Minimum Audit Fees- Why increment is justified?

The Kantipur article   on audit fee begins with “Up to 10 times higher than the current fees.” The Supreme Court stay order in an appeal of a Cooperative has sparked a new debate on ICAN’s decision to increase fee to be charged by its members for audit and other services. Would 10 times high make sense if the initial base is low? Or is the recent fee increment by ICAN really so high that it can’t be justified?

The Supreme Court stay order is based on premise that determination of audit fee is the scope of AGM of the organization and ICAN, in absence of any specific legal provision, cannot limit right of an AGM. While it appears legally correct, the issue should be evaluated and judged considering other broader aspects of the issue.

Nepal has a difficult regime regarding auditor’s liability. The audit firms are registered as proprietorship and partnership firms. The liability is unlimited, and without any professional indemnity insurance. In the past, we have seen legal cases where auditors were charged of criminal liability even in cases where civil liability arising from professional negligence is the international practice. The reporting requirements imposed by regulators, especially in case of audit of banks and financial institutions and insurance companies are too broad, requiring an auditor to report on several aspects of operations of a company which are not assessed in normal course of financial statement audit. Failure to identify management fraud or report on any material issues results in enormous risk to the auditors. Besides this, audit risk has increased with increase in regulations, complex business environment and too much reliance on IT system by companies.

On other hand, except few national level commercial bank, the audit fee paid to the auditor is quite low and not commensurate with the scope of work they are assigned with. In case of majority of financial institutions, we see that the audit fee paid is less than annual staff cost per employee of the organization.  Unlike individually provided services in Nepal such as of a lawyer, audit involves a team with industry knowledge. An audit of a bank requires several months of specialized manpower involved to cover all the aspects of reporting. The audit firm needs to hire good quality staff, train and develop them, and retain for the future. The audit fee that is paid today is hardly enough for paying the labor cost associated with the audit, let alone the other cost of developing and retaining staffs or investing in improving audit quality. The recovery from audit is very poor. But at the same time, auditors are being criticized for poor audit quality and negligence.

ICAN has the mandate to regulate its members and the minimum audit fees regulations are on the ground that the increment in audit fees is vital to improving audit quality and protect the investor’s interest. Determination of minimum audit fee is not new concept in South Asian region. Bangladesh,  where the audit profession has similar challenges as seen in Nepal, has been implementing  minimum fee regulations from some time. Pakistan too practiced minimum fee provisions, despite being challenged for violating competition related laws.

Normally, sizes of business, audit risk, complexity of business etc. are the major factors contributing to audit fees. We do not have any detail studies on what determines audit fees in Nepal and how audit fees of a company of an industry compares with others. But we see that the growth in audit fees is not at satisfactory level and not proportionate to the increased scope of work, especially due to unhealthy competition, undercutting despite regulations of ICAN preventing it, and sometime apparent lack of professionalism. The regulatory intervention through ICAN was considered essential to address the fee issues, such that the audit market size increases enough to enable audit firms to invest further in staffs, expertise, resources and audit method and tools.

From our experience of the market, we consider that the fees decided by ICAN are not too high because of the low base that we had earlier. However, given the reluctance shown by organizations to pay for the extra cost, it is the responsibility of ICAN and ACAN to come up with empirical evidences/data to demonstrate how the proposed minimum fees are appropriate and justified and not “too much” in the current context. Hence, I believe that the audit fee increment should not be viewed as curtailment of shareholder’s right in AGM. Shareholder’s still have the right to appoint auditor and determined their audit fee, subject to the minimum audit fee guidelines determined by a regulator of the profession in the country. The audit firms, in turn, should use this opportunity to convince their clients on basis of increased fees, how it is in the interest of the profession and overall economy, and is not a waste for them.

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