Most investors would obviously like to be out of a stock BEFORE a fraud hits the fan. John Waggoner’s recent article entitled “Audit fees can serve as [an] early red flag?If they’re sky-high, that could mean stock trouble” provides a valuable tip that may allow investors to unload a stock before it tanks. He is almost certainly correct in saying that by the time investors read about an auditor’s “substantial doubt about [the company’s] ability to continue as a going concern,” it is probably too late to sell.
Back in 2001, the Securities and Exchange Commission required public companies to disclose audit fees on their annual report, but most investors did not use that information in deciding whether to invest or hold on to a stock, according to the article. For example, very few realized Enron was in trouble until it was too late. But upon closer inspection, Enron paid $25 million in auditing fees, which was much more than most companies of comparable size paid, according to the article. One professor did a study and found that there is a “correlation” between high audit fees and a firm being in financial trouble.
The theory is that, in general, higher fees mean the accountant found a problem that leads to more billable time. It is particularly significant if there is a sharp rise in audit fees. It is advisable, says Waggoner, to consider the size of the firm and its industry in evaluating whether the audit fees are a telltale sign of problems. Waggoner says that such signs could provide up to five years warning for investors.
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.