Editorial | Hong Kong listed firms should not hire auditors based only on lower fees
The industry watchdog has warned that a race to the bottom could lead to a rushed job, compromising auditing standards and opening the door to fraud
AFRC carried out random checks on 16 auditing firms, 13 of which were found to have offered lower fees than the previous auditors, and 12 of them were identified as having quality issues. That is a worryingly high number. The council said 17 per cent of 2,631 Hong Kong-listed companies changed auditors last year. All 16 firms audited by AFRC were replacements.
While established auditors usually won’t compromise on fees, some smaller ones competing for clients might be willing to do so. But if standards are being compromised, keeping the client happy in the short term may not be in the long-term interest of these companies.
In this, the listed firms – which especially have a social and financial responsibility to shareholders and the investing public – may be even more to blame. AFRC said one of the main reasons listed companies changed auditors was lower fees, when existing auditors refused to offer discounts. Some listed companies did so knowing they faced a tight reporting schedule. According to AFRC, there have been cases where auditors were replaced just one or two months before the auditing deadline. In a more egregious case, the company changed auditors three times in a single year.
Such “auditor-fishing” could be a red flag. It goes without saying that accounting fraud also becomes more difficult to detect.