Always wondered why you have to pay for an audit when its your bankers or suppliers that requires it?
You are not alone and why has the arrangement that the firm pays its auditor survived so many rounds of audit reforms is something this article by Tan Boon Seng seeks to explain and explore.
In summary, the article uses the setting of a used car industry and asks the question if the buyer, seller or government should be paying a trusted and competent mechanic to certify the condition of the car being sold. Buyers would seem to be the obvious choice. However, potential buyers need the certification before deciding to be buyers. But once the certification is produced after payment by the first potential buyer who decides not to buy, the value of the information remains undiminished for subsequent potential buyers. This situation is thus a free-rider problem where nobody is willing to pay first.
If the seller pays, the issue is that the mechanic could become beholden to the sellers, making their certifications not very credible to buyers.
If the government pays, this arrangement removes the free-rider and credibility problems. However, the government collects its revenue from tax payers who include non-participants of the used car market. Hence, this arrangement may not be equitable or politically feasible.
With no clear optimal solution, the audit market chooses the “seller pays” approach, historically and currently. The credibility issue is then dealt with by putting safeguards to ensure the independence of audit to the users of audited financial statements.
And this is the reason why to this day, you, the "seller" still pays for the audit.
This does feel like you are getting the short end of the stick but here at ECHTUAL, we just might have a solution to help alleviate the pain. To find out more, ask us about our review of financial statements services today!