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November 25, 2014

Fee pressure still a top challenge in South Africa

By Isabella Grotto

A sluggish economy and cash-poor clients have kept fee pressure at the top of the agenda for South Africa’s professional service firms, according to the International Accounting Bulletin’s upcoming South Africa survey.

Deloitte South Africa chief operating officer Allen Swiegers told IAB that, at slightly below inflation, his firm’s audit performance was affected by a market environment in which "increased time spent on quality is not recovered because of fee pressures."

The repercussions of recent international regulatory changes have made themselves felt in South Africa, with European mandatory rotation bearing a particular impact on fee pressure.

"Unfortunately," explained Swiegers, "the mandatory firm rotation leads to undercutting of audit fees."

Firms competing for contracts have an incentive to undercut fees in an attempt to out-bid their opponents and increase their appeal in the eyes of the client. As a consequence, Swiegers added: "what we see with the rotation is more pressure on the reduction of fees."

Indeed, Morison International member firm SizweNtsalubaGobodo chief executive officer Victor Sekese described the situation to IAB as "a lot of clients going to market looking for competitive pricing, thus causing a price war."

Such observations are confirmed by other major players in the market interviewed by IAB. PwC South Africa chief executive officer Suresh Kana said: "I think fee pressure is one of our biggest challenges at the moment."

As the South African economy continues to struggle, he explained: "what we see is that our clients are under pressure and so we become under pressure. Fees are linked to this and there is tremendous pressure on fees too."

KPMG South Africa chief executive officer Moses Kgosana added: "At the bottom line, it means our margins are squished, we take home less and less every year, because of fee pressure, but not at the expense of quality."

Despite the struggle to remain competitive, however, respondents denied the pressure on fees has meant a fall in service quality.EY South Africa chief operating officer Val Davies told IAB: "Whilst there has been fee pressure, I think there is a recognition that constantly looking at the audit fee will ultimately have an impact on the quality of the audit; you run that risk."

As such, she explained: "What we’re seeing now, in the audit tenders we’ve been involved in, is that the winners are not necessarily the ones that put a cheaper fee quote in."

IAB’s 2014 South Africa survey will be published in the November issue.

 

Related articles:

South Africa survey: Hurdles and competition at every turn

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