[Exclusive] Korean Institute of Certified Public Accountants (KICPA) moves to crack down on ‘dumping’ in audit-fee competition... seeks special inspection by Financial Supervisory Service [fnMarketWatch]

[Financial News]  The Korean Institute of Certified Public Accountants (KICPA) has moved to curb accounting firms’ cutthroat competition to dump audit fees. The move comes amid concerns that competition to win external audit contracts by offering low fees could lead to shorter audit hours and lower audit quality. In particular, the KICPA is pursuing a plan to ask the Financial Supervisory Service to consider the need for special inspections in cases with a high risk of deficient audits. The move reflects concern that cutthroat competition among accounting firms could undermine confidence in accounting in the capital market, beyond fueling conflict within the industry.
According to accounting industry sources on the 20th, KICPA Chairman Choi Un-yeol recently met with the heads of the Big Four accounting firms—Samil PwC, Samjong KPMG, Deloitte Anjin and EY Hanyoung—to discuss excessive competition in the external audit market and ways to ensure audit quality.
The central issue at the meeting was competition for engagements driven by cuts in audit fees. It is understood that concerns were raised that accounting firms’ steep fee reductions to retain existing clients or secure new audit contracts could also constrain the allocation of adequate audit hours and personnel.
In particular, disputes have reportedly arisen recently in the accounting industry over one firm’s practice of taking on engagements at low fees. As competition to cut audit fees intensifies, it appears to be fueling conflict among accounting firms.
A senior accounting industry official said, “Accounting firms are continuing to argue over claims that one particular firm is seriously undercutting audit fees,” adding, “Rather than simply debating which firm won a contract by charging a lower fee, it is important for the industry to develop the self-regulatory capacity to uphold reasonable audit fees and audit quality.”
The KICPA is more concerned about the possibility that low-fee engagements could undermine audit quality than about the low fees themselves. Lower audit fees are not a problem if sufficient audit personnel and time are allocated to carry out the necessary procedures. But if audit hours and procedures are also cut during the competition for engagements, the risk of deficient audits could rise. The KICPA plans to ask the Financial Supervisory Service to consider special inspections in cases where audit quality may be compromised, including when there is not enough time or when necessary procedures cannot be secured to conduct the audit properly.
This is seen as an effort to heighten vigilance over audit quality through the possibility of regulatory inspections, going beyond a call for restraint in competition to cut audit fees. It means that even if a firm wins an audit contract by offering a low fee, it could be subject to regulatory scrutiny if the audit work is deficient.
Pressure to lower audit fees has persisted in the external audit market as competition among accounting firms for engagements has intensified. Companies have a strong incentive to reduce audit costs, while accounting firms are in a position where they have little choice but to accept demands for lower fees to prevent clients from leaving. There have long been concerns that, as a result, audit fees could be determined more by competition to win contracts than by the complexity of the audit work or the personnel assigned to it.
The problem is that the adverse effects of competition over audit fees are not limited to reduced profitability for individual accounting firms. If sufficient audit hours and professional staff are not secured, the likelihood of detecting accounting errors or signs of fraud could fall. Ultimately, lower audit quality could erode investor confidence in companies’ financial information.
The KICPA’s direct discussions with the heads of the Big Four accounting firms on ways to normalize the audit market are also seen as stemming from these concerns. There is concern that if major accounting firms fail to establish principles for conducting audits properly, low-fee competition could spread throughout the industry. However, a low audit fee alone is not enough to conclude that an audit was deficient. The actual audit hours and personnel, procedures performed and audit quality must be assessed together. The KICPA’s request for consideration of special inspections does not mean that the Financial Supervisory Service will launch an inspection or impose sanctions.
The accounting industry is watching to see whether this move will change the way firms compete in the external audit market. Another accounting industry official added, “It is just as important as post-audit checks by regulators for accounting firms to show restraint in competing for low-fee engagements and establish a self-regulatory framework to ensure audit quality.” 

[email protected] Kim Gyeong-a, Kim Hyeon-jeong Reporter