True account: Why Indian companies don't sweat over high audit fees

One segment accounts for the majority of the industry's income, and it is not complaining

Rising audit fees have upset companies in the US and the UK since the pandemic began three years ago. Companies listed in the UK’s FTSE 100 even wrote a joint letter to large auditors over escalating costs, after expenses reportedly rose 22 per cent in four years.

Indian audit fees have also increased 20 per cent in the last four years, shows a Business Standard analysis of 362 firms on the S&P BSE 500 index with comparable data since financial year 2017-18 (FY18). Indian companies perhaps do not complain because their profits rose significantly more in the same period as seen in chart 1 (click image for interactive chart).

Audit fees in India have actually lagged net profit growth. Audit fees as a share of net profit was 55 basis points in FY18 for the companies under consideration. It dropped to 29 basis points in FY22, the latest year for which data is available. One hundred basis points is one per cent.

Fees depend on the industry audited, and profitability can affect metrics. The automobile sector had the highest ratio of audit fees to net profit in FY22. It paid auditors the equivalent of 2.7 per cent of net profit. The high number may also be related to the sector’s profitability, which took a hit during the pandemic. Among key sectors, banks paid out the equivalent of 50 basis points. It was 30 basis points for information technology (IT) firms. Cement and steel firms paid out 20 basis points and 10 basis points respectively (chart 2).

The Tata group was among the largest private sector paymasters for auditors. It accounted for 6.4 per cent of the pool. Multinational companies accounted for three per cent of the total fees. The biggest clients of audit firms are not private companies though. Central and state public sector firms accounted for more than 50 per cent of the fees that auditors collected, shows data from the sample (chart 3).

This means that it is the government, and not private sector firms like in the UK, which could demand concessions from audit firms. The government pays nearly Rs 1,000 crore as audit fees just in the sample under consideration.