Capping audit fees risks weakening oversight

Bangladesh's banking sector is fragile, strained by non-performing loans (NPLs), poor governance, weak regulations and a trail of scandals. At a time when public trust in banks is thin, the role of auditors as the last line of defence has never been more critical. Yet auditors have often failed to deliver robust scrutiny, not least because statutory audit fees have traditionally been set too low to support meaningful oversight.

It is in this environment that the Financial Reporting Council (FRC), the country's audit watchdog, has moved to set both floors and ceilings on statutory audit fees for banks. The new ranges are linked to a bank's total assets or risk-weighted assets. Fees are calculated using the hourly rates of audit team members, but capped by a maximum number of hours permitted for each category of bank.

The intention may be to standardise costs and promote fairness. But in practice, the rigid framework risks limiting auditors' ability to respond to complex exposures. By constraining what auditors can charge and how much time they can allocate, the FRC has raised concerns about whether statutory audits can remain sufficiently rigorous. In a sector plagued by corruption and past audit failures, the cap could weaken oversight and erode trust further.

The problem is more acute because the scope of bank audits in Bangladesh is already far wider than in many jurisdictions. The Bangladesh Bank, the prime regulator, expects auditors to examine not only the annual financial statements but also areas such as irregularities in cash incentive claims, over and under-invoicing in trade, compliance with anti-money laundering rules, outward remittances, and withholding tax obligations. These tasks demand forensic expertise, sector-specific knowledge and significant investigative effort.

Imposing a ceiling on fees while widening responsibilities risks forcing audit firms to stretch limited resources. If auditors cannot dedicate the required time and staff, the quality of scrutiny will inevitably suffer. The cap on hours reinforces the worry that auditors will be unable to exercise their judgment freely or allocate sufficient effort to safeguard independence and thoroughness.

Looking abroad highlights the risks of this approach. In India, the Reserve Bank sets only minimum fee schedules, designed to prevent a race to the bottom and to protect audit quality. Regulators in Europe and the United Kingdom take a different tack: they restrict the proportion of fees that can come from non-audit services to preserve independence, but they do not cap statutory audit fees themselves. The common thread is that the priority lies in protecting quality, transparency and accountability rather than squeezing costs.

The initiative by the FRC, though well-meaning, could send the wrong message. A ceiling on statutory audit fees and hours may appear to save money, but it risks leaving the banking system even more vulnerable. Bangladesh would be better served by strengthening the floor -- guaranteeing fair remuneration, ensuring transparent disclosure of audit scope and hours, and demanding accountability from audit firms when quality is compromised.

Ultimately, confidence in the financial system cannot be rebuilt through tighter fee caps. It depends on stronger enforcement, credible oversight, and a commitment to making audits more effective. The stakes are high. If audit quality declines further, so too will public trust in a sector that is already on shaky ground.

The writer is partner of Rahman Rahman Huq Chartered Accountants (KPMG in Bangladesh) and vice president of the Institute of Chartered Accountants of Bangladesh (ICAB)