Professional Services Monitor: Today

In another look at audit marketshare, below are the total FY2008 fees, average FY2008 fees per client, and number of clients in three cities—Chicago, Denver and Seattle—based on the city from which the firm is serving a client. That is, the data is grouped on the office of the firm signing off on the client’s financials. This is often the same city as the client’s headquarters, but not always. The data is taken from Ames Research Group’s audit fees database, sourced primarily from DEF-14A proxy statements.

More lists are available on our Auditor Marketshare page.

Fees are listed in $US millions.

Chicago

Seattle

Denver

For those of us who track such things as “professional fees paid to auditors,” February, March and April are hectic months as December fiscal year end companies file their latest proxy statements.  Ames Research Group tracked about 1300 proxy statements and 20F filings during March 2008, and we will probably double that number during April.

Below are some preliminary findings from what we tracked during March.  All summaries are based on companies with $500 million in revenue and greater.

10 Largest Gains in Total Fees (Companies over $500 million) 

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10 Largest Drops in Total Fees (Companies over $500 million)

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Average Fees Change, FY06 to FY07 (Companies over $500 million)

In an 8K filed Tuesday, Broadcom announced its dismissal of Ernst & Young and engagement of KPMG. This is a nice win for KPMG, but the more interesting part of the event was one sentence within the filing:

The decision to change auditors was the result of a competitive process, conducted as part of the Company’s ongoing efforts to enhance its corporate governance practices, that was launched in conjunction with the rotation of the lead E&Y audit partner off the Company’s account pursuant to Rule 2-01(c)(6) of Regulation S-X.

That partner rotation rule, part of Sarbanes-Oxley, requires that the lead and concurring partners rotate off engagements every five years. With smaller audit firms and smaller clients, this has been a big deal. Since a small firm has only so many partners to go around, this often means the loss of a client after five years for the reason alone. Among larger firms and clients, however, we have not seen this mentioned in many, if any, auditor changes.

Broadcom had used Ernst & Young since its 1998 IPO, if not longer, meaning it could have been working with the same partner for 10 years. While we have no further information than this on the situation, that mention under these circumstances seems to bring to light the importance of personal relationships, even with a Big Four firm and a billion-dollar client. Through our Quarterly Competitive Summary, we interview hundreds of CFOs every year following auditor changes. Rising fees and independence concerns have been key reasons cited by CFOs for making an auditor change over the past three or four years. But other factors having to do with the relationship, such as previous experience with a firm, have been a constant through the nine years we have done this research. Furthermore, smaller companies say over and over again that they leave, or are left by, the Big Four in order to get more personal service at Crowe Chizek or Grant Thornton.

The Financial Times this afternoon has an article on a new study from The Corporate Library on how the audit industry has changed since 2001.

In a sign of the explosion in audit activity since the passage of the Sarbanes-Oxley compliance law, the median fees earned by the world’s top auditing firms shot up by 345 per cent in the five years to 2006, a study said on Wednesday.

The findings came in a study of 100 auditing firms and 1,300 companies by The Corporate Library, a respected US corporate governance research firm which billed it as “the most extensive study of the audit industry ever published”.

More information on the report is at The Corporate Library website.

Ames Research Group also tracks audit fee data, processing about 40,000 proxy filings since February 2001. Some of this data is available in our 2007 Big Four Annual Report.

Link: Top auditors’ median fees up by 345 per cent – Financial Times

With BDO Seidman’s future in the US audit market now the subject much speculation and discussion, it might be useful to look just how big their US marketshare is.

BDO Seidman audits approximately 305 US-based “public” companies—meaning they file a 10K with the SEC. Not all of that number are currently trading. Furthermore, this excludes mutual funds and benefit plan audits. By that measure, BDO Seidman is the the 2nd largest 2nd tier firm, behind Grant Thornton with about 50 more clients. KPMG is the closest Big Four firm, with almost 3 times more clients.

Those 305 clients represent between $75 and $80 billion in annual revenue audited by BDO Seidman. Using quick, automated look at market capitalization from Google Finance this morning, BDO Seidman audit clients total approximately $95 billion in client market capitalization. In fiscal 2006, the firm received $156 million in audit fees from about 210 clients, as disclosed on company proxy statements. For comparison, Grant Thornton had $171 million from 260 audit clients in fiscal 2006.

Among BDO’s largest clients are Barnes & Nobles, Jones Apparel, and Forest Labs. Notable audit engagement wins for BDO in 2007 include Westaff (from Deloitte), Cambrex (from PwC), and Spartan Motors (from E&Y). The firm has been the auditor for two IPOs this year, but both are small, developmental stage companies. Furthermore, BDO, as a smaller firm, has a large client base among private companies, including PBS, Red Apple Stores and Colonial Group.