A high price to pay for regulation?

It’s official, audit is a lucrative business. For many of you that will be
stating the obvious. It’s always been a decent source of income, but you’ll
forgive us for pointing out that it has also appeared to be the slightly poor
relation to services like consultancy, tax advice and a dozen other services
that, believe it or not, generate a little more excitement in the financial
world.

The average FTSE100 audit fee has now reached £3.26m -­ its highest level in
almost 10 years. PricewaterhouseCoopers alone now takes £259m from the FTSE100
in audit fees, KPMG pockets £163m, while Ernst & Young and Deloitte take
more than £100m each.

But the rise in fees reveals something else. It tells us that businesses, in
spending more, are placing more importance on their audits. They have good
reason, of course. In the wake of the avalanche of new regulation following
Enron and WorldCom, there is more interest than ever in giving the accounts a
clean bill of health.

Executives want to be seen as whiter than white, and are willing to spend
more of their budgets to show every investor that the finances are above board.
Businesses are therefore asking for more checks, which cost more, hence the
rising fees.

The trick is to make sure those checks actually mean something, and that they
really do indicate that the accounts can be relied upon. Investors, in general,
may take to heart that bigger fees mean better checks.

But the fees also herald a warning, and that is the increasing regulation
that companies have to manage. Hanson and Prudential revealed that they spent
£1.6m and £1.8m respectively on complying with the Sarbanes-Oxley Act alone.

Those are large sums (granted they are small in comparison to the companies’
overall turnovers), but they beg a question about whether the cost is worth it.

There have been many complaints about Sarbox, not least that it represents a
massively increased burden for a disproportionately small increase in assurance.
A conclusion, were it borne out, that would have most finance directors feeling
perhaps a little cheated.

But the balance between cost and regulation is a problem that won’t go away.
The New Year will see the debate continue as companies grapple with rising bills
while maintaining their compliant status.