Why are audits so expensive?
If you look at the financial statements of any company which has been Audited, you’ll see a note showing the Auditor’s fee. It can be £5,000 or £150,000, depending on the size and complexity of the organisation. Either way, it’s often a proportionately significant cost. But why so much? The expense is predominantly the result of the traditional ‘supply and demand’ model.
Only around 22% of professionally regulated Accountants are registered Statutory Auditors who can sign-off on a Statutory Audit. To achieve this high level of the Accountancy profession requires additional studying and a specific set of skills and experience. Qualified and experienced Auditors are often very bright people.
Most of the time, companies have an audit because they are legally obliged to (not all companies are - discussed more later), rather than by choice, so it is an inescapable cost.
Combining this necessity with the comparatively smaller number of Auditors (vs. general Accountants) starts giving you an idea of why the cost is often significant. Of course, there are other market forces at play, but this is one of the main factors.
A large chunk of the fee goes towards the time spent by the juniors / trainees in the audit team who carry out all of the legwork; known as ‘testing’. (Incidentally, this is also an area where I’ve seen professional services firms make much of their profit; on the charge-out rate of the trainees vs. what they cost to employ and train). The remainder of the fee goes towards the time and expertise of both the qualified audit manager, and the firm’s partner with overall responsibility for the client in question. Oh, and not forgetting whatever they allocate towards their overheads, such as offices and admin staff.
“Oh, right – I see now!”, you say. But wait - there’s more…
The “more” is ‘overruns’. As with most professions now days, firms quote a fee based on their expectations of the amount of work required, balanced with whatever the market rate might be, and the client’s budget. It’s therefore necessary for Auditors to keep a close eye on the time they spend on an engagement. It’s often the case that the amount of time Auditors end up spending on a client ends up exceeding what they originally budgeted for, so the client ends up paying more – sometimes a lot more – that they were originally quoted.
It may seem like there’s not much the client can do but swallow the cost, but there are steps you can take. DSV Accounting can help with this, and you can find out more in my article: Do you want to reduce the cost of your external statutory audit?
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