Big Four’s fee for non-audit work at audit clients declined by a fifth last year
The Financial Reporting Council have released its 2020 Key Facts and Trends in the Accountancy Profession (KFAT), in which it has revealed that fees for audit work at the largest UK companies increased in 2019 as audit quality improvements continue to be a major focus.
In 2019, the Big Four’s fees for non-audit work for audited entities declined 20.8%, according to the new report. This reveals a positive market shift ahead of operational separation by 2024 and reflects the application of the non-audit services fee cap for public interest entities for the first time.
The report also shows greater competition in the auditing space for FTSE 250 companies. The two largest firms outside of the Big Four audited 10 FTSE 250 companies, increasing their market share from 2017 at 3.2% to 4.8% last year. However, in 2019, the Big Four audited all of the FTSE 100 companies.
This comes as the Financial Reporting Council’s (FRC) data in July showed that a third of UK audits are substandard. For example, in the case of British Home Stores (BHS), its auditors, PwC, were fined a record £6.5m after signing off accounts the industry watchdog, the FRC, called “incomplete, inaccurate and misleading” in its report into the aftermath of the collapse.
Parliament has been scrutinising the audit industry for some time. In 2011, a report from the House of Lords said: “The audit of large firms, in the UK and internationally, is dominated by an oligopoly with all the dangers that go with that.”
It recommended companies should tender for audit work every five years, and it said that “complacency of bank auditors was a significant contributory factor” to the 2007-08 financial crisis.
Chris Biggs, partner of Theta Global Advisors, commented: “There is a huge amount of heightened scrutiny on auditing services, especially of the Big Four, looking at the overall quality of the audit, the role auditors play in terms of legislation and their public perception, and the independence of auditing services. For example, how this is impacted as firms also deliver more lucrative non-auditing consulting services to their audit clients.
Clients should minimise the use of their auditors for non-audit consulting services as much as possible. This will reduce actual conflicts of interest, reduce perceived conflicts of interest and increase public confidence both into auditing firms and their clients.
Although the auditors seem to be reducing non-audit work to their audit clients and are therefore seeing a reduction in non-audit fees received from their audit clients, much much more needs to be done. If this doesn’t change, drastic measures may be taken by supervisors and Governments. We could see audits moving to be the responsibility of government-led bodies. Furthermore, public confidence will not improve and the image will decline.
At Theta Global Advisors, we do not audit and hence, we are one of the few truly independent accounting advisory firms for non-audit services. Clients will avoid auditor independence issues if they engage firms such as ours and they could use other Big Four and mid-tier firms who are not their current auditors, however, there are some issues there. By using such other firms who are also auditors, then if the clients want to change auditors in the future, they will have limited the ‘pool’ of possible auditors who are totally independent to engage i.e, firms who have not recently provided non-audit services. This could become problematic and continue to raise independence issues in the future.”
