Audit fee as a percentage of company revenue has been on the rise. Based on data from the International Federation of Accountants (IFAC), audit fees hit an eight-year high in 2020, despite pandemic restrictions and business slowdown. The average audit-fee-to-revenue ratio of companies listed on the Toronto Stock Exchange from 2013 to 2020 was 0.29% but became 0.33% in 2020 alone. United States companies on the Russell 3000 index yielded an even higher jump, from an average ratio of 0.38% over the period 2013 to 2020 to a high 0.44% in 2020.
IFAC’s survey also showed that smaller companies paid comparatively higher fees (as a percentage of revenue) than large- and midcap companies. From 2013 to 2020, the average audit fees of micro-cap companies on Russell 3000 were 0.69% of revenue while the average audit fees of mega-cap companies were 0.06% of revenue.
Unsurprisingly, we are also seeing trends of increasing audit fees in Singapore, especially recently, with inflation on the rise. Under the baseline scenario, global inflation is now predicted to reach 8.7% this year and then fall to 5.3% in 2023. Many central bankers have indicated that inflation will remain structurally higher beyond the short-term. Businesses, from sole-proprietor hair salons and hawkers to multinational companies, are increasing their fees to cope with inflation. Audit firms are no exception.
As audit fees increase, there is a tendency for companies to look for another service provider that can offer more competitive rates, especially for smaller businesses for whom cost is a key concern. Finding a more economical option is unlikely to be a challenge since there are more than 700 audit firms in Singapore. But should cost be the key determinant? What should companies consider when selecting their auditor?
While cost remains one of the factors for consideration when engaging an auditor, and rightfully so for any business decision, it cannot be the sole driver. Companies should look at other aspects, especially the quality of the audit firm.
Assess audit firms using ACRA’s Audit Quality Indicators Framework
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How is the quality of an audit firm determined? The Accounting and Corporate Regulatory Authority’s (ACRA) Audit Quality Indicators (AQI) framework is a good starting point for listed companies to assess factors that contribute to audit quality. The framework lists markers that correlate closely with audit quality. These markers include the number of training hours, audit hours spent by the audit team, years of audit experience and industry specialisation of the audit team, results of external and internal inspections, number of headcounts in the quality control functions of the firm, staff per partner/manager ratios and the attrition rate of audit staff.
For private companies, it is important for management to have a conversation with the auditors on the audit firm’s quality management framework and whether they have hired qualified professionals to execute the audit. Prior experience with the audit firm and the firm’s quality management practices are good indicators of its quality and are important considerations.
Consider if the firm has invested in staff’s professional development
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When selecting an audit firm, look for one that has invested in staff’s professional development. Continuing professional development ensures auditors keep pace with the changing and increasingly complex financial reporting and auditing requirements. Audit quality is likely to increase with higher training hours as this implies that auditors are spending more time upgrading their capability to perform effective audits, as well as keep abreast of the changes in accounting and auditing standards.
Also, consider if the audit firm has qualified Chartered Accountants as its staff. As the national accountancy body, ISCA requires its members who are Chartered Accountants of Singapore to achieve at least 120 training hours over a rolling three-year period. For audit practices to achieve and sustain audit quality, attracting and retaining talented professionals, and supporting their competency and skills development through training and coaching is paramount.
Examine if the firm has invested in technology and quality management systems
Investing in technologies and continuously enhancing tools to deliver audits will also have a direct impact on audit quality. Good audit software helps firms conduct audits consistently, reduces errors, and ensures a better audit trail. Firms that employ analytics tools can better identify business and audit risks. Data analytics enables the auditor to create more value for management by giving them insights into business trends and predictions. Such insights can aid the company management in their decision-making.
Another key aspect is the quality management systems that firms invest in. By end this year, all audit firms must implement a quality management system that is in line with the new quality management standards. The standards require audit firms to have a customised approach toward quality management. This includes establishing quality management systems that are proactive and adaptable as well as having governance and practice management processes to monitor quality controls, set robust standards, perform internal reviews and identify deficiencies to improve.
In addition to reasonable fees and quality, which encompasses a suite of considerations involving the audit firm’s expertise, reputation, quality management processes and use of technologies, and the audit team’s qualifications and experience, other areas of consideration when selecting an auditor include the working relationship with the auditor, the capacity of the team and its ability to meet timelines.
The value of quality audits cannot be overstated. Quality audits increase the credibility of financial statements, reducing risk for investors and stakeholders. Quality audits can flag inappropriate accounting treatments at the early stages. They can also provide additional insights, presenting management and shareholders the opportunities to help companies improve business performance as well as identify shortcomings in processes, inefficiencies, and risks.
If your company receives a request for an audit fee increase, would you immediately look for another auditor who can offer lower fees? Is the lowest cost option the best option for your company? Perhaps it is time to start having meaningful audit-quality conversations with the auditors.
Fua Qiu Lin is the divisional director (members and stakeholders engagement) at the Institute of Singapore Chartered Accountants.
