Size matters in the auditing stakes

Up to a third of Vietnam-based auditing firms are too small to ensure their operational quality.

Many firms had just three auditors on their books, according to a Vietnam Association of Certificated Public Accountants (VACPA) report. There were 49 such tiny firms out of the 150 auditing companies operating in Vietnam, said the VACPA report into the local auditing sector in 2010.

“Company sizes like that are too small to meet the minimum requirements for auditing practices at the moment,” said VACPA’s general secretary Bui Van Mai.

VACPA has recommended to the Ministry of Finance and auditing firms that these minnows merge and gradually grow to “an adequate scale of seven to 10 auditors and 50-70 employees.”

Among these dwarf auditing companies, the association listed up to 23 that posted below VND1 billion ($48,300) in revenue last year. That revenue level was five to 10 times lower than the majority of domestic firms and was up to hundreds of times lower than major players.

“Those companies [with less than VND1 billion in revenue] should consider whether they should exist anymore,” said Mai.

Vietnam’s auditing sector is still young with just 20 years of development, and 75 per cent of auditing firms in the country chalked up below VND10 billion ($483,000) in revenue last year.

The nation’s market was easily dominated by the big  four  Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG and several other foreign auditing firms.

The business results of Vietnam’s branches of the big four can drag down or pull up the consolidated results for the whole domestic sector. Those leading firms also have client lists with 1,000 names and over, while the small fry might have 100 or even just one.

That situation had raised problems of dumping charges among small auditing firms, which also means omitting necessary auditing procedures and hence reducing the quality of audited financial reports.

But the nation’s lawmakers have not stood idly by. In a bid to increase the quality for the whole auditing sector, the new Law on Independent Auditing was approved in late March, 2011. Under the law, all auditing firms must have at least five “practicing auditors” - meaning auditors with three year practicing - instead of three auditors as previously.

While small auditing firms are struggling to recruit more “practicing auditors” given the local market’s lack of a skilled workforce, insiders said the new law would boost mergers between small firms.

The new law comes into effect from January 1, 2012. However, the existing firms will have a two-year period of grace to meet the new regulations.