[Exclusive] Total Audit Fees of All 'Big 4' Accounting Firms Increase by an Average of 18% Annually Over 5 Years

[Record High Audit Fees]③Major Shift in Accounting Market Since New External Audit Act
Total Audit Fees of Other Accounting Firms Soar 33% Annually
"Accounting Firms Designated as Periodic Auditors Charge Higher Fees"

Even after the enforcement of the new External Audit Act, the so-called 'Big 4' accounting firms (Samil PwC, Samjong KPMG, Deloitte Anjin, EY Han Young) continue to hold an overwhelming share of total audit fees. Last year, the Big 4 accounted for about 60% of the audit fee market among 40 registered accounting firms, leading to evaluations that the audit fee market remains a tilted playing field. However, significant changes have emerged since the full implementation of the periodic auditor designation system. Accounting firms other than the Big 4 have shown higher hourly audit fees, and their total audit fees have rapidly increased, narrowing the gap.

Big 4 Accounting Firms Account for 78.62% of Audit Fees for KOSPI Listed Companies

According to an exclusive analysis by Asia Economy based on data from the Korea Listed Companies Association on the 7th, among the 40 accounting firms registered as auditors for listed companies last year, the Big 4's total audit fees amounted to 381.2 billion KRW, accounting for 59.2% of the total. The total audit fees, which were 198.8 billion KRW as of 2018, have increased every year. The average annual growth rate was 17.68%.

The number of companies contracted by the Big 4 was 916 in 2018, representing 45.8% of the 2,000 listed companies analyzed. This number decreased to 715 by 2020 but rose again to 770 the following year. Last year, the Big 4 contracted with 776 companies out of 2,272 listed companies analyzed. Compared to 2018, the number of contracted companies decreased by 140, with an average annual decline of 4.06%.

The total audit fees received by the Big 4 from KOSPI-listed companies were overwhelmingly high. The Big 4's audit fees from KOSPI-listed companies increased from 148.8 billion KRW in 2018 to 299.7 billion KRW last year. For KOSDAQ-listed companies, the increase was from 50 billion KRW to 81.5 billion KRW during the same period. The average growth rate of audit fees for the Big 4 was 19.12% for KOSPI-listed companies and 13.02% for KOSDAQ-listed companies. Last year, the Big 4's share of audit fees was concentrated more on KOSPI-listed companies (78.62%) than on KOSDAQ-listed companies (21.38%). Professor Choi Jun-sun, an emeritus professor at Sungkyunkwan University School of Law, stated, "For larger companies, it is difficult to have audits conducted by firms other than the Big 4, and relatively smaller accounting firms may find it challenging to handle such audits."

Other Accounting Firms’ Total Audit Fees Increasing Faster than Big 4

The total audit fees of other accounting firms have increased significantly compared to the Big 4. Last year, other accounting firms' total audit fees amounted to 263.2 billion KRW, accounting for 40.8% of the total. Since recording 83.8 billion KRW in 2018, their fees have surged at an average annual rate of 33.12%. The number of companies contracted by other accounting firms steadily increased from 1,084 in 2018 to 1,496 last year, with an average annual growth rate of 8.39%.

The share of total audit fees held by other accounting firms has gradually increased since the introduction of the new External Audit Act. Their share dropped from 29.65% in 2018 to 27.77% in 2019 but rose to 37.72% in 2020. It slightly decreased to 37.58% in 2021 but surged to 40.8% last year.

For other accounting firms, audit fees from KOSDAQ-listed companies, which are relatively smaller in scale compared to KOSPI-listed companies, were higher. Audit fees from KOSDAQ-listed companies were 58 billion KRW in 2018 but increased to 176.4 billion KRW last year. Audit fees from KOSPI-listed companies rose from 25.8 billion KRW to 86.7 billion KRW during the same period. As of last year, the share of audit fees from KOSDAQ-listed companies was 67.02%. However, the average annual growth rate of audit fees was slightly higher for KOSPI-listed companies (35.42%) than for KOSDAQ-listed companies (32.05%).

Increase in Audit Fees for Other Accounting Firms Following Enforcement of New External Audit Act

Although the Big 4's share of total audit fees remained high at 59.2% last year, the increase in market share to 40.8% by other accounting firms, narrowing the gap, is analyzed to be influenced by the implementation of the periodic auditor designation system. Since the system's enforcement in 2020, hourly audit fees for other accounting firms have been higher than those of the Big 4. In 2018 and 2019, the Big 4 had higher hourly audit fees, but this reversed in 2020. At that time, other accounting firms charged 100,000 KRW per hour, 6,000 KRW more than the Big 4's 94,000 KRW. In 2021, other accounting firms charged 108,000 KRW per hour, while the Big 4 charged 104,000 KRW.

Additionally, the standard audit hours system introduced with the new External Audit Act has influenced the increase in total audit fees and market share of other accounting firms. The average audit hours for the Big 4 were 2,874 hours in 2018 but increased by 63.92% to 4,711 hours last year. For other accounting firms, the average audit hours rose from 963 to 1,628 hours, a 69.06% increase. Although other accounting firms have relatively fewer average audit hours than the Big 4, their higher growth rate is interpreted as a factor reducing the difference in total audit fees. The average annual growth rate of audit fees per accounting firm over the past five years was 22.66% for the Big 4 and 22.82% for other accounting firms.

Standard audit hours refer to the typical and average audit hours by industry that auditors can use as a benchmark when determining audit input time. This system was introduced in 2019 and is readjusted every three years by the Standard Audit Hours Deliberation Committee. Although standard audit hours are not legally mandated minimum audit hours, some designated auditors have been criticized for mechanically applying them and demanding excessive audit fees. In response, the Financial Services Commission decided to abolish provisions that could cause misunderstandings of standard audit hours as mandatory norms, clarifying their role as guidelines.

"Other Accounting Firms Demand Higher Fees... Impact of Independent Accounting Unit Operation"

Professor Jeong Do-jin of Chung-Ang University’s Department of Business Administration explained, "The increase in audit fees for other accounting firms is a phenomenon resulting from the periodic auditor designation system and the standard audit hours system. It seems that registered accounting firms designated through the periodic auditor designation system tend to demand higher fees." He added, "Most other accounting firms operate under an independent accounting unit system, which is believed to cause this phenomenon. Due to these issues, companies are experiencing side effects of perceiving accounting as a regulatory burden."

Domestic accounting firms are generally divided into independent accounting units and one-firm structures. The independent accounting unit system refers to an organizational structure where audit teams operate as simple collectives within the accounting firm. Each team independently secures audit work and earns fees in a 'self-reliant' manner. The one-firm structure operates as a single organizational entity centered around a CEO or similar leadership. Except for the Big 4 and a few other accounting firms, most operate under the independent accounting unit system. This system has been pointed out as a cause of declining audit quality because it incentivizes departments to share profits rather than investing resources in common areas such as quality control and personnel development.