[Exclusive] Largest Ever Audit Fees for Listed Companies... Costs Increase 128% While Assets Grow 28%

[Record High Audit Fees]① Comparison of 4-Year Cycles Before and After the Implementation of the New External Audit Act, Average Audit Fee per Company Increased 5 Times
Standard Audit Hours Increased and Internal Accounting Audited by Certificate... Risk Burden Rises with Designation System

Last year, the audit fee expenses of domestic listed companies reached an all-time high. This surge is attributed to the rapid increase in audit fees following the implementation of the new External Audit Act (a complete revision of the External Audit Act, enforced in November 2018), which centers on the periodic auditor designation system, the standard audit hours system, and the internal accounting management system. In particular, the total audit fees of listed companies more than doubled within four years of the new External Audit Act's enforcement. Companies have raised objections, arguing that audit service fees have grown disproportionately larger than the asset growth of listed companies, encouraging excessive spending.

Average Audit Fee per Company Surged by 101.4%

According to an exclusive analysis by Asia Economy based on data from the Korea Listed Companies Association, the total audit fees of listed companies last year (644.3 billion KRW) reached a record high due to the strengthening of auditor independence, the introduction of the standard audit hours system, and the enhancement of the internal accounting management system certification level following the enforcement of the new External Audit Act. The analysis covered 2,395 listed companies as of 2022, including 798 KOSPI and 1,597 KOSDAQ companies. Among these, 2,272 listed companies were analyzed after excluding foreign corporations, investment companies, special purpose acquisition companies, companies with fiscal year changes or failure to submit business reports, those with unclear monetary units, and those without audit fee or time disclosures, making content analysis impossible.

Comparing the audit fees per hour and average audit fees per company over a four-year cycle before and after the enforcement of the new External Audit Act in 2018, both showed a sharp increase.

The average audit fee per company increased by 20.5% in 2018 compared to 2014 before the new External Audit Act was introduced, but surged by 101.4% from 2018 to 2022 after its introduction. Audit fees per hour also rose by 2.7% from 2014 to 2018, but sharply increased by 37.7% from 2018 to 2022. The average audit fee per company increased fivefold, and audit fees per hour increased fourteenfold after the enforcement compared to before.

Both the average audit fee per company and average audit hours began to show significant growth from 2018 (increases of 13.1% and 8.1% respectively compared to 2017), maintaining a large upward trend until 2020. In 2021, the growth rate slowed due to the previous sharp increases, but surged again in 2022 (increases of 14.3% and 9.6% compared to 2021, respectively).

Audit fees per hour also rose sharply after the new External Audit Act was enforced. Last year, the audit fee per hour was 106,000 KRW, up 4.4% from 101,000 KRW the previous year. In 2018, it was only 77,000 KRW, resulting in an average annual growth rate of 8.3%.

"Suspicion of Legislative Cartel Surrounding the New External Audit Act"

While the total assets of listed companies increased by an average of 6.27% annually over the past five years (2018?2022), total audit fees rose by 22.88%. The total assets per listed company grew by an average of 2.94% annually over five years, whereas the average audit fee per company sharply increased after the new External Audit Act enforcement, with growth rates exceeding 20% from 2019 to 2020 (29.3% in 2019, 24.9% in 2020) following a 13.1% increase in 2018 compared to the previous year. Although the growth rate eased to 8.7% in 2021, it surged again to 14.3% in 2022. The five-year average annual growth rate was high at 19.03%.

The average annual growth rate of audit fees per company (19.03%) significantly outpaced the recent five-year average annual growth rates of nominal wages (3.47%) and the consumer price index (2.11%).

Looking at the four-year cycle before and after the enforcement of the new External Audit Act, the increase rate of audit fees is even more striking. As of 2022, the total audit fees of listed companies increased by 128% compared to 2018. Compared to the 27.6% increase in total assets of listed companies during the same period, this proves that audit fee expenses were excessive. Notably, nominal wages and the consumer price index rose by only 14.6% and 8.7%, respectively, during the same period.

Choi Joon-sun, Honorary Professor at Sungkyunkwan University School of Law, pointed out, "If audit quality improves, I would support the introduction of the new External Audit Act (including the periodic auditor designation system, internal accounting management system, and standard audit hours system), but most domestic and international studies show that simply changing auditors leads to a decline in audit quality and a significant increase in audit hours, which is quite risky," emphasizing that the side effects were rather significant.

Jung Do-jin, Professor of Business Administration at Chung-Ang University, also said, "The increase in audit fees for listed companies is due to the introduction of the standard audit hours system and the periodic auditor designation system. In particular, the standard audit hours have become a kind of minimum threshold, and from the auditor's perspective, the risk increased with the auditor designation system, resulting in higher fees after audits."

An official from a listed company raised their voice, saying, "It is hard to believe that audit fees more than doubled unless there is effectively a cartel," and added, "I suspect the new External Audit Act might also be a legislative cartel."

Strengthening Certification of Internal Accounting Management System Drives Increase in Audit Hours

The strengthening of certification for the internal accounting management system (from review to audit) is cited as a factor for the increase in audit hours. The internal accounting management system refers to an internal control system that requires accounting processes to follow predetermined procedures and methods to prepare and disclose reliable accounting information. Since it is mainly implemented through computerized systems, companies have expressed difficulties due to increased costs.

The external audit of the internal accounting management system has been applied sequentially. In 2019, it applied to companies with total assets of 2 trillion KRW or more; in 2020, to those with total assets between 500 billion KRW and less than 2 trillion KRW; and in 2022, to those with total assets of 100 billion KRW or more. Accordingly, in 2019, the average audit fee per company for listed companies with total assets of '2 trillion KRW or more' increased by 51.93% compared to the previous year. In 2020, the average audit fees per company for listed companies with total assets of '1 trillion KRW or more but less than 2 trillion KRW' and '500 billion KRW or more but less than 1 trillion KRW' increased by 43.02% and 55.58%, respectively, compared to the previous year. In 2022, the average audit fee per company for listed companies with total assets between '100 billion KRW and less than 500 billion KRW' surged by 32.94%.

An official from a listed company pointed out, "Looking at the changes in average audit fees per company by total asset size due to the sequential application of the external audit of the internal accounting management system, it is clear that this system has driven the increase in audit hours, leading to a notable rise in audit fee growth rates."

Professor Jung Do-jin stated, "The review of the internal accounting management system only involves checking documents under the assumption that the submitted materials are correct, so it does not take much time. However, audits require reasonable suspicion and manpower deployment, which takes considerable time. Naturally, audit hours increase due to this system, leading to higher audit fees. But since each company has different internal audit risk factors, standardizing audit hours through the standard audit hours system is inappropriate," he argued.

On the 11th of last month, the Financial Services Commission announced 'Major Accounting System Improvement Measures,' postponing the mandatory external audit of consolidated internal accounting management systems for listed companies with assets under 2 trillion KRW, originally scheduled for next year, by five years to 2029. This aims to alleviate excessive cost burdens on companies. Professor Jung Do-jin criticized, "Delaying for such a long time (five years) undermines the validity of the system's introduction. Instead of postponing by five years, it would be better to mandate application for companies above a certain size and allow optional application for others." He explained that optional application means companies voluntarily receive audits or reviews from external auditors as needed and disclose the results. This is because the fundamental purpose of the internal accounting management system is to ensure proper control for preparing financial statements.