However intriguing the House of Lords’ investigation into auditors may be, one recent occurrence speaks volumes about the high standing their industry continues to enjoy: Her Majesty The Queen taking time out of her schedule to officially open KPMG’s brand new, purpose-built, £340m headquarters in London’s Canary Wharf. Her public endorsement of the firm and, by extension, its kith came in the very same week that the investigation opened. Highlights included Economic Affairs Committee member Lord Lawson’s comments that the defendants seemed to have been “asleep on the job” when collapse met the financial markets.
What is less intriguing is that it appears auditors have been absolutely wide awake and lucid when addressing falling revenue from audit work, having plugged that shortfall with revenue from doling out non-audit advice to their business clients, our latest audit fees survey shows.
In a year when the Commons Treasury Committee recommended audit firms be banned from dispensing non-audit advice to financial services companies – and the Financial Reporting Council’s (FRC) Audit Practices Board later came within a whisker of recommending the same for all audit clients, before backing away from a ban – it has become clear that, despite concerns around the breaking down of Chinese walls that protect auditor impartiality, companies rely ever more heavily on their auditors for other advice. And in reality, few could reasonably argue against an industry rising to the demands of its customers.
Deloitte is one of the clear winners of this trend in the past year or so. Our survey shows that Deloitte and Pricewaterhouse-Coopers rake in the most in non-audit fees from the FTSE-250, with the former making £33.2m from 66 clients in the index versus PwC making £32.4m from 74 FTSE-250 clients.
In our list of the highest and lowest-spending companies on audit services in the period for FTSE-250 companies, the average fee paid to an audit firm for non-audit services fell, but by half as much as it did among FTSE-100 companies, with an average fee of £430,000 going on non-audit services – seven percent down in 2010 on the same time in 2009.
Balfour Beatty ranks top of our list of companies in the FTSE-250 spending on auditors; it spent £5.6m on its audit through Deloitte in the past year, nothing on audit-related fees, but £4.7m on non-audit fees. It said the bulk of the non-audit fees were spent on advice on its acquisition of Parsons Brinckerhoff and a financial restructuring it carried out after the acquisition, as well as tax and compliance advice in Europe and the US.
Taking it as one example because it tops our list, Balfour Beatty was one of the many companies that, in its submission to the FRC in consultation on whether auditors should continue providing non-audit advice, strongly advocated its continuation. And the fuzzy boundaries between audit and other provisons from one firm is clearly a benefit to the business.
“Auditors obtain a significant amount of knowledge about the operations of our group through their audit work. They are often best placed to perform certain non-audit work such as due diligence services and non-audit certifications of financial information,” finance director Duncan Macgrath said. “Preventing them from doing so would introduce very significant costs and inefficiencies, particularly considering the size and complexity of a multinational such as Balfour Beatty.
“We also believe that from the auditor’s perspective, being able to perform non-audit work allows them to gain valuable knowledge regarding the group, and apply that knowledge during the audit process, eliminating duplication of effort, decreasing costs and improving the quality of their audit.”
If auditors can be accused of being asleep on the job, it appears FDs do not have the same experience of them.
The UK’s imminent exit from the EU that may now put the audit committee to the ultimate test
Audit tendering has turned from good practice to legal practice under the EU audit reforms
Businesses will have to think more strategically about where they can source those non-audit services in the future
The FRC has raised concerns that the FTSE 350 audit market remains highly concentrated among the Big Four despite high levels of tendering and rotation