The Big Four audit firms charge a premium for their services – although one of them not noticeably more than non-Big Four firms – for a number of reasons, according to a research paper.
The paper also found that the amount of external audit fees is significantly influenced by the size and complexity of the client, its ownership and its corporate status.
The highest fees are charged to publicly listed equity companies, because “issuing a wrong opinion for a public listed equity company would probably be suicidal for the audit firm”, and there was a lot of extra work and effort involved, including the need to attend audit committees held during the year.
The lowest fees, on the other hand, are for companies with debt securities listed on the Malta Stock Exchange.
Foreign companies tend to pay higher fees as they rate auditing services more highly than their Maltese equivalents – but the opposite holds for companies where government holds the majority shareholding.
“This stems from the fact that up to around 20 years ago, most large Maltese companies were all government-owned. Thus, auditing such firms was of a prestigious nature and in a bid to win the audits of such companies, lower fees were charged,” the paper said.
“Today, although the majority of companies have shifted to private ownership, the culture of lower fees for government entities is still entrenched in the Maltese market.”
The paper, authored by Peter Baldacchino, Miriam Attard and Frank Cassar, was published in the latest edition of the Bank of Valletta Economic Review.
They identified a number of trends explaining the various factors, as audit fees are not necessarily based on a straightforward formula covering the hours worked and the hourly fee.
Owner-managed companies ... tend to view audits as an ‘unnecessary cost’, seeing it merely as a statutory requirement with ‘no added value’
The size of the client has an impact on the fee because it would involve more compliance and substantive testing, and the complexity of its operations also has a bearing – particularly if they span international borders, and when the majority of subsidiaries are incorporated in foreign countries.
Other factors taken into account by the authors were the size of the auditing firm and the risks involved.
The survey also found that the client’s profitability also affected the fees.
“A client earning a higher return on capital is likely to be charged a higher audit fee.” On the other hand, “some audit partners felt that if the client is enduring difficult financial times, they would be more ‘sympathetic’ when negotiating the fee, provided their recovery rate is reasonable.
“However, other partners disagreed with this notion, with one stating that ‘auditing is a business and one cannot go about pitying one’s clients’,” the authors wrote.
Of course, clients also try to negotiate the fees.
The authors found that the hardest bargains were driven by owner-managed companies, who tend to view audits as an “unnecessary cost”, seeing it merely as a statutory requirement with “no added value”.
The study concluded that the audit market was competitive, with price competition and product differentiation to the Big Four across the whole spectrum. It also noted that audit fees in Malta were lower than those in similar circumstances in other countries.
The authors looked at 372 client firms in all, covering a range of public and private firms of different sizes – although the smaller firms were not included as they are entitled to file abridged accounts.
Ten audit firms were interviewed for the study.