Due to inflationary pressures, COVID-19 impacts, and acquisitions & divestitures, external audit fees are expected to increase at 62% of organizations this year, according to a survey by Gartner, Inc. To combat this, an analysis of external audit firm clients’ survey data revealed that organizations that automate at least 25% of their internal controls paid 27% lower audit fees on average.

Gartner surveyed 166 publicly traded and privately held external audit firm clients across industries in March-April of 2021, ranging from organizations with revenue above $10 billion to those with revenue under $500 million. Of the respondents, 81% employed a “big four” audit firm (Deloitte, EY, KPMG, PwC). Among the 166 organizations surveyed, Gartner analyzed 124 for the impact that internal controls automation had on the ultimate amount paid in audit fees.

“With audit fees increasing significantly, finance leaders should take note that organizations with higher levels of internal control automation saw substantially lower external audit fees on average (see Figure 1),” said Ashwani Gupta, director in the Gartner Finance practice. “The biggest decreases were seen in organizations using between 1 to 50 controls, suggesting that getting internal control automation started has potential cost benefits when it comes to audit fees.”

Companies with fewer than 50 controls, and more than 25% of them automated, reported 52% lower audit fees relative to ones with less than 25% of their controls automated. Companies with 50 to 250, as well as more than 250 controls and more than 25% automated, showed 27% lower audit fees.

"Automation of internal controls can play a role in not only reducing financial reporting and audit risks but also audit costs,” said Mr. Gupta. “As organizations invest in internal controls automation it will likely become a prominent argument for audit fee reductions in the future."

Audit Fees Rise in 2020, But Negotiation Still Effective

Audit fee increases in 2020 were led by the banking and insurance sectors, with 69% of respondents in each category reporting increases. Financial services companies have more complex accounting processes and financial reporting exposures requiring higher external auditor hours. Insurance companies also have some of the highest number of internal controls relative to companies in other industries. The technology/telecom sector was the least impacted by rising fees, with just 41% of respondents reporting increases in 2020. The firms that did report fee increases most often indicated they were sizable, with 22% of overall respondents reporting “significant” audit fee increases of 6% or more, compared to their fees paid in 2019.

While the primary drivers of audit fee increases were macro in nature, ranging from inflation to COVID-19 related, organizations that argued a strong case with the primary auditor were able to get a flat fee or lower than expected audit fee increase. Of the respondents that attempted to negotiate their fees, 45% said their fees decreased by more than 6%, while half were able to decrease their fees by between 3-6%.

Gartner’s full survey results include a range of audit fee benchmark data sets, an extensive list of drivers of audit fee changes, auditor satisfaction scores and fee expectations as well as an analysis of COVID-19 impacts to external audit procedures.

Gartner clients can read more in: 2021 Audit Fee Benchmarks.

Non clients can learn more here: Digital Future of Finance.

CFOs and finance leaders can participate in Gartner research and get complementary access by joining the Gartner Research Circle.

About the Gartner Finance Practice

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