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April 30, 2008

Big Four hit back at findings of UK audit fee report

By Nicholas Moody

A new report claiming concentration in the UK audit market is directly linked to higher audit fees has been challenged by all Big Four firms but supported by the mid-tier.

Concentration, Auditor Switching & Fees in the UK Audit Market was commissioned by UK mid-tier firm BDO Stoy Hayward (BDO) and conducted by the London School of Economics (LSE) to study whether there was a direct causal relationship between the high concentration among Big Four auditors and the level of audit fees being paid by large corporate clients. The LSE research involved the study of 1,279 listed and private companies between 1998 and 2006.

According to the report, the collapse of Arthur Andersen and the subsequent reduction of the Big Five to the Big Four in 2002 led to a 2.4 percent increase in the average audit fee paid by listed companies when other factors such as changes in regulation were considered. In 1998, average audit fees for listed companies were marginally below £400,000 ($778,834) and by 2006 had risen to about £625,000.

The research also suggested a drop of just 10 percentage points in the market share currently held by the Big Four could lead to a fall of 7 percent in the annual audit fees of listed and private companies. At present, all FTSE 100 companies are audited by one of the Big Four and only three per cent of FTSE 350 companies are audited by a mid-tier firm.

Same old story?

;However, several Big Four UK accounting firms said the LSE research revealed no new information with one firm suggesting the survey suffered from serious flaws.

Deloitte UK national audit technical partner Martyn Jones described the report as “simplistic” and said it did not provide an adequate analysis of the factors that affect the audit fees. Jones said factors such as the introduction of International Standards on Auditing, the adoption of IFRS, the impact of Sarbanes-Oxley and the introduction in the UK of a more proactive and independent form of audit regulation added considerable cost to the audit fees of larger entities.

Ernst & Young UK managing partner for regulatory and public policy Jan Babiak argued that significant changes to the profession since 2002, including regulation reform and new independence rules, had impacted on the cost of an audit.

Richard Sexton, UK head of assurance at PricewaterhouseCoopers, said the report did not raise anything new and appeared inconsistent with his firm’s client experience in what is a “fiercely competitive” market.

KPMG UK head of audit Richard Bennison agreed competition was hot and  the report was “a lot of noise about not much”. He said clients were choosing firms on the basis of price but also on quality of the service.

Unsustainable Grant Thornton UK head of external professional affairs Steve Maslin said there were a number of possible reasons for the fee hike, including new regulations and standards. He said BDO was quite right to flag up the concentration issue and that having four firms audit the majority of large listed companies was not sustainable in the long term. “[The report] is something new out there that reminds everybody that concentration is a problem. It is keeping the discussion live and from that viewpoint it is healthy,” he said. Maslin said an update from the UK Financial Reporting Council’s Market Participants Group expected in the coming weeks might show movement in concentration at the upper level of the UK audit market.

BDO Stoy Hayward managing partner Jeremy Newman said the research revealed there was a real cost of high market concentration among auditors and that the current market structure needed to change.

Nicholas Moody

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