Study: Investors Might Want to Tread Carefully Around Companies with High Audit Fees

Posted on by Caleb Newquist

[R]esearch finds auditing fees charged to companies to be significantly related to the their financial performance for as long as five years into the future: the higher the fees this year, the lower firms’ performance next year and beyond. In the words of the journal report by Jonathan D. Stanley of Auburn University, “Primary results indicate a significant inverse relation between audit fees and the one-year ahead change in clients’ operating performance… Further analysis reveals that the primary results extend to changes in operating performance observed up to five years after the fee is disclosed; are more pronounced for future negative versus positive chances; and [are] applicable to future changes in earnings unaccounted for by analysts’ forecasts.” Asked if these findings are likely to be of value to average investors, Prof. Stanley answers in one word: “Definitely.” [AAA]

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Add Another Hoop to the Audit Process

signature.jpgIn a move that probably just adds one more annoying hoop to jump through for auditors, audit engagements will now go through quality review with adoption of AS No. 7, Engagement Quality Review (EQR).
According to the press release, “The EQR standard provides a framework for the engagement quality reviewer to objectively evaluate the significant judgments made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement.”
We’re hoping the engagement quality reviewers will be given free range to document their “overall conclusions” as they wish. Some that we would suggest: “You call yourselves auditors?“, “I’m recommending that the PCAOB inspect this engagement” or “What in God’s holy name are you blathering about?“. It would be a shame for the firms to institute a check-the-box method that would compromise artistic integrity.
In other PCAOB news, the Board is asking for comments on its Concept Release “to consider the effects of a potential requirement for the engagement partner to sign the audit report.” We speculated last week that signatures in blood or dog excrement might be appropriate in many cases but if you’ve got other ideas, you’ve got 45 days to give them better suggestions.
Press Release [PCAOBUS.org]