If you want an early warning that a company is in trouble, you should look at how much that it’s paying for being audited, says a study that American Accounting Association released last September.
Audit fees are required to be disclosed annually, either in the company’s annual report or in its proxy-vote solicitation. Companies that report audit fees that are higher than analysts’ expectations can warn of underperformance as many as 5 years in advance—the bigger the change, the bigger the potential underperformance—according to the study’s author, Jonathan Stanley of Auburn University in Alabama.
Stanley’s study was prompted by an observation that one particular company’s auditing fees had skyrocketed a few years before the company collapsed.
That company was Enron.
Meanwhile, research by professors at University of Iowa and University of Texas-Dallas uncovered a link between a company’s audit fees and later revelation of financial misstatements and problems with Securities and Exchange Commission.