RSS feedsThe 1998 merger between Price Waterhouse and Coopers & Lybrand drove audit prices up by 12% in a year, and further market concentration has meant continuing double digit year-on-year growth in audit fees, according to the government’s report into audit competition among the Big Four.
Whether the merger was responsible for driving up audit fees has emerged as a point of contention from last week’s report into perceptions of audit choice, jointly commissioned by the DTI and the Financial Reporting Council.
Audit fee growth has been in double figures (on average) each year since 1995. Since Andersen collapsed, the growth of audit fees has accelerated, according to the study from consulting firm Oxera.
Gerald Russell, E&Y partner and head of the Audit Quality Forum, said he did not believe that having fewer firms had increased fees: 'I don’t believe any concentration has led to pricing increases per se.'
Among other findings was that competition is not working as well as it would with a greater number of audit competitors within the FTSE 350.
Alongside this, the present situation with the Big Four dominating the audits of practically all the FTSE 350 is not regarded by those asked in the study as healthy for competition or choice.
Tighter auditor independence regulation has also reduced the competitive pressure on the audit market, it was claimed.
This belief is enhanced by the fact that so few companies change their auditor in a year. Switching rates are calculated at around 4% a year on average, but within the FTSE 350 this figure dips below 3%.
Oxera concluded that choice within the market is limited for many UK listed companies. In certain sectors, such as financial services, some companies effectively have no choice over who their auditor is in the short term, due to the various conflicts of interest that can arise.
The chance of greater choice being available in the short term seems quite limited, unless changes can be enacted quickly. Oxera argued that the chance of a mid-tier firm making a challenge to the Big Four’s market was at the moment limited, as the economics for the firms were not right and there was a perception among the larger companies that the firms were not equipped for the task.
The loss of another large accounting firm would exacerbate the current problems around audit choice, and is likely to result in the loss of investor confidence in the audit process.
A Big Three is also unlikely to encourage the mid-tier to mount a challenge against those that remain. Currently BDO is the only non-Big Four firm to have a FTSE 100 audit, that of PartyGaming.
Key Findings
• The current market is not regarded as healthy for competition and choice
• Expansion by mid-tier firms may not be economical unless there is change to
perceptions and market conditions
• Lack of choice has resulted in audit firms gaining bargaining power, and
higher audit fees
• Some companies have an inability to change auditor in the short term
