February 11, 2020

Audit & Non-Audit Fees: The Song Remains the Same?

Audit Analytics recently took a look at the audit fees paid by S&P 500 companies – and to say that they vary widely is a huge understatement. The average audit fees paid by S&P 500 companies were $13.0 million in 2018. Median fees were $8.3 million, with the lower quartile cut-off at $4.6 million & the upper quartile cut-off at $14.7 million. But what’s really eye-popping is the fee range – audit fees paid by the S&P 500 ranged from $800,000 to $133.3 million.

That degree of variation in audit fees is interesting, but so is this nugget about non-audit fees:

Roughly 9.5% of S&P 500 companies had non-audit fees greater than 25% of total fees in 2018. While high non-audit fees exclusively are not a red flag, they can serve as an indicator for investors and other users of financial statements to review what factors are contributing to the fees in each disclosed fee category and potentially look closer at services that have been characterized as non-audit work.

As Audit Analytics notes, the size of non-audit fees that auditors receive may raise concerns. Here’s an excerpt from this NYT article on the topic:

Most recently, the Securities and Exchange Commission issued a statement cautioning accounting firms on the provision of consulting services to their auditing clients. The commission, which did not challenge any specific services in its June 15 “interpretive release,” said its purpose was “to reinforce the sensitivity of corporate‐audit committees and corporate managers as well as accounting firms to the need for preserving independent audits.” Apparently, the commission is concerned because it fears that an accounting firm’s interest in keeping — or obtaining — a company as a consulting client may erode the auditor’s independence.

I guess I probably should have mentioned that this NYT article was published in 1979.  The rules are tighter now – but after more than 40 years, it seems like the music may have changed but the song remains the same.

Proxy Access: Adopted Widely, Used Only Once

Sidley recently issued a 5-year review of proxy access developments.  In addition to tracking the adoption of proxy access bylaws, the review also addresses a variety of other topics, including management & shareholder proxy access proposals, typical proxy access provisions, and proxy advisor policies on proxy access.

While noting that proxy access bylaws have been adopted by 76% of the S&P 500 and a majority of the Russell 1000, the memo also notes that such bylaws have actually been used only once. Here’s an excerpt with the details:

In 2019, for the first and only time, a shareholder included a director nominee in the proxy materials of a U.S. company pursuant to a proxy access right. In December 2018, The Austin Trust dated January 1, 2006 (with Steven Colmar as trustee) with ownership of approximately 3.8% of the common stock of The Joint Corp. filed a Schedule 14N seeking to use proxy access to nominate a director at the company’s 2019 annual meeting.

The Joint Corp. had adopted proxy access in August 2018 on standard terms after a shareholder proposal to adopt proxy access submitted by Colmar was approved (with 96% support) at the company’s annual meeting in June 2018. (The board of directors had not made a recommendation for or against the proposal.)

Both the board of directors and ISS ultimately recommended that stockholders vote for the proxy access nominee, and he was elected at the company’s May 2019 annual meeting with more than 99% support.

Tomorrow’s Webcast: Tying ‘ESG’ to Executive Pay”

Join us tomorrow for the webcast – “Tying ‘ESG’ to Executive Pay” – to hear Aon’s Dave Eaton, Mercer’s Peter Schloth, Southern’s James Garvie, and Willis Towers Watson’s Steve Seelig discuss how to handle the growing demands – and challenges – to including ESG metrics in executive compensation plans.

John Jenkins