Falling Audit Fees May Increase Restatements: Study

March 4, 2014 Leave a comment

February 28, 2014, 3:18 PM ET

Falling Audit Fees May Increase Restatements: Study

By Saranya Kapur

Reporter

Audit fees have sagged since the recession, and that trend may increase the possibility of misstatements going undetected, according to a study by researchers at Texas A&M University and University of Nebraska-Lincoln.

Financial restatements are more likely among high-risk clients where risk appears not to be incorporated into audit fees, the study found. Since the financial crisis, fees have fallen approximately 10% for all companies between 2006 and 2010, and companies that don’t fully pay their auditor for risk have a 29% higher risk of restatement.

“Lower fees are hindering auditors’ ability to be compensated for the risk they incur,” said Nathan Sharp, a professor at Texas A&M University and one of the authors of the paper.

Before the financial crisis, higher risk companies typically had higher audit fees, but that was no longer true by 2010. In 2007,, the gap between the highest and lowest risk companies’ audit fees stood 10.2%, but three years later the gap was not significant.

“It’s not sustainable to have this level of fee pressure for audit firms,” said Brant Christensen, a doctoral student at Texas A&M and another author of the study. “At some point, something’s going to give.”

“Our research begs the question, are we going back to where we were before Sarbanes-Oxley?,” Mr. Sharp said. “Is audit once again becoming a commodity?”

 

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment