In Stabroek News of January 10, 2001, there appeared
a letter entitled “Accounting Firms Are Underbidding For Audits”. In
Guyana the accounting profession is regulated by the Institute of
Chartered Accountants of Guyana which enjoys statutory recognition and
which has among its objects the promotion and protection of the
interests of the accountancy profession. So far the Institute has not
seen it necessary to respond publicly to the several issues raised about
the profession in a national newspapers.
Like so many other Guyanese the letter writer did not
wish his/her identity disclosed perhaps out of fear of victimisation by
the employer. (I only hope that it is not an employee of the firm with
which I am associated). This is regrettable but understandable. It would
be a great day for the profession when an aspiring member will feel free
enough to raise such concerns with the employer. Perhaps the Institute
could arrange for a to allow for the ventilation of such intelligent
views no matter how uncomfortable it may make others.
The caption of the letter failed to capture the
several and serious criticisms made by the letter writer some of which
were wide enough to affect the public interest while others dealt with
employment practices by firms.
Low balling and hidden costs
A significant issue raised by the writer was the low
level of audit fees accepted by auditors with complete disregard for the
risks associated with the audit. Perhaps when an audit firm is
successfully sued for sloppy work putting prestige ahead of
professionalism will kick in. Related issues of hidden costs and
salaries being paid to the staff of the firms were also raised. The
members’ Rulebook of the Association of Chartered Certified
Accountants notes that the fact that members secure work by quoting a
fee lower than others is not improper.
This statement is however qualified by noting that
care must be taken to ensure that clients are not misled as to the
precise range of services that the quoted fee is intended to cover and
the likely level of fees for other work undertaken. The Rulebook also
states that where there is evidence of unsatisfactory work being
performed where such work has been obtained or retained by quoting a fee
that is not economic in terms of the standard of work required for the
particular engagement, this amounts to professional misconduct.
In examining the situation in Guyana, one needs only
to examine the level of remuneration paid to auditors by reviewing the
published financial statements of large public companies such as the
banks, insurance companies and Banks DIH and DDL to see the mismatch
between publicised fees and risk. The financial statements of state
owned entities where the audits are sub-contracted could also be
Dubbed “low balling” by the profession,
quotations of low fees have affected practices worldwide. It is known as
the simple means to secure the engagement while the subsequent invoice
is “padded’ with various disbursements such as printing, traveling,
While the separation of fees and expenses is
perfectly legitimate, the accusation made by the letter writer of
unwarranted costs needs to be examined. Rarely do clients ask their
auditors for supporting documentation of expenditure. A certain degree
of trust must exist between professional firms and their clients.
However, it would seem good business as well as professional practice
for prior agreement both on fees and expenses including measures and
incentives for auditors to reduce their costs. One firm we know provides
in its fee proposal for reimbursable costs to be limited to 10% of the
audit fee. Directors who are often “delegated” by shareholders to
agree fees with the auditors never see the actual invoices submitted by
the auditors and it is quite likely that they are not even aware that
the fee they agree is not the fee they will pay.
The Companies’ Act seeks to address this by
providing that all payments to the auditors be disclosed but this
requirement is followed more in the breach. Of course there is no one to
monitor compliance with the Act as it relates to the auditors and the
poor shareholder simply does not know what is happening.
Provision of other services
In making low fee proposals to ‘win work’ - to
use professional jargon - professionals anticipate that they can
compensate by charging high fees for such other tasks as preparation of
tax returns, accounting, etc. They also know that once they are in, with
the advantages of incumbency, they have the opportunity to substantially
increase the fee after the first or second year. The auditor in these
cases sacrifices losses in the early years with the promise of profits
in the later years.
Modern companies governance seeks to address these
possibilities by providing for empowered Audit Committees with the
authority to what amounts to monitoring the audit and in dealing with
all matters with the auditors including appointments, remuneration etc.
Regrettably even our leading companies are not so modern after all when
it comes to corporate governance with powerful directors preferring to
concentrate these powers in their own hands.
The letter did not address the question of
independence when the auditor engages in a whole range of other
activities. Indeed segments of the profession regard audit as the bread
and butter and look to other services as icing. Where the fees from
those services are significant this can seriously erode auditors’
independence, a point on which SEC Chairman Arthur Levitt had to wage
war on the US mega-firms which even threatened to take him to court.
Professional firms do not like their wonderful life to be brought into
We believe that it is time for the Institute to
intervene and prescribe measures for the prevention of abuse, protection
of the public interest and promotion of the image of the profession.
Shareholders need to concentrate less on the handouts at AGM’s and
start asking the tough questions of their directors who they appoint.
They must insist on complete disclosure and take the auditors to task
when they fail in their duties.
Level of salaries
It is true that the level of salaries paid to persons
employed in accounting firms is lower than those paid in the private
sector. Of course we have come a long way since the days when to enter a
professional firm one had to have wealthy parents who could afford to
pay a hefty premium to the principal. One of the reasons advanced for
the comparatively lower salaries is the time and cost incurred by the
employer in training the staff and the study leave, exam fees and other
“reimbursable costs” to which the successful student is entitled.
Another obvious reason of course is the level of
income which the employing firm receives by way of fees. My own
experience is that partners in professional firms are extremely
secretive about their firms’ financial affairs and the staff hardly
have any way of knowing how their firm is performing. This perhaps
explains why incentive systems in professional firms are so rudimentary,
generally a Christmas bonus of so many weeks per year.
The Guyana profession is littered with one-man firms
all with the misleading names “& Co.” The Institute has had the
greatest difficulty implementing a system of continuing professional
education even as everyone else talks of life-long learning. The
profession s a dynamic one and no one qualified even five years ago will
be up to date with developments in the auditing and accounting
profession. In just about every reasonably progressive country not only
is CPE mandatory but so too is peer review whereby the audit files of
practitioners are reviewed for quality.
The advent of the Stock Exchange should help to bring
this about as the disclosure standards set by stock exchanges are
usually more stringent that those set by either the profession or the
law. Hopefully those with influence over the profession will use their
influence to promote rather than retard progress.
The contributor to Business Page is a long-standing
member of the accounting profession as well as the Institute of
Chartered Accountants of Guyana. He has to accept the extremely valid
criticisms made by the letter writer and has a duty to assist the
profession in enhancing its image. The letter that prompted this article
has not been given sufficient attention. However it is a mistake to
believe that the profession dominated by vested interest will willingly
address the issues raised. Auditing is a public interest matter and
others must join the debate.
Stabroek News often crafts wonderful editorials out
of letters in its columns and it is famous for its Editor’s Notes. We
believe that the letter deserves no less treatment.