Auditing the Audit: The Negative Effects of an External Audit
Jan 02, 2020 | By John Siegel
Some organizations consider an external audit of the business’s financial statements as merely a requirement to comply with grant agreements, lender covenants, or regulatory authority. Others choose to engage external auditors to conduct an annual audit because it’s considered a good practice. Whatever your company’s reasons for going through an annual financial audit may be, it’s an investment — both in terms of dollars and time spent by the finance teams responsible for responding to requests and participating in meetings with the external auditors.
So how do those finance professionals deal with the disruption? To find out, Dimensional Research conducted a survey to examine the real-life experiences of the professionals responsible for their organization’s annual financial audit.
A total of 203 financial professionals with direct responsibility for their company’s year-end financial statement audit responded to the survey. All were finance executives, controllers, and other finance and accounting staff from a wide range of company sizes and ages. According to Dimensional Research, respondents were pretty evenly split between companies that operate solely in the U.S. and those with international operations.
External Audits Are Disruptive
Perhaps unsurprisingly for any financial professional who been through the external audit process, the majority of stakeholders (95%) report that the annual audit creates significant challenges for their teams.
Those challenges include:
- Non-audit related work that doesn’t stop to allow room to focus on the audit – 82%
- The complexity of accounting rules creating more gray areas – 58%
- The audit process takes longer than expected – 50%
- It’s a stressful time that has a personal impact on the staff – 50%
- Need to immediately respond to questions and re-do work they thought was done – 42%
- Loss of meeting space to auditors performing fieldwork – 37%
- Difficulty finding documents requested by auditors – 27%
Oddly enough, 5% of respondents said their team faces no challenges in dealing with the annual financial audit. Must be nice; good for them.
External Audits Are Expensive — and Costs Are Rising
One of the most concerning findings from the study is the rate at which audit costs are increasing. Taking into account auditor fees, personnel, investments in technology, and other costs, 88% of respondents say the cost of their annual audit has gone up.
More than one-third (37%) said their costs have increased anywhere from 5% to 20% over the past two years. Another 16% said their audit costs have increased by more than 20%. That's pretty substantial.
Many of the factors that influence audit fees should come as no surprise:
- Companies with international operations tend to see more significant increases than those which operate only in the U.S.
- Large companies (defined as those with more than 1,000 employees) are more likely to report dramatic increases in audit costs than smaller companies
- Companies with increasing complexity of operations, such as expansions into new regions, acquisitions, new product lines and services, and increased transaction rates due to growth, tend to see the costs of their annual audit increase
However, the primary cost driver is not company size or complexity but new accounting regulations. 64% of participants pointed to new accounting regulation adoption, including ASC 606 and ASC 842, as drivers in the increased audit costs at their organizations.
The financial impact of those new regulations doesn’t appear to be temporary, either. Most stakeholders (90%) report that they expect audit costs to continue to grow, with nearly half (49%) anticipating increases between 5% and 20%.
What Does It All Mean?
For too long, the audit was thought of as a necessary evil. But with hard data showing it's negative impacts on the business — with rising costs — and it's employees — through lost productivity and stress — it's time for businesses to reconsider their relationships with external auditors and investigate ways to limit cost and mitigate audit-related employee stress.