Audit remuneration in Nepalese listed companies – a study (part-1)

September 26, 2023.

1. General Study

1.1 Introduction

We have combed through the audited financial statements of companies listed in Nepal Stock Exchange (NEPSE) to analyse auditor remuneration. The study pertains to the audit engagegements for statutory audits under the Companies Act, SEBON Act and related rules and regulations, the provisions of audit as per listing rules under NEPSE Act and other relevant regulations under vogue in Nepal. The audit period taken into consideration is Nepali fiscal year 2078-79 (2021-22).

The companies under consideration are those whose financial statements have already been audited for the fiscal year 2078-79 and available in the public domain on the date of this publication.

While the financial statements have been audited for Himalayan Laghubitta Bittiya Sanstha Limited, the data for remuneration could not be obtained. Additionally, there was no reasonable judgement that could be made. So, this has been excluded.
 
On the other hand, there were no remuneration figures for some other companies, judgments as to possbile remuneration was made based on audit fee charged by the same auditor to a different company in the same industry.

The entities authorised to perform statutory financial audits are the member firms of the Institute of Chartered Accountants of Nepal (ICAN) and the Office of the Auditor General, Nepal.

There were 162 companies under consideration for this study.

The sector wise break up is shown here:

 

The total auditor remuneration recorded for the reporting period, from these 162 companies was NPR 119,713,574.

 

1.2 Total Remuneration collected by the auditors

The audit firms involved on the audit of these companies were 89 for 162 companies. The top 15 firms by the total amount of remuneration generated accounted for 61% of the total remuneration billed to these listed companies. The next 15 firms took home 21% of the total remuneration, while the remaining 59 firms shared the rest i.e. 18%.

 

 

2 Sector Specific Analysis

2.1 Commercial Banks

The Commercial Banking sector contributed NPR  48,971,634 towards the audit of the financial statements for the fiscal year 2078-79 (’21-22) as of the date of this report. This amount to 41% of the total contribution from all audited listed companies.

The total number of commercial banks under study was 19 . The minimum remuneration for an audit engagement was NPR 1,356,000 , while the maximum remuneration was NPR 8,190,454.

The median auditor remuneration stood at NPR 2,260,000 . Likewise, the average stood at NPR 2,577,454.

 

The Top 5 auditors in terms of total remuneration derived from the Commercial Banking sector amounted to 60% of the total remuneration expenditure of this sector.

 

 

2.2 Development Banks

Development Banks in Nepal paid NPR 15,281,650 to have their financial statements audited for the year 2078-79 (2021-22). This amount accounts for 13% of the total amount paid by all audited companies in Nepal to have their financial statements audited.

Twelve (12) development banks were studied, and the audit remuneration ranged from NPR 135,600 to NPR 3,220,500.

The median and average auditor remuneration were NPR 1,028,000 and NPR 1,273,471, respectively.

 

The three auditors who earned the most money from auditing development banks accounted for half of the total audit fees paid by development banks.

 

 

2.3 Finance Companies

The finance sector paid NPR 6,536,570 for the audits of its financial statements for the fiscal year 2078-79 (2021-22), which accounts for 5% of the total audit fees paid by all audited listed companies.

The total number of finance companies under study was 11. The minimum remuneration for an audit engagement was NPR 292,670 , while the maximum remuneration was NPR 841,550.

The median auditor remuneration stood at NPR 565,000. Likewise, the average stood at NPR 594,234.

 

SAR Associates, the auditor that earned the most money from auditing financial companies, took 20% of the total audit fees paid by financial companies.

 

 

2.4 Hotels and Tourism

The tourism sector in Nepal paid NPR 750,000 to have its financial statements audited for the fiscal year 2078-79 (2021-22). This accounts for 1% of the total audit fees paid by all audited listed companies in Nepal.

Two hotels were studied, and the audit fees ranged from NPR 200,000 to NPR 550,000. The median and average audit fees were both NPR 375,000.

 

There were only two listed companies under the sector of Hotels & Tourism, both were audited by one single audit firm, i.e. B.K. Agrawal and Co.

 

 

2.5 Hydro Power

The hydropower sector in Nepal paid NPR 12,388,283 for the audits of its financial statements for the fiscal year 2078-79 (2021-22), which accounts for 10% of the total audit fees paid by all audited listed companies in Nepal.

Forty-one hydropower companies were studied, and the audit fees ranged from NPR 32,919 to NPR 1,832,727. The median and average audit fees were NPR 226,000 and NPR 302,153, respectively.

 

The hydropower sector availed the services of the second most number of auditors (32 audit firms). But only 2 auditors were responsible for 40% of the auditor remuneration generated from this sector.

 

 

2.6 Investment

The Investment sector contributed NPR ,722,429 towards the audit of the financial statements for the fiscal year 2078-79 (’21-22) as of the date of this report. This amount to 1% of the total contribution from all audited listed companies.

The total number of investment companies under study was 5. The minimum remuneration for an audit engagement was NPR 100,000, while the maximum remuneration was NPR 957,429.

The median auditor remuneration stood at NPR 226,000. Likewise, the average stood at NPR 344,486.

 

B&S Associates was paid more than 55% of the total remuneration from the investment sector. 

 

 

2.7 Life Insurance

The Life Insurance sector contributed NPR 1,989,975 towards the audit of the financial statements for the fiscal year 2078-79 (’21-22) as of the date of this report. This amount to 2% of the total contribution from all audited listed companies.

The total number of life insurance companies under study was 4. The minimum remuneration for an audit engagement was NPR 363,475 while the maximum remuneration was NPR 791,000.

The median auditor remuneration stood at NPR 417,750. Likewise, the average stood at NPR 497,494.

 

Life insurance sector employed 4 auditors for the four companies under audit for fiscal year 2078-79 (till date). The highest remuneration was more than two time the lowest remuneration paid.

 

 

2.8 Manufacturing and Processing

The manufacturing sector in Nepal paid NPR 4,552,067 to have its financial statements audited for the fiscal year 2078-79 (2021-22), which accounts for 4% of the total audit fees paid by all audited listed companies in Nepal.

Seven manufacturing and processing companies were studied, and the audit fees ranged from NPR 195,000 to NPR 1,057,067. The median and average audit fees were NPR 500,000 and NPR 650,295, respectively.

The Top 2 auditors in terms of total remuneration derived from the manufacturing sector amounted to 45% of the total remuneration expenditure of this sector.

 

 

2.9 Micro-finance

The micro-finance sector contributed NPR 20,785,667 towards the audit of the financial statements for the fiscal year 2078-79 (’21-22) as of the date of this report. This amount to 17% of the total contribution from all audited listed companies.

The total number of micro-finance companies under study was 46. The minimum remuneration for an audit engagement was NPR 67,800, while the maximum remuneration was NPR 1,423,800.

The median auditor remuneration stood at NPR 370,249. Likewise, the average stood at NPR 451,862.

 

The microfinance sector employed the most number of auditors. This sector was responsible for availing the services of 36 audit firms. The two top dogs took home 23% of the total fees generated from the sector.

 

 

2.10 Non-life Insurance

The non-life insurance sector in Nepal paid NPR 3,970,299 for the audits of its financial statements for the fiscal year 2078-79 (2021-22), which accounts for 3% of the total audit fees paid by all audited listed companies in Nepal.

Thirteen non-life insurance companies were studied, and the audit fees ranged from NPR 140,000 to NPR 506,000. The median and average audit fees were NPR 325,000 and NPR 305,408, respectively.

 

The Top auditor (SAR Associates) in terms of total remuneration derived from the non-life insurance sector amounted to 23% of the total remuneration expenditure of this sector.

 

 

2.11 Others

The “others” sector in Nepal paid NPR 2.7 million for the audits of its financial statements for fiscal year 2078-79 (2021-22), which is 2% of the total audit fees paid by all audited listed companies in Nepal.

Only two companies in this sector were studied, and the audit fees ranged from NPR 565,000 to NPR 2.2 million. Both the median and average audit fees were NPR 1.38 million.

 

Three audit firms were employed for audit of this sector. Two firms took home double the amount of fees than the third firm.

 

 

3 Conclusion

The audit fees paid by different sectors varied widely, ranging from NPR 32,919 (Swet-Ganga Hydropower & Construction Limited, audited by JBRH & Co) to NPR 8,190,454 (Agricultural Development Bank Limited, audited by Sujan Kafle & Associates / Dev Associates / CSC & Co).

Further analysis of the relationships between turnover, transaction volume, industry and other causes is warranted. This shall be done in part 2 of the study.

This report only covers the observed remuneration details for listed companies in each industry. In the next part, we’ll be discussing the determinants of audit fee in more detail.

If you have any questions or suggestions on this topic, please feel free to reach out to us through email at sushil.basnet@bhrikutiadvisors.com or whatsapp/call at +977 9851352710.