desktop Search can help increase your document-management efficiency, more sophisticated and secure document-management tools are highly recommended.
- The fourth step is understanding what documents are required. You need to understand the SEC filing requirements and deadlines, not in great detail, but with a high level of understanding of what SEC requires of you. In addition, your accountant should understand exactly what auditors want and are looking for in their task as your independent auditors. In a nutshell, your auditors simply need to validate what you have been recording in your books.
- And finally, if you feel your auditors' fee is unreasonably high, pick up your phone and shop for another PCAOB-registered auditor – one who understands your company and can provide you with honesty and transparency in their fees.
At JL Verar CPA, pllc, We combine our knowledge in accounting, auditing and IT consulting to give the most cost-efficient solutions to financial reporting and prepare you for audit. we care about your company and we always provide reasonable, no-surprise fees. We have professionals specialized in Smaller Reporting SEC companies and small private companies that are ready to take the next step and go public.
About the author: Jorge L. Verar, CPA, CISA, CFE is the founder and Manging Partner at JL Verar CPA, pllc, specializing in Providing accounting and IT solutions for Small SEC Reporting Companies in various industries and private companies getting ready to become public. We also provide solutions for Not for Profit Organization who requires regular reporting to donors and annual audit of their financial statements.
Source: Audit Analytics; http://www.auditanalytics.com/blog/audit-fees-for-smaller-reporting-companies/