[Exclusive] Audit Fees Lower Than Five Years Ago... Price Dumping by Big Four Accounting Firms Intensifies

Average Audit Fee Falls Below KRW 400 Million, Down From 2021
"Companies With Sharp Fee Cuts Should Also Be Inspected"

The average fee that the Big Four accounting firms (Samil PwC, Samjong KPMG, EY Hanyoung and Deloitte Anjin) receive for auditing companies has fallen below KRW 400 million this year, as competition to win engagements at lower prices grows increasingly intense. With the Financial Supervisory Service (FSS) moving to manage audit hours amid concerns about declining audit quality, industry voices say companies that have sharply cut fees in the free-appointment market should also be subject to inspection.

Big Four Audit Fees Have Declined Since the COVID-19 Pandemic

According to data submitted by the FSS to the office of Kim Jaeseop of the People Power Party, a member of the National Assembly’s Political Affairs Committee, the Big Four accounting firms’ average audit fee this year, combining designated audits and freely appointed audits, is KRW 399 million. That is down 7.2% from KRW 430 million in 2021. Audit fees rose during the COVID-19 pandemic, reaching KRW 498.25 million in 2022, but have declined steadily since 2023. The Big Four have seen similar trends in their average fees for both designated audits and freely appointed audits. The average fee for designated audits fell from KRW 429.25 million in 2021 to KRW 381.25 million this year. The average fee for freely appointed audits also declined over the same period, from KRW 432.5 million to KRW 423.5 million. Under the designated auditor system, companies can freely appoint an auditor for six years after undergoing an audit by an auditor designated by the financial authorities. Conversely, they may be required to undergo a designated audit after a period of freely appointing their auditor.

Audit fees also mostly declined when companies in large business groups switched from designated audits to freely appointed audits. Among listed companies with total assets exceeding KRW 2 trillion, 124 changed auditors when switching to free appointment after a designated audit. Of these, 114 signed contracts with lower audit fees when changing auditors. The remaining 10 companies saw their fees increase, mostly due to the impact of the introduction of IFRS 17, a new accounting standard for the insurance industry in 2023. In fact, five of the 10 companies were insurers or holding companies that owned insurers.

Samil Wins More Engagements Than Five Years Ago, but Fees Fall... Samjong Gains Ground in Free Appointments by Lowering Rates

Accounting firms with lower fees appear to have had an advantage in winning engagements. Compared with 2021, when it audited 274 listed companies, Samil increased the number of its listed-company audit engagements by 52.9% to 419 this year. Over the same period, its average audit fee fell 23%, from KRW 435 million to KRW 336 million. Samjong performed strongly in the free-appointment market for large companies. It won 36 of the 124 engagements involving listed companies with total assets of at least KRW 2 trillion that switched auditors when moving to free appointment, ranking first among the Big Four. As with Samil, Samjong’s number of listed-company audit engagements rose 46.8% this year compared with 2021, while its average audit fee fell 10.8%.

However, an industry official said, "Audit fees are calculated based on the hours spent on an audit, so it may not be appropriate to assess fee levels simply by looking at the number of companies audited and revenue." According to accounting firms’ business reports for last year, hourly audit fees, calculated by dividing audit revenue by the hours spent on audits, were KRW 187,000 at Samil, KRW 143,000 at Samjong, KRW 153,000 at Hanyoung and KRW 146,000 at Anjin.

Declining audit fees can lead to lower audit quality. Audit fees are calculated by multiplying the hours spent on an audit by the labor rate. Since junior accountants cost less, accounting firms facing more intense price competition may assign more junior staff and reduce audit hours. In addition, the more large accounting firms lower their prices, the less room smaller and midsize accounting firms—which are somewhat less competitive on price—may have to operate.

FSS Says It Will Scrutinize Declines in Audit Hours Starting This Year

The FSS said it would consider cases involving low audit hours when selecting companies for inspection starting this year. In particular, it added "significantly insufficient audit hours" as a risk factor in selecting samples for financial statement reviews and inspections. It said it would select companies for inspection in the second half of the year. For inspections of auditors (accounting firms), the FSS has already incorporated this criterion, selected 10 firms—including one large accounting firm—for inspection, and begun the process.

The FSS said, "From 2021 through last year, we did not separately consider factors such as abnormally low audit fees or a reduction in audit hours when selecting targets for financial statement reviews and inspections or auditor inspections." It said it selects companies for inspection each year based on risk factors for accounting fraud and regularly adjusts those factors after considering recent issues and historical rates of violations, among other factors.

Industry: "Companies With Sharp Fee Cuts Should Also Be Inspected"

Industry voices say that companies that sharply cut their fees, not just their audit hours, should be included among inspection targets. An official at a large accounting firm said, "Companies have recently been saying, 'Since AI has made the work easier, let's lower the audit fee,' citing the adoption of artificial intelligence (AI)." The official added, "But with AI in place, we need to verify a broader range of areas and prepare additional working papers to verify the appropriateness of the data. As a result, audit hours have not decreased; they have actually increased."

The official said companies whose audit fees fall below a certain level when switching from designated audits to free appointment should be inspected, adding, "Since an inspection is a significant burden for a company, the fear of being inspected would deter it from switching auditors to cut fees, allowing it to select an auditor based on expertise." The official also said that setting different minimum rates according to company size could enable smaller and midsize accounting firms to coexist with larger firms.

Assemblyman Kim Jaeseop said, "It is late, but it is welcome that insufficient audit hours have been incorporated as a risk factor starting this year." He added, "This alone is not enough. The financial authorities should also consider cases of sharp declines in audit fees when selecting inspection targets, or establish effective measures to ensure that low-priced engagements do not lead to poor audits."

This content was produced with the assistance of AI translation services.