From: Ron Hansen
I am the CFO of a micro-cap company. We are a manufacturing company that has been competing for 68 years in a global environment. To survive and provide our shareholders with a reasonable return we have become efficient and adopted lean manufacturing techniques. We have cut our costs big time.
Our 2005 audit fee doubled from the quoted fee before being reduced through negotiations to a 43% increase. The Company did not receive an audit adjustment nor has it for twelve years with the exception of one reclassification entry which did not change net income as it was a balance sheet entry. We have never received a significant weakness in internal controls. I am a CPA and former partner and my controller is a CPA and former manager. This year we performed significantly more work formerly done by our auditors. Our 2004 audit was recently reviewed by PCAOB with outstanding results. We receive a SEC comment letter every few years and never has there been a problem in answering questions or with the answers given. We have been told that auditors fight to be on this engagement.
There is no incentive for the Big Four to run an efficient lean audit. If they can think of a question to ask they can charge us. If they can keep us from releasing our 10K (and they can) they have more time to ask questions.
Annual audit fee quotes mean nothing as engagement contracts all have sentences that permit added billing for anything encountered. An audit committee pre-approving the audit costs means nothing as the fees for audits typically increase significantly upon final billing (regardless of company size).
I do not think the accounting profession will voluntarily run an efficient operation or forgo added billing. These increases are not exclusively about generating higher billings but are driven from the fear in many instances that if they do not look under every rock they will be the next Arthur Andersen. This is exactly what was meant to occur by taking out the entire firm of AA. Unfortunately, the victim is the small manufacturing company who is trying to provide good jobs for working class people in America and compete in a global environment against the Chinese and other countries who do not have SOX.
To control the costs of SOX I think Congress or someone empowered needs to regulate and control accounting fees. To work, there would also have to be controls over dropping clients who do not voluntarily agree to abnormal increases. Perhaps there needs to be an arbitration board to hear conflicts. I do not wish this upon any of us but now that SOX has been released, costs controls must follow.