The rising cost of audit fees

The cost of audits is rising as a shortage of auditors and increasing demands around compliance and complexity bite, according to KPMG’s 2023 Audit Quality Transparency Report.

The report identifies five key drivers behind the rise:

• professional services salary inflation
• increased total hours spent on audit
• a new deal “our people” working in audit
• technology costs
• other cost inflation

The cost increases are concurrent with the audit quality, according to KPMG Audit Partner Brent Manning who says for medium-sized and large businesses, audit quality can be critical.

“Sometimes there is not a lot the audit will identify that the owner of smaller businesses won’t know about. But an audit is critical when you're in the capital markets, or if you've got that separation between the people who have funded the business versus the management team,” Manning says.

A high-quality audit is essential for any organisation or business taking money from the public, including those issuing shares, receiving deposits, membership fees or taxpayer money.

Auditors provide stakeholders with confidence and trust in New Zealand businesses and public institutions, and external audits provide credibility and also ensure the organisation is providing a true and fair view of its financial performance. And today, trust in an organisation’s reporting is more important than ever before – a growing trend sees stakeholders increasingly wary of fake or distorted news and becoming more interested in a business’s ethics and values alignment.

Brent Manning

Pressure on the talent pool

Like other professions, there is pressure on the auditor talent pool – a decline in accounting graduates has been compounded by the post-Covid drift and immigration challenges. Kiwis are leaving Aotearoa in pursuit of opportunities overseas and the audit sector is struggling to fill skills gaps.

The auditing profession, according to Manning, is looking to appeal to new talent by making a concerted effort to minimise excessive workloads during peak times.

“We've got a real focus on making sure our staff don't work long hours,” Manning says. “Partly, there's an onus on the firm to push back on our clients when extra hours are required, because a large amount of those hours are driven by client issues and poor client delivery.”

Manning says clients invested in a quality audit will engage with the auditor throughout the year and ensure their own finance teams have dealt with the reporting issues ahead of time.

“When finance teams don’t adequately address the reporting issues during the year it increases the workload for our teams in the year end process, which is already tightly resourced.

“We also need to do our part and ensure we have enough resources – we have been increasing staff numbers, whilst reducing client numbers to help balance the workload of our team.”

Technology driving quality and workload

The report shows that, while technology has improved the quality of audit, it is contributing to the increase in fees. New technology means auditors can now test ‘full transaction populations’, which provides more transactions for auditors to interrogate than previously possible.

“Before this technology, a sample of 50 to 100 transactions was common. Now, this is thousands, hundreds of thousands,” says Manning.

With many of its larger clients, KPMG can now interrogate every transaction that has taken place during the year, which is likely to reveal more ‘exceptions’, requiring staff to apply a critical lens to resolve them.

“Technology outputs still require human interpretation and strong analytic skills in order to understand the results,” says Manning.

More time spent on analysis also contributes to higher fees, along with licensing costs to securely run the technology and host the data.

ESG reporting and assurance now a priority

As far as what’s on the horizon for the audit profession, ESG reporting is the next cab off the rank and KPMG is currently undertaking this type of work with a range of listed companies.

“People want to know that the information presented about the impact businesses are having on the community and the environment is fair and accurate,” he says.

Manning says having an external assurance provider lends credibility to the numbers in fast-changing areas such as climate reporting.

“It stops greenwashing because you've got a quality audit from a reputable firm saying, yes, that is indeed the impact.”

For the director community, Manning says it is important to understand what goes into a ‘quality audit’, both from your auditor and from your business.

“It’s important you’re getting a robust audit that stands well with your stakeholders, and that you understand the costs that contribute to your audit fees.”

Manning reinforces that external audits are a legal requirement for many businesses, and act as a safeguard, providing assurance and confidence to the community - an audit can build that trust.

“When businesses are reporting on their own performance, people may think they are being overly optimistic as to what they have achieved during the year and people are also growing sceptical of whether they can believe what they read.”