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
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

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.


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

Nicholas Moody