Accounting Ratios

Auditing Expenses/Sales (bp)

We penalise companies which have extreme auditing fees relative to their industry peers. If auditing fees are too low, it suggests that the auditors have not been rigorous enough. After all, an audit fee is a function of time and seniority. Meanwhile, if an audit fee is too high, it suggests a complicated or problematic audit.

Bloomberg only collected data on 40% of the 16,000 companies in our global sample. It has data on more than 80% of companies in Singapore, Hong Kong, Japan and Australia but no data in Taiwan and Turkey, as Figure 95 shows. The typical audit cost 6.1bp of sales between 2010 and 2015 but varies between 2.4bp and 13.7bp of sales from the 20th to the 80th percentiles. There is significant variance by industry. REITs, software and media companies have audits which generally cost more than 10bp of sales while electric utility and metals & mining companies have audits which generally cost less than 4bp of sales.

Our accounting screen is set to trigger a red flag when auditing costs/sales are either in the lowest 20 percentiles or above the 80th percentile (i.e. they are either very high or low) relative to GICS industry peers.