Low fees are not a bargain. They are a governance failure.
The quality of an independent audit is inseparable from the resources deployed to conduct it. Yet in India, audit fees for listed companies have consistently failed to keep pace with the very companies they are meant to scrutinise. Between 2018 and 2023, audit fees for Nifty 500 companies rose a modest 28 per cent — against market capitalisation growth of over 90 per cent, net sales of 84 per cent, and profits after tax of 126 per cent. By comparison, audit fees for FTSE-listed companies in the United Kingdom rose 75 per cent over the same period. The gap is not incidental. It is structural, sustained, and consequential.
The scale of under-pricing becomes clearer in international context. The entire NSE audit market is, in real terms, roughly equivalent to what two or three large global companies pay for a single statutory audit. PwC’s fee from HSBC alone in 2023 was approximately £64 million — around Rs 680 crore — compared to an aggregate audit fee of Rs 1,738 crore paid by all NSE-listed companies in FY 2022-23.
Reasonable Audit Fee a Standard, Not a Suggestion
This is not merely a market anomaly. It is a breach of professional obligation. Standard on Quality Management 1 (SQM 1), which governs quality systems for audit firms, requires that before quoting a fee or accepting an engagement, the firm must assess the time required at each level of the engagement team, the skills and experience demanded by the nature and complexity of the client’s business, and the extent of specialist involvement needed to conduct the audit in accordance with professional standards. Accepting a fee known to be insufficient for these requirements is a breach of professional obligation — not a commercial misjudgement. NFRA’s quality inspection reports have repeatedly identified inadequate resourcing of audit engagements as a pervasive deficiency. The root cause, in most cases, is a fee structure that never permitted adequate resourcing for quality audit in the first place.
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A lower-than-reasonable audit fee should therefore serve as a red flag for investors, lenders, and regulators — not merely about remuneration levels, but about what the audit can credibly be expected to have achieved even if honestly performed.
How Independence is Compromised
Low fees compromise audit quality through two distinct mechanisms. First, the auditor is economically constrained in the time and resources that can be deployed. Corners are cut — not always dishonestly, but inevitably, to preserve the firm’s minimum profit margins. Second, the auditor develops an economic dependency on the client, creating pressure — conscious or otherwise — to recalibrate professional judgements toward client retention. The appetite for cross-selling non-audit services or pseudo-audit services is itself a symptom of this dependency. Independence, and eventually audit integrity, is fundamentally compromised in such circumstances.
The practice of quoting below-cost fees to gain or retain a client is usually with the expectation of recouping losses through fee increases over time or through advisory revenue. The bargaining power that large companies exercise over auditors, combined with an abundant supply of firms and the absence of any regulatory floor on fees, systematically tilts outcomes toward fee suppression. The IESBA’s Code of Ethics — long-standing in its application and adopted in India — specifically identifies fees that are negotiated and paid by the audit client as creating both a self-interest threat and an intimidation threat to auditor independence.
Audit Committees: Obligation Without Accountability
Both the Companies Act, 2013 and SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations place on the audit committee the obligation to recommend auditor appointment and ensure the reasonableness of audit remuneration. In practice, most audit committees approve fees negotiated between management and the proposed auditor without independent scrutiny. There is no requirement to disclose the basis for the fee determined or the methodology used to assess its reasonableness relative to engagement scope and complexity. The shareholder — the principal stakeholder for whom the audit is conducted — is not even provided information sufficient to assess whether the auditor was appointed through a transparent process and at a fee commensurate with the task.
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Audit committees must be empowered and held accountable for independently assessing proposed fees — calibrated against the company’s size, transaction volume, regulatory complexity, group structure and risk profile — and for recording that assessment in both the board report and the annual report.
The Regulatory and Legislative Gap
In the United States, the Public Company Accounting Oversight Board (PCAOB )and Securities Exchange Commission (SEC) actively examine audit fees as part of inspection and enforcement. In the United Kingdom, the Financial Reporting Council (FRC) treats fee adequacy as a quality indicator. Australia’s FRC publishes annual data on audit fees relative to company size. None of these jurisdictions treats audit fee determination as a purely commercial matter between management and auditor.
In India, NFRA, SEBI and the Reserve Bank of India — in relation to regulated financial entities within their respective jurisdictions — should incorporate audit fee scrutiny into their inspection and enforcement frameworks. A below-market fee should trigger a rebuttable presumption that the audit is inadequately resourced, the auditor’s independence is compromised, or both. SEBI should mandate disclosure of the methodology used by the audit committee to assess fee reasonableness, the ratio of audit fees to non-audit fees paid to the same firm or its network, and in the year of the last real-terms revision.
The Corporate Laws (Amendment) Bill, 2026, currently before a Joint Parliamentary Committee, strengthens NFRA’s enforcement architecture and tightens audit enforcement framework in several respects. But it falls short of mandating a structured methodology for fee determination, periodic revision, and dual accountability — of the audit committee and the auditor. The Joint Parliamentary Committee has the opportunity to fill this gap. It should not be missed.
A low audit fee is not a prudent economy. It is a deferred liability — payable the day a governance failure or financial reporting fraud surfaces, and when the inevitable question is asked: where were the auditors?
The author is Former Secretary, Institute of Chartered Accountants of India.
