The price of audit services has been rising at an estimated annualized rate of 0.5% in the three years to 2017. However, rates for services have changed steadily year over year on the back of strong competition among auditors during this period. In particular, auditors have been deterred from adjusting rates for services too rapidly for fear that their clients may defect to competing firms. As a result, buyers have been able to budget accurately for purchases of audit services during the period.
Demand for audit services has grown during the past three years. For example, the number of businesses in the United States has increased as the economy has grown, which has given new enterprises the confidence to commence operations. Ultimately, a greater number of businesses increases the pool of potential firms requiring audits. Meanwhile, government consumption and investment has increased as federal, state and local governments have collectively fared with greater tax revenue. A large amount of these expenditures has been paid to government contractors, many of which have required audits in order to ensure that they have been complying with the terms and conditions of their contracts. Overall, rising demand for audit services has softened competitive pressure among auditors, which has placed upward pressure on rates for services.
Suppliers’ costs have also increased during this period. Auditors require legal counsel in order to avoid expensive litigation from shareholders, regulators or clients stemming from erroneous audits. The cost of legal services has increased on the back of stronger demand for such professional services, which has inflated auditors’ overhead costs. Therefore, vendors have been increasing rates for services in order to reconcile these rising costs.
During the three years to 2020, the price of audit services is forecast to increase at an average annual rate of 0.6%. Nevertheless, strong competition will continue to underpin steady changes in rates for services on an annual basis, so buyers will be able to budget accurately for purchases of audit services in the coming years.
Rates for services are projected to grow at a slightly faster pace as demand for audit services strengthens. Following a decline in the past three years, IPOs are anticipated to increase as investor confidence swells during the period. Companies are audited prior to an IPO, and public companies are audited every year per compliance with federal regulations. Therefore, an increase in IPOs will increase the number of publicly traded companies requiring audits. Additionally, government consumption and investment is projected to increase as local, state and federal governments receive greater tax revenue. Many of these expenditures will be paid to government contractors, which will require audits in order to ensure they are complying with their contracts.
Meanwhile, vendors’ costs are forecast to continue rising. Auditors will continue to require legal counsel in order to hedge against lawsuits stemming from inaccurate audits. As the cost of legal services increases, suppliers will contend with higher overhead costs. Consequently, vendors will increase rates for services in order to protect their profit margins.
In light of this upturn in rates for services, buyers should consider establishing multiyear agreements with auditors. Long-term contracts can help buyers save time and money throughout the life of their agreements. The first year of an audit engagement involves significant startup costs because auditors must devote extra time to learn about buyers’ operations and internal controls. Using this groundwork, however, the vendor can usually perform the audit in less time and at a lower cost in subsequent years.