Audit Fees Cost Public Companies Millions

It's been 10 years since the Sarbanes-Oxley Act was passed to clean up Enron's mess, and public companies are still paying big accounting bills - although some of them actually declined in 2011.

The complexity of the auditing process means corporations hand over hundreds of thousands or millions of dollars to auditors every year.

Wal-Mart Stores Inc. of Bentonville, for example, paid Ernst & Young LLP of London more than $15 million for its services in fiscal 2012, down from $17 million the previous year. That's about 0.3 percent of Wal-Mart's nearly $450 billion in 2012 revenue.

Arkansas is home to 17 publicly traded companies in Arkansas, and Wal-Mart and five others spent more $1 million on auditing fees in their most recent fiscal years. KPMG LLP, the Dutch accounting giant, did the work for Dillard's Inc. ($1.1 million) and Acxiom Corp. ($2.9 million), both of Little Rock. PwC LLP, the company formerly known as PricewaterhouseCoopers, does the auditing for Windstream Corp. of Little Rock ($3.2 million), Tyson Foods Inc. of Springdale ($4 million) and Murphy Oil Corp. of El Dorado ($3.2 million).

J.B. Hunt Transport Services of Lowell saw its audit fees go down from just over $1 million in 2011 to $972,404 in 2012.

The Center for Audit Quality in Washington, D.C., is a nonprofit that works with auditing companies. According to its guide to public company auditing, "the independent auditor's overarching goal is to provide financial statement users with reasonable - but not absolute - assurance that the financial statements prepared by management are fairly presented."

The process is coordinated generally among four distinct groups: the public company's audit committee, which selects the auditor and oversees reporting; the independent auditor, which performs the audit itself; the company's management; and sometimes an internal auditor for improving operational efficiency and other services.

Most of the companies employ the larger public auditors, with three of the big four represented: E&Y, PwC and KPMG.

KPMG is most popular among Arkansas' public companies, with four, followed by E&Y, BKD LLP of Springfield, Mo., and Grant Thornton LLP of Chicago, all of which are employed by three public companies in the state.

The other firms involved with the companies include HoganTaylor LLP of Oklahoma City and Crowe Horwath LLP of Oak Brook, Ill.

Just as Wal-Mart, the company with the most revenue, paid the biggest audit fee, the company with the least revenue had the lowest accounting bill: Advanced Environmental Recycling Technologies Inc. of Springdale. It paid HoganTaylor $154,168, or 0.2 percent of its 2012 revenue of $59 million.

A few companies had dramatic changes in fees between the two most recent fiscal years. Wal-Mart, as mentioned, paid about $2 million less in 2011 than in 2012. Windstream's fees decreased by around $500,000. According to Windstream's 2012 proxy statement filed with the U.S. Securities & Exchange Commission, the higher 2011 fees were due to work performed in connection with Windstream's acquisition of Q-Comm Corp. of Overland Park, Kan., in 2010. The 2010 acquisitions of NuVox Inc. of Greenville, S.C., Iowa Telecommunications Services Inc. of Newton, Iowa, and Hosted Solutions LLC of Raleigh, N.C., also figured into the fees.

The Wake of Sox

Enron and other accounting scandals cost stockholders billions, and public companies are still feeling the ramifications of the Sarbanes-Oxley regulations, known colloquially as "Sox." The act requires corporations to change signing partners - but not firms - at least once every five years. Managing the partner shifts and new rules spiked accounting fees during the past decade.

"It has dramatically changed auditing in the last 10 years," said Jake Leon, deputy director of communications at the Center for Audit Quality. Leon said Sox also led to the creation of the Public Company Accounting Oversight Board, a nonprofit group that oversees accounting firms.

"They investigate and bring disciplinary action against accounting firms that do not comply with Sox," Leon said. "That ended what was, at that time, self-regulation."

Sox also prohibits firms from providing non-audit services to audit clients and requires companies with more than $75 million in market capitalization to be audited for effectiveness and internal financial reporting controls.

Switching Firms

Accounting firms often stay with their public company clients for decades. E&Y, for example, has audited Wal-Mart since before the retailer went public in the 1970s.

When changes of firms do occur, the firm sometimes explains the reasoning and sometimes doesn't. Deloitte & Touch LLP, the fourth of the "big four," parted ways with First Federal Bancshares of Harrison at the end of fiscal 2010. The bank's proxy statement says that Deloitte had "no disagreements" with First Federal save for some 2010 uncertainty about the bank's ability to continue as a "going concern." After a recapitalization last year, First Federal Bancshares replaced Deloitte with BKD.

Dillard's parted ways with PwC at the end of fiscal 2011 and is switching to KPMG. The latest Dillard's proxy statement says PwC didn't depart out of ill will: "There were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of PwC, would have caused PwC to make reference to the subject matter of the disagreement in connection with its report, except as discussed below."

Instead, according to the proxy, Dillard's and PwC disagreed over a real estate investment trust into which Dillard's had transferred some properties.

"At the time, the company believed that a tax election might be available to the company that would result in a taxable gain on the transfer of these properties to the REIT," the proxy states. "The company and PwC had different views on the financial reporting impact of this tax election."