Companies seek value for audit money

More pressure on auditors as companies want lower fees, as well as more checks.

Auditors who have been raising their fees 10 to 15 per cent (a few even managed 50 per cent increases) every year in recent times are in for a tough time. Hit by the slowdown, clients are now asking them to reduce their fees or hold them.

This has, in fact, become a global trend, with companies like Nokia, DuPont, and Agilent already asking auditors to take a cut this year. India Inc is catching up. Sources familiar with the developments said companies like NIIT Technologies, Maruti Suzuki and Moser Baer had told their auditors they would not increase the fees this year. The auditors have no option but to oblige.

Kaushik Dutta, partner, Price Waterhouse, said it would be inappropriate to expect an increase in fees when companies were trying to cut costs, laying off people or paring salaries.

A Subba Rao, CFO, GMR Infrastructure, said the firm generally considered an increase in auditors fee once in three years. “We would be happy if we do not need to increase the fee in the current year. However, we are not asking for any reduction, ’’ he said.

The downward pressure on fees can also be seen on proposals for new businesses, which are down 15 to 20 per cent, compared to what a similar job would have cost clients last year.

This is also reflected in the request for proposals for IFRS work from PSUs and banks like SBI, IOC, MRPL and Canara Bank, where the fees are coming down. The companies are doing this exercise to see how their profits would be impacted once they adopt the International Financial Reporting Standards (IFRS), applicable from April 1, 2011.

Auditors said it’s like a double whammy for them. While clients were pressing for lower fees, the work pressure has gone up 10 to 20 per cent because after the Satyam accounting scandal broke in January, independent directors are asking for more details and explanations, which in some cases, significantly increased the scope of audit.

‘‘Independent directors have raised the bar and are expecting auditors to do a lot of things that may not be there in the scope of the audit. They are expecting the auditor to conduct detailed analyses of almost every area of the financial statement, which may not be covered in the scope of the audit,’’ said Rajesh Arora, partner with audit firm BSR & Co.

For instance, independent directors are asking auditors to verify the fixed assets but auditors said this was outside the scope of most audits and was essentially a management responsibility.

‘‘They expect us to verify the level and the quality of information and its authenticity. Auditors are meant to be watchdogs, not bloodhounds,’’ said an auditor.

There’s a way out. Experts said auditors might need to do more sophisticated tests to get a higher level of comfort with lesser test of details (auditors are focusing more on areas like streams of revenues or profits, where’s there’s a risk of mis-statement than manually checking for something like fixed assets, which is an item of relatively lesser importance/ value-add).

‘‘Everyone is trying to reduce time by getting into higher areas of risks (possible mis-statement of revenues). If they want more bells and whistles (if independent directors want us to do extra work), it will cost you more,’’ said Dutta. This means that while fees for plain audit may come down, if the board wants an auditor to do additional work, they may have to pay separately for it.

Some companies, however, said they were not pressing for a reduction in auditors’ fees. ‘‘We have not sought any reduction, as the fees we pay are fairly reasonable,’’ said Issac George, CFO, GVK Group. Lanco Infratech said it was neither seeking a cut nor hiking fees.

Manish Dugar, CFO, Wipro Technologies, says auditors’ fees for Wipro are less than 0.03 per cent of revenues.

‘‘The focus with respect to such an important service is to get best-in-class value for the shareholders and not worry about cost. In any case, the auditors compensation is decided by the Audit Committee, which is made up by all independent directors, and not by the management,’’ he said.