Business Page – January 28th, 2001

Low Balling

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 examined.

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, accommodation, etc.

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 question!

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.

Peer Review

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.