While driving a hard bargain is all part of commercial reality, two recent reports by the Hong Kong Accounting and Financial Reporting Council (AFRC) reveal that Hong Kong audit firms are coming under frequent pressure to reduce fees.
AFRC’s audit fee report and its 2023 survey report on effective audit committees found that the biggest and smallest audit firms (in terms of number of audit engagements for public interest entities – PIEs) have come under fee pressure that could compromise audit quality.
Half of category A audit firms (100 or more PIE engagements) and 40% of category C firms (one to nine PIE engagements) experienced such fee pressure on a periodic basis.
AFRC has called for a stronger focus on setting audit fees and the appointment of auditors
Fees should not be the overriding consideration in auditor appointment, says AFRC. Its survey report identifies the top three priorities for audit committees when selecting an auditor: industry experience and the audit team profiles (72%), engagement performance (54%), and proposed fees (50%).
AFRC has called for a stronger focus on setting audit fees and the appointment of auditors, both of which it says are crucial in upholding the quality of financial reporting and the audit of listed companies. In general the level of audit fees should be a function of audit complexity, the size of the auditee and the resources required.
Key report findings include a rise in audit fees paid by listed companies in Hong Kong to HK$13.1bn (US$1.67bn) in 2021 from HK$12.4bn in 2020. However, while average PIE audit fees went up by 3% between 2017 and 2021, they fell 4% over the same period when adjusted for consumer price index inflation.
The level of audit fee is generally positively associated with audit quality
A growing number of companies listed in Hong Kong changed auditors in 2020 (249) and 2021 (285), with 399 of those 534 switchers negotiating a lower fee for the new audit engagement. Meanwhile between 2010 and 2021, the total assets of listed companies in Hong Kong increased by 91%, revenues by 67%, but audit fees by only 9%.
While listed companies may welcome the decline in audit fees, AFRC is concerned that audit firms may be unable to upskill, invest in new technology or maintain the same level of resources for audit engagements, all of which may impact audit quality. Citing research conducted in other jurisdictions, AFRC points out that the level of audit fee is generally positively associated with financial reporting quality and audit quality.
While negotiating on fees may be a sign of a competitive market, this overlooks the importance of quality, which can be gauged only when there is some transparency in the market. AFRC believes that promoting the disclosure of audit firms’ performance would improve transparency and facilitate the selection of auditors as well as the determination of reasonable fees.