February 16, 2011 / 6:54 PM / 9 years ago

Auditor shopping helps U.S. companies cut fees

* Recession, cost-cutting put pressure on fees

* Competition especially fierce for U.S. audit industry

By Dena Aubin

NEW YORK, Feb 16 (Reuters) - U.S. companies from Apple Inc (AAPL.O) to Tyson Foods Inc (TSN.N) are paring what they spend on getting their books audited, winning markdowns amid intense competition among big-name audit firms.

Bucking a long-standing preference by most companies to stick with the same auditor for years, some companies are putting their audit work out for competitive bids to win better deals on fees, or to get fresh teams looking at their books.

“It’s a change in the competitive landscape among the audit firms where they have the ability and desire to take on more clients,” said Mark Grothe, an analyst at consulting firm Glass Lewis. Public companies also seem to be more willing to switch auditors, as long as one of the “Big Four” firms will be doing the work, he said.

The savings for companies are not huge, but the money is crucial to audit firms, which have struggled with fee pressures since the recent recession led their clients to wrangle for cost cuts. At the same time, the need for audit work has slumped because business generated by the 2002 Sarbanes-Oxley reform act has tapered off.

Apple, which has a new policy of reviewing its auditor every five years, put the work out for bid in 2009, selecting Ernst & Young [ERNY.UL] to replace KPMG [KPMG.UL], which had audited its books since 1997.

Fees fell to $5.9 million in 2009 from $6.8 million in 2008, when KPMG audited its books, according to company filings. The $5.9 million included about $707,000 of fees paid to KPMG for part of that year before it was replaced.

Tyson Foods replaced Ernst & Young with PricewaterhouseCoopers [PWC.UL] for its 2010 audit after a competitive bidding process. Its fees fell to $3.05 million from $3.49 million, according to company filings.


The Big Four audit firms — PwC, KPMG, Deloitte & Touche [DLTE.UL] and Ernst & Young — still have a tight grip on most of the biggest clients, auditing more than 90 percent of the market capitalization of U.S. public companies.

A lot of fees are at stake: U.S. public companies spent about $16 billion on audit and related fees in 2008, according to an analysis by CFO Magazine of Audit Analytics data.

A company listed on a U.S. stock exchange is required to have an auditor check its financial statements. To keep auditors independent, Sarbanes-Oxley requires that lead audit partners, but not the audit firm, be rotated every five years.

Though changing audit firms is not required, and it can take time to get a new team up to speed, there are benefits, some executives said.

“It’s a new account, so they throw themselves into giving you the service that you should demand from professionals,” said Linster Fox, chief financial officer at Shuffle Master Inc SHFL.O, a Las Vegas-based firm that makes equipment for casinos.

Shuffle Master put its audit work out for bids after Fox analyzed what his companies’ peers were paying.

After getting bids, the company switched to PwC in 2010 from Deloitte & Touche, cutting its annual audit fees by more than half to about $994,000 from $2.04 million.

Fox said he also put audit services out for bid at the last three firms where he worked, saving 40 to 60 percent on fees.

“There’s no degradation in service — the service is actually higher,” Fox said.


Most companies still do not change auditors that often.

“When a company does go through a change, it is almost always driven by something other than fees,” such as concerns about quality or relationships, said Tim Ryan, a vice chairman at PwC.

“The most important thing for us is to make sure that we deliver a quality audit for investors and boards that we serve,” said Ryan. “What we’re trying not to do as a firm is to cut corners to the point where it doesn’t make sense.”

Skimping on audit fees can backfire when an auditor misses problems and a company has to restate its financials, a costly and lengthy process. But some companies are finding they can get a big-name auditor and still pay less.

Tower Group Inc TWGP.O, a New York City-based property and casualty insurance company, was able to replace its regional auditor Johnson Lambert & Co, with Big Four firm PwC and still cut its fees after seeking competitive bids.

Tower was happy with the service it was getting before, but its market cap had grown rapidly, and “we felt that we were better served by having a Big Four firm rather than a regional firm audit our books,” said Tower’s Chief Financial Officer Bill Hitselberger.

Tower has not disclosed what it paid PwC, but Hitselberger said it was slightly less than the prior year’s fees.

Fee pressure has been intense worldwide, but especially in the United States, according to the International Accounting Bulletin, which tracks global audit fees.

“The U.S. is a very competitive market, easily the largest audit market in the world, and the Big Four have competition from a much larger pool of firms,” said IAB editor Arvind Hickman.

“Last year we received reports of fees being cut between 5 and 15 percent on average on audit work, and there were extreme cases where fees were being cut up to 40 percent,” he said.

Fee pressure appears to be easing somewhat, “but there will still be fee pressure this year and we don’t predict it will go away any time soon,” he said. (Reporting by Dena Aubin, editing by Gerald E. McCormick)

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