Introduction

The importance of annual audits in instilling confidence in financial statements and capital markets cannot be overstated. However, investors often overlook the cost of audits, as it has no direct impact on earnings forecasts. The auditor’s opinion is another aspect that investors tend to ignore, as it does not provide insights into the work and thought process behind it. With minimal information disclosed in the proxy statements, investors are left with puzzling questions about audit fees. This article will analyze the audit fees of various companies to shed light on this topic.

The Apple and Microsoft Comparison

Apple (AAPL) and Microsoft (MSFT) are two giants in their respective fields. Apple has higher assets and revenues compared to Microsoft, yet it was found that Microsoft paid nearly 4.5 times more in audit fees. This raises questions about the complexity of auditing Microsoft’s operations and the superior financial reporting controls at Apple. However, without more information about the quality of the audits, investors can only speculate.

The AT&T and Verizon Conundrum

AT&T (T) and Verizon (VZ) operate in the same industry and possess similar dimensions. Despite AT&T having higher assets and revenues than Verizon, Verizon paid more in audit fees. This unexpected situation lacks a satisfactory explanation, leaving investors puzzled and in need of additional information.

A Glance at Citigroup and Wells Fargo

Citigroup (C) and Wells Fargo (WF), two banking giants with comparable assets and revenues, paid significantly different amounts in audit fees. Although Citigroup’s global operations might explain the higher cost, investors should be provided with more information regarding the reasons behind this disparity.

The Need for Investor Curiosity

Investors generally lack curiosity when it comes to audits – a practice meant solely for their benefit. Perhaps this is because audits rarely impact earnings per share or company forecasts. Furthermore, major corporate failures have been relatively infrequent since the early 2000s. However, a proposal from the Public Company Accounting Oversight Board (PCAOB) aims to change this by introducing more quantitative information about the audit process.

The Future of Audits

The PCAOB plans to develop “audit quality indicators” for both audit firms and individual engagements. These indicators, which could include metrics such as the involvement of the engagement partner, workload distribution, specialized skills, experience, staff turnover, outsourcing, and investment in training personnel, will provide investors with valuable insights into the audit process.

Conclusion

While the PCAOB’s project is still ongoing, if successfully implemented, it has the potential to make investors more engaged and interested in the audit process. By going beyond a mere endorsement in proxy statements, investors can gain a deeper understanding of what goes into an audit.