AI sounds the death knell for audit fee inflation

Auditors make a point of looking for unexpected shifts and unusual trends. They may find some of both among their own fees. Companies’ audit bills have generally increased 4 per cent to 5 per cent a year. Yet last year, the increase, at less than 2 per cent, was basically in line with inflation. There is good reason to think the days of reliable audit-fee increases are numbered.

Several factors are at play. More stringent regulation, which drove prices higher, is washing through the system. The Big Four firms and their smaller peers were also getting their houses in order after a run of audit scandals; many didn’t shy away from passing those costs down the line. In the five years to 2023, fees paid by the top 100 London-listed companies rose 75 per cent.

Fees in any case are lumpy. A merry-go-round of dealmaking and expansion among clients means more work, often at a more sophisticated level too. Drugmaker AstraZeneca, the UK’s biggest company by market capitalisation, paid total audit and related fees of $34mn last year, an increase of more than 6 per cent. Separately, the mid-cap sector has become a hive of M&A activity, and thus of fee generation: Bodycote, Gamma Communications and Capricorn Energy all agreed to be taken over this week.

Equally, some companies are slimming down, jettisoning staff, assets, entire divisions or all of the above, which means less for the auditors to vet. Retailer Sainsbury’s, disposing of its banking unit, paid a quarter less in audit fees last fiscal year compared with the previous year. Diageo, distiller of Guinness and Johnnie Walker whisky, paid 15 per cent less than before. More broadly, last year a third of FTSE 350 companies secured cheaper bills.

The issue for accountants — and their peers in other professional services — is that clients footing the bill want to see prices decline appreciably to reflect the growing proportion of work undertaken by AI. That includes the accountants themselves, in so far as they are also consumers of such services: Big Four accountancy firm KPMG International secured a 14 per cent cut in fees paid to its own auditor, Grant Thornton UK, claiming it should pay less because of savings wrought by the technology.

That own goal notwithstanding, the gains from AI may in reality take some time to come through. For one, the nature of technology integration, along with cyber security and compliance, means costs will rise before they fall — especially if firms find themselves running new systems in parallel with the old until they can be confident of switching over in earnest.

And the truism that a “human in the loop” remains essential is definitely applicable to as high-stakes an area as checking companies’ numbers for glitches, intentional or otherwise. As Microsoft co-founder Bill Gates noted, it took 20 years for the PC to make its impact felt on the workplace. AI will work its magic much faster but for many users it is in the experimental phase.

The future does, undoubtedly, involve downward pressure on audit fees. Consultants are switching some billable hours to outcome- or value-based pricing — and measuring and defining outcomes is perfectly straightforward for accountants. Start-ups are adopting that approach from the get-go. The auditors’ own financials are unlikely to get much prettier.

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