Higher audit fees in UK linked to market concentration

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 3 June 2008

Report reveals impact of drop from ‘Big Five' to ‘Big Four' on ‘UK plc'

Higher audit fees are directly linked to concentration in the UK audit market, according to a report recently published by the UK Member Firm of BDO International.

The research was commissioned by BDO Stoy Hayward and carried out by the world-renowned London School of Economics.

The report reveals that the reduction from the ‘Big Five' to ‘Big Four' firms in 2002 prompted, in the UK, an increase of 2.4 per cent in the average audit fees paid by listed companies, when other factors such as changes in regulation are excluded1. Audit fee growth has continued every year since then.

It assesses the consequences for investors, companies and auditors if another big UK audit firm were to leave the marketplace and the so-called ‘Big Four' auditors were to become the ‘Big Three'.

The research also shows that a drop of just 10 percentage points in the market share currently held by the ‘Big Four' could lead to a fall of around seven per cent in the annual audit fees paid by UK listed and private companies. It also highlights the potential benefits of an increased choice of audit firms.

In the UK at present, all FTSE 100 companies are audited by one of the ‘Big Four' and only 3 per cent of FTSE 350 companies are audited by another firm. The UK regulator, the Financial Reporting Council, is continuing to monitor this issue and established the Market Participants Group (MPG) in October 2006 to provide advice on market-led actions to mitigate the risks that could arise in this event.

Dr Mariano Selvaggi, researcher at the LSE: “While previous studies have looked at the relationship between market concentration and audit fees, we believe this research raises new concerns about the current market structure in auditing services. Our findings have important implications for the future evolution of the UK audit market.”

Frans Samyn, CEO of BDO International, commented: “The report reveals that in the UK there is a real cost to the high market concentration among auditors and, with both the US and the European regulators now looking seriously at this issue, the time has come for a significant review of the market concentration among auditors which exists around the world.

Even though this research was conducted for the UK marketplace, it is clear that the same principles may apply both internationally and outside the audit sphere: if data were available, a similar issue with regard to other jurisdictions as well as to non-audit services could be seen.

Samyn continued: “The research also highlights the potential impact of another firm leaving the marketplace. The audit market is not adequately prepared at present to cope with the departure of another major network from the marketplace. This must be a cause for concern for all involved – the accountancy profession, investors, regulators and listed companies alike”.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 3 June 2008